BiggerPockets Money Podcast - REITs Have Under Performed for 25 Years. Is the Next Decade Different?

Episode Date: August 11, 2026

REITs have underperformed for 25 years, but could the next decade be different? Jussi Askola joins us to look at where REITs stand today, how they are valued, and where investors may find the best opportunities. We discuss how to value REITs using NAV and FFO, why management quality matters, and which sectors look most attractive, including data centers, cell towers, multifamily, retail, and office. We also compare public and private real estate and explore what could drive REIT returns over the next 10 years. To go beyond the podcast: Take the guesswork out of investing, taxes, and retirement. Book a free consultation with Domain Money Today: www.biggerpocketsmoney.com/cfp  Get 50% Off Your First Year of Monarch by using code ‘Pockets’: https://www.monarch.com/pockets Kick start your financial independence journey with our FREE financial resources - https://biggerpocketsmoney.com/ Subscribe on YouTube for even more content- www.youtube.com/biggerpocketsmoney  Connect with us on social media to join the other BiggerPockets Money listeners - https://www.facebook.com/groups/BPMoney Connect with Jussi Askola Website: https://www.leonbergcapital.com/ Buy His New Book ‘The Reit Advantage’: https://www.amazon.com/dp/9916435359?lv=shuf&channelId=500&plpRedirect=mhFallback Substack: https://www.high-yield-landlord.com/ We believe financial independence is attainable for anyone no matter when or where you’re starting. Let’s get your financial house in order! Learn more about your ad choices. Visit megaphone.fm/adchoices

Three years ago, we had UC Eskola, reet expert from high-yield landlord, talk about reits, and we had a lively debate here in the Bigger Pockets Money podcast about real estate investment trusts versus rentals. Since then, both real estate investment trusts and rentals have been pretty flat, significantly underperforming the S&P 500 or other major market indexes. UC is back to talk with me about the landscape for reets, what's happened, his wins and losses, and where he thinks the opportunities are going forward. Hello, hello, hello, and welcome to the Bigger Pockets Money podcast. Without Mindy Jensen, I am Scott Trench, your real estate investment trusty solo host today.

I am very excited to be joined today on the Bigger Pockets Money podcast by UCA for this conversation. Welcome back to the Bigger Pockets Money podcast, UC. How's it going? Very good. Thank you for having me, Scott. And as I was just telling you, the big change from last time we talked is your mustache. It's very nice. I like it a lot. I'm very glad you noticed the mustache, or the moustache, yes, wonderful. So, well, to start things off for people who haven't listened, I want to actually pop a big question here, which is we talked maybe about two, three years ago about REITs.

And if you just look at like a broad REIT index, like VNQ, it hasn't really gone anywhere, right? And that's big news because the rest of the market, you know, gone and ripped. Can maybe start us off there and tell us what's happened here? We thought, I think there was a good case to be made. A, reits are probably at a relative low. They haven't gone anywhere for a while. while and they still haven't gone anywhere. So what's going on? So it depends, obviously, on when you start your measurement period. But generally speaking, rates have gone through a multi-year bear market.

This bear market began in early 2020 with the surge in interest rates. You know, this hasn't fundamentally impacted rates quite that much. The average loan to value in the rate sector is only 35%. So despite interest expense rising somewhat, the impact hasn't been significant, as reads have also benefited from the high inflation in rents. And so because of that, cash flows and dividends have kept on growing, even as richeer prices drop to low levels. But since late 2023, rates have actually begun their recovery from this bearer markets. Their total returns of REITs on average since late 2023 is about 55%. So it's nothing exceptional, but they've been gradually recovering from this bear market. But you're correct to point out that REITs have significantly underperformed the SAP 500 of

the past five years or so. And this is unusual. for reeds, you know, over the past 50 plus years, if you include this recent bear market, reeds have actually earned very comparable returns to the broader market over the long run. You know, I've been posting a lot of content online about this opportunity. I think that with a lot of reeds trading at large discounts relative to the value of the real estate they own, they are today presenting a very compelling opportunity, in my opinion. Let's start there. Why is this a compelling opportunity and talking about pricing of these reeds? Are we pricing it on a base, you know, on price to earnings or in the reed world,

price to flow funds from operations or adjusted funds from operations? How do you think about this and can you define some of these terms? Yeah. So, I mean, there's many ways to measure rate valuations. But basically, over the long run, historically, rates have typically traded at a small premium to the net asset value on average during most times. And this makes sense when you think of it because reeds essentially give you exposure to real estate, but with the additional benefits of liquidity, diversification, limited liability, professional management. economies of scale, all these things that has value. And so typically, rich should trade at the premium to the net asset value on average. However, today, following this despair market, we've reached your

prices dropping quite significantly. Now you have a lot of REIT trading at 20, 30, up to 50% discount relative to the value of the real estate net of debt. So that's one way to measure the valuations of REIT is that, you know, if REIT might own $1 billion worth of real estate net of debt, and yet it's market cap might be just half of that. So that's one way to measure the valuation. And that's a reason also, by the way, why there's been so many REIT buyouts lately. We've had, I think, 10 plus buyouts this year alone. This MNA activity has really accelerated this year with major private equity firms like Blackstone, Brookfield, KKR, Blue Oll, and many others going after reeds, paying significant premiums, often 20, 30 percent to acquire the REITs and they're still getting

a good deal. And so this is my money. My favorite way of measuring the valuations of the reeds is to compare their net asset value to the current share price. That's how I like to measure it as, you know, I'm thinking of rates as real estate investments and I'm always comparing in which I'm getting the best value. Do I get a better value for buying reeds or buying private real estate? You know, because of your conversation, I dabbled in REIT analysis for a little bit here. I didn't put any real money into it.

