Commercial Real Estate Investing in 2024 (Investors Round Table)

It's been a wild year for commercial real estate and 2024 is shaping up to be somewhat the same. With high interest rates, an uncertain economic environment, and inflation on the rise, will commercial real estate be a good investment in 2024? What strategies should you employ as we're heading into the new year? We're diving into that and more in today's investors round table.

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Key Takeaways:

• The real estate market is facing challenges like higher costs, difficulty obtaining financing, and uncertainty about the future. However, this also creates opportunities for investors who can find good deals.

• Local politics and policies have a major impact on real estate markets, more so than who is in the White House. Investors need to pay attention to their local areas.

• Expectations for investment returns will likely need to be adjusted downward, with a focus on cash flow over high IRRs.

• Rising costs like insurance are major issues in addition to interest rates, making deals harder to make work financially.

• 2024 may see opportunities emerge as developments from the past few years deliver properties into a difficult market environment. Having cash available will be important.

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

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0:25

Welcome back to the commercial real estate investor podcast today we are alive with a another investors roundtable today diving into commercial real estate investing in 2024. What are we seeing what's it going to be like out there in the market? It's a very interesting time. I've got this report that I looked at this morning that I wanted to kind of start off our conversation with Treasury yields are down. It's actually the lowest settles since September according to the Wall Street Journal. The Federal Reserve decided for the second time in a row to keep interest rates unchanged, the stock market is up labor market is strong CMBS debt delinquencies are pretty much at the same economic indicators say that. I mean, if you're if you're basing everything off of that, that we're probably starting to level off, maybe we're headed into a positive direction. But it's interesting being on the front lines, because I am not feeling that whatsoever. And I wanted to see what these guys are feeling too. As always, we're joined by Bryan Adams, Logan Freeman and Dave Comadre. For this episode of the investors roundtable. Brian, I want to kick it over to you first, what do you you know, before we kind of dive into what we're gonna be doing in 24? What are you feeling out there right now?

1:37

Yeah, I mean, before we went live, we were kind of talking about this, it's, it's pretty grim out there amongst operators and funless sponsors like myself and a lot of the GPS, I know, I'll give you kind of some anecdotal data points, maybe, amongst we have about close to 25 kind of active properties in the portfolio. A number of investors obviously have exposure across those assets. Pretty much anyone that has more than three plus positions is asking us for a portfolio review. And we're probably doing two or three of those a week. And the sentiment amongst the investors that I meet with, let's call it kind of a ultra high net worth individual or family office where I'm a small portion of the overall alternative portfolio. I'm going in there and saying, Hey, probably 25% of our portfolio is impaired in some way. Either pausing distributions or having some kind of issue involving could be anything capex, operating expenses, etc, refinancing risk. And most of the LPs are saying thank you, to me, because when they're speaking to their other fund managers, or other GPS, private equity, venture capital, etc, their impairment ratio is probably 50% to 70%. So it's not necessarily your specific exposure. If you're a GP or sponsor, you have to understand that the overall LP world if you're a high net worth individual or family, it feels it feels pretty tough out there. Because their overall exposure is tremendously impaired right now, if that makes sense. Yeah,

3:22

I mean, it pays to be honest with your investors, I've always seen that I know, it's really difficult to do so. So kudos to you for for being straightforward with them. 25% is pretty good. Considering where everybody else is right now, I know that 25% from the people that I've talked to is a very low number. So I mean, that just points back to you know how conservative you guys are and what y'all do as operators. Can you explain for those in the audience that may not know what a portfolio review is what that actually means? Sure.

3:54

So if we have 25 assets total within our portfolio, if an investor is invested into 10 of those properties, we will do a sit down or a zoom call with them. I'll bring in my asset management team, I'll bring in my finance team. And I'll bring in usually my VP of acquisitions as well, because they're going to want market commentary. We'll give them our global macro view of the world, like what we're seeing in real estate, what we're seeing kind of big trend wise, and then we'll do a deep dive into every single asset that they own. From a balance sheet perspective. From a leasing perspective, capital expenditure, deferred maintenance will go into the financials, and it can be anywhere from one to two hours depending on how many positions they have. And, I mean, it's an exercise, obviously, that we do internally. But it's something where, you know, I'd say we're probably doing two of those a week. And again, I think it's really important even though I agree with all the statements you made, if you're talking to investors that have invested in venture capital, or leveraged buyout, private equity, or anything that has kind of asset, heavy non stock market, correlated investments, they're feeling, they're feeling really bad right now. Because if you look at in our world, we look at cap rate, right? But multiples on EBIT, da multiples on revenue, whatever the kind of terminology data point you want to use, when rates go up this high this quickly, those asset values fall tremendously. And if you have to mark them to market, your portfolio is probably down somewhere 40 to 60 plus percent year over year. Yeah,

5:41

I was listening to the all end podcast yesterday, and they were talking about how stripe is, you know, there, if they go public, they're going to really set the new starting point for valuation of companies because they are run so well as a private company. And everybody knows how well they are run, that, you know, they're going to set the new benchmark for what these companies are going to be actually valued at. And it's, if they go public, it's going to probably devalue a lot of other companies, because everybody's going to look at them and say, No, it will have stripe is valued at this, there's no way you're valued at x, right, because they're very well run and they're in, you know, pretty strong health right now.

