The Derivative - The Current state of Commercial Real Estate: Armageddon or Overblown? Setting things straight with Matt Lasky of Equity Velocity Funds

Episode Date: June 1, 2023

We’re back! Hitting first up with the question of where the current state of Commercial Real Estate is at since COVID. Is the market coming back? Were the hits too hard with everyone out of the office? We’re looking at all the aftermath with Matt Lasky of Equity Velocity Funds, where the pain points are, who kept afloat, and how the market has changed since the vacancy or ‘phantom occupancy’ of Commercial buildings. In this episode, we talk with Matt about the commercial real estate bubble bursting, inflation & debt cliff, leverage factors, new lending standards, the difference between debt and equity & the challenges of bringing on new supply in real estate. Were there any success stories in all of this mess? Find out as we dive in with Matt as he gives us a closer look at just what is going on in the current state of Commercial real estate. SEND IT! Chapters: 00:00-02:40=Intro 02:41-10:32= Commercial real estate services/wellness, growth markets & did Red States during COVID save businesses? 10:33-24:21= Big Trouble? Real estate Armageddon viewpoint: Where’s the pain? Cost of Cap, Loss of Value & Phantom occupancy 24:22-39:37= Equities getting hammered, Leverage factors, short-term living spaces & the move to SOFR 39:38-50:26= Dead funds “loan to own”, Private Credit, Yield alternatives & bringing new supply to real estate 50:27-01:06:18= Leaders in real estate, Conversions, Diversification with Managed futures & Healthcare locations 01:06:19-01:11:07= Real Estate Market Outlook Follow along with Matt on Twitter ⁠@MattLasky & check out equity.net for more information! Don't forget to subscribe to ⁠⁠⁠⁠⁠⁠⁠The Derivative⁠⁠⁠⁠⁠⁠⁠, follow us on Twitter at ⁠⁠⁠⁠⁠⁠⁠@rcmAlts⁠⁠⁠⁠⁠⁠⁠ and our host Jeff at ⁠⁠⁠⁠⁠⁠⁠@AttainCap2⁠⁠⁠⁠⁠⁠⁠, or ⁠⁠⁠⁠⁠⁠⁠LinkedIn⁠⁠⁠⁠⁠⁠⁠ , and ⁠⁠⁠⁠⁠⁠⁠Facebook⁠⁠⁠⁠⁠⁠⁠, and ⁠⁠⁠⁠⁠⁠⁠sign-up for our blog digest⁠⁠⁠⁠⁠⁠⁠. Disclaimer: This podcast is provided for informational purposes only and should not be relied upon as legal, business, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations, nor reference past or potential profits. And listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. For more information, visit ⁠⁠⁠⁠⁠⁠⁠www.rcmalternatives.com/disclaimer

Welcome to the Derivative by RCM Alternatives, where we dive into what makes alternative investments go, analyze the strategies of unique hedge fund managers, and chat with interesting guests from across the investment world. Hello there. Summer is here. June 1st, 85 degrees here in Chicago. Love it. at summer is here June 1st 85 degrees here in Chicago love it almost as nice as Vegas which I just got back from after attending the EQD conference they're listening to big institutional

options traders and hedge fund managers and exchanges and all the rest talk the talk Jason Buck was there as well and we're doing a little home and away pod breakdown first here on the derivative then on mutiny investing podcast of all the panels all the speakers what was said by all those vol and risk pros who said something interesting who didn't so subscribe today so you get that in your feet as soon as it drops next Thursday under this week's show as I mentioned beautiful day here in Chicago people are out and about all's good in the city but if you watch any news you'd probably say well hold on you got some violence you got a bunch of empty office space people moving out in droves to low tax rate states which makes you question what

will commercial real estate look like here in Chicago and indeed what will it look like across the country with empty resale stores empty office space and more will all that start blowing up real estate developers, regional banks, pensions, insurance companies, and more? We're getting into all that and more with Matt Lasky, the managing partner at Equity Velocity Funds, and having him make the Armageddon case first and then switch him over to the bullish case.