But I looked at READS and I was like, I understand this net asset value argument. But in order for me to concoct a net asset value opinion, I have to understand every building in each REIT's portfolio and then market to market. And these things are not marked to market, right? There's not a lot of liquidity in buying or selling office buildings in Dallas, Texas, you know, in class A right now. How do you value it? I mean, you can put a price to square foot, but you're going to get a range that's super high. So I think that's the challenge here is a training at a discount to net asset value. Are they?

I don't know. I think that that's where it is. Certainly KKR and Blackstone apparently think so, at least in some cases, with these acquisitions. But walk us through how you would actually make the argument or defend the stance that these are trading at a discount to net asset value if the assets were marked to market fairly in many of these reads. It's a lot of work to calculate these net asset values. The first thing to note here is that publicly listed rates, which is what I focus on, for the most part, they are not typically releasing an estimate of the net asset value.

They will, according to US GAAP, record the value of the assets on the balance sheet as historic costs minus the accumulated depreciation. So if you're just looking at balance sheet figures, that's not going to get you far. Those are not reflected at all of the true market value of the properties. Instead, you'll have to calculate them yourself. And as you noted, it can be very tricky whenever it owns, let's say, 100 plus properties, all over the place. Sometimes they are not really specialized. all kinds of properties, that makes it very difficult. But the good thing is that this doesn't have to be an exact science.

You will never manage to determine the exact net asset value to the exact number. But even if you have just a good estimate, you can often tell if a rate is undervalued or not. You will not know if it's undervalued by 17%. But you'll know that perhaps the range might be 15 to 25% discount. But yeah, it's not an exact science. But, you know, there are a lot of reeds, especially the smaller ones that are very specialized in, let's say, let's say the example of BSR REIT, which is an apartment read that I like to talk about that focuses on the Texas Triangle. It owns these garden style, class A new built apartment communities in cities like Dallas, Austin and Houston. A real tough time to be owned in apartments buildings in Dallas, Texas. Maybe a good time to buy it. I don't know. It's tough time to be owned it, right? oversupplied markets for sure that are going through a rough time. But my point here is that

despite them owning a portfolio of a lot of assets, you can, with a reasonable amount of certainty, know a good cap rate range for these type of assets in these markets. And then you can apply that to the forward NOI of the company and you can deduct the debt and you'll get to an estimate of the net asset value. And you know, today the shares of the REIT are trading at an implied cap rate about six and a half percent. But in the private market, transactions are happening at closer to a 5.5% cap rate for these type of assets. And so you'll know that there is likely some type of discount even without knowing exactly how much it is. Let me zoom out here because you have an opinion on like hundreds of reeds, right? And you would put real money

behind that opinion and make money on those opinions. But if I, if I zoom out and I think like from a macro perspective, right, and I look at just like vNQ, right, Vanguard's REIT index, right? Here, Here's what stands out, right? This is that divot you were talking about in 2023. I'm sharing my screen here and I'm showing that the VNQ REIT reached a low point in October, 2023 of $72, and today is trading it around $99. So there's a real gain since that particular low point. But the average for 2023 was closer to this like 80 to 85 price target. And that price target was actually last seen all the way back in 2007. And then again, around kind of 2014. So it's arguable that this reet hasn't gone anywhere in 20 years, like the index for reits, frankly, besides the cash flow distribution.

And certainly, maybe even more arguable that it hasn't gone really anywhere meaningful in about 12 years, 11, 12 years. Like, how do I think about that as an investor at this point? Like, does that mean it's going to rip and start roaring over the next 20 years? Or was there different pieces of the reet sector that drove all the returns if you were concentrated in those? How do I think about this from like a bird's eye view? There are a few important points to consider here. The first one is that while REITs make up a large portion of BNQ, this actually isn't a pure play REITTF.

It's a real estate ETF. And so this means it also includes a lot of home builders. It includes real estate development companies, some brokers. And so it's not a fully a REITF. And a lot of these businesses have had a particularly rough time, even rougher than REITs, following the great financial crisis, following the pandemic. So it's not pure play on REITs. But even then, you're correct.

Reitz had a very rough 20-year period. They've suffered several Black Swans in this time period, starting with the great financial crisis. We had the surge in interest rates. We had the pandemic. And so, no, you're correct. The last 20 years, especially if you include the last year's, and you start before the great financial crisis crash.

It's been a very poor time period for rates. What I would say here, though, is that if you expand this time period to 50 plus years, which is the longest existing time period for rates. Back then, VNQ wasn't even available, but if you look at the rate indexes provided by any rate, which is the representative body of the REIT sector, the returns have been very competitive over the long run, even slightly outperforming the SAP 500 over the last 53 year period, I believe, ending in 2023. So before this, you know, a lot of this value was lost in this recent bear market. But yes, no, you're correct. Valuations today are low. Market sentiment is low.

And that's impacting the performance of REITs a lot, if you look, even until the last 20 years. Why is that, though? Because, you know, I just take like a single family rental. And, like, you held that for the last 20 years. Things are going well, right? Like, I made a lot of money, you know, even if I had some Rocky Roads or even if I had the nightmare tenant, you know, two years out of those 20 years and had to do the big hassle or whatever and I'm slow at it. I still doubled my money easily unlevered, right? You know, maybe me tripled it unlevered. And then you add leverage and it just goes through the roof. you know, if I put in the S&P 500, I did very well. Why are the reits in housing? Let's just segregate into that category alone. Why is that not ripping? As you mentioned here, there's a lot of

different categories of reeds. And I think that, you know, what's hurting the averages, these benchmarks in the reed sector a lot is the fact that there are all kinds of rates and the dispersion of returns is really big. You might have an industrial rate focusing on e-commerce warehouses that shareholder-friendly that's not extremely well over the long run delivering 15% plus annual returns over the past decades. East Group properties is a good example of that. But then at the same time, you might have an over-leveraged, poorly managed office rate with significant conflicts of interest that might have gone bankrupt in the same time period or lost significant value.

