What Is A "Deal," Flex Space, The Future of Residential Agents (Office Hours)
This episode of Office Hours dives into what I think is a “deal” and what isn’t, the future of flex space and that asset class as an investment, the future of residential real estate agents after the NAR ruling, and more.
Get commercial real estate coaching, courses, and community to jumpstart your investment journey over at CRE Launch Pro: www.crelaunchpro.com
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. Welcome back to the commercial real estate investor podcast live from the condo group Studios here in Nashville, Tennessee. This is our office hours edition We're going live every tuesday at 8:30am Central Standard Time, I will get you all a schedule of how things are going to look towards the back half of December and the front half of January I typically take about 30 days off so we will likely not be doing these for a little bit. Also bear with me today my voice is a little bit scratchy. The if you're if you're a hockey fan the predators last night one of the wildest comebacks and wins I've ever seen in hockey, we were losing to the avalanche three to two the avalanche are a better team than we are this year. And in the last minute basically of the game, we scored a goal, got it even and then in under 20 seconds scored a second goal and came back and won with probably 21 seconds left in the game. So of course everybody was going wild and I happen to lose my voice a little bit. Can't help it big Preds fan. And that was a very exciting game to watch. So office hours, this is the time for you all to come join me live. ask whatever questions you all have about commercial real estate. I believe next week I actually have a member of the audience that's going to be sending me a deal for us to take a look at. So we'll probably take 10 to 15 minutes to dive into that deal. If you have any deals or you have anything that you want to send to me ahead of time, so that I can present it and we can talk about it live, you're more than welcome to do that. The email is office at the capo group.com That is also in the YouTube description and in the podcast description if you want to reach out. Before we dive in any questions, let's catch up on what's been going on over the last week. So you will I release their emerging trends report, we had a great panel discussion in here at the studio, I highly recommend going and checking that episode out. If you're if you're on the podcast, it should be up by now as well. But it was it was excellent. We had at Henley, Sheila Barton and Brittany row in here to dive into what is trending in real estate in 2024. Really exciting to see what's what's going to happen in the new year. I mean, I know a lot of people are nervous about it. But it's it, there's just a lot of opportunity that's going to be out there. I think that I think there's actually going to be a lot of opportunity in the office space environment. I know that a lot of people are worried about office space, it's so easy to talk bad about how office is dead. But let's be honest, 2008 Everybody said that housing was dead. It's never coming back the housing market is done for not true. It came back in 2010 2011. The retail Apocalypse retail is done. It's it's never coming back? Yes, it did. They both just changed a little bit. And I think the exact same thing is going to happen with Office. You know, look, I could be completely wrong. But I firmly believe that the office environment is critical to the way that we work. I think that there will always be some sort of hybrid office space, or, you know, hybrid work from home model. Now, I mean, we have the technology to utilize that. But you cannot replace culture, and teamwork and things like that remotely. And also as an employee, you're not going to be as valuable to a company if they can just easily replace you because they're having to manage you remotely. Businesses also need professional spaces, right to host clients to host events to host team meetings. So I think there's a lot of value in that. And honestly, office is going to be on sale. We talked a lot about interest rates and where we're headed next year. And it's it's interesting to think about, you know, I have a feeling that that interest rates are going to remain flat. All of 2024 It just seems to me what would track but the biggest thing again, we've talked about this before, it's an election year. Who knows what's going to happen? Every single morning Tyler appreciate what you do. Good morning, Anthony. Thanks for joining us. Glad to be live with you all. Let's see I also was at Hamza always flexpays connect in Austin, Thursday and Friday. Had a great time at that event. It was hosted at the Circuit of the Americas, which is a Formula One race track. I guess they could probably host other racing events there. But that's the biggest one that they have. And I'm a big fan of Formula One, I've actually been to a race there probably six or seven years ago, what an awesome place to host an event I loved connecting with you all. For those of you that were there at the event, it was really neat, getting to meet everybody in person, because I recognize some of those names from commenting on my videos, and reaching out to me, probably one of the better networking events that I've actually ever been to. Let's see eight sign of the zodiac is saying I'm interested in learning about the type of deals you look at, what's the definition of a deal? I just bought a mixed use unit. And we'd like to know if it qualifies. So that's a good question. You know, the types of deals that I look at our, you know, we like to invest within neighborhoods, right, so I don't like the urban core, I don't like the suburbs, I prefer the neighborhoods that surround the urban core. So if you're familiar with Nashville at all, that would be mostly East Nashville and Madison, that's typically where I'm buying a lot of real estate. But I'm not opposed to buying in Germantown, the nation's Wedgewood Houston. You know, anything that's closer to the urban core, has a growing population, and has a story to be told. I've looked at other markets like