Wholesaling Commercial Real Estate, Finding the Right Lender, Valuations in 2024 (Office Hours)

This episode of Office Hours dives into wholesaling commercial real estate, how to find the right lending partner for your project, Tyler’s outlook on commercial real estate valuations in 2024, and more.

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Key Takeaways:

• Tyler's commercial brokerage is aiming to increase sales volume by 500% next year through goal setting and action plans with brokers.

• Tyler takes an annual month-long sabbatical in December/January to rest and work on other projects.

• The commercial real estate market outlook seems gloomy according to Tyler and other investors on the roundtable, with defaults expected to double in the coming months.

• Office loan defaults are around 87-89% already, which will likely cause issues for banks.

• Tyler recommends prospecting for off-market deals by handwriting letters to 600 property owners and following up quarterly for potential leads.

• Tyler's underwriting process is very conservative, targeting a 12% cap rate and stress testing for downside scenarios. He is currently only looking at deals that cash flow from day one.

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.

0:25

Welcome back to the commercial real estate investor podcast live from the cobble group Studios here in Nashville, Tennessee. With a another office hours we go live every tuesday at 8:30am Central Standard Time so that you can jump in and ask your questions. So feel free to join me live on YouTube, I typically share the link on Instagram, so that you can jump in and get some free coaching, free mentoring. It's been a good past week I'm doing currently doing my goal reviews with all of the brokers and planning on a big year in 2024. Despite all of the turmoil in the market, if you follow me on LinkedIn, I shared a post about how we're going to increase our brokerage by 500%. Next year, I laid out a five step plan as to how we're going to do that. And part of it is setting some pretty intense goals with my brokers. So we are currently going through that and finalizing their action steps for next year as to how they're going to get out there and go do that. Some of them are increasing their sales volume by two to three times some more, which is pretty exciting to see. And I'm actually going to be doing a monthly podcast report on where we stand the actions that we took, essentially a bit of a deep dive into the business and what we are doing to take those steps to make it happen. It's gonna be wild. I've never done anything like that Wogan Freeman, who you may know as a guest on our investors roundtable. And of course, an absolute Rockstar in the commercial real estate world. He's going to be coming on and we're going to be having these conversations monthly together. One so that we can kind of share the ins and outs of what it's like running a business and commercial real estate but to so that you all can hold me accountable for everything that I'm saying that we're going to do next year. I'm excited, a little bit nervous about it. But I think it's gonna be a lot of fun. spent the past few days in Chattanooga.

2:22

Out there, my girlfriend had she coaches for a rowing team here in Nashville. So they had the head of the hooch, which is one of the biggest rowing meats in the world. Pretty, pretty fun to get to see that but of course out there, working out peerless and meeting with some people in the Chattanooga area to

2:39

get that project rolling forward. Pretty exciting. We've got a lease out for signatures on about 10,000 square feet there. And we're finalizing some quotes on a 28,000 square foot building that we're looking to get leased. So good time getting out there walking the site, making sure everything's kind of clean and up to date and

2:58

meeting with some of the officials in the city and, and other people. So good time for that. I'm also preparing for my annual sabbatical. Some of you may know that, each year, I take 30 days off between December 15 and January 15. So that I can kind of rest, recuperate, dive into some other things that I enjoy working on. It's it's a great time actually was able to give a talk last night at the Leadership Institute, which is a program put on by the National Junior Chamber, about why I do that every year, and how it has impacted me and my business and and you know where we're headed, I feel like, it's very easy to always be in the weeds. You know, it's it's not uncommon for me to work 10 to 12 hour days. So having something like that to look forward to where I cannot check my email, I cannot check my phone. I do not work on business at all during that time. Other than some other initiatives I may be wanting to work on or something creative. And it was a great thing to get to work on last year. So that was a lot of fun. Let's see we've got a super chat from Michael.

4:06

Does small acreage like one acre that is rail adjacent have any added value? It's a good question, Michael. I mean, it comes down to you know where you're located.