And so you take the average of the two, and yes, your returns are not great. But if you're able to select that good rate, you would have actually earned pretty good returns. So, you know, there are studies that show this actually that the REIT sector is one of the very few ones today in which active management still beats passive even after fees. And that's quite rare today. You know, there's a lot of studies that show that it's nearly impossible these days for active managers to outperform the SAP 500 or a lot of the major market indexes. But in the REIT sector, it's not the case.

And I think it's simply because there's a lot of bad apples in the REIT sector, companies that are conflicted, that have poor management, over leverage on troubled assets that exist, you know, primarily to enrich their managers. If you're able to weed those out already, the average performance of that chart will be a lot better. More specifically, going now into the residential space, which you mentioned. The last three years or so, the aftermath of the pandemic, a lot of these rates have suffered a lot because of oversupply. We mentioned BSR. It performed really well during the pandemic, obviously. Even trading at a premium to its net asset value

is still in early 2022, had delivered great returns. But then their market sentiment took a particularly big hit because it wasn't just rising interest rate, but it was also the oversupply leading to stagnating or even slightly declining rents. And so as a result, today you even have those blue chip,

a-rated multifamily rates like Camden Property Trust or Mid-America apartment communities, trading at large discounts to the net asset value. It's been one of the REIT sectors that has actually suffered the most in this spare market. This is really interesting because that was my big question around VNQ. And thank you for the clarification that it's not just reits that are being housed in VNQ, but even if you did have a perfectly set up reed index,

the story would be similar, maybe a little bit different, but it would be similar that it just hasn't gone anywhere. And so your answer is active management, actually, is you have to then begin to go back to skilled management. Oh, I can hear a bogelhead screaming at their earbuds right now that active management doesn't work. So can you explain this, you know, from the theoretical or philosophical standpoint and then give us an example and practice of what that means? Yeah, I mean, there are 200 plus reeds in the U.S. There are 1,000 plus worldwide today. And the basic concept is that, you know, if there are 200 rates in the U.S., not all of them are worth buying probably.

And I think that you can start with the management. There are two management structures in the rate sector. A read can be externally managed or internally managed. With the external management structure, the management is outsourced to an outside company that takes care of the management in exchange of fee income. And this management structure over the long run has proven to lead to much greater conflicts of interest, lower economies of scale, and as a result of this, all the internally managed rates have outperformed very significantly the external managed rates of the long run. Even then, there are still a lot of externally managed rates that exist today, and they are part of these ETFs. By simply avoiding these external managed rates,

of course, there are some exceptions in the mix that likely are quite attractive and worth buying, but by simply avoiding these rates, you could already do better on average. So you're basically looking at fundamental factors that historically and likely in the future are likely to leave. to better returns and you'll, you know, build a more concentrated portfolio. I want to chime in here because I could hear, you know, everyone who's a landlord who listens to bigger pockets is like, well, that makes perfect sense to me, right? Because, you know, I imagine that returns for a self-managing landlord in the single-family or duplex space over 20 or 30 years is very different from the returns from somebody who has

outsourced third-party property management in many cases as well. That observation doesn't take much for me to believe even before I see the data. What you just said there. Yeah, and the internally managed rates on the other hand, that's a structure that has proven to do a much better job at aligning the interest, but also leading to economies of scale because what this means is that the management is hired as employees of the rate and their compensation will not be a fee structure with like, let's say, 1% of assets in the management and then some incentive fees, which doesn't scale. That means that the manager is simply keeping the economies of scale for themselves in the form of higher fees and higher margins.

With the internal management structure, there are simply employees with the compensation that's typically tied to some key performance indicators that reflect shareholder value creation. And so much better alignment of interest and better economies of scale. And so naturally it leads to better returns. If you give the right incentives, people,

you'll have better outcomes. Thank you for saying this. And it's just fascinating. I don't know, I've never had somebody to actually make this assertion on the podcast. I can't defend what you're saying, but I'm taking a face value for now. But like at bigger pockets, right?

You had some stories. They exist of people who bought a duplex moved into it, literally lived in it, and self-managed it, and failed. That can happen. But the overwhelming sentiment from this type of investing is positive financial outcome over the long run, right? You can lose, but it's relatively more difficult to lose because you're able to just control everything there. You see the problems. You can react instantly. You're on site.

And then from there, I heard a lot of stories about people building out-of-state, long-distance rental property portfolios. I don't know how those are turning out, but I've heard a lot of horror stories in that category. I've heard fewer horror stories from people who bought a bunch of properties in their area and self-managed them, right, on that scale. And the syndication space, the same story repeats, right? Dude in rural Cincinnati who buys the same vanilla type of apartment for 20 years seems to be doing just fine as far as I can tell. Dude who bought 30 different asset classes across seven geographies in different types of locations and lived in yet another geography is not doing so good and things are going very poorly.

This story repeats across all real estate, as far as I can tell, as a rule, and not as a hard rule where it's perfectly strict, but without too many deviations across the entire value chain. And so I have no trouble now coming back to if I'm investing in BSR REIT, which you like, I'm going to assume BSR REIT, generally speaking, is concentrated in one or a small handful of geographies. generally speaking has staff on site in those geographies. And generally speaking, employs that staff to actually manage the assets over the entire hold period. Is that the right way to infer what I'm grasping from what the argument you're making?

