CRE Investing in Changing Market Conditions, Panel Discussion
During Verivest’s Investment Summit last November 2022, Chris Carsley - CFA, CAIA, Chief Investment Officer (CIO) & Managing Partner at Kirkland Capital Group was one of the panelist for their session on “CRE Investing in Changing Market Conditions”
Aside from Chris, the panel of experts included Dan Norville, President and CEO of Vivo Investment Group, Ryan Ulrich, Founder and CEO of Ricor Capital, and Blake Hansen, Co-Founder and CIO of Alturas Capital.
Some of the key things that they discussed were:
How the current economic conditions, including rising inflation and interest rates, are affecting their portfolios and the private real estate market as a whole
Identifying opportunities and mitigating risks in the market
What they think will happen in the market in the next 12-18 months
The discussion was hosted by Adrian Boley, President and Head of Investment at Fairway America.
Some interesting quotes from the speakers were:
“The concerns we’ve seen are not really of the rising interest rates, what [it] really is inflationary aspects and a lot of other global macro [trends] leading us into this recession that is going to potentially create some wrinkles on exits and how it affects the properties that we’re funding and making sure that we’re being very risk conscious.”
“But going back to the point about real estate being a hedge to inflation. It’s faring better than a lot of other sectors across the economy, right? So we do have that hedge. We are seeing the rent growth that is offsetting those inflation gains and we could slow the inflation or the interest rate gains a little bit.”
“Probably the best example out of our portfolio is our industrial portfolio. We have about a million square feet primarily in Texas and the Southeast. But our focus is on Class B rollup door smaller suites, 2,500 square feet, up to 30,000 square feet. So not the big bulk. And really what’s great about that is there hadn’t been a lot of development in that sector because all the money was pushed to the class A stuff. And so one of our assets in particular in Houston we’ve pushed rents 40%. We’ve increased NOI about 40% in the last 12 months. And so it’s a very healthy time. It’s a great time to be in industrial”
Watch the full video below to get more valuable insights and perspectives from these industry leaders.
CRE Investing in Changing Market Conditions
Transcript
[00:00:00] Adrian Boley: I am Adrian Boley, president, head of investments with Fairway America, and I have a number of my peer set here. We will be having a discussion about the state of the market and how those impacts are rippling through private real estate, and then hopefully start looking at some opportunities. As well as identifying risks that we should all be mindful of here. With that, I'll start here with Dan Norville. I'd like each of my panelists to introduce themselves and give a little bit of. Background for the audience.
[00:00:34] Dan Orville: Hey everyone. Uh, Dan Norville president, CEO of Vivo Investment Group. Our firm primarily works on conversions of hotels into workforce, multi-family.
[00:00:44] Ryan Ulrich: Hi, I'm Ryan Urich, founder and CEO of Ricor Capital. We, our strategy's more diversified. We play in several asset classes, office, industrial, retail, and medical. Manage about a 350 million portfolio, about 125 million of.
[00:00:59] Chris Carsley: Hi, I'm Chris Carsley. I'm the CIO of Kirkland Capital Group. We operate a microfinance bridge lender that invests in commercial real estate only.
[00:01:07] Blake Hansen: My name's Blake Hansen with Alturas and we invest in diversified asset classes, office, industrial, retail some residential, and we're in the inland Pacific Northwest and Intermountain West.
[00:01:24] Adrian Boley: Excellent. Why don't we just get into the meat of it? Everyone's mind is what's happening right? Interest rates are spiking. They're really in response to what the Federal Reserve is doing and tending to tamp down inflation, which is at four decade historical high. What are the impacts for you specifically as it relates to inflation? Let's start there. The print is about eight, eight and a half percent depending on what metric we're looking at. Historically, real estate returns have correlated very well with inflationary regimes in the economy, but specifically, how is inflation impacting each of your portfolios right now? Let's start with the current state of the Union about that, and Dan, we can start with you specifically.