4:18

If it's, you know, a value to the potential tenants that are going to be in that area, as well as if it's zoned for access to the rail. You know, there's there's always some nuances when it comes to making sure that you actually have access to the railroad. Just because you're on it doesn't necessarily mean that you can create a spur or jump onto that track. So highly recommend looking into your local zoning and codes and make sure that it's something that you can access.

4:46

Like for example, at peerless mill, we have rail access there. And we actually have something that could eventually become a passenger rail drop off slash train station. So we've had initial conversations with the group

5:00

that controls the rail there to see what that would look like eventually, because that rail runs directly into downtown Chattanooga, which would be pretty awesome to have once the site is fully up and developed. Now, I would imagine, yes, it is going to increase the value of that, but it's going to be only for very specific tenants. Right. So the majority of your, you know, commercial users out there are not going to find value in having real access. But there are certain industrial industrial users that have to have it, in order for them to even consider going into a site will one acre be enough for them, it could be depending on the type of business that they're running. And what they're looking at. Typically, what I see is that larger properties are the ones that have real access. These are typically distribution centers, or groups that are moving a lot of freight, and that's why they need quick access to the rails. So few things to keep in mind as you're going through that process. Let's see Dukes is saying good morning, Tyler Morton Dukes

6:00

would like to ask about wholesaling commercial, over SFRs. I currently do wholesale, but I was curious if commercial wholesale deals are something worth pursuing. So Dukes, I do have a video on wholesaling commercial real estate highly recommend you check that out. I do think that there is something to be said about wholesaling commercial properties. But it is very difficult to do. Now, that being said, I have seen people walk away with six and seven figure checks from wholesale and commercial deals. But it's a bit more of an intensive process than it is on the single family residential side. One because you have to, there is a lot more due diligence that goes into commercial properties. And because of that, you need a longer timeline. So I see a lot of wholesale deals, you know, they'll get the deals on the residential side under contract for 30 to 60 days. Whereas in commercial real estate, you really need 90 to 120 if you're the buyer, right, so you got to think if you're the wholesaler, you got to get it under contract for even longer than that, so that you can spend the time to go find the buyer, and then they can properly do their due diligence. Now, you could of course, skip a couple of steps there, if you start to if you take on some of the risks yourself, and do some of the due diligence, such as, you know, ordering the survey, getting the Phase One environmental reports, doing some soil tests, if you're going for a development, you know, there's a few things that you could do to kind of help speed up the timeline for anybody that's coming in that might want to you might want to wholesale that deal to.

7:34

But it is not a very easy process, you have to be somewhat sophisticated when it comes to commercial real estate and know exactly what you're getting into. But like I said, I mean, if you find a good enough deal, you can get a six to seven figure wholesale check, which you know, I don't see very many people getting commissioned checks like that. So it's a very lucrative opportunity. If you do it right, and you find a good enough deal. But make sure that you've got enough time under contract to pull that one together.

8:02

The entrepreneurial journal is saying hotel, I'd really like to connect with you, I have a deal that I would like your perspective on. Well, entrepreneur journal, this is exactly what this this office hours is for. So drop some information on that deal in the live chat and I'd be happy to talk through it with you. We can dive in any questions you'll have. So if you're joining us live, feel free to jump in the live chat, drop your questions, and we can dive into it. I think you know if y'all caught our investors roundtable yesterday, it's kind of funny. We had a similar market update, probably about two months ago. And it wasn't overly positive back then. But yesterday's conversation got heavy. You know, everybody just kind of diving into what, what our thoughts are on the market right now and where we're headed.

8:51

You know, I think it's gonna be pretty dark for a little bit commercial real estate is gonna be rough real estate in general is gonna be rough. I saw something on Twitter this morning. Let me see if I can go ahead and pull this up because it was it was pretty wild to see.

9:05

But there is apparently some fraud that has been discovered.