Huntsville, and Huntsville is a very strong growing market. But what we do is a little bit different, right? It's it's more of your hospitality focused, kind of cooler hip types of deals. And the demographics in Huntsville don't really strike that. Right, they tend to get married younger, they tend to start having kids younger, which means that they're not going out as often, which means that the types of projects that I do don't make sense. So I look for a younger demographic, it's why I love Chattanooga so much. To me, I'll invest in any type of property, it doesn't matter if it's office, retail, industrial, hospitality, we're doing a hotel right now. I'm really open anything, as long as it's in the right neighborhood, there's a story to be told, and there's something really cool that we can do with it. I love value and adaptive reuse, when I'm looking at those projects, I try to find something that is severely under market compared to replacement costs. So if it costs today to build an office back for $250 a foot, and I can find an office building for $80 a foot, drop $50 A foot and renovations into it and bring it bring it to market at below market rental rates. That's a great opportunity right there. But it all comes down to the underwriting, you know, I like to double my money every five years, or at least my investor capital. So if if we see a very clear path to doubling our investor capital over the next five years, then it's probably a pretty compelling deal. So if you have deals, I mean, this is one thing I was talking about quite a bit at the flex space conference. You know, if you want to partner with me on deals, if you want me to come in as an advisor in your GP, I am open to doing that I will look at your deals, and we can talk about it and discuss that structure. I have done that before with members of my audience in the past. So I'm always open to looking at deals and coming in and as an advisor and seeing how I can kind of help you guys get your own deals going. As far as you know, trying to figure out if it qualifies as a deal. Like I said, it all comes down to the underwriting and it all comes down to what's going on in the market. I mean, I try and find something that has a really good, just cost basis. Right? I mean, again, if it cost you $250 A foot to build an office building, and you can buy one for 80 bucks a foot, that's pretty compelling. Even at 80 bucks a foot, you could probably add, you know, some 14 foot roll up doors, turn it into flex space. And now you've got a really compelling story. So I look at you know, what is it today? What could it be? What does the zoning allow? And what's the future viability of this as a redevelopment project? So there's a lot of things that we take into account whenever we're looking at any one given project.
Rich with Carson saying good morning, Tyler, if you're Oh, you are correct about Office as per one of your videos, look at what various spaces doing. I completely agree. I mean, I think that we have a glut of office buildings. I think there's too many office buildings out there. I think that most companies will will likely start to downsize but not eliminate their office portfolio completely. I think that flexibility is going to be key moving forward teams want to be able to, you know, go from having some private office space if if employees want to work from the office one day to turn in the entire thing into an event space where they can host people. You know, it's it's, there's a very compelling story there. I know I keep going back to stories. I just, that's the way that I like to think. But, you know, it's, it's a big part of a company's brand. And you know, think about it I mean, if you're gonna hire an attorney, and the attorney says, Oh, I work from home, let's meet at a coffee Be Sharp, are you really going to hire that attorney to represent you? I wouldn't. I mean, it just to me, it just doesn't seem very professional. Right. So there's, there's something to be said there. So guys saying good morning, Tyler, nice chatting with you Overwatch flexpays Connect. Likewise, man, appreciate you, you coming up and saying, hey, it was great conversation, I really enjoyed flex space connect, there were some good conversations to be had. It was nice being a panelist there and talking about, you know, kind of my experience of flex space. I love the flex space environment, I think that it's going to be a big asset class gonna be a big winner in 2024. I mean, let's let's talk about the fundamentals of why why flex space is going to be so good. And if you guys have any other questions, feel free to jump in, we'll get to them. But flex space is in high demand. There are a lot of businesses that can utilize flex space. Again, I talked about flexibility earlier with the office environment, through about flex space. It is inherently flexible. You can accommodate, you know, small manufacturing, to e commerce to podcast studios, to you know, the HVAC technician that just needs a place to store all of their things and do their bookkeeping. The problem with flex space is that a lot of it's getting torn down. Which means that there's a lot of opportunity there. Think about it most flex space historically, has been located closer to the urban core of downtown's because it's convenient, right, you can easily access the interstate get around the whole city and access it from living anywhere in the city. But the problem with those sites is that a lot of them have a higher and better use, right. So people are buying them, they're tearing them down, they're building back retail, they're building back multifamily, they're building hotels, which means that that product is being pulled off the market. Now you combine that with the fact that over the last 10 years, most industrial developers have been focusing almost exclusively on building large scale distribution, manufacturing facilities, and almost no flex space. And you've got a recipe for you know, a very high demand product with very low supply. And it's not uncommon for a lot of these projects to be fully leased. By the time they deliver me we see it all the time. I've been telling developers