And whether he believes, you know, don't believe everything you read, it's all going to be okay. We'll see which side you land on. Send it. This episode is brought to you by RCM's Outsource Trading Desk. Did you know RCM does the clearing and execution for several ETFs and mutual funds utilizing futures options and more? That's right. Check it out at rcmalts.com. And now back to the show. We're here with Matt Lasky out of the Columbus area. We were just talking about the baseball team we lost to, Licking Valley Dirtbags, which I guess Licking Valley is not too far away from you? Nope. East of the city.

A lot of growth going on out there now. Really? I thought it was a fictitious place. It's a real place? It's real. I haven't been out there a ton, but can imagine there'll be more trips out there with the Intel chip plant. That's big news in Columbus and some of the

reshoring of chip manufacturing. How big is that going to be? Like a couple billion dollars? Yeah. I don't even know what a chip plant looks like. Is it big? It's a big footprint. Who knows?

Just know that they're rationing concrete already for all of Columbus. So it's pretty substantial. Really? All right. Well, we've had you on the pod before, but with another guest who was talking like mortgage-backed securities and stuff, wasn't a perfect fit. So wanted to get you back on with all the talk of commercial real estate. Is it a bust? Is it overblown? What's going on? So give everyone, if you could, a little background, what you do

and why you know the CRE space, and then we'll dive in. Sure. So managing partner and equity of velocity funds, we're a 35-year-old commercial real estate investment firm. Our two core competencies over the majority of our history have been retail and healthcare. At inception, that was big retail. So think grocery anchored centers, Walmart anchored centers, and small healthcare. And now that's flipped on its head. So think larger suburban medical office buildings, surgery centers, some seniors housing, and then smaller infill retail. So things you can't necessarily do online on the retail front. And then been a developer our whole history. So getting more and more involved in larger scale mixed use

projects. So think apartments, office, retail, and kind of a live work play type wholly integrated setting. And then two things there, you just jogged my memory of like, yeah, pre-COVID, you guys were Amazon proofing, right? I think was the word you used or what was the word? Yeah, we called the Amazon test, which is our real estate vernacular for, you know, hopefully things you can't do online. Right. And then that spectacularly got shut down by COVID or what happened in that scenario? So what does that look like? Gyms and things like that? Fitness, restaurant, um, some bat, you know, we do have a lot of medical stuff in our retail. So as kind of, uh, healthcare shifts from a patient type mentality to a customer mentality,

you'll get dental PT, urgent cares, primary cares, other types of uses in retail. But we'd say service-oriented retail broadly, and then health and wellness would be your type of tenant pool we're seeking. But in that post-COVID, was that a tough time of basically everyone stopped going to gyms and restaurants, or did PPP save the day? Or what did that look like? Yeah, so I think we'll get into this more. But it was, we have, we have largely invested in growth markets thematically, it so happens that, you know, without making a political statement, a lot of those growth markets happen to be red states, and red states happen not to shut down. So I think we were better lucky than smart, but we had very few impairments of kind of government mandated business closure. So some of the tenants struggled, we had to work through some things, but we across our entire portfolio of call it roughly $500

million in 2020, we ended the year, mid to high 90s percent rent collected. And so it was a little lumpier. We had to work with some tenants, but that's a pretty normal year for any landlord. You're not usually at 100 percent collections, have a little bit of AR. So call it PPP, call it luck, because a lot of our tenants were able to stay open and get creative. And then we were able to work with them and defer some rent to catch up later. But we ended in good shape. And then you hinted at something there, maybe I read into it. So what's the, explain to me the difference between pure CRE and developer. And then are you guys sort of bridging the gap there? Yeah. So we, we invest kind of across what people would call

different risk spectrums. So development is, you development is taking a piece of land and building a building. We do development a little differently in that we want to be at least 50% or more pre-leased and not have negative debt coverage or like a negative debt carry. And then a lot of our business is an acquisition business where we're buying buildings that have, where we think we have strong risk adjusted returns, sometimes that means we can push rents or increase occupancy and add a lot of value. Or other times we think that it's a solid asset and a little bit mispriced and there's great kind of in-place cash flow in a growing market. So do most CRE go down to the developer? Is that the developments on the far end of the risk scale, the riskiest? Yeah. So from a risk adjusted return standpoint, if you're going to be a developer, you want the