[00:02:09] Dan Orville: Sure. We're seeing a interesting dance going on between inflationary rent growth within our portfolio after we convert our hotels to multifamily. We're in markets primarily in the southeast that are experiencing very strong rent growth. 15 to 25% over the last year. Not at really a sustainable level, however, still in the high double digits is what we're forecasting over the next year for much of our portfolio and in our current conditions with multifamily, there's a lot of operating leverage. Our costs are primarily fixed. So those rent gains are translating to the bottom line. However, that's the delicate dance that I mentioned is that interest rates are increasing pretty much in lockstep from what we're seeing across the board. So where we are looking for sales of property, refinances of property, the gains that we're seeing from an income perspective are being primarily offset by the increase in interest rates. But going back to the point about real estate being a hedge to inflation. It's faring better than a lot of other sectors across the economy, right? So we do have that hedge. We are seeing the rent growth that is offsetting those inflation gains and we could slow the inflation or the interest rate gains a little bit. Then it'd be nice to really benefit from the continued rent growth that we're seeing.
[00:03:28] Ryan Ulrich: Probably the best example out of our portfolio is our industrial portfolio. We have about a million square feet primarily in Texas and the Southeast. But our focus is on Class B rollup door smaller suites, 2,500 square feet, up to 30,000 square feet. So not the big bulk. . And really what's great about that is there hadn't been a lot of development in that sector because all the money was pushed to the, the class A stuff. And so one of our assets in particular in Houston we've pushed rents 40%. We've increased NOI about 40% in one year. So we're seeing, it's been very positive for us. We have fixed rate debt, 3%. So it's it has helped us in that regard as far as our cash on cash is, in, in the tens. It has been very positive. Now, the downside is, interest rates, it's hard to buy deals right now. So we're gonna just doing an asset management mode, managing what we have and figure out what the next step is as we move through this. What seems to be a recession coming?
[00:04:24] Chris Carsley: Being a loan originator in secondary and tertiary markets rising interest rates we're extremely happy and , we're loving it cuz we keep on raising interest rates. We keep on asking for greater payments from borrowers and we're hitting more and more term sheets. So this has actually been a boon year for us especially on a comparative basis. The concerns we've seen are not really of the rising interest rates, what really is inflationary aspects and a lot of other global macro leading us into this recession that is going to potentially create some wrinkles on, exits and how it affects the properties that we're funding and making sure that we're being very risk conscious. But overall rising interest rates is great when you're the bank .
[00:05:08] Blake Hansen: Yeah, I think the only thing that I would add is we've definitely seen an increase in the tenant improvement. Just with the inflation there's no doubt it costs more to put a tenant into a space or on the renewal side to keep a tenant in a space. So definitely having an impact.
[00:05:25] Adrian Boley: Yeah. Let's pivot then to interest rates. It's on everyone's minds right now, obviously inflation and what real estate can do as a hedge for that and mitigating some of that bite. Purchasing power is very important. But the flip side of that too is you know, when the Federal Reserve steps in to try and squelch out inflation the way it is now, it has very real implications for our portfolios. Ryan, you touched on it a little bit about what you've done as a mittigant against fixed rate financing, but generally I'd like to hear from the rest of the panel especially. And Chris, you also mentioned pricing is going up, but from an equity position, how. In your mind, how, what is the mitigant that you're looking for or mitigants in order to manage through the current situation, but then also, generally speaking, position new opportunities Where, if any opportunities or is it simply risk off right now managing the existing portfolio? How would you view that?
[00:06:21] Dan Orville: Yeah, it's a, it's really interesting to watch the markets, equity REITs or apartment REITs are down 20, 25%. From an equity standpoint, and that has to do a lot obviously, with what they think is gonna be an increase in cap rates and a decrease in valuations. For us, the mitigation is getting the fixed rate debt as soon as possible, right? So we have agency debt, Fannie Mae, Freddie Mac debt that we can achieve in a very short timeframe with our conversions. So locking in that debt accounts for approximately 80%. Of our costs on our projects. So that is a, obviously a very big carrot. We think that paper will be valuable for probably the next two to three years if interest rates continue their climb. Obviously we would lock it in today at a better rate than we would six months from now. So that's a hedging strategy. And in terms of the investment climate we're on our side. We're buying hotels which have already been in. For much of two years after Covid. But we're looking at a very long-term approach to our investment mandate at this point. Looking at 30 year cap rates for multifamily, what's a good risk adjusted return? What's a good stabilized cap rate that we'd want to be at? And these days we're probably gonna be a lot more picky. We are a lot more picky looking at eight, 9% yield on cost for multifamily. So those opportunities aren't here yet, but we're excited for them to.