for five years, go build flex space. I mean, that is the the one of the aside, aside from affordable housing, it is probably the most in demand asset class out there. And that's what we want as investors, right. I mean, I know a lot of y'all are just getting started in commercial real estate. And one of the most frequently asked questions I get is How do I find tenants for these spaces. You know, it worries me getting into commercial real estate because I know in residential I posted on Zillow I posted on apartments.com I posted on Craigslist, and I've got, you know, 100 tenants applying, you're probably not going to have that same level of demand. When it comes to commercial real estate. There's just fewer businesses out there. But you pick an asset class that has very low vacancy rates, right industrial think across the country sub 3% vacancy, at least in some markets it is. And those tenants, you know, you put a sign up, you get a good broker working on the deal. And chances are pretty good that you're gonna get that filled relatively quickly. You can also post it on online marketing place. Yeah, online marketing places and do everything you can I mean, we like to do videos on our properties, we put fliers together, put nice big signs out and just build a nice product that's in a visible location. People are going to drive by et Cie, your for lease sign and want to come lease space there. So if you're worried about getting into commercial real estate, because you don't know how to find the tenants, flex space is a great first step into the market. Because you don't have to worry, of course, I can't say that about every single market within the country. But it's relatively easy to find tenants for these. Dukes are prepper counties saying is the market and is the market cycle of concern. I know that traditional real estate gets affected first and market crash and then commercial. These are just waiting or continue if it meets income requirements. It's a great question and it's one that is asked about real estate in every market cycle right? Is now the best time to buy. Well, the best time to buy was really, you know, 1020 3040 50 years ago. The second best time to buy is today. I think that if you can get a good deal that is covering your mortgage and who If we making use of profit, then it's always a good time to buy, you know, especially if you feel really comfortable with a tenancy and the cash flow on the property. Because you know what you can refinance a bad interest rate, you can't refinance a bad purchase price. So if you get a deal on a property today, and 345 years, it's going to be a screaming deal, especially when you can refinance into a lower interest rate loan, and probably pull some cash out by that time. I mean, I always think it's a good time to buy commercial real estate, I think that now more than ever, you've just got to be more cautious, right? I don't think that, you know, we're not going to see the easy real estate game that we have for the last few years. Real estate has been too easy, right? I mean, you shouldn't be able to just jump into real estate, make six figures your first year, and think that yeah, this is this is how it's supposed to go. Right? There's a reason that developers get paid what they do that investors get paid what they do. And there's a reason that some people lose a lot of money in real estate. And it's because it takes a lot of knowledge, it takes a lot of work. And those who understand it, stay in the game, right? But those that don't, they'll get in, they'll lose a bunch of money. And then those are the people that say, Oh, don't invest in real estate, it's just a, you know, it's just a losing game. But, you know, those are also the people that sell when the market is at the bottom, and they buy when the markets at the top. Right, if everybody you're running into is saying got real estate's so hot, I can't wait to you know, go buy an apartment complex, you start hearing people talk like that, that means that there's probably too much, you know, the markets too frothy, there's way too much going on. And we've we've had that for the last three to five years. I mean, we've seen, you know, even big investment groups going out and raising a whole bunch of capital that have never had any experience buying real estate because they wanted to get into the apartment game. And there are even the professionals can get it wrong, right. I mean, there was a group that night and Gil portfolio in Houston, we've talked about that before on the show. But that guy went out raise capital to buy 3200 apartment units in Houston, put it on a floating interest loan, you know, an adjustable rate mortgage, which never in the history of the United States has that ever made sense to do. And within, I want to say six months, give or take, his interest rate went from 4% to 8%, the portfolio went completely underwater, he gave the keys to the winner and disappeared. You know, it's it's not even necessarily market timing. It's just your savviness as an investor. You know, today, I think properties are worth probably an 8% cap rate. I mean, the types of properties that all of us here are looking at, right i mean Class A assets, I was having a conversation with an investor in Austin. Class A assets in Austin new construction are probably five and a half to 6% cap rates right now. So if the absolute cream of the crop brand new construction 100% occupancy deals are trading at a 6% cap rate, then the value add opportunities have to be trading at a seven and a half to 8% cap rate or higher. That's just how it works. There's inherently more risks, you should get inherently more returns. The problem is people keep going out there and buying things at 6% cap rates or 7%. Cap rates when it's clearly a value, add play. And there's just too much risk there. I don't like the risk adjusted returns, you can get on those deals. Rich with Carson saying regarding commercial real estate market cycle, I believe that we're already headed into correction territory. I'm a commercial real estate broker in Central Florida and started seeing cap rate repricing by 25 to 150 basis points and clusters.