9:10

In the world of CMBS. This is from Barrett Lindbergh heard through the grapevine one of the largest commercial mortgage brokers in the country was raided over the weekend, fraud was found in loans they'd sent to Fannie Mae. This could now trigger a chain reaction of buybacks and less liquidity among Fannie Winders. Now important to note when he says commercial there it is, it is meaning multifamily, because Fannie and Freddie are multifamily loans. But that can be a big deal in the world of multifamily if there's a lot of fraud going on in some of these loan documents. You know, there could be some big buybacks, a loss of liquidity, some write offs on the valuation of these loans, which could have a trickling waterfall effect as to what that could mean for commercial real estate. Now.

9:57

That doesn't actually put it really much pressure

10:00

at all on commercial loans, for office, retail, industrial, you know, anything that's basically not multifamily, because multifamily is kind of packaged up, it's a very different industry. It's a very different type of loan, very different type of assets. So, but interesting to think through what that could actually imply and mean for lending moving forward.

10:24

You know, the Fed chose not to hike rates again, for the second time, treasury yields are actually down, the stock market is up, the job market is pretty strong.

10:36

You know, CMBS, defaults remained flat at, you know, 2%, give or take. And those are all really positive economic indicators. So it's interesting talking to, you know, investors and brokers that are on the front lines, saying, we're not seeing anything positive coming out right now, but the economic indicators are positive.

10:56

That being said, you know, Brian Adams and I were talking yesterday, and, you know, he feels that we're probably going to see, you know, the CMBS, defaults double in the next couple of months. I also believe that,

11:10

just because of, you know, some of these deals are not quite to the point where it's a problem. But if you look at office, mean, he was saying yesterday that 87 or 89%, of Office loans were in default,

11:23

meaning, you know, these, these owners cannot make their payments, which, you know, there's going to be some sort of reckoning there for banks, right? Because either they're going to have to accept that, you know, they're going to write off a part of the loan, which, which causes a lot of issues with their balance sheet, or they're gonna have to find a way to work with the current owners to make sure that those loans don't default, and something keeps happening with them. Let's see Michaels saying,

11:46

another wholesaling question was struggling owners who want to sell be the target client, for example, they have buildings on the market for two years.

11:55

Michael, I would probably stay away from buildings that have been on the market for two years. If that's the case, they're probably overpriced already. Right, I typically don't see good deals sitting on the market for more than six to 12 months. Now, there are some other reasons you could, you could always find a good deal that sits on the market for a while, simply because of complications with, you know, the due diligence or something with zoning and codes or something to that effect. But if a property has been sitting on the market for a while, it's probably not a wholesale opportunity unless they're willing to take a steep discount. You know, if it's been listed at 1,000,005, for the last two years, you probably got to get it at a million and flip it at 1,000,001. Right, make a quick, you know, $100,000 and move on.

12:40

Let's see, Virginia real estate agent, any advice to finding off market commercial real estate multifamily specifically, who wants to sell after this multifamily loan fraud news?

12:52

I don't know that there's a way for you to specifically target multifamily owners that are involved in whatever, you know, potential fraud, this could be because loan documents are often private, and it's very difficult to find that information. But I would say you know, I was having this conversation with our brokers yesterday,

13:12

all you have to do if you're looking for off market deals is go find 600 properties, you can go pull this from your tax records, you know, there's any number of ways you can actually do this, go find 600 properties, and handwrite 10 notes a day, I mean, we actually type out the letter, hand, sign it hand, address it on the envelope, do 10 a day, each quarter, that's 600 contacts, you'll hit them four times a year, and you'll typically see half a percent to 1% conversion on those. So if you're doing 600, I mean, you can imagine you're gonna get a fair amount of opportunities coming out of that. And the reason I say pick 600, because you want to stay in front of these people multiple times a year, you don't want to send them a letter once a year, it's, it's you're not going to be top of mind. And things can change quite a bit in 90 days. So that's why, you know, I tell them like, look, it's really great to go out and find 2000 properties that you can, you know, potentially prospect, but you're not going to be able to get to them all within a quarter unless you're really you know, sending out 2030 4050 letters a day. I have found that 10 letters a day is incredibly manageable, takes you far less than an hour to put all that together. And you can really stay on top and get to know those 600 properties really well. So I would just go find 600 multifamily properties that kind of check your boxes and start prospecting to them and chances are good one out of that 600 is going to be a hell of an opportunity and they're probably facing some trouble right now.