Going even beyond that, the management of BSR rate will be internal and they will have significant skin in the game themselves. They own a large chunk of the equity, which will then do a good job, you know what, incentivizing them in trying to unlock this value. And a good example of that is last year, they sold a third of their portfolio. portfolio to another big rate called Avalon Bay just to try to, you know, prove to the market that look, our assets are more valuable than what we're getting credit for. They sold these assets at a roughly 5% cap rate. And they then use this cash to buy back a lot of shares at a big discount to create additional value for shareholders. And, you know, a conflicted management would typically do the opposite. It would want to grow the size of the pie to justify higher salaries and higher fees. They are doing the opposite. They're scaling down operations to try to unlock value. BsR just are example, but I completely agree with what you're saying here. And management is really the number one thing, whether you're in the private side of the real estate market or the public side in the

REIT sector. It's always the first thing I start with because at the end of the day, real estate is a fairly low margin, low barriers to entry, industry. There's a lot of bad actors in it. Let's say you're analyzing REITs. If you cannot be comfortable with the management being well aligned with you, the rest of the story really is irrelevant. They might own the best assets, have the strongest balance sheet, a very low valuation. But if the management is not well aligned, it's conflicted, you're still likely going to face poor returns of the long run. They'll do a lot of stupid things like raise equity at dilutive prices

just to grow the size of the portfolio to justify how your salaries. And so then you have a chart like you have with VNQ where it doesn't go anywhere. And then the opposite, if you have a read, like I mentioned earlier, East Group properties, a very successful industrial rate, is done exceptionally well of the long run. Their managers own a large stake of the rate themselves. They think like real investors. And they're constantly following a unique strategy of developing the real estate themselves,

earning initial yields far superior than what they could get by buying stabilized properties in the private market. So yeah, management is the most important thing, in my opinion, whether you in the private real estate or buying rates. I come back to, you know, I'm a long-term investor. And I'm debating, you know, where I want to allocate my capital. It's bigger packets of money. So maybe I have a rental or two already. So I have real estate exposure in my financial portfolio in addition to my house. I've got, you know, some stock investments, maybe, you know, S&P 500 or market index funds.

And why should I add reits now if I can't passively allocate to the reed based on what you're saying here because of the exposure here? And I've either got to form an opinion about the net asset value either by constructing a forward estimate of bunch of operations unlevered and then, you know, putting the debt back in, or by actually valuing each building separately and providing an opinion of value. And then I've also got to figure out if the fund manages their own assets, all are in part. And there's no checkbox,

as far as I can tell next to the REIT that says, we manage our own fund here. I've actually got to go in and read stuff or get an opinion from certain other parties. So it seems like a lot of work to invest in the REIT sector successfully.

For sure. Like, it's not an easy category to invest in, which is why I think, you know, to this day, if REITs remain a bit of this, obscure sector that's right in between stocks and real estate and, you know, real estate investors don't really trust the stock market often, whereas stock market investors don't understand real estate. And it is definitely a trickier sector to invest in. But if you're willing to do the work,

I think that there is some very attractive opportunities. And we see these big private equity players that are very highly sophisticated. They are certainly doing the work and investing billions of capital right now in rates because they essentially allow you to buy real estate that the steep discount with net asset value. And historically, whenever they've traded at such large discounts, eventually they have recovered and richly rewarded investors. There was Januson Henderson, which is a big investment firm, come out with an investment study. This is already a few years back.

But the study showed that historically, when REITs have traded at a 28% discount to now have or more, they have on average, then in the following three years nearly doubled your money. And obviously, this is historical and it's an average. doesn't mean that this is going to happen over the coming years. I think the discount to now is actually a bit smaller today on average as well. But the point is that historically, when you get into buy rates at a big discount, you've gotten into pretty good returns over the coming years. But yes, it is work to select those rates,

and you may not participate in those returns if you just buy something like the VNQ or perhaps your returns will at least get partially diluted by some of these rates that are poorly managed or on troubled assets like some office building. that are facing oversupply or some over-leveraged rates that are really feeling the pain of rising interest expense. So yeah, it is just like private real estate is time-consuming. You have to, you know, study your market. You need to meet brokers. You need to inspect properties. Similarly, reits can be quite time-consuming as well. Awesome. So let me transition to kind of attractive sectors here. And I'd like to start and then hear your opinion here. But I have kind of three feces that I'm

interested in exploring. I have committed money to one of the only one. one of these so far. The first, which I did place a small position in, is office real estate. My belief is that office is a really unique and interesting opportunity right now where a good portion of the office buildings that are vacant right now will never really functionally return to being offices again, right? You have a large tenant who vacated, their buildings old, it's useless, it's gone. And that means that vacancy rates are overstated in many parts of the market sector because they're including these buildings that are just not really competitive anymore. And the second part of this is that a lot of leases still are going to mature in the next few years

with tenants who have no reason to renew or will renew with much less space. That is simultaneously overstating occupancy in the better stuff right now. So you have a really interesting analysis challenge, but boils down to in markets where people are moving and businesses are moving, in the class A sector, I think you have a really long tailwind for demand for return to office in that sector. And you may have very low price. priced on today's occupancy rates. I made a modified version of that here locally in Denver in an office building that I thought had a chance to fill back up when it was positioned really well over the next seven years of our hold. But when I was looking at this from a REIT's perspective,

there seems to be moderate opportunity. It doesn't seem like it's really fully priced in that this is a deep bear market in that specific expression of the thesis. And it seems like if it was, then you have to really go into a market that you may be less comfortable with. Like Dallas, Texas, people seem to already be pricing this is going to happen back in. But in, Denver, perhaps. They're not really pricing that in. Maybe rightfully so. But what's your opinion on this in a nutshell? I've gone very fast here. But does this occur to you? Have you thought through this thesis? Generally speaking, yeah, I agree that clearly the gap is growing a lot between the Class A office building with great amenities that's very well located versus this very generic office

building. The gap is getting enormous. And so if you're asking me, if I'm generally bullish on office, including this generic office buildings, then I would say no. But this Class A buildings can be very attractive investments probably over time. And, you know, most office streets, they focus on this Class A new built, modern, and great amenities type of buildings, often in supply-constrained markets like in New York City. And so because of that, while their market sentiment has taken a hit, it's not quite as much as many would expect, given this narrative going around, that offices are not needed anymore.