[00:07:42] Ryan Ulrich: So for our current portfolio, we're a value add operator. So the biggest things that are happening, and you touched on it is, we have we renovate office in the industrial we're building out space. And right now bids from contractors are good for. Feels like 24 hours and then the next day it's something new. So managing through that now, fortunately what we did, we made a strategic decision is we fixed all of our loans as including the good news funding. The amount that the bank will fund for those type of costs. So our interest rate risk is has been minimized, but the amount of money that we're able to get may or may not be able to pay for the increase in in, in cost. And then on the investment side. Look it's hard to do a deal when you're getting 7.5% interest rate, right? That's, you need to have some spread over that interest rate, so you're talking a 10 cap. It's just it's very difficult. We're looking at ways to maybe do smaller deals, go all cash, and then do more of a refi out, because, I'm not an economist, but I think what the fed's doing, they're gonna throw us into a recession. And then they're gonna have to start cutting rates maybe in 24. That's what we're betting on and how we're navigating through what's going on.
[00:08:50] Chris Carsley: I don't know if you wanna stick with the equity side or you wanna, I, like I mentioned earlier on the debt side, we're the other side of the coin valuation is something you'll probably hear as a constant theme as we go through these questions. It's equally as important on the debt side cuz that's what we're writing against. Here, there again we're seeing a lot of price capitulation in the secondary and tertiary. A lot of core markets owners are still trying to get, a premium price because they're in a key market. We've got a number of borrowers that, know, they were looking at a million dollar property towards, February of this year, and now they're looking at that property being 850,000 which is opening up a very big spread for them to come in and they need the bridge financing quickly so that they can get that deal at that price and the fact that maybe in February I would've charged you an 11 and I'm gonna charge you a 12 or 12 and a half now it, it doesn't matter to them, it's just getting them in. But for us, really making sure that we're very strict on valuation, cuz that's actually where the hit's gonna come. As we go further into the recession is what people have bought or getting into, is that deteriorating value of their, their equity portion is what they're gonna have to worry about. And so that's what we're monitoring and trying to be pretty draconian about that. We'll get some valuations in and then we'll go in and do an economic assessment to even maybe push that even further. The borrowers don't like that but my investors are happy that I'm out there shaving away. I'm gonna go do a 70 LTV, and I pushed valuations 10% below what the valuation came back. That's just the way it works right now.
[00:10:16] Blake Hansen: Yeah it's interesting you think maybe there would be more carnage starting to, be present or at least like seeing places where there's cracks. It's just not happening like this. The sellers just don't have a motivation. It's interesting to see on the labor side, the job side, interest rates ratcheting up, have done little to really affect the broader economy. There are certain places like residential real estate where interest rates going up have a significant impact, but that's not translating across the broader economy. So there are a lot of businesses that are feeling very bullish about where they are. They're expanding. We've seen it in our office portfolio. And it's just counterintuitive. They're still hiring, they're still looking to hire more. They're looking to expand. They're feeling like they've come off of record profit years and they're still feeling that and have a lot of cash on their balance sheets, and they're in a different mindset than they, than you might think they would be in at this moment. So it, it is just like we're saying, it's a wait and see. You gotta be patient until. You have a little bit more realism. On that side of the seller. There's just really no motivation at this point to, to have adjustments based on the interest rates going up. And for us, the underwriting, it changes and based on your cost of capital. So just you're just not seeing it. The markets aren't reflecting that those prices really adjusting.
[00:11:50] Adrian Boley: Yeah I want to touch on that. You actually, I think you hit the nail on the head realism in the market, on the acquisition front. We're experiencing this real time right now because financing costs, of course are eroding value, and that's the federal Reserve's intent. So Blake, I'd like to start with you and just to your thoughts, how there's a wide bid ask right now to take speculative risk on a value add or opportunistic investment. How are you approaching this now when you're on the market? Are you said wait and see, but how has your underwriting criteria changed or evolved in this new paradigm that we're looking and potentially it could be lasting with implications that we can't even predict?