highest level of returns relative to if you're buying a long-term single tenant net lease asset is usually the opposite end of that continuum where people for better or for worse, treat that long-term lease and credit more like a bond and less like real estate. And then development is kind of the most risk you're going to take. In a good jurisdiction, it's going to be a two to three-year timeline from inception of a project to delivery of a building. And in more complicated markets, that could be five or more years. And then help me understand, I was, I'm like sitting here doing spreadsheets and bemoaning my life of picking analysis and all this stuff on futures programs and data. And I'm like, oh, I should have gone in real estate and I'm driving around, sun's out, tops down in the car. So commercial real estate, are you mostly sitting at the office doing work or are you out and about meeting people, walking buildings, walking sites?

Yeah, it's a little bit of both, I think. There's a lot of people who've had success with maybe limited institutional financial acumen in commercial real estate. I think some of that is interest rate driven and also flows driven as real estate is now a major food group and much more of an, you know, main asset class, more institutionalized as opposed to 20 years ago. So I think you need to understand the spreadsheets maybe now more than ever, but at the end of the day, it's a tangible asset. Like in our acquisition process, we're always going to see the building. We're going to talk to all the tenants during our due diligence period. One of the interesting things about real estate relative to the regulated futures world is the ability to trade on insider information and not go to jail for it. If we find out that an area is about to improve or there's about to be a big project or an

interchange put in or something that dramatically, positively or negatively impacts an area, you're allowed to act on that information in real estate. Whereas that'd be material, nondisclosed public information maybe in a regulated securities world. I think there's technically not insider information in futures markets as well, right? Like all those oil majors are trading around their own data and their own positions in there um but anyway let's not get anyone in trouble so sure early in the pot so i'm gonna let you choose your own adventure here i want to take two sides of the story of one right it's died down a little bit, but back March, April, Silicon Valley Bank, all that stuff was, there's going to be a huge commercial real estate fueled bubble bursting

that's going to cause the next great depression, right? There was that kind of level of craziness of we're in for big trouble, commercial real estate's driving the ship. The other side we're seeing a little bit more recently is like, hey, this is overblown. Like yourself, these are professionals. They know how to manage their risk. They know how to manage their interest rate risk. It's not as big of a deal as everyone's making it out to be. So let's spend half the pod talking, it's not that big of a deal and half the pod saying it's Armageddon. So which path do you want to take first? I'll let you choose your own adventure. Let's start's Armageddon. So which path do you want to take first to let you choose your own adventure? Let's start with Armageddon because I think I lean a little bit more bullish

and this will be the harder case for me. So we'll start on the hard side. So in short, I'd say the majority of pain is call it the interest rate, the historic interest rate increase that everybody knows about. And so there's a lot of younger, less tenured sponsors and some well capitalized sponsors that originated debt deals, call it, around COVID, maybe a year or two before, and then up until the last year or two with floating rate debt, limited caps and short term maturities. So what that means is, you know, you're looking at a SOFR that went from SOFR, I guess it was LIBOR technically then, right, but a floating rate debt index that was essentially zero or barely around an error to whatever it is today in the fives. And that dramatically changes your valuation on an exit and your cost to carry the project. So we have a world whereby you had slowing apartment rent growth across the country. I'd say in most markets, it's still positive, but the rate of increases is slowing. So you can have this perfect maturity storm where people didn't

implement their business plans, which means growing net operating income. That could be because they missed on the revenue growth. They spent too much in costs, right? Because there's an inflation story here. So if you're rehabbing a building and you underwrote anything the last few years from a materials or construction standpoint, those costs probably ran away from you. And then you also have the two biggest other expenses in an asset are insurance and taxes. And you've got a lot of municipalities with limited budgets, increasing tax millage rates. So like the higher tax per dollar plus higher insurance costs that you have this storm that can erode cashflow and create this looming debt cliff to where you have to have a cash in refi. So when your debt comes due, if you don't have money to bring to the table to pay off some of the lender or can't