Everybody can work remotely and AI is going to lead to major white labor force disruption and so on. But no, I agree with you. I think that in many ways, the demise of these lower quality buildings is going to benefit these higher quality buildings as tenants are moving out and they are consolidating, perhaps leasing a bit less space, but they are leasing that space in the higher quality buildings to, you know, motivate the employees to get back to the office. With that said, there are really one main thing that concerns me about.

office potentially, is that I do wonder if some of this lower quality stock will change hands, get new owners sometime over the coming years with new owners coming in with much lower basis, which will then allow them to heavily reinvest in these properties to try to make them somewhat more competitive with the higher quality buildings. And they will not ever be quite as high quality as these newer built nice properties, but that could perhaps bring some new competition suddenly to the market with this, let's say, class. B, but improved, competing a bit more with Class A on the pricing. That's one element that concerns me a bit.

If we see a lot of, you know, these empty buildings, see new owners coming in with lower basis of the coming years. Well, second thing is, how is AI going to impact the office sector? I think that in the near term, it may be a net negative where companies are, you know, using some of those efficiencies to cut down their labor force. However, in the long term, I think that you can also make a very bullish case. I think that AI could potentially lead to an explosion in new small business formation because it's becoming easier than ever before to start almost any type of business.

And if that's the case, likely we'll have a lot more competition actually for good office buildings over time. But yeah, I kind of myself put it in the too difficult basket so far, the office sector and decided to focus on other easier plays in the reed market, given that discounts to nav, the valuations are not that different between, let's say, office and a part of the market. community or service-oriented retail, which is easier for me to see the bull case. But I certainly think that there is a compelling argument to be made for long term to buy these good office buildings.

I went and walked an office building, you know, maybe six months, eight months, nine months ago now. And I think the guy got this thing for like $7 million, $150,000 square foot office building right in the middle of downtown Denver. So they're giving it away for free, right? I mean, that's effectively, I got it for free, right? Unlevered. I think they bought it unlevered. And so now it's just like I have some costs to operate this.

thing, but if it fills back up, I'm going to make $70 million on the exit, you know, at a 10 cap, or, you know, if I can ever get there, or I'm going to lose this and then some money and have to demolish the thing. And so, like, that's an interesting bet. That's what I think is really fun about office right now for investors today is, is that's not my like kids college fund here, but you can have potentially good odds on a series of those types of bets in the sector, depending on how you want to go about it. So that's, I think, you know, when you frame it like that, I think it's too hard, right, for most people. But if you have a sleeve of these kind of side bets, maybe there's a case that there's mathematical alpha in some place in there. So that's one part. The second thesis I have is

multifamily. I was late on multifamily. I put some money in in 2020, 2021 into some syndications. And I write that down pretty heavily at this point. I kind of zero. Maybe I'll get something out of that. I don't know in some apartment complexes. But, you know, by 2023, we were seeing, it was clear what was going to happen in that space over the next few years. I would have said, do 2023, 2024 and 2025 would be tough. But what I'm surprised at is, is that the timeline keeps extending. And I think what's happened here is banks have been very generous or not very generous, maybe scared, some combination of fear and greed from the banks. And they've been extending a lot of the credit lines so that the forced selling did not begin in mass before 2026. We are now seeing some

forced selling, forced liquidations in the space. That is steadily ticking up. So 2027, 2028, who knows what that's going to look like. But it seems. like the time to express a thesis in multifamily is when you see large amounts of forced selling really heavy underway for a while, and we have not been there yet. That's what surprised me is that the observed market condition where to me it would be a really good time to put money, you know, go pretty big there. And we just haven't had that in the apartment space yet. So what's your thought on that from a macro perspective? And then I'm sure that it varies regionally, of course, as you look at it. Seems like just like you have drawn

more and more uncertain about the multifamily sector because, you know, back in 2024, I remember everybody was saying that 2025 will be the year when finally same property, you know, high growth turns positive and we, you know, the oversupply gets absorbed in most markets and we turn the corner, things get better. Then 2025 turn into 2026 will be the year. I'll say this. I'm not going to be straight wrong now in 2026 because I would have said rent growth was going to be really strong here in 2026 because the deliveries. I'm going to be straight wrong on that one. It's going to be down and down substantially in Denver in particular. I don't know how I'm reasonably insulated that with my duplexes so far. I certainly

had a couple of vacancies, but man, like that is, I'm just straight wrong. I would have expected that absorption to be well underway by this point two or three years ago. Same. And if it makes you feel better, I think there's not just you and me who were wrong. If you listen to the REIT management teams in 2025, most of them were expected. expecting rent growth already to accelerate in 2026 and simply hasn't happened. And now everybody's talking about 2027, but as the year progress, I feel like one more people are again getting more concerned that actually it's probably going to be 2028. You know, it's been significant supply and then just not enough demand growth.