14:49

Do X is saying what is your expectations of valuations dropping by this time next year I feel that many places will experience up to 50% price reduction.

14:58

So I do

15:00

think that overall values are down at least 17 to 25%. Now, that doesn't mean that you're going to start seeing people selling for 17 to 25% less than what their real estate was valued at last year. And that doesn't necessarily mean you're going to start seeing deals transacted, that, I think there were too early into this recession for commercial real estate owners to be in a desperate spot overall, I mean, if you think about it, even even a lot of office even though I just said 87 89% of it is in default, a lot of that is in an OK spot right now, because most banks do not want the keys back, they don't want to deal with with taking those properties, because they don't know what to do with them. They, they're, they're more willing to work with owners right now to figure something out, so that they can just weather the storm. And most other commercial assets are doing okay, you know, I'm not seeing a whole lot of distress out there, outside of, you know, syndicators, or groups that, you know, put too much leverage on their assets and haven't been able to accomplish, you know, what they said that they were going to get. Now,

16:09

I think there's going to be some deals out there, right, I mean, every year, there's always a certain number of commercial real estate loans that come due. And a lot of those owners won't have the ability to refinance, because they're not going to have the debt service coverage ratios that they need, or, you know, whatever else may be going on, and they're gonna have to sell at a loss and take a discount. I mean, it's it really comes down to market timing. You think about all the developments, I mean, there's supposedly over 600,000 apartment units that are set to be delivered in 2024. You think about that, I mean, those developers were buying that land back in 2020, and 2021, to put those deals together. They couldn't have predicted necessarily, I mean, if you go back and look at how much money we were printing, you could probably think, yeah, there's gonna be a recession here in a minute, because they're gonna have to curb inflation. But, you know, they, they just timed the market poorly, it was a hot time to buy a bunch of real estate. And if you have 600,000 units coming online, in a single year, there's going to be a lot of vacancy, which is going to be good overall for affordable housing. But when you're building at $280,000, on average, including the cost of the dirt, it doesn't make sense anymore. I mean, when you're when you're competing, I mean, you're gonna start seeing 345, maybe even six months of free rent on some of these apartment deals, just people trying to get them filled, so they don't have to deal with it. But I do think prices are down.

17:35

Is extra saying, Hey, Tyler, new to commercial. Can you talk a little about your underwriting process and selecting new projects to take on? Are you finding it hard to cash flow with interest rates and vacancies?

17:47

ICEX welcome to the channel. Welcome to commercial real estate. So my underwriting process, I'm very conservative I like to underwrite to a 12% cap rate. Now, that doesn't necessarily mean I'm going out and looking at a fully stabilized property that's asking for a 6% cap rate and a Walgreens and saying, Oh, I'm gonna give you half the value.

18:06

I tend to like heavy value add deals, where there's either high vacancy, or,

18:14

you know, there's a big need for renovations, because then we can come in and force value. And so that's why I underwrite to a 12% cap rate, it helps mitigate my risk. And you know, if all things go wrong, we can still get to an 8% cap rate, and we're probably going to be fine. So I'm very conservative in that respect, I typically assume you know, up to 18 months of construction, so zero cash flow coming in, and then another, you know, 12 to 18 months for lease up depending on the size of the property. And I try and beat it up as much as I can. I've got a few videos on underwriting on this channel, you're welcome to go check those out. And you can kind of see my process for how how I like to look at deals conservatively. And then I'll go through and stress test it. Alright, so I'll say okay, well, what if we end up getting $2? A square foot less in rent? What if it takes six months longer to get a space leased? What if you know, renovations go over cost by 10 to 20%, just so that I can see, okay, if if everything goes wrong, we're still probably going to be fine. And that's kind of how I like to run my underwriting process. As far as deciding what deals to take on right now.