6:21

Yeah, and I don't want to hog all the airtime, I've got to leave at 230. So I want to make sure I kind of share. But Dave and I were at a YPO event. The other week in Nashville, it was a lot of other groups that look similar to us. And it was depressing, the sentiment was really nice, it was really negative. It was really tough. And if you just look at to your point, Tyler, like volume, depending on your product type is down 70% year over year in terms of transaction volume. So you've got to realize that the stuff that is trading is probably not trading at a very competitive price. So if you're in the market trying to buy or sell something, and everyone else around you is saying, Well, yeah, but you're looking at a 70% discount, seven 0% discount, then you're upside down on your position, even though it's illiquid, right, and that's kind of the hard thing to address right now. And I'm a little bit more pessimistic than most folks, because I do think the banks are trying to hold off having a mark to market as much as they can. So they're blending and extending. But at some point, when those when they realize those losses, the whole market pricing is going to reset in any market participant over the last three to five years. It's a totally different pricing world, right. And so what you were saying about stripe going out, it's what we're all going to, unfortunately feel the pain of and you mentioned CMBS. Well, the last month 89% Of all the CMBS maturing debt for office was impaired. In other words, the borrower cannot make their payment. And so if people just look at that as a data point, and using that as a pricing reset, there's just huge gulf in pricing expectation between buyers and sellers right now. And so I think, even though the global macro trends are very positive, I agree with you. I think for real estate, it's going to be a tough two to three years to work through all this.

8:19

Yeah, it's gonna be interesting. I mean, CMBS is expected to at least double in its delinquency over the next couple of months, which makes sense. Glad that you and Dave got to meet each other here in Nashville. That's pretty cool. But you know, David Greene, I interviewed him at the BiggerPockets conference a couple of weeks ago, and he said, You know what, I think real estate is going to be the cleanest shirt in the dirty laundry. And I thought that was a really good way of looking at it again, nothing's unscathed right now. But real estate might be the most, okay. Of all of the investment vehicles that you could be looking at. That doesn't mean that it's great. You know, it's kind of like the ULI emerging trends just came out. Nashville is number one, but I was joking with some friends are like, yeah, it means that Nashville is the least worst off out of every market out there. But Dave, want to kick it over to you, man, what are you feeling out there in the market right now?

9:08

Just the, just the volume. You know, Brian mentioned in this, there's not much out there. You know, in the stuff that is out there to buy, you're kind of like, hey, maybe just wait, because it's probably going to be cheaper and a little bit, which isn't helpful. That's not a helpful mindset for the overall like market as a whole. But like, right, but right now, it's like kind of weight. And you can probably get a better deal if you just wait a little bit. But if you're like, Hey, I've got to sell because I've got issues on this deal that the volume is just not there. So you're gonna you're gonna be hard pressed to really force the sale right now. You're probably just hold it and do what you can. So that just delays. I think in the last time we saw that where people like holding too long and operating poorly, it actually degrades value even more over time. When you have a deal where you got to salvage parts, and you don't have a budget to go buy anything, it's literally just like slowly dying even more and more on that deal. So it's hard. Yeah,

10:15

I mean, you're not you're not reinvesting capital into the property and it just slowly goes downhill year after year. I mean, you know, our brokerage, which I think is, you know, the brokerage is the frontlines of commercial real estate, right. So if you're monitoring brokerage, you can see pretty well what's probably going on in the world. We're down 50%, year over year, and nothing has changed, like in terms of the amount of prospecting we're doing the amount of conversations we're having everything is the same as we were on track for last year. Now, last year was a little bit of a different case. Right. I mean, we were up significantly last year. So all in all, not a bad spot to be. But I mean, if 50%, you know, down on the brokerage side is any indicator of how many transactions are taking place in the overall marketplace? It's a lot. Logan, what are you feeling out there, man? You