I think that we've been in market correction for the last six to 12 months. The thing with commercial real estate is that it takes a while for there to be enough comps for us to actually see it happening. You know, interest rates spiked. Or they started going up last what August September. And they've been going up ever since. And you know, I stopped by in January. I mean, we haven't decided to move forward on a single asset. I'm sure my limited partners, my investors are all sitting on the sidelines going you know what the hell, we want to put some money into your deals, but I'm being picky, you know, and deservedly so, I mean, the market is more uncertain. I don't want to just go raise a bunch of capital to buy a mediocre deal. I'm gonna wait for a better deal to pop up and you know, whereas I was probably looking at 50 to 100 deals to find one before I'm probably looking at 500 now, and that's okay, right? Because when we find that one, it'll be an amazing deal. We'll go raise capital for it in a workout. But as far as we pricing goes. I mean, there's a, there's a couple of multifamily assets that are great cops in the Austin market that went to market at these are both new construction deals when delivered, you know, earlier this year, and or maybe end of last year, and it's sold, I think they were asking like mid for hundreds per square foot. To sell that asset, they ended up getting high three hundreds per square foot, they delivered the second phase of that project and went to sell. And it's at $250 foot, talk about a massive decrease in Pricing and Value, almost the exact same product, just market timing. So I think that we're down at least 25% across the board for commercial real estate values. I think that we're not going to necessarily see that because a lot of sellers aren't going to accept a 25% decrease in the value that they thought they had in 2022. But we're going to start to see more of that. And 2024 as some sellers have no option, right, they can't refinance, the new interest rates won't allow them to cover their debt service coverage ratio. Maybe they just want to move on get out of the market, there's any number of reasons for it. But I also don't think that it's necessarily a bad thing, that real estate values are down 25%, if you're not trying to sell today, I think it's a great thing if you're trying to buy, because real estate historically goes up 3% a year. So, you know, if we if you if you're able to buy at a 25% discount today compared to what it was last year, that's a pretty good deal. You know, it'll, it'll keep going up. And one thing that I'll say too, when it comes to the market, real estate appreciates, historically, at 3% per year, historically, like over the last 100 plus years, it has gone up 3% a year. And there are so many investors out there that get these blinders on that look at what the market has done over the last three, four or five years. And think, Oh, well, you know, Nashville has gone up at 10 to 20% a year, it's gonna keep going up at 10 to 20% a year, I'm only using a 12 month lens instead of a 10 year lens. And when you do that, you get yourself into a lot of trouble, because there's going to be a correction, it averages 3%, historically. So if you're seeing 20% In one year, you might be able to get 20% 10 to 20% the next year, but at some point, something's going to happen to bring it back down to that average. It's an average for a reason. So you know, I think that there's gonna be a lot of opportunity out there, I really do, I just think that it's going to take a lot more work. And this is where we're going to see, you know, who is a professional real estate investor, and who is just dabbling because the market was easy to buy in. You know, I was, I've actually been kind of looking forward to a market crash for a little while now. I mean, honestly, since probably 2018, when I thought it was originally going to go down. Because we'd been you know, the economy had been so hot for so long. You think if, you know, we run in 10 year cycles, it should have happened a few years ago. But, you know, in Nashville alone, there's over 12,000 residential real estate agents 12,000. Why? That's way too many real estate agents, and a lot of them have no idea what they're doing. And the same goes for commercial, I'm not just picking on residential, there's an honestly investors, there's too many people that get into this game that have no idea what they're doing, that are able to just ride the wave of the market being hot. And you know, what's, what's the saying, when the tide goes out, you can see who's swimming naked. I mean, that's, that's what we're seeing right now, there's a lot of contractors out there that don't actually know what they're doing. A lot of investors, a lot of, you know, brokers, it's it's all across the board. So there's gonna be a lot of people that are getting out of this industry that don't want to go back to him, they're burned, they they lost a bunch of money, or they don't like putting in hard work. Which means that for those of us that are willing to stick around and ride through it, there's gonna be less competition, fewer people going after deals, which means you've got a really good buying opportunity and more leverage to negotiate with sellers. Right? I mean, for the past few years, it's been a seller's market sellers can kind of come in whatever pricing they want. Now, it's a buyers market. You know, that's what we've always talked about how wanting right everybody wants to be in a buyers market where as the buyer, we have more leverage. It's gonna take more work. That's just part of it. But now is a great buying opportunity. And I'm looking forward to it. We'll see kind of what we decide to move forward on. And 2024 There's no specific asset class that I'm targeting. I mean, if some land comes up to develop a flex deal. And the numbers make sense. I'm doing it. If an office building pops up, and you know, it's got, you know, smaller offices, or I could convert it to medical or tech office, or data centers, I'm doing it if a