raise rescue capital through like some sort of creative financing and preferred prep equity, preferred equity or Mez that, MES that you're going to have a gap between where your asset would be valued today and the debt cliff. And so I heard you saying they're getting lower rates of return because the rates are going up, but the Armageddon scenario is like, you're not just making less money, you're forced liquidate sale, which is kind of what you're saying. There's this clip of like, okay, and tell us how most of those are structured. They're like balloon payments or how does that work? Is it both the month after month payments? So they're floating rates. So now every month I

have to pay more. And then at some point I have to pay this money back and I maybe don't have the revenues because the rents are down? Yeah. So a lot of the sophisticated capital and both on the debt and equity side would have had probably some sort of rate cap or swapped rate in place today. But a lot of the aggressive kind of value add or opportunistic sponsors or developers might've had like a three-year note plus two one-year extensions that are subject to certain tests. So essentially in today's world, they're probably not meeting a lot of those tests. So think that they had a three-year balloon. So that's kind of why that COVID time period is where I've mentioned the start. So common terms in real estate that three

years, five years, 10 years, plus maybe extensions for balloon payments coming due. So the first of those, COVID, which by the way, was peak valuations. So not only do you have revenue and debt issues, but you also probably paid more than you ever have historically for real estate across the majority of asset classes in 2020 and 2021. So as the profit on your asset or net operating income goes down for some of the reasons earlier mentioned, and so real estate's valued on cap rates, which is the net operating income divided by the purchase prices if you paid all cash. So maybe the best way to think about that is it's like the inverse of a PE ratio. And so as cap rates are not one-to-one correlated to interest rates, but they are affected by interest rates. So as interest rates kind of blew out, cap rates ticked upwards, which means the

multiple in which someone would value your property went down. And that creates the scenario where income may or may not be stagnant, could be down, valuation multiples are down, and you have to pay off your debt in this three or five year window. And there's a shortfall. And that's what's going to hit and cause the kind of issues. A lot of people are fine from an in-place cash flow standpoint. Fundamentals across the board and most asset classes are still really good other than maybe some central suburban office that we could talk about. And then tie in the regional banks there. So the regional banks have most of this exposure of when you say shortfall, that means the bank's not getting its money back, right? Because does

the CREs like, hey, if we go out of business, whatever, they're not coming personal guarantees. They're not coming. Who's on the hook for a big, bad CRE deal gone bad? So it's so nuanced. I'd say in a lot of cases, depending on going in leverage ratios, these regional banks who don't want to be in the business of owning real estate still might be close to money good on a lot of the stuff that was aggressively levered. But they're now, in a lot of cases, because of government stress tests, ability to lend cash elsewhere, deposit ratios, they're out of the market from a capital standpoint. So there's this handfuls of billions of dollars of originations like Signature Bank. I forget what the stat was, but they were one of the three to five largest lenders in New York City. They're gone. That capital is out of the market. So that blows a hole in a borrower's ability to, you know, refi their asset. Yep. And there's not exactly a bunch of

groups, you know, with what I would call reasonable capital based on everyone's kind of last five years. And you can argue whether that's reasonable or not, but there's not a lot of capital line enough to take their place, right? You got some aggressive debt funds, but that money today is priced higher than probably they told their equity it would be. So cost of capital is way up and values are down. And that's driven by kind of supply and demand imbalance from banks. They're just choosing and maybe using the term banks loosely, but call it all aspects of the real estate lending ecosystem are just being a lot choosier on their deals. And I mean, we've heard stories of banks that a year ago, we're open for business, you didn't have to have any deposits. And now they're saying,

oh, the only way we'll do this loan is if you have deposits that are like 30% of the loan. And that's just kind of unprecedented. But that goes back to some of the ratios we talked about, and the banks trying to stay on the right side of stress tests and what they have to do from a regulatory standpoint. And so nobody's blowing up? Nobody's losing those billions? Yeah, so there will be some equity. Yeah, it'll be the equity on undercapitalized sponsors, mainly, that I think takes the biggest

hit. So if a sponsor doesn't have the staying power, the ability to get through it, or there could be a lot of dead money to where you may not lose your equity, but it takes the sponsor seven years and you get out whole. Yeah, it's just dead money. It's like a zombie fund. So from an opportunity cost standpoint, you're probably negative on any sort of real rate, but from a dollars impaired, it's probably there'll be more dead maybe than truly impaired. With the exception of, I think there's going to be some big gloomy outlooks for some of the tier one city office towers. So think New York, Chicago,