11:03

know, last time I checked, you could not find his he estimate for my shopping centers, or for my 100 Plus unit multifamily deals. So that is an interesting perspective to take here. So as long as you have no issue of an upcoming capital event, right, you don't need to refinance. You don't need to sell. You're not in distress, right, which is, I think, one of the things that Brian is speaking to is, many of the deals that were done previous two to three years, are not in that boat, right? They're in a boat where they have to do something right now. And when you are forced to make a decision, because of your debt structure, you are now beholden to the market. And if you're in that position, you're in a bad spot. Here's what I will say we took, we have a commercial real estate brokerage as well, we are actually not down this year, it may just, you know, point to how bad of a year we had last year, but you know, where we're actually doing okay. But this year alone, I mean, this quarter alone, sorry, we've had $5.6 million of real estate go under contract. And we're typically a 50 to $75 million a year brokerage. So not huge, but, you know, we also have a lot of deals that aren't marketed. So fees are a little bit higher on a lot of those transactions. So it's like I'm doing the double amount of of gross commission volume. But long story short, what am I seeing trade and not trade? Okay, well, we have brought a lot of deals to market personally in our own portfolio this year, as well as for clients and represented over 10 buyers this year. What's trading is deals that are in great locations with low crime, newer vintage, 2000s and newer, with great schools around them that are highly occupied, and don't necessarily need a huge value add component from a cosmetic standpoint, people are still okay, I think going into an operational type of value add, but if you are looking on the brokerage side, and this is what I'm seeing on our disposition side, which we will sell about 350 multifamily units this year, and I'll walk through a couple of those transactions as well. But on the brokerage side, there's stuff that is in tougher areas that is heavier value add, I think people have less faith finding a contractor, that's not going to blow the budget out of the water beet. Why? Well, because rates are higher, insurance is higher, paint is higher H back costs went up 2,000%. All of these things are, are putting even more pressure on these value add plans. I'm talking about the smaller multifamily investor here, but that's what I'm feeling on the brokerage side, if something is 100% occupied, and it's, you know, close to being positively leveraged, we're still having a lot of success transacting those real estate deals. But again, location has to be really, really, you know, really good on that front, and you need to have, you know, some sort of, you know, occupation or, you know, cosmetic that's, you know, a vintage that isn't a decent 2000s or newer, the older stuff is having a hard time trading. I also think that's because lenders and insurance companies are being harder on those properties as well, potentially, because what they're seeing in their own portfolios from what they're holding, right, so, on the on the disposition side, though, you know, we have a project in Des Moines, Iowa that was built in 2014. And when we acquired it, we had the the optionality to take a floating rate mortgage on that deal. For you know, it was close to 3.2%, but instead we locked it at 3.67% for 10 years. And we went to market with that deal less than a month or probably about 45 days ago, had 25 offers and went under contract for above asking price. So we purchased this 123 unit project about 13 and a half million dollars. And we're under contract to sell at 16 and a half million dollars with a DST company that put up $500,000, hard day one with another $300,000 to go after the due diligence period, why assumable loan 2014 vintage and a growing market. We've also put on the market 1960s product in a non favorable sub market in Kansas City, and have struggled substantially to even get an offer to even get one offer. And this is not priced at the highest mark, you know, price of Independence, Missouri. And so we are able to transact on one of those deals out of out of a portfolio 426. Again, why? Well, it's in a better location and the debt is assumable at a nice leverage point. And, you know, the vintages in 1975. So I think that we have to be very careful, investors need to be very careful about value add multifamily deals that are vintage between 60s and 70s, as they are falling out of favor substantially from not just equity investors, they might still be on the on, you know, in the game with those, but maybe from a lender standpoint and insurance standpoint. And then let's just think about how old these properties really are. I mean, if you're talking in the 70s, we're, we're 55 years old now. And things start to break. I mean, I turned 34 years ago, and my my body started to break down, right. So you know, I can just tell you that the properties are the same way and to to get them back to the challenge. And I'll stop after this. But the challenge is, you're having to put in the dollars now for not a renovation plan to granite and better cabinets and better flooring, it's putting in the renovation dollars just to get the property operational for the residents that are living there. From a mechanical, electrical and plumbing standpoint, that stuff is going out. And it's not going out all at once. But building by building, you know, you've got these issues that are causing budgets to be blown up. And that costs to do that from a laborer and a material standpoint is through the roof in a lot of those components, if you can even find a company to come do it in a lot of markets. And so I think that, from what I'm seeing, if you have a good property with assumable debt in a nice market, that's a good vintage, you're probably still in shape of why, you know, the question would become why wouldn't you hold that right? Well, you always need to look at your marginal rate of return, versus what somebody's willing to pay now. And you may go get that DST company that absolutely needs to deploy by the end of the year, because you know, their structure is whatever that is requiring them to do that. But we have failed on multiple listings of our own portfolio this year, which didn't meet those criteria. So if somebody had to go get a new loan, you know, insurance, I mean, I'm I'm seeing costs go from 450, a unit to 750, all the way up to $1,000. A unit on the multifamily side, that's just blowing budgets out of the water. And I, you know, Brian could probably speak to the insurance market better than I can. But I'll tell you this, I mean, most of the top three, insurers are dropping out of doing even insurance in this. And so that is something that I'm not seeing a lot of people speak about. But I can tell you what I mean, that's a huge issue, especially if you're on a coastal market where you might have, you know, serious weather issues going on. I mean, insurance is really causing a lot of issues for getting deals done. So it's not just interest rate, where people are saying, oh, man, I can't make deals work because of interest rate. It's not just that I mean, it's the operational costs to do these deals. That are we're seeing, you know, being a lot of a lot of challenges on as well. Well,

18:59

let's let's dive into the insurance pays more. And I'll kind of open that up to whoever wants to talk about it. But I agree. I mean, I don't see too many people talking about what's going on in the insurance world right now. And it's it's been wild to watch over the last 12 months. You know, it's I think that part of it has to do with we're having more billion dollar damage storms than we've ever had before. And the way that the insurance market works is as soon as they take a loss somewhere, they're going to raise rates across the board to start paying for that. So you know, even if it's sure the coastal markets are going to be affected more so than inland but inland is going to have to pay for that as well. I mean, at what point does the government have to step in and start doing reinsurance or what like, where do we go from here with insurance rates where they are?

19:47

And it's like how expensive can the government do it for you even that big hurricane that was just down in Mexico. Now that's gonna affect the reinsurance pool so everyone's insurance is going to be more expensive because all insurances Normally going into some reinsurance pool, you know, from a carrier, and that just makes it more and more expensive. The other the other part that we see a lot of is, is the legal like tort component of it, where a slip and fall maybe 10 years ago $15,000 Or $30,000 settlement, and now you're seeing millions of dollars being paid out in those kinds of incidents, whether they're on loss, and they're right or wrong, or good or bad, you know, you don't want to see anyone get hurt. But the cost of that to an insurance company that's now battling those costs, all over the place is substantial. That's why yes, $700 a unit for insurance that doesn't, you know, now, yeah, it's crazy. Because it was, you know, even just five years ago, it was in the $200 range. So you're seeing some significant price increases across the board on that front, which I think is that's definitely gonna take some deals out, the other pro, we can't a lot of our properties to like, you can't get the full insurance coverage you used to be able to get, because insurance providers are unwilling to provide that level of either loss on rent or that level of coverage for different acts. You know, every insurance contract has like a million different carve outs for how it's negotiated. And those limits are all coming down, basically, meaning the property owners got to self insure above certain levels, which is, you know, it is what it is, but that's, that's just pushing put more downward pressure on the value of stuff and how much reserves you gotta have? Well,

21:43

it puts investors in a really tough spot, right? Because the bigger guys will be able to self insure, right? I mean, at a certain point of policies that you're paying every year, it makes sense for you to just self insure and take yourself out of the private insurance pool. But that means that a lot of your smaller investors won't be able to make deals pencil anymore, and it's just another way to push them out of the market. I mean, it's just, it's weird to think of how that's gonna get solved, I don't know that it is, you start thinking about $700 a unit in insurance. I mean, that's, that's your net on a unit, if not more than your net on a unit in a single month, right. So you're gonna go ahead mark off one month out of the year of no more profit. It's, it's tough to make all those numbers work. Fortunately, in the in the triple net commercial real estate space, we get to pass it on to the tenants. But then that's still I mean, you know, which is great, right? Like, we always talk about, hey, it's nice and triple net, but then tenants are still looking at their own costs. So does base rent move?