[00:12:29] Blake Hansen: Yeah, I don't think underwriting criteria changes. What are you gonna do? Take on more risks? That doesn't make sense. For us it's, stayed true to the principles that have always guided us in our investment thesis. . We're not adjusting with that. The box doesn't become bigger all of a sudden, so you can accommodate, lower yield and higher risk. For us, I don't know that, I don't know that anything really should change. Bid ask spread. It will it comes down that time will create motivations individually. There will be motivated sellers. It happens, they're for different reasons. They may have debt that's maturing. They may have, an equity partner that, wants to go after a different asset class or whatever it might be. We're always looking on the margins to find those deals. So we never bought market rate deals as it was , so we're not gonna change that today. We're always gonna find, the, this special motivated seller, we're gonna find the unique angle. Nothing changes. It's just now the equation is what's the cost of capital and how does that factor in?
[00:13:35] Adrian Boley: Dan, how are you navigating the change in risk sentiment and the bid ask now when you're looking at new opportunities?
[00:13:41] Dan Orville: Yeah we're waiting it out. Like I said, looking at long-term historical averages over 30 years, I think it's gonna be a capital markets driven opportunity. 2009 and 10, I was buying a lot of multifamily and we were able to really strike on some amazing distressed opportunities. Obviously back then. Now we have 300 billion of CMBS maturities coming in the next 24 months. Those are going to be in for a rude awakening. There's a lot of bridge and floating rate debt out there that has short terms, 12, 24 months. Those people that underwrote thin deals are not gonna be able to refinance those. And there's already been big institutions, some news coming out, big institutions giving back properties when they had loan maturities, not willing to do the cash in refi. The new topic, this word, not a good position to be in, especially these days when your equity's wiped out or nearly wiped out. To have to inject more capital, not knowing where you're gonna go and potentially have to take on a bridge loan. And even the perm loans in other areas outside of multi-family that we've seen are getting very expensive and very low. LTVs, I'm sure you can surmise here. So it's I think it's the realism is coming because it's going to happen when those maturities.Just like it did in 2009 and 10 when equity was wiped out and they couldn't refi.
[00:15:00] Adrian Boley: Ryan you're focused on industrial and you also, I believe a core plus retail strategy as well, right? What, similar question, what sort of impacts are you seeing now, not just on speculative deals, but also what are you seeing with your tenant health within your own portfolio, and are there any signs, any cracks on the surface, or is it similar, what Blake described? It's still very much risk on from your tenant base?
[00:15:24] Ryan Ulrich: Yeah, it's I mean we're staying active because the acquisition business is such a huge lead time from the time you find a deal to get it closed. So to just put pencils down like the institutions are doing, small guys like me can't do that, right? So we're constantly in front of 'em. I, And I agree with you 100% on the, on, I think there's gonna be dislocation next year with the folks that have debt. . And just with interest rates as high as they are, their valuations go down. They're gonna have to pump more cash into it, and their basis might be, may be at a point where it doesn't make a lot of sense. So there's gonna be opportunities there, and that's why we're staying front and center with owners, just so the phone starts ringing and saying, okay, hey, you, you put an offer on this. I'm ready to sell. So that's what we're proactively doing. As far as the tenants yeah, I mean we, we've, we haven't really experienced too much one of our medical deals. We've had some tenants consolidate and, but that's more of a global corporate strategy. But our office deals actually fully leased. So I haven't really had any tenant issues as of yet. So knock on wood .
[00:16:29] Dan Orville: Have you had any LOI's come back four months later that you put out four months ago and they just signed it and sent it back to you? That's been happening a lot lately, and we just laugh and we're like whoa. Not anymore guys. That was four months ago.
[00:16:40] Chris Carsley: That was another lifetime.
[00:16:41] Adrian Boley: How did the sellers react to that? Because they think, oh, bird hand sign this now because it looks good. You go back and. , there's a haircut coming. How do they react?