Don't have much migration. Like there's a lot of factors why just the market has remained surprisingly weak. And so that has caused me to slow down some of my purchases of multifamily. estate in favor of other property sectors. But even then, you know, if let's say cap rates for a given sub sub sector of the multifamily is, let's say, five, five and a half percent, but you can get something that's representative of that in the REIT sector at six and a half, as an example, an implied cap rate, that is quite attractive, in my opinion, long term, it's good management, not heavily leveraged with an

attractive strategy, with a read that's selling assets and buying back shares to create value, take advantage of the spread. So, you know, just not theoretical. They're actually taking bold steps to try to take advantage of this discount. I think that that can still be quite attractive from a risk-reward perspective, not necessarily, you know, as an investment that will generate huge returns just like potentially these office buildings, but as a more conservative investment that, you know, AI will not be able to disrupt, will always in the roof of our head. So I like that aspect of multifamily, but like you with a robots. start building homes, there's nowhere to hide.

Yeah, potentially. But I think that if you go that far in the rabbit hole of AI, I think that then it's important to start considering the value of real estate in real term rather than nominal because I think that if robots are literally building everything, I think that you'll see the cost of most goods and services still drop a lot more than real estate. So in real terms, the value of real estate will still hold its own quite well. I feel the same way.

Yeah, that's how I've expressed it in the, the past there is exactly what you just said. So if you're betting on deflation, what's going to deflate the least? Yes. And so in real terms, real estate will still hold its value and in its first transcing power measured by most other goods and services. And obviously, you still have the land. You have the building permit. You have the bureaucracy. You need financing. You still need building materials. So yes, it may come down somewhat, but probably not as much as many other goods that can be produced at scale in some factories by robots as an example. Here's another question actually is a deep dive on the, and I understand the multifamily and residential real estate space

much better than I do the office financing piece. I mean, it's actually very simple in some of these commercial spaces. But in multifamily, you know, I see some real wacky financing stuff going on. In single family and multifamily, especially as the portfolios get complex, literally to the point where I was pitched a syndication deal once and here's the purpose. It was like a portfolio, single family homes and they're being purchased at a seven cap. Great. Then there was a really complex debt structure that involved like short term, some short term components, some longer duration stuff, some balloons, like all these different crazy things. And the return of this thing was like 11 or 12%. And I was like, if you assume three and a half percent appreciation and seven cap, you get the 10 and a half cap.

No, I know it's like a little crude way to do it. But why are we doing all this for 100 basis points of return on the financing piece. It's like kind of crazy when you just buy the thing paid off. This is what I've done as I bought some paid off properties last year. It looks like rents went down right afterward. That was not the thesis in there. But again, I'm still doing fine with it because it's unlevered, right? I'm getting an okay return on the thing. Why is that not being expressed more in the reed space right now? And why are they going to these crazy lengths with the financing? How do I then underwrite the untangle the mess of financing that goes on at a lot of these reeds? Yeah. I mean, in the case of your syndication, I

I mean, I don't know, but I would assume that if you didn't have all this financing and you looked at the potential unlevered return after fees, probably it would have been quite a bit less than 10 and a half. So maybe part of the difference is the fees that the syndicators were trying to take for themselves. Same with the REIT sector, right? So to the less GDP. You're right. So in the REIT sector, you have some rates that take so much dead. They are so greedy and create such complex capital structures that eventually push them into bankruptcy. I mean, it's quite rare in the reed sector, but you'll have a lot of reads that turn into value traps, where they take a lot of, they're too greedy, they try to maximize the size of the portfolio, and that comes with taking a lot of leverage and very complex structures.

And in the end, this was supposed to allow you to earn better returns with the leverage, but in the end, actually, in the read sector, we've seen that the rates with the lower leverage have delivered better returns than highly leverage rates of the long run. because not only they avoid the big crashes during downturns, but on top of that, they're able to act aggressively and by properties of distressed sellers when times are tough, and that creates a lot of value over the long run. And because of that, most rates have now learned their lesson, and especially following the great financial prices, reeds have been gradually de-leveraging.

And so the average loan to value in the REIT sector is today in the 30 to 40% range, which is quite conservative by most private real estate investment And most private real estate investors commonly will use 50, 60, 70% loan to values, or even more in some cases. So by those standards, it's actually quite conservative today. And most of them don't have a very complex capital structure. But you're right that there are quite a few that are. And one company that lost me quite a lot of money is called Branix.

And it's a German reed-like entity. It's not an official structure that is a reed, but it's a reed-like entity that owns a lot of office, but also industrial real estate. and they closed a major deal just before the surge in interest rates, unlucky timing, and since then they've been trying to sell assets to pay off debt. They failed to sell enough of them, and so recently they had to come to a restructuring agreement with their lenders, and they came off of this really complex structure with different trances of debt, very high interest rate.

Some of the debt is not being, the interest is not being paid. It's simply being accumulated in kind, so the loan balance keeps on growing over time. and once again we get back to management, you know. Real estate is a people's business in the end. And if you have a very good, skillful manager that's shareholder friendly, probably it will not make the mistake of being too greedy with leverage. And it will think long term over a full cycle and make sure that they can survive a major

black swan because those blacks ones will occur. But then again, if you invest in the rate or the syndication that's managed by someone who's greedy, just looking after their short term financial interest in the form of fees, then these things will happen. So this one's more speculative. I actually don't know anything about this category. So I want to ask you, but it seems like there's a narrative out there

that these data centers have been really ripping and providing a huge disproportionate share of the positive return that we've seen in the last year, if we zoom in on that area, in the REIT sector. Can you tell us what's going on in the data center sector? Yeah, I mean, the data center reads are doing quite well. They've benefited from this AI trade. And, you know, the AI revolution is in question.