22:45

Looks like you're, you're, you're gonna start getting pushback from your tenants there. And I can give you kind of a we have a deal in Fort Lauderdale. We were unable to get insurance on it, we couldn't get a bid. And so we had to go to and that obviously breaches a covenant suite to go to the lender and say, Hey, like, this is the situation, we can't get a bid on this asset. And so the lender had to go get forced coverage on it, which I don't even I didn't even know that that was possible, right. But they have some kind of warehouse line that they can draw down on to force place coverage on the asset, you're gonna see more and more of this. And yeah, I mean, I think it's just going to, it's going to ultimately hit returns to the LP side, because it's part of your noi. Right? And underwriting is going to get harder, I think, a comment I would make on this. And then I want to make a comment that I heard from both you and Logan. That's important for people to understand. I do think the federal government's got to step in. And they're gonna step in for the commercial real estate industry as a whole, you're starting to see the Biden ministration pretend to do this from social reasons like tax incentives to get conversion happening to residential because of immigrant issues, etc. I think that's a red herring like smokescreen to just help save the real estate industry, because I think we are going to have to have some type of bailout facility at some point come in. They're gonna have to do the same thing on the insurance side, for sure. In the coastal markets, like the way they do it residential, it has to be applied commercially. And another comment I'll make is this is where you're going to see sponsors, pivot to different revenue lines, and or cut their overhead. Because one of the dynamics that's happening that I don't think investors fully appreciate is it's frustrating when assets don't make distributions for everybody, obviously. But when what ends up happening is when you don't make distributions typically means there's no management fees, being crude for asset management to the sponsor, which means your overhead gets tighter, which means people have to be let go. Or you have to go find a different way to make up that revenue elsewhere from a different source. So when you see distributions being paused or capital calls being made, that means that that overhead No longer will apply to the sponsor, the GP, which hurts their operating business. And on top of that, I think another issue that people don't fully appreciate is because the lenders aren't taking the keys back like they used to back in Oh, eight, they're blending and extending because they don't want at the mark to market, it means that you have to maintain the asset management of those assets are performing. So sponsors are getting double hit. They're not getting asset management fees, because they're not making distributions on the properties. And they're having to hold on to assets that aren't performing. So a lot of these operating businesses no longer makes sense from a capital structure

26:03

perspective. Yeah, and once you start marking that down, it's just a self fulfilling prophecy. It's a tailspin that you can't really pull yourself out of because you don't have the people anymore to even help turn it around. And, you know, I saw there's a, an office building in San Francisco that's being auctioned off. I think it's, you know, I think that they think it's gonna go for between, you know, 30 and $40 million, but it's got $58 million dollars in debt on it. So you know, Bank of America is going to take a huge loss on their books, that investor is going to take a huge loss. I mean, it's not going to be just that one building is going to have a lot of implications for what could be happening in the market. I've got a very potentially controversial question. But I do think that it's something that we should we should jump on and talk about, because it's very relevant for 2024. DW is saying, what do you guys out? Look, if a Democrat stays in office versus a Republican winning the White House in 2024? When it comes to commercial real estate? We don't have to take this in a completely political direction. But you know, Logan, I'm gonna kind of hand it over to you first, what are your thoughts on a Democrat versus Republican in office and 24? And what that means for the real estate market?

27:13

Yeah. So I would point this individual back to Dr. Peter Lindemann in his research, because he does track this on an ongoing basis, for the last 20 to 25 years. And I don't think there is a substantial from a national standpoint, I'll be used as a substantial difference between Republican and Democrat. However, when thinking about it for my own local municipalities, there is a big difference. And I think that's where you need to really understand. So I mean, what what would the what would a democrat or republican really impact? Well, I mean, I guess its policy, but you got job growth, you've got job losses, you've got real estate taxes, you've got things like the 1031, exchange and opportunity zones, but that's on more of a national macro standpoint, if I look, from a micro standpoint, I think this is what is going to be a larger impact, right. So that might be where people are actually moving to. And that driving multifamily development, that driving office needs, retail needs, industrial needs, things like that. You know, I'm a big, I'm a big follower of some individuals that have been spending a lot of time out in Los Angeles and what's going on in Los Angeles and San Francisco. And some of the policy that has been implemented and implemented their prime example is you can drive up and down one of the most popular boulevards on your way into Hollywood, California. And outside of multimillion dollar houses, there are RVs just parked on the side of the road. And unfortunately, yes, you can park a vehicle there, but you're not supposed to camp out there. But for the law enforcement to actually get them to leave that space, you have to actually evict them from that space. So you have to serve them papers. And there's an actual process for that RV owner to move their RV out in front of somebody's house, right. And not only that, if they don't if they don't have the ability to take their belongings with them, the Los Angeles Police Department is required to take their belongings and put them in a self storage facility. So it's policy like that, that I think you need to be aware of and think through when you're you're thinking about real estate investing is probably more local, because I haven't been able to really find a definitive answer that if a Republican or a Democrat is in office, does real estate do better or worse. I actually think you know, real estate is on its own cycle. You know, we have a we have a financial cycle. We have an economic cycle. We have a credit cycle. I think those are the things that you probably should be looking out more than is a Democrat or Republican in office, but local municipality and policy where you live and where you're investing absolutely does have an impact because that is what's going to In fact, what you can and cannot do. Another prime example is short term rental space hot topic for a lot of real estate investors, right? Well, I know Kansas City just recently passed a law that said, Okay, no more short term rentals. And if you, you know, if you actually do have a short term rental, you need to go get it registered with the city, and you may or may not get your permit. So then you cannot have a short term rental. And there are neighborhoods in Kansas City where you cannot operate or short term rental. If you are in a commercial building, however, and it's mixed use maybe retail on the main level, and you have short term rentals on the top level, as long as you cannot be denied a permit, but you still have to go get a permit. Right. And so that's revenue for the city. Yes, but it's also limiting real estate investors, you know, opportunities if they want to go into certain neighborhoods in the city. So that'd be my my answer. But I would look up Dr. Peter Lindemann. And I do think that he actually spoke about this on Willie Walker's last podcast that that they had on just recently, and his data and research would be very informative, I think on this on this point. Yeah,