[00:16:49] Dan Orville: Our LOIs expire in one week, so four months .
[00:16:52] Ryan Ulrich: Yeah, that's right.
[00:16:53] Dan Orville: Yeah. Things are changing by the day right now. But yeah, it's been an interesting thing. And we just, we take that wait and see approach. We know they have pain, we know why they're coming back and we say, okay valuations down 20%. We're glad to play ball. We want to hit that eight and a half, 9% stabilized cap rate, which on a 30 year average cap rate basis is a very solid investment, thesis.
[00:17:17] Adrian Boley: Chris, let's talk a little bit about borrower quality, right? You're having a lot of success right now, originating new business. Are you at, at all worried about the borrower quality? Are you, And how do you evaluate that?
[00:17:30] Chris Carsley: No. Yeah we run 'em through the ringer pretty well, cuz in what we do, it's 95% of the time, it's not the property that's the problem, it's the operator and the borrower. So you need to really crank down. We, it's full background checks, credit checks, financials, bank statements and we're fortunate that we're seeing a lot of deal flow come through and it's, it is one of the deciding factors of we got a great property, love it. Borrowers, on the cusp. We got a great borrower. Lots of years of experience. We're just gonna take that guy, he's, we do a background check on him, talk to previous properties and he's always paid, every month. And so we're a little fortunate on that cuz we've got the deal flow. But it is extremely important to make sure you've got a solid borrower. Cuz you, a lot of times it hasn't, like I said, it has nothing to do with the property. We had one guy who ran into some trouble.. Luckily, we're working that out with him, but he had loaded the boat on crypto. Now this is hard for us to understand cuz you can do all this background check on him, and then he didn't get out and now he has no liquidity and he had pumped a ton of money and now he's running pretty thin. And so we're working on, refinancing that loan, but that's the kind of stuff that happens. And so we've continued to advance the level of questions we ask. Hey, what's your source of money? You say you've got all these assets. And so we may have looked at crypto in a different way, pre blow up, but now it's something where it's okay, we understand that's an incredibly volatile asset now and we need to discount, that borrower's capability to meet future needs personally, cuz we take, personal guarantees full, he's at risk as well for that property. So it's super important probably just as we love the property and we're all about property, but problems happen and headaches happen and your team has to work twice as hard if the borrower screws up.
[00:19:18] Adrian Boley: And then if you do have to take back the property how do you evaluate in terms of executing that? I mean we've heard your low leverage going into this, are you just looking at Hey, I'm going to unload these, or do you think there's equity value and worth working out? How do you look at that side of the risk equation?
[00:19:36] Chris Carsley: Yeah, no. One of the things that we ask when we go into a loan is, would we want to own the property? had, daycares are a great business, but I don't know anything about them. I have never run one. And so we've seen a lot of stars align on some loans that people want for daycares. We've never done one yet, because if I ended up at the property, I don't know what to do with that. Hopefully it goes to public sale. But yeah, the actual procedure of an operational default to a full, we're gonna, foreclose on you and start the legal process. Sometimes it gets cured through that process and that time the borrower can actually fix and it's just very expensive. But if you end up going full and, get right to the property, we're not really in the business. If we would offer, if one of our investors wanted to take it on, we might actually say, Hey, you can buy this paper directly from the fund. Do somebody who is external, almost like a co-invest structure. I've actually built the docs on that and ready for that, but most likely we have such a huge spread. I The one that we're working on right now is a 1.4 million value on a $600,000 loan. That's a big equity spread. We'd probably let that go to public auction and we'd basically get our principal plus our accrued and unpaid interest back easily, cuz someone's gonna come in and take that at 1.2 or one and we're gonna have money in money to get out. That's gonna be the most likely case for us, especially in today's world where there's a lot of money looking for deals. And if someone can walk in on a $1.4 million property at a 1.1, a great steal for you. Good luck. Have fun. Pay me my money. .