hotel comes up, and it's a really compelling story, and the price per door is cheap enough, and I can see I mean, Nashville's tourism is on fire. It's one of the hottest markets in the country for tourists. But it doesn't really matter to me, it just all comes down to you know, can we get the loan? Right? That's probably the biggest thing right now is, can you actually secure lending on the project? And that's, that's the toughest part, right? I mean, that's why it's so important to build relationships with lenders, make sure that you're working with them in good times and bad times. But also have some additional resources like private money. You know, there's a lot of dead funds out there. Now, I think private money is going to be big in 2024, because a lot of banks are pulling back, that there are private money lenders that are willing to go out for 910 11% interest rates, which let's be real, it's not that far off from a traditional bank loan, they can typically move a lot faster, offer you more flexible terms. It'll be interesting to see what happens in the debt markets, right? Could this be a big shift away from traditional lenders, to where we've got more private money coming into the market, and really changing up the lending game? That's one thing I would love to see. I mean, aside from construction, which Gosh, construction is an absolute nightmare, the fact that we haven't figured out how to manufacture, you know, 80 90% of what's going into these buildings within a, a manufacturing facility to eliminate the need for all these terrible contractors. Again, that's why I'm getting my contracting license blows me away. But I think lending also needs to modernize. It just does. Duke's is saying, Do you believe that sellers agents are going away or just renegotiated contracts for sellers to pat the agents? You know, I think that I think in commercial real estate, we're going to be fine for a while, these deals are very complicated, and they can be very intensive. And you have to have a commercial real estate broker that's there that understands the market, understands the ins and outs, and understands the nuances and complexities of that specific deal. The difference in residential real estate is that every deal is relatively templated. Right, you've got a three bedroom, two bath house is in a neighborhood is the same as the three bed two bath house down the street. And so it's very easy for there to be significant amounts of data on what a three bed two bath house is going to trade for. Whereas an office building down the street from another office building, those could have two completely different sets of tenants. One could be more medically medical office focus, the other one could be or general office focused or professional services.
One could, you know, even be a data center, right, they're all very different than one could have more local groups and the other one could have national tenants. And the credit of those tenants is going to heavily impact what the cap rates are. And so it'll try to vary those two very different costs. They can be two identical buildings. But based on the leases that are executed and the tenants that are in there, that could be two wildly different prices. Whereas in residential, it doesn't really work like that. So you have to have professionals that work on commercial deals and transactions that understand the ins and outs of that deal. Whereas in residential, I mean, let's be real Zillow has been working towards getting rid of residential agents for the longest time. And the funniest thing to me is that residential agents are paying for it. They are advertising on Zillow, giving them revenue while Zillow is actively taking that money and finding ways to get rid of agents. So I think that there's a very strong chance in the next five to 10 years that most residential agents become obsolete. I think that there are there is a contingency of residential agents that are really good at what they do. And they will be around because the value that they bring to the table is worth the three to 6% that you're paying them. Most residential agents though, take photos, put it on Zillow, and blast it on the MLS. That's all they do. I mean, I've seen buyers reps that all they do is put you know their buyers on a drip campaign. Right it's automatically done through the MLS. And they're not even actively searching for these people. It just sends them something every day it says hey, here's some new properties that you know check your box's why couldn't a buyer just do that? Why couldn't a seller you know, just take pictures of their own house It, it's tough to see what the future is for residential real estate agents, I think that there's a very real chance that a majority of them go away. And I think that's fair. I mean, I think that, you know, for as big of an investment as a residential home is to have people that come in with only 90 hours of education, that's not even good education. I've been through these classes myself, they don't really teach you a whole lot. It's kind of wild. I mean, you think about Wealth Advisors, financial advisors, they have to go through an immense amount of training and certifications in order to advise people on investments. So that's probably a controversial take. I get it. I'm probably gonna get flamed in the comments or on the podcast for my thoughts on on the future of residential real estate agents. But it's, it's just the truth. I mean, I've been feeling that way for 567 years and Zillow really started growing, that it was very clear what they intended to do. That is all the time we have for this week's office hours. Join me live Tuesdays at 8:30am Central Standard Time here on YouTube to ask me your questions about commercial real estate, and we will see y'all next week. 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
Each week, I'm going live at 8:30am CST for my "office hours" to answer your questions about commercial real estate on the show. Let's hear what you'd like to know when it comes to brokerage, investment, and development!