31:00

I think the average person completely underestimates how much a local politician has control over their local real estate market, and, and overestimates what the White House typically does. And in the sad thing is, you know, Nashville, just we just voted on our mayor. And I think that we had less than a 20% voter turnout, or less than 25%. I mean, it was just some crazy low number where you look at that, and you're like, I mean, you know, obviously, you don't want to ever have to force anybody to vote. But how do we lower the barriers of entry so that more people are actually getting their voice heard? Because, you know, it's the same in national elections? I mean, when you have 20% of the people that are determining who the president is, or who your local politicians are, I mean, that's, that's when you start running into problems. Brian had to jump. So he got to bounce out on the controversial question. But Dave, what are your thoughts?

31:57

I mean, getting people to vote is definitely important. But yeah, I think I'm a local investor, too. You know, I don't, I don't have any national platform investments. So when I look at the federal level politics and how they're going to impact real estate, just looking for consistency in policy decision, on how stuff is made, whether whatever the policy is, if it's consistent for a good amount of time, that's easier environment to operate in. And then it's one thing this country has benefited from is a very stable political system. I know internally, we see a lot of ups and downs. But if you think holistically, we've had a pretty, pretty stable world we operate in here, which is, which is very helpful and conducive for business. But locally, it's to me, it's all in the mayors and the planning office of what zoning they're going to approve and what they want to see happen in certain areas, that can have massive swings in the value of certain pieces of real estate, even how you operate down to the sheriff's office, the sheriff's office for the past four years has had a lot of control over how evictions are going to be handled and what's going to be done there. So, you know, that stuff's super important on a local level. And, you know, the governor has a lot of input, you know, statewide for whatever state you're invested in. But for me in Georgia, you know, the governor of Montana doesn't do much for me. Right. Like, I'm just following what the local, you know, governors and mayors are doing in the cities that I operate in, and making sure I know what's going on. So

33:28

yeah, makes a big difference. It looks like DW jumped in and said, let me clarify mitt the context of possibly working with the Fed to curb inflation and policies to better protect business owners. That's yeah, that's a little bit different.

33:42

Well, the Federal Reserve is both a bipartisan office that is not directed by the Republicans or the Democrats. Now, we have seen in recent years, the, you know, the President put a lot of pressure on the Federal Reserve, but at the end of the day, I think that Jerome Powell, is somebody that you should understand and research. He's actually a corporate guy, you know, you count he came from big business, and he thinks about the world, I think, from a business standpoint, in a lot of ways. But one book that I would highly recommend, and I'm always giving book recommendations, but is Paul Volcker's memoir, because he gets compared to Paul Volcker, a lot and his policy and the way that he is thinking about things and so Paul, is a mentor to a lot of individuals, Ray Dalio be one of them. And so I would highly recommend reading that book, I forget the book's name, but just search Paul Volcker, and you'll be able to find his memoir in that regard. So I think that the President and Truman commander in chief can put pressure on the Federal Reserve, but Jerome Powell has shown resiliency in that regard. And so I think that, you know, from that standpoint, I'm not sure how much impact that would or would not have, so to speak, if you read the crypto Creature from Jekyll Island, and there's a lot of people in that camp of saying we don't need a Federal Reserve, and it shouldn't we should not have that, then that's a whole different landscape, right. But those are two books, The Creature from Jekyll Island, and Paul Volcker's memoir that really helped me understand what's going on there in the White House. And there are great individuals like Ed Yardeni, who does the Fed watch and things like that will summarize those things for you. So you don't have to read all those minutes to the point of how many times Jerome Powell said recession or tightening or some other words, that will be indicative on the policy going forward. So I think that that's something to keep in mind and think about. But always just remember on that front that, you know, real estate is very simple business in a lot of ways. You know, purchase price is going to always be permanent. Financing is always going to be temporary. And so put yourself in a position to do a deal that you trust that the real estate, the location is in a good spot for the long haul. And you will have auctions going forward. But do not put your self in a position where you have to accomplish three things like financing, a rent bump, and cosmetic upgrade to the property, all three of them have to go perfect for you to even break even, that's a deal you just don't do. So highly recommend putting in decision criteria that say, Okay, if I can implement one of these things, that's that'd be a win. But if I can't do any of them, would I still buy this deal or still invest in this opportunity. That's how we need to be thinking about this. Now, the mental model of the greater fools theory of buying something sitting on it and waiting for it to appreciate that game is over. For the time being that the height the tarp requirement for that is cheap money, and we do not have that, relatively speaking to our last three to five years. Over time, the last 15 or 20 years, were pretty normal, where we're at on our interest rates. So I mean, that's something to keep in mind as well. So Brian's not here anymore. But he did hit the nail on the head that when he said, there will be a price Reckoning and there will be a repricing event. I mean, we can't have multifamily properties, you know, continuing to be $275,000 a unit to build, and that that would include land as well, at some point, it just doesn't make sense to buy something versus read, you know, versus building something, you know, the replacement cost matters in this business. And so there will be a point where that that shifts back, but just the thing that I've been telling investors and keeping true to is that purchase price is permanent. Financing is temporary, don't put yourself in a position where you have to do one of those things to make the deal work, and you're probably going to be okay. Now, today's point, you might do a whole lot less for the time being, but guess what, you'll be on the field, when the time is right to actually make your next move. And I think that's extremely important to keep in mind right now.