[00:21:01] Adrian Boley: Got it. Blake, I'd like to shift to you beyond the capital market dysfunction. There are some very real changes in how people are using and deciding to use real estate in the future. Some secular trends really around work from home, right? And the impacts it has on office. Supply demand imbalance and multifamily in this country. In your opinion, how are, how is that, how are you viewing new opportunities through that lens specifically as it relates to these trends and the changes in the way that people approach real estate and how you expect they will do that over the next decade plus?
[00:21:34] Blake Hansen: Yeah, that turns out a lot of these trends are long-term trends and the death of retail. Are people gonna go to the office? These are things that've been asked for a long time, in some cases for decades and decades. Again, our investment thesis is never based on some broad stroke, painting with a broad stroke doesn't make sense to us. We we bought a whole bunch of suburban office in the last few years when everyone said office was, . I think when we first got started eight years ago in the fund, we got a lot of pushback because we were buying a lot of retail because I guess all retail was dead, even though, we knew that specific places inside of retail and certain geographies, et cetera, made a lot of sense. Yeah, I think you've gotta look at those trends. You've gotta understand 'em. We can talk about any of those. If it's retail, if it's office, if it's industrial, I mean it, it's just, it's not quite black and white. We can go to any of 'em, like we can talk about retail and we can talk about, distribution and, this proliferation of industrial and it's this hot thing and it's been hot for so long. Cap rates of compressed, I don't know. I've noticed over the years that you know, what's hot becomes cold and what's cold becomes hot. And, that's not usually the long term trend. It's those are medium term trends. And so you gotta follow the longer term thesis. I don't know. There, there's a lot of nuance when it comes to investing, especially in real estate. And you've gotta buy on the nuance and you've gotta develop narratives that are based on the nuance and the specifics of an individual deal and not get caught up in, what you read in the newspapers and what, the chatter is it can throw you off and lead you to do the things that the institutional investors do that create the types of opportunities that we buy into.
[00:23:27] Adrian Boley: Brian, what do you think?
[00:23:28] Ryan Ulrich: I think like office and retail, I don't think they're dead. I think they're evolving. I think office like when we look at office right now, there's some good buys and it's just really focusing on don't, we don't look at like highrise we're looking at, single story drive up. Cause what we saw during Covid, we were pretty active during Covid buying up stuff cuz there was some good prices. But we saw single story office, everyone went to the office, right? And you're insulated from the covid cause you're not getting in an elevator and so I think, it's evolving into that piece. And then also when you're looking at an office deal, you want heavy use heavy office users, right? You want people who have to be in the office, engineering firms, construction firms, things of that nature. Same with retail. Retail actually is performing exceptionally well. When I say retail, I'm talking about strip retail in neighborhoods not malls. So it's, it's places where you have to go, like the dentist, the UPS store, Subway those, especially in Houston, some of the assets we own, vacancies is 5%. So I don't think retail's dead. I do think people now want the experience again because they've been cooped up in their house for the last two years. It's the same way with office, right? Everyone's saying, okay, everyone work from home. Okay, how do you collaborate? How do you hire a new guy and train them if they're at home? So I think. It's not as bad as I think, what the press kind of portrays on those two as far as me as an investor, as I see it.
[00:24:48] Adrian Boley: Dan?
[00:24:50] Dan Orville: Yeah. From our perspective, it's It's really a bet on housing and affordable housing, workforce housing, and so we don't see that trend dying down anytime soon. Actually being able to get into the market with new supply at an affordable price point for us that, that is our thesis and doesn't really exist across the US. There's 4 million homes short in the. In our market, we'd have to buy 27,000 hotel properties to solve the crisis. As long as we can buy look at it on a long term basis and have that staying power, which we don't consider ourselves necessarily investors, we're operators, we're development company, we're a management company, and we're really, keep our focus on the operations so that we can have that staying power, have that longevity. That, that trend for us is something that we're very willing to go all in on and have gone all in on for the last four years, and it's really paid off. And unfortunately, we would like to have more housing out there. We're trying to solve the crisis, help solve the crisis. But but in the meantime, if we can do some social good and benefit from it, we're pretty proud of that.
[00:25:56] Adrian Boley: I'll wrap up with one more question before we turn over to the audience. Key takeaway as we look at the next 12, 18 months for our industry and where you're specifically focused, what is one thing that's really top of your mind as we head into whatever this economic condition this storm looks like, and how do we navigate? In your mind, what are you thinking about top of mind?