leading to significant demand for this infrastructure and it's leading to growing rental rates, occupancy rates. But myself, I'm actually not very interested in these specific rates. And to be fair, I'm not even super well informed about them. I don't follow them that closely. And that's simply because I don't really view them as traditional real estate investments. In my mind, the terminal value of these buildings remain very uncertain. You know, let me ask you this. So do you think that today's data centers will be similar as the data centers 10 years or 20 years from now? Or do you think that perhaps investing trillions of capital in this space might lead to some new major innovations and that could then potentially not just maybe not render the property completely

obsolete, but perhaps its value could be cut significantly if suddenly it's simply not nearly as efficient as the data center of the future? And because I'm not a technology expert, I'm not able to answer the question of what the probability is of this happening. But I just feel like if you're investing so much capital in this space, likely we're going to keep seeing some innovations over time and perhaps what we're building today and what's valuable today might not be in the future. I think that if I were to talk to an AI about REITs right now and attempt to have this conversation, I would have very few of the opinions and insights that you're generating. I'd have more data and much of it would be wrong that I have to re-correct in there. And that's being powered by an average

AI data center of 100 megawatts. Uc's brain right here and all of the intellectual horsepower he brought to this conversation is being powered by 20 watts. That's a ratio of 5 million to 1. Right? So the data center is consuming 5 million more watts than your brain is. There's no like physical reason why the data center has to be that large in the end, in a terminal sense. Now, whether that's 20 years from now and these things provide an excellent return for their investors because the cash flows grow exponentially over those 20 years. And then, you know, hundreds of years in the future, the AI chips that we begin to use are moved into a vehicle that can be contained, you know, in the same volume or mass as the human brain or smaller. But, you know, there's no reason why these have to be there for that long

versus, you know, human habitation probably needs some minimum size. That's more there. So we get to the really big theory. That's where you can arrive there. But I like your answer. of these are really uncertain where they're going to end up. And how's that going to go? And I think it's a really good bet that you're going to see more megawatt capacity being built in the next few years. And I think it's really open into question whether that's going to be the case in 10, 20 or 30 years. And obviously you have the REITs and not just the REITs, but the major private equity players

like Blackstone and Brookfield and Blue Wall, they're all making a very compelling argument that this is an amazing opportunity for investors because you can develop a major data center and have an A credit tenant. Some of the best credit companies in the world lease that space for 20 years with a strong lease. They take care of all the expenses and you earn a pretty good return, like solid cap rate with rent escalators. But what's the value of that property in 20 years? That's the thing. And if you think that the terminal value is good, that's an amazing investment. But if you feel that's a bit of a coin flip, you're not a technology expert like me, then that's the reason that has kept me away from these investments.

so far. Kind of like that inverse of that office investment, right? Because, you know, office is, you know, either going to zero or it's going to a lot and you can buy it really cheap. This one's either going to a lot or going to go into zero eventually and you can buy it, you know, fairly expensive. But it has cash flows that you can underwrite in the next few years. That's the difference there. I think that'll be interesting. And I find that a very challenging thesis as well, but it's really fascinating for you to be able to go so quickly into a lot of these expressions. So those are, those are the three big ones I wanted to cover here, which were office, multifamily and then the data center at actually the high level. Where are you look at?

What are some of the places that you think are the most prime for opportunity right now in the reed sector? Well, I like service-oriented retail a lot right now. And by that, I mean this like a strip center that's anchored by a grocery store and some tenants that focus on essential services. Those are quite attractive in my opinion because retail is undersupplied today. It was out of favor for so long that very little got built. And now occupancy rates are growing, rents are growing, same property and why growth of most of these retail rates is three to five percent annually. And yet, despite that, these reeds often don't trade at valuations that are that different from multifamily rates as an example which are facing stagnating rents or even

slightly declining rents. And so I think that's an attractive opportunity. Unfortunately, less so than it was one year ago. They've now reasoned already quite a bit in 2026. Our biggest investment in this space called Whitestone Reed got bought out by a private equity players, that one worked out really well. But we still own some investments in this space, including Kite Realty Group, Kimco Realty, and some others. So retail is attractive, in my opinion. Alternatively, while we talked about data centers earlier, many investors like to invest in data centers to profit from this AI revolution, I prefer to invest in cell tower rates. I think that they will also benefit from the AI revolution over the long run, as I expected

to lead to an acceleration in data, consumption, you know, more and more of us have apps like chat GPT on our phones, very data intensive. But on top of that, we're going to have more and more of these autonomous vehicles everywhere. We'll have, you know, a lot of smart city technologies using AI. We'll have at some point perhaps humanoid robots. And all of that, I think, is very data intensive. And it's going to force the tenants of these towers to reinvest more heavily in the equipment.

and I expect this to overtime lead to higher rental income for these reits. So that's, I think, a narrative that's overlooked today by the reed market. And I think that makes the Seltower rates quite compelling as they trade at historically low valuations. I think that those will be the two ones that come to my mind. This has been fascinating. So it sounds like a takeaway as I've got today are you agree, reits in a broad sense have really gone nowhere for a long time. At least 10 years, maybe 20 years, small, positive, nominal. increase. There's been distributions, of course, but really just been crushed by owning a single

family home as a rental, for example, or maybe just buying your family house rather than invest in a reits. You might have done better over the last 10 years, 12 years. Then it's been crushed by the broader market. And if you're going to invest in these reits, there's a thesis that you need to bring to bear on where you want to find the opportunity. That's a very complicated, difficult process. And you can be very wrong in each part of it. And if you're going to invest in individual reits, then you got to understand how to value the underlying assets. You got to understand the growth thesis. And then you got to understand if they check that box that says I self-manage or not, in your