38:00

Yeah, that's funny. I've been saying something very similar. You can refinance a bad interest rate, you can't refinance a bad purchase price. So right, you know, something to keep in mind, right? I mean, that's especially in times like these, like interest rates are probably going to come down to make sure the deal works today, right, but go for a better purchase price, and deal with the interest rate if you can cashflow it, or if you can, you know, bear through it and refinance that as soon as you can. Dave, what are your thoughts on on red versus blue when it comes to working with the Fed and, and policies?

38:30

I mean, the the federal component, I think they're gonna get involved, as Brian was mentioning, on the I see it from the banking side, whereas the large banks that have so much loans that are probably undervalued, like, how is that going to be kind of not to say bailed out, but like, what are they going to do there? Because a lot of the banks, you know, if you reprice all that debt, then they're going to not be hitting, you know, their covenants that they have to have to for banking regulation. But I don't think either democrat or republican side is, is too anxious to say, hey, we're going to be sending big banks more money. So I see more like, if something like that happens, the policies that are going to be packaged in with that bill, from the Republican or Democrat side, are really kind of gonna be where the action is at. So if if it's a Democrat that's in an office, we probably have more social programs that get put into anything that that happens to fix either the debt or the insurance side of the game. And, you know, if it's on the Republican side there, probably less of that. That's gonna go into it. That's really where I see kind of the action happening. But ultimately, I don't see that as having a direct national play on the on the real estate space. So I still think it's just very hyperlocal and Mayor based. Yeah,

39:56

I agree. I mean, I don't see it being a huge win either way. I mean, it is what it is. Right. And, you know, there's there's only a few directions that you can really take. I mean, the time tested, proven method is curb inflation by raising interest rates, leave them there until inflation starts coming down and drop interest rates, right. I mean, it's, it's basically economics one on one. Unfortunately, we've just got to deal with it right now. Yeah,

40:23

I think the Fed to I mean, they're gonna, they don't want to come out and be like, hey, either any president or any political person has direct influence over me as like, as Powell or anyone in the Fed? So I mean, I think they're gonna push push back pretty hard against saying that they're being influenced and, and they're going to make, you know, whether we agree with those decisions or not, they're going to make the decisions that they believe

40:45

are best, and I think anyone can be quick to either agree or disagree with with the actions the Fed has, but

40:54

yeah, they're gonna I don't I think they're going to try and not be swayed, or at least they're going to try and show that they aren't being swayed as much as possible. Yeah,

41:01

yeah, I would agree with that, because it's not going to be good look, if they are, let's, let's get into 2024. Let's talk about our strategy, what we're looking at I know, obviously, we've we've spent 41 minutes talking about how bad the market is, that doesn't necessarily mean that we're, we're closing up shop and everybody's running home. Because, you know, 2024, is, it will be a good year for real estate investors, if you make it one. It's gonna be a tough year for real estate as a whole. But, you know, I like opportunities like this, and I'm sure you guys are the same. I mean, you look at this price correction. To me, it's like, hell, yeah, everything's going on sale. Finally, we're gonna be able to make things work again, you know, with Logan talking about, you know, $275,000 cost to build apartments. I mean, it's about the same in Nashville, I think the average national is like $280,000. So it's right on that mark. And you I mean, you start thinking about that from a condo perspective, you couldn't even build condos and sell them to really make any money at that cost, right. So, you know, what's, Dave, we'll start off with you. I mean, what's your strategy going into 24? What are you looking at, you know, what, what are your thoughts on loan devalues and debt and what kind of deals what kind of discount do you have to get in order to make a deal attractive to you going into the new year?

42:16

I would say right now, I'm trying to work on making sure I can be offensive as possible, in 2024. And what I mean by that is, is ensuring that I don't have like big defense situations, I've got a handle in the next like, eight to nine months, right, I want to have that stuff in position that, you know, don't have any big lease renewals or make sure note renewals, I've gotten rid of all of that stuff and got it out past 20 2040 to 2025, or 2026. So I think going into 2024, there's gonna be a lot of people playing defense. So the opportunity to play offense, you're going to be competing against fewer people, if you can find something in your area that is attractive for you to buy and operate. And in in my space. I'm I'm looking at a lot of commercial office right now. And I know it's a negative area overall. But we're taking some office buildings, some not all of them by no means all of them very few of them. But they can be turned into other uses fairly quickly. I'm focusing on those opportunities and trying to do as much of that as I can. That's not going to be great. It's going to be in the 789 percent range. It's going to be 50% loan to value if you can, if you can get it. But that's what it is. So we're making deals penciled that fit with you know, with that in mind, we're not going in assuming Hey, in June rates gonna be back to 0%. I don't I don't think so. So you got lower, lower LTVs. And you got higher interest rates, and you gotta make a deal pencil around what that is.

43:56

Yeah, it sounds to me like just resetting your expectations, right? Figure out what that cashflow number is that makes sense for you and your investors and just move the bars wherever they need to go. This is what we can offer on this property now, because that's the you know, we have to get x return. Well, good. What do you do?