[00:26:20] Dan Orville: Extremely excited. 2009 and 10. Had a ton of success putting capital out in the market. Back then did over 20,000 units of multifamily, and I'm seeing this same perfect storm right now, but just like it was then. It will be now. And investor appetite and investors willing to get in is gonna be difficult. So we had trouble raising money there for those opportunities, which are now worth four times what we bought 'em for. But if people can have the stomach for it and look at the long term trends and invest wisely looking at the dislocation, I think it's gonna be a really phenomenal opportunity coming up.
[00:26:56] Ryan Ulrich: Yeah, I'm excited as well. I see this being the best buying opportunity next year in, in 24 since the Great Recession. All right. It's not gonna be as bad. Now's the time to shore up capital and be ready because I think there's just gonna be some folks who are gonna feel some pain and, if you're an investor, you scoop, scoop in and go after that. And again, back to what I stated earlier about the loans and those coming due and it has been a seller's market for 10 years in commercial real estate. So it's, I don't want us to go in a recession, but it's nice to finally be in a more of a buyer because cuz previously it was, you put offers out even off, off market on market there's 20 offers, right? Then the thing gets bid up and it, and the numbers don't work. Very excited about what's happening and just, deal with it.
[00:27:44] Chris Carsley: Not to date myself, I've been through four left tail events every single time. And here's our next one. As a hedge fund trader, I've done venture, you are gonna see opportunities all over the place. It will happen. Be patient. Focus on what your particular niche is. Or if you're building out a new portfolio and you're looking for something new or you want to advance something that's already in your portfolio, buckle down, focus on that area, building that network and building your information in that area. You will see things come around. Just be patient. It's happened. We're in our fourth circle. We don't really evolve much. We just go in the same circle over and over again, and here we are again.
[00:28:23] Blake Hansen: Yeah, I think it's interesting because in, in these moments where everyone, like the conventional wisdom says that we're gonna have this massive buying opportunity, and when you get to that massive buying opportunity, no one sees it. Or no one's ready for it, no one wants to catch that proverbial falling knife because where will it land? Where's it gonna be? If it really starts going, how far will it go? So I think it's easy for us to say here, where we're pretty close to the top of a market, right across all these asset classes, yeah, we're gonna buy more. Let'swe'll be ready for the opportunity. And I think the opportunities come where you don't expect them. , I think you've, you're, it's gonna emerge in ways that you don't know. I had a friend recently say, if you've been through one recession, you've been through one recession. Yeah. And you can learn a lot from the past, but the dynamics are different every. and things will happen that we don't expect. Who would've expected a pandemic in 2020 and what happened there? And who can really project or predict what the government response might be to anything that happens and things that might be out of our control. So yeah, for me it's, whatever we've done so far to this point, to prepare. It's what you've done. Like you can't pull a lot of levers at this point. You had to prepare. , did you fix your debt when you had the opportunity? Cuz you can't do that anymore. Did you do the things that you need to, and now going forward, are you looking in the places that other people aren't looking? Are you finding the opportunities that other people aren't finding? And do you have the discipline to really go against conventional wisdom? Or are you going to just follow the crowds again into where everyone else is going?
[00:30:13] Adrian Boley: We have a few more minutes left. Why don't we turn it over to the audience and see if they do a better job than I did. Any questions?
[00:30:21] Audience: Could you comment on the increase in rent, the rate of increase? You said in 23 you anticipate the same to be as 22, the gentleman in the first seat. And is it realistic? I'm just trying to speculate as to what the rate increases might be, because past few years has been very good. And when do you think it'll top, is there any forecast?