19:28

Very different than it was 18 months ago, 18 months ago, I would have been probably more comfortable taking on a heavy value add deal like that.

19:35

Now, I'm going for more cash flow, which is why we haven't you know, if you're on my investor list, I get reached out to by my investors all the time, like, Hey, you haven't raised capital for a deal this year, what's going on? And it's because I haven't found anything that I feel comfortable taking to my investors. We haven't bought a single deal this year. You know, and gosh, the two three years, really the two years before this year, we bought over $50 million with a real estate so

20:00

Oh, it's

20:02

it just hasn't been a time for me where it makes sense. Now, that being said, we're looking at a few deals that pencil. And they make a lot of sense today, like, that's what I'm looking for, if I can get some sort of seller financing or something,

20:16

some sort of good enough deal to where it's cash flowing as is, without making any improvements, then we'll probably make a move on it, especially if it's a lighter capital raise right now, because I'm probably going to be bringing 30 40% equity down, simply because of where interest rates are and where the uncertainty is in the market gives me much more stability in my investment. So you know, we're looking at a self storage deal right now, it's got a little flex building on it. And it cash flow is day one, but we can also add 40,000 square feet of flex space to it, and probably another 180 self storage units. So that's a great value add opportunity, but we don't have to do it to get our investors a good return. Like if all things fail, and we just sit there and cashflow it. Well, we'll be able to ride out the storm it'll do well.

21:07

Let's see Jake is saying and your latest, Matt on a free episode around 910. You said you don't have to tell them what they paid for it, though it is public information, they can go check the records. How is that possible?

21:19

Well, it not all states are like this. But in many states, Tennessee is one of them. Texas is not

21:27

the purchase price of the property is public record. So you can go to your tax records and see what the properties have transacted for oftentimes, you can also look on costar or some sort of, I mean, I'll usually look at the Nashville Business Journal. And they'll report on what the purchase price was. So you can go back and see, sometimes not not every state has this, but you can go back and see what somebody bought their property for. Now, I will caution you against that. It doesn't necessarily matter what somebody paid for their property when it comes to what they're going to sell it for. I've had investors in the past get upset. For example, I paid $5.6 million for peerless mil,

22:10

this, the seller bought it for less than $500,000. So I mean, we're talking about a 10x plus return on what they paid for it. Now, they only bought it three or four years before I did. So you think about it like well, did they really increase the value of it 10 plus x to get to a $5.6 million valuation? Probably not, they just got a better deal on it three to four years ago, and I still got a hell of a deal on I paid $3 a square foot for that property, it's one and a half million square feet. So you know, I just say that, you know, take it with a grain of salt as to what somebody paid for it. Because just because they paid, you know, almost nothing for it doesn't mean that they'll take anything close to that. Because if they're relatively sophisticated, they know what it's worth. And that's what they're gonna sell it for.

23:03

Let's see Matthew saying good morning, Tyler. Sorry, not a commercial question. But thoughts on residential wholesale company rebuilt?

23:10

That's funny. Matthew actually know the owners are the founders of that company pretty well. They because they're based here in Nashville, they seem to have a pretty good program pulled together. I really liked the leadership team over there. Those guys know what they're doing. And, you know, I'm not a big residential wholesale guy. But I've looked into the platform that they're putting together. And I think that it is a pretty great solution to an outstanding problem, right? I mean, you can go on there. And they have a whole database of residential properties that they're looking to wholesale. And what I like about what they're doing is that they're taking a volume approach, instead of you know, your typical one off wholesaler approach, which means they don't have to mark up their deals nearly as much as your average wholesaler does in order to make it make sense because they're, they're talking about dozens if not hundreds, or maybe even 1000s of wholesaling deals. Instead of you know, your typical person doing maybe 10 to 20 a quarter. So they don't have to make nearly the

24:17

they don't have to make nearly the margin on one single deal as your average wholesaler does. So that means better opportunities for investors. So yeah, I mean, you know, again, I've never used it. I'm not a big, you know, residential.