44:14

Well, some highlights and some bright spots. So I think about Tina, a lot. Sometimes I dream about Tina, and Tina, here we go. There is no alternative, right? And so you hear that a lot, a lot of times across different investment asset classes, but Tina has been in my mind a lot until my wife, just give me maybe I love you. But at the end of the day, the 6040 portfolio lost 17% last year. So Tiger 21 is a group that I highly recommend everybody checking out their portfolio allocation reports on it is the top 1% of investors. It's what they're allocating to, and it's really informative and they're pouring money into cash. Even you see Ray Dalio say that cash is not trash anymore. For a reason, Howard Marks is the same way they are getting ready to buy at a discount. You know. And I think that that is something to keep in mind. And I saw that play out here recently when we launched our first project of the year to our investor base. And in a week we were $800,000. oversubscribed, for retail shopping center. I think it's because there is no alternative. And folks may feel comfortable putting money into treasuries to a certain extent. But real estate is tangible, there's still value in cash flow and having a tangible asset. That's something we have to remember, also taxes are not going down, taxes are going up across, you know, many states, if not all, and so I think people are seeing Okay, well, how can I look at this from not just a cash flow standpoint, but also a tax diversification play as well. So, you know, I think that's helping, in a lot of ways when you're talking to investors. Now, there's not just a price reckoning between buyers and sellers coming there's a price reckoning become between GPS and LPS coming. And I mean, that in the sense that, you know, I can pull up any offering memorandum, mine included over the past three years and see an 8% preferred return 16 to 18% IRR. That is what has been, you know, standard across a lot of different asset classes. And so I think that's going to come down. And so we will start to see people really start to look like or look at the cash flow from these properties and try to understand IRR partitioning, which just simply means is the return based off of an exit or is the return based off of the cash flow of the property. And if you can generate cash flow during the hold of the property, you're going to be in a good spot. And so I think that's one thing that investors are probably going to be asking for and or evaluating more in depth here in 2024, which also impacts the way that we think about doing deals and what we're trying to acquire. The other part being that capital markets are still going to be very spooky, in my opinion, and spooky in the sense that even for an 85% well located shopping center that had good tenants in it was hard to find a loan for and what 60 days down the road with one lender and had all the commitments and everything and, you know, went to one guy who was on vacation, and he came back and said, Nope, you're not getting my vote. And so we were back to the drawing board to get a lender for this project. So, you know, I think that that's important to, you know, keep in mind as well, the capital markets are going to be spooky. And that's something that impacts deals heavily. So, you know, that presents opportunities, right? So if you can force it, for example, go raise all cash and still find an unlevered IRR. And a cap rate in this scenario would be your return, right? Because you're not using any debt on a project. So your cap rates your return. And so you can still buy at a 9% cap rate, then you should be getting a 9% return. And when capital markets do return, you can put 5% debt on there and do a cash out refinance. At that point, can you tell that story to investors and get them excited enough to move forward? In real estate? If you can, one, you will be able to move faster and get more deals probably because you're not dependent on financing. I think that, you know, 50 to 60% of the transactions we've done on the brokerage side this year have been cash and a lot of cash, you know, two, three $4 million deals that were cash. And so I think that's an opportunity and a component to be thinking through. The other part, the state of homeownership. This is wildly interesting to me. I'm not in residential real estate. But watching these prices is incredible. Check this out. A homebuyer needs an income of nearly $115,000 to afford the median price United States home in August. That's up $99,000 From a year earlier. I know people got raises, but I don't think they got $100,000 raises. And that's 54% above the median household income in the United States. What does that present? Well, that's it that's definitely an opportunity in that space. Are you doing build to rent? Are you creating some sort of housing for individuals that might be very lucrative? Are you taking an office building and making it into condos? Again, we haven't seen that in a lot of time in a long time. But I'll tell you what, there was a boom of condos downtown in Kansas City, I think in the early 90s and 2000s. And now you can't find a condo because people are buying them up. So I think there's in all these things there's opportunities to exploit and you have to be willing to pivot as a company to see okay, well this is what the markets presenting to me let's see what I can actually do. You know, so I think deal volume will be still down but Let's also so those are some bright spots. I'm not going to throw shade on that, but I will because I that's just the way that I think we are now in, you know, the global climates now and to geopolitical hot wars, we have a fiscal deficit that is skyrocketing, we are in debt. Remarkably, as a country, we couldn't pick a speaker of the house for three weeks, you know, even in the same party couldn't pick somebody to lead that we have big spending bills coming for likely Ukraine and Israel we have. So that's more, we have issues at people's borders. And this is not me, I live inland. But I do watch a lot of things that are going on at the borders. So we have that. And we have an election coming up. I mean, all of those things going into 2024 Do not make it an easy investing climate, I don't mean from a GP standpoint to find a real estate deal, because they will be out there. And we will buy them and so will you to guys, because you're in the know and working on it. And not letting a lot of this stuff impact you. But I will tell you that raising capital from private investors could be a tricky situation in 2024, just because of the perceived risk of all those things that I just mentioned, making people sit on their hands more. And so what do I think the opportunity is, is likely all those funds that were being raised, and folks that have been in the business for some time and have relationships with their investors, and they've probably been through a cycle, you know, up and down, and maybe come back up, are the ones that are going to be comfortable investing throughout this. But I mean, this is the time and I said this during 2020 as well, when we purchased most of our multifamily. But, you know, when everybody's being fearful, you need to be greedy. And when everybody's being greedy, you need to be fearful. Well, we're walking into that space right now, and or we're probably in it right now. The other piece that I will just mention is that if you track Phil Anderson's 18.6 year cycle, he's predicting in 2025. And it's never perfect. So it's either two years before or two years after, that's just an average. So it could be next year, it could be you know, we've seen at least in one asset class in office this year, that big price declines will happen. I mean, you're talking about a $55 million office building, that's just the debt sale for 30 or $40 million. It's happening in office. And so does it happen in multifamily? Does it happen in industrial retail? I'm not sure. In pockets, I do think that that will, will be the case. And so that's going to present opportunities for people who have a team and have operational capacity to step into those deals and have the investors that are, you know, obviously warmed up to that idea. And so I think that's, you know, what I'm thinking about, I also, you know, wonder, you know, heavily around, you know, what, what is the Wall Street Journal going to keep writing about, you know, retail, and if that just doesn't make developers start developing a boon of retail shopping centers, you know, and, and how does that impact the asset class that I'm kind of the most bullish on right now, because one thing I'm always tracking is supply and demand and supply has been very limited the last 10 years. But if it's becoming back into favor, we know what happens with developers is they start to develop that, that that asset class now, with retail, specifically, it's hard to do, because it takes a lot of ground to do that, because you need a lot of parking. And usually, it's already been developed for multifamily or something that can go you know, up. So there might not be as much land available. And then construction costs. And capital is also going to put a constraint on that. So I think you have some runway within that. But developers, and if anybody's developer here, I know Tyler you are but you know big developers, let's just say that. Typically, when the going is good, they're going to develop as much as you possibly can. And then pullback in the physical demand of that is actually out of balance, meaning when it's easier to do, you don't have as much physical demand. But then when you deliver, you might have less physical demand than what you actually need. So that can be kind of out of balance a little bit. So I think that's going to present opportunities. And anecdotally, I'll just say that, I've talked to a few developers recently developing or sorry, delivering new multifamily projects that are walking away at cost just to free up their capital that are in those projects so they can get to the next deal. You know, and that's, that's, that's tough, right? I mean, you worked on something for three, four or five years, and you're walking away from it at cost because you can't get a loan on it. Because that's just where capital markets are. That's one of those things that I would say that, you know, is indicative of making the deal pencil, meaning I gotta go get a 4% loan for this to work. You should be thinking about that heavily on if you should do that deal. Nobody could have predicted we'd be in the situation that we are four years ago, if you would have looked at starts on the multifamily side or anything like that. So it's just it's a completely fabricated capital markets issue, because the physical demand is Is there but I think at 24, it'd be really interesting to see Austin, Nashville, you know, Dallas, Fort Worth, Phoenix, Arizona, how some of these markets do. And all of these units do come online, I do believe real page, Jay Parsons shout out to him is predicting that 670,000 units be delivered next year in the United States, on average, the past 15 years, it hasn't been above 325,000. So that's more than double. So we will see how that impacts, you know, rents and supply and demand going forward for multifamily. And I, I talk a lot about the multifamily because that drives a lot of the stuff that we do around the multifamily, right. So that's kind of a, you know, one of those indicators that says, Okay, well, if density is going to grow in this area, they're going to need more retail are going to be more industrial, and office. So those are kind of things that I'm watching and just tracking and trying to make sense of on a regular basis. Yeah,