[00:30:43] Dan Orville: Yeah, as I mentioned, I don't expect, we were 15 to 25% rent growth the last year. In many of our markets, we don't expect that trend to continue. We're underwriting anywhere from four to 8% over the next 12 months. Rent growth but we are, we're in a unique position too because a lot of our underwriting that we've done over the years, we've been able to buy at a low basis with being a hotel and then converting it to multi-family. And we had very conservative rent assumptions. So a lot of it for us is just converging to the current market rent. And we'll have a very successful project doing that, but we're not forecasting rents to continue by any means at the pace that they've been doing. We think it's unsustainable. However, inflation does lift all ships. So when you see Whataburger offering 1650 an hour in Riverside for, anyone coming in the. Landlords have the benefit and the leverage to command those higher rents. When wages are increasing, 80% of that wage increase goes to living expense, primarily rent, right? So we will, we'll go in lockstep with where the economy's going. So as wages continue to go and we continue to have this free for all of everyone trying to get employees we'll see benefit, but we're not banking on it. And again, we're looking at long-term trends. Right now we're underwriting everything nearly untrended? No. No growth.
[00:32:00] Audience: I'm interested in the geography office. Are there certain sections you think are set up for a bigger fall or no fall?
[00:32:10] Ryan Ulrich: Is that for me? Go ahead. Okay. , jump in. I think I, as far as fall meaning valuations yeah I think. , I think you're gonna see a lot of office product hit the market. I think a lot of the institutions you have just said, office is four letter word. We just want out. So I do think there'll be some good basis buy and we're a basis buyer, but we've partnered with Fairway and of think the same. We make your money on the buy. That's how it's taught the business. And so when someone's selling a class A minus office building for 130 bucks a foot, , that's attractive, right? Because the replacement cost is three 50 depending on where you are and whatnot. But so I think there's gonna be a lot of opportunity there. Industrial's tough. We, like I said, we, we have quite a bit of industrial, especially if your interest rate's 8%, how do you buy a six cap deal? And then the other thing we struggle with is how do you value the exit, right? If you're IRR driven, that exit drives that IRR. So it's really hard cuz you really don't know where interest rates are gonna go and historically, interest rates go up, cap rates go up. That didn't happen. So there's that's the other difficult part. But but I, those are the two asset classes at least that we focus on, that we see, opportunity.
[00:33:20] Adrian Boley: I think we have time for one more question.
[00:33:24] Audience: I'd love to hear what your thoughts what your crystal balls tell you for how bad is this recession gonna be, short, shallow, or five years of stagflation? What lies ahead?
[00:33:40] Dan Orville: That's a question we were all dreading before this.
[00:33:44] Adrian Boley: We're hoping no one would ask.
[00:33:44] Chris Carsley: We knew this was, here we go. We were like what? You brought the crystal ball, right?
[00:33:47] Adrian Boley: Yeah. We're, oh, wrong.
[00:33:49] Chris Carsley: So you want down to the week or down to the hour it happens . How bad the recession will be. I track a lot of economic data. It's just my background of, doing a lot of hedge fund work at the global macro trend following basis. That's how they base their trades. Depends on what data you wanna look at. If you look at enough data, you'll come up exactly where. I have no idea cuz half says it's the end of the world and the other half says no. The dollar's up 15% and it's all gonna be okay. It's a European problem on their energy. But to say that's not gonna bleed across you're gonna have good and bad in America. I think the key element to how I look at it is we are in a different position economically, and I think a couple people that have been up here have, said the same thing. We are in a strong economic position. We are, people are begging for people to come back to work. They've got the money to pay, they've got strong balance sheets. So do I think we're going into a recession and yes, there'll be some pain and suffering. Do I think it's going to be death and chaos and people jumping out of buildings? No, I think that we're gonna, actually, we might hit hard and there might be a little bit of a bounce, but I think all of them said, Find those niches that you can be in and you'll still make money. There will be trades out there. Don't follow the crowd cuz the crowd's gonna go listen to the talking heads, go do exactly what the talking heads do. And when that blows up, everyone goes down on that ship. I think most of you guys are in a position to where you're not following the, how do I get into the next Goldman fund or the next Blackstone? You're looking at smaller managers that are niche, that have an inefficient space that you're playing in, and they have an edge in those inefficient spaces. That is what is gonna protect you for whatever kind of happens in the future, as long as that manager is nimble enough and understands what might be in front.
[00:35:38] Adrian Boley: Thank you and we're out of time, so hopefully appreciate. Thank you panelists.