opinion, as some of the major factors of making that decision. Is that a good summary of the key takeaways from you today? It is. The only thing that I would add is that I would argue that it's not that different in the end from private real estate. Probably if you looked at all real estate combined, probably all single family homes in the U.S., in every market, including all the tertiary market, the secondary market, more rural places, with declining

populations, probably the returns have not been all that great over time. But if you're more selective, if you first, you learn about how to invest in real estate, you know how to look for a good deal, you get educated, then obviously you can find some great investment opportunities. And it's a bit similar in the REIT sector. There's no magic. I mean, you can buy an ETF that represents everything and your returns might be decent if you have, if the reed market is going through a good time and their market sentiment is strong, but especially if you go through a long bear market and many blacks ones, you're going to do quite poorly. And if you want to earn good returns, probably you need to be a bit more selective. And again,

you need to spend some time educating yourself, doing some research. It can be a full-time job if you want to do it right. It's not an easy way of investing, but if you do it right, it can be very rewarding. And, you know, I gave you the example of East Group properties in the past, but there have countless examples of REITs that have existed for decades. And including in this past time period where most rates have done poorly, they've kept compounding very strong returns consistently over time. So the key is to be selective, just like in private real estate. Awesome. Well, you see, where can people find out more about you? I have a substack called high-year landlord. Alternatively, I wrote this book, which you mentioned

earlier, called the REIT Adventist recently. Oh, it's blurred so you cannot see it. But it basically discusses pros and cons of REITs versus private real estate as well as my investment strategy. But those are the two places where people can find me. I would refer people also as well, in addition to your book, to the conversation we had previously here on Bigger Pockets Money. You can just Google U-C-S-S-S-C-O-L-A-U-C-S-C-O-L-A-S-S-C-O-S-E. U-S-S-I-S-K-O-L-A, UC, and we had a wonderful debate, I thought, about the pros and cons of privately held real estate, single families, duplexes, triplexes, and cli-luxes versus the

REITs world, and they're real pros and cons, and they're, I think, arguments for both. I thought that was a really fun one. So go check that one out as well, and go check out the REIT advantage by UC. And high-yield landlord, I have, at various points, been a subscriber to your excellent, like this newsletter and series of analyses that are constantly rolling out on various reeds. Is that the right way to describe that? That's the right way to describe it. And we share there my portfolio and how I'm investing in reads and so on.

And likewise, you know, I think I started following bigger pockets. I don't even know how long ago it was, but I was not even working yet. It was very long time ago. And I've been following all the content on the blog as well as on YouTube. So enjoy it a lot. and, you know, while I'm bullish on REITs and I like REITs a lot, and in my mind, it's a better way of investing in real estate. I also invest in private real estate. I think there's a place for both, as we've discussed in this earlier interview. Oh, you have a private real estate now?

Well, the place I'm right now as an example is private real estate and I own this one. It's a little of these days, it's become my office, but initially it was my my residence. The house hack or business hack, you know, the business hack is a less talked about one because your different different type of profile. But moving into the office building that you then rent out to other people or using your converted house, whatever it is, those are the same concept. And I think it's really hard to beat a, I'm going to move into a property and it also turn portions of it into income or other productive use. That's just a killer app. That beats by a duplex out of state or the next market or a reed or a syndication, I think, in many cases for many people. No one is ever

going to be a better tenant than yourself to your own property. And then no one's ever going to be a better landlord as the renter from the property. When you want to move out and move into the bigger office down the block, you think your landlord will let you out of the lease? Yep. Well, awesome. Well, UCA, this is great. Let's catch up again in six months or a year and see how things are going. And good luck with the REIT portfolio this next year. Thank you very much again for having me. It was a pleasure. Talk soon. Bye-bye. All right. That was UCSkola. Scott, what do you think? Great question. I thought it was pretty, pretty interesting discussion. I think UC is really, really knowledgeable about all this stuff. I think it's been a really tough market. So he's

clearly spent a lot of time studying this. And I thought it was really fun to talk with someone who is, I think studied the REIT landscape as intensely, maybe even more intensely than I have studied the small mom and pop or, you know, retail landlord that has 10 or fewer properties. So, I mean, the amount of hours I spent talking with people in that space, you know, probably comes reasonably close to rivaling what he's put into the REIT sector. And it's amazing how many parallels exist when you really dive deep across that, those two sectors. In terms of what? what seems to work for the small mom and pop and what seems to work at scale for the reits. I think the most fascinating thing is self-management or close proximity to the properties,

maybe not necessarily self-managing. But I think that's going to be a major theme in real estate returns over a career is, are you close to the property and are you involved in the decision-making on any high stakes or maybe even the day-to-day operations of managing a portfolio? And I bet that has an enormous difference maker in the long-term returns at every level of real estate investing across the entire spectrum. So that's my biggest takeaway from today's. call. As a reminder, over at biggerpocketsmoney.com, we have a whole host of developing resources.

We've got like, I think, 20 artifacts now in our resource library at biggerpocketsmoney.com slash resources. I've published four calculators. Those can be found at biggerpocketsmoney.com and you can go to the drop down for resources. You'll see the I guess five calculators that we've released at this point across budget benchmarking, Monte Carlo, pay down the mortgage or invest in real estate calculator, income tax projection tool and a health care cost estimator and many more to come. So those are, I'm having a lot of fun building those and go check them out, provide me feedback, and we're constantly iterating and shipping new ones. So check that all out at biggerpocketsmoney.com and email me if you have any questions. It's got at bigger

pockets money. All right, that wraps up this episode of the bigger pockets money podcast. Today's lease on your time has expired and so I'll save myself out. That was kind of a reach. Reach. Reach.