24:31

Home wholesaling guy. I'm gonna be getting into that here soon. Some of y'all may know that we're starting a construction company. And we're going to be doing some residential flips and development, because that's actually where I cut my teeth back in the day. My first project was 42 townhomes down at Bellevue. So yeah, I'll probably be looking into it here more soon. And in seeing what they're offering but yeah, I think I think you guys should definitely go check out rebuild if mean if you're into buying residential the

25:00

at a discount. That's that's where you can do it. So let's see, Duster is saying Nashville Business Journal with Jim's yet natural Business Journal is great Nashville post is awesome. I mean, we are always following our new sources because they are on top of it. I'll tell you what I mean, the reporters in Nashville are really good at at uncovering deals and seeing what's going on and talking about all that stuff. And it always helps to just stay on top of the news. So you know, curate, you can get newsletters from these groups. If nothing else, it helps you stay involved in the market, to know what's going on what's transacting, what corridors might be popping off? What trends are going on in the market, you know, they're all they're reporting on a little bit of everything, when it comes to commercial real estate in Nashville. And you know, most cities have a news source like that. So definitely jump, jump in there and get educated, it's the best thing that you can do, when it comes to commercial real estate is just know your market very well know what's going on in the world of commercial real estate as best as you can. And, you know, do everything you can to learn. I mean, that's, you guys are in the right spot if you want to do that, right. I mean, this this podcast, we've got Gosh, over, I don't know, I think over 160 episodes released at this point. It's just kind of crazy to believe that we've gotten to that. I mean, the YouTube channel has over 350 videos now. And it's, it's really fun to see what it's become, you know, I started this back in 2021, I had literally nothing else to do. Nobody wanted to buy any real estate, I wasn't buying any real estate. And it's kind of wild to see, you know, three years later, what, what this is turning into, it's becoming its own business. And you know, I've got a full studio now, which is pretty cool to have set up. And it makes my life so much easier. Whenever I'm going live and live streaming to your let's see Michaels saying Any comment on us home sellers class action case in the news. Michael, I assume you're talking about the Commission's issue. And I've got a couple of thoughts on that. In AR, you know, just got sued in the class action lawsuit along with a couple of other residential firms for allegedly,

27:13

I guess, setting commissions or conspiring to set commissions. And I mean, I fully agree with that if people are conspiring to set commissions, you're not supposed to do that. I mean, you can set Commission's to whatever you want. But if a whole bunch of people get together and say no, we're all going to charge 3%. We're all on the same page, then yeah, I mean, that's price fixing. So I

27:37

you know, we'll see where it goes. I think that it could be the end of buyer reps in residential real estate, which has been going away for a little while now. We'll see where it goes.

27:48

Grant, Tyler, from an investor standpoint, if you had to start over what would you do differently today for your investment portfolio? Grant, I actually have a really good video on that where I think it's literally, if I started over today or something, something along those lines. And I kind of talked about everything that I would do. I mean, I think that I wouldn't change a thing. We've done a really good job of diversifying our portfolio and making sure that we can ride out an economic storm. I mean, we don't have any properties in distress right now. You know, we're dealing with some issues on the construction side for my hotel, but that's to be expected in a market like Nashville. I think that we'd be dealing with that even if the market was totally fine today, so I wouldn't change the thing. I mean, I think that we've built this out pretty well.

28:33

Virginia saying best option for financing six units rent at $700 but can be $1,000 A month tenant occupied for sale as a three side by side duplexes outside interiors for sale for $240,000 each individually ARV comps 250 to 300,000.

28:49

I mean, it depends on what you're wanting to do. If you want to do just do a quick flip hard money could be a good option. But I'm a big fan of local and regional lenders banks.