55:56

I mean, it's really tough as a developer to time the market. You know, it's these guys started working on these deals back in 2020, when you can get really good, really good acquisition prices, and, you know, they're going to be delivering this year and next year, and you just couldn't have timed it worse, really, I think that there's going to be, you know, kind of unpacking everything you just said, I mean, tax tax incentives next year, I think you're gonna be a big reason as to why people are investing in real estate. I was on the phone with a developer earlier, one of our clients that, you know, he's he's debating whether to sell his his triple net investment, he just did a ground up bill to sue for some big corporate tenants. And, you know, whether he should sell it, take his cash, or whether he should raise some investor capital, pay off the current note that he has, and just sit on it. And so we were running through that cost benefit analysis of okay, what does it look like for you to depreciate, you know, do cost SEC study, accelerated depreciation on it, hold it, not pay taxes this year, or next year? Versus the returns you could get if you had that in cash? And where could you deploy it? I think you're right about investor expectations. You know, we we've been raising on an 8% preferred return with an 18 to 22% IRR on our projects for a while. And I just don't see that happening. I think that you know, 6% preferred return with, you know, 15% 16%, maybe even a little bit lower IRR is going to be the norm. And it's it's totally going to be based more on cash flow, because we don't know what the exits gonna be. And, man, you mentioned this earlier, and I wanted to touch on it, but the $115,000 being able to afford the the median home, man, I'll never forget the first time I made six figures, and thinking to myself, like how does somebody support a family on this on this amount of money? Because it doesn't go very far. And I'd be curious to see what true inflation has actually been like, over the last five to 10 years. Because I don't feel like money goes nearly as far as it used to. And I don't live like a crazy outlandish life style by any means. I'm actually pretty conservative in that respect. But I feel like every time I get to a new income level, like it just resets and I'm kind of back to where I was. It it's it's interesting out there. But Dave, I'll let you kind of close this out at any final thoughts and going into 24.

58:26

I mean, I'd say Logan, you mentioned 670,000 apartment units coming online, they were built in the most expensive timeframe with the cheapest debt. And now maybe they're all underwater, with rates being seven 8% for debt versus three on that construction loan. So I think that's going to, one, create opportunities in 2024. That stuff's coming out of the ground getting delivered, there's not really debt for it. And developers typically are not operators. So like, someone's gonna have to operate it, run those assets, and find a way to fix the capital stack. That's there. I see. 2024 is having a lot of opportunities. Everyone thinks like, hey, when is there going to be a buying opportunity in, it looks like it's more geared towards 2024. And in some situations happening, you don't want to root against people, but there's going to be whether it's debt, or insurance or capital stack pain and 2024 It's going to be here. And that's gonna be opportunity to buy stuff in and if you're in a good position, you'll be able to do it,

59:31

hopefully at a really nice discount. Well, gentlemen, thanks for joining me today. We'll be back in a couple of weeks. If you're watching us on YouTube. Don't forget to like and subscribe. Leave your comments in the comments below. If you had any questions as to what we were going through, I'll be sure to get around to those. And if you're listening on the podcast, please, you know follow and leave us a review. And we'll see you guys next time. 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.