San Fran, you know, have some very serious structural issues from a population decline standpoint, a work from home standpoint, and then a valuation and basis standpoint. And the assets with- You left out crime here in Chicago, but yeah. Well, there's crime in a lot of those cities. That goes down to the valuation standpoint, but yeah. Yeah. And the lack of tenant demand to backfill the space where people bought, you know, office was one of the trophy darling assets for a lot of institutional investors. And, you know, real occupancies in all those cities are way, way down. Yeah.

Have you seen that chart with the cell phone usage data? Yeah. That was impressive right for if you didn't see it listener like they were right because some of this tenant tenancy data can be a little wishy-washy i guess i'm like is that real is that not real but this was actual cell phone how many signals are hitting the towers in the downtown areas of all these major cities and it was down 20 to 70 percent since pre-covid yep so it's, no matter what the tenant data says, there's just not as many people coming downtown.

Exactly. In the same way, a lot of the pain will be when the shoe drops in debt coming due. You mentioned kind of wonky lease data. Some of the bigger credit tenants might have done five or 10-year leases and they might still show as occupied, but nobody's been in the building in years. And so it's like, how do you classify that? And that's one of the big debates. Bad looking, already bad looking data in terms of occupancy in New York or San Fran or Chicago. Like you're saying, that's even overstated because some of these big tenants are showing as occupied when there's nobody actually in there. Yeah, it depends on the source. The or Chicago? You're saying that's even overstated because some of these big tenants are showing as occupied when there's nobody actually in there. Yeah, it depends on the source. The more

sophisticated analysts or people in the know are trying to account for that, call it phantom vacancy. So it's leased but not occupied. And others are just showing the face rate levels. But we've talked to people in a lot of those markets that say it's a lot more damning than just occupancy would show based on people who have leases, but probably won't renew based on remote work policies and a shift in their business. And now put your macro hat on, which I don't know if you have one, but put your macro hat on like what does that do for society as a whole right if we have these right everything's built especially in these big cities of like come into the city work down here go back to the suburbs or even like okay high-priced condos near the city and like it seems like a lot of stuff could break and which was the

initial panic after covid right of like sell all everything's breaking. But then it was like, no, it's fine. Yeah. So there's a saying, I think that'll forever be true. People are going to learn in real estate that basis is forever and yields temporary. And so a lot of people get sucked into, hey, the going in yield on this is whatever. And that's some usually form of relatively good, right? And that can change. And so I think, you know, there's, assuming the cities don't structurally decline, which would be a whole different macro call,

but like, let's just assume San Fran, Chicago, and New York, you know, remain mega cities in the world, maybe that happens, maybe it doesn't. It takes a low basis to reset to do anything with those buildings, whether it's repurpose them or office comes back and you can lease it at cheaper rates. But it takes some serious pain for the current owners to revalue the stuff back to a level to get other investors willing to reposition the assets to make it attractive, there has to be a big narrowing of that bid-ask kind of spread right now. And Detroit, I would assume, is a prime example of that, right? It was dirt cheap. They were giving away houses and downtown real estate and whatnot. So that's what you're saying, that level of pain perhaps is needed in some of these places

to get things rolling again. Yeah. And maybe the floor is higher just based on how big those cities were. But right. For a while, people don't realize that Detroit was bigger than Chicago for a lot of this country's history. Right. Until that pig that you mentioned. And it took a lot of pain. We had a babysitter when my kids were younger and she's like, Oh, I'm moving back to Detroit. I'm like, Oh no, we don't want to lose you. And she's like, well, I bought a house with

your babysitting money. Like what? I'm like, I turned to my wife, how much are we paying this? She's like, it wasn't that much. Just the house is that cheap. So the equity holders, and are we seeing that in the publicly traded commercial REITs, right? Basically, the equity is getting hammered. Yeah, right. And they say that the public markets lead, and sometimes maybe they overcorrect. But if you look at all the public office market REITs, they've been slaughtered, right? And a lot of those guys have exposures into those markets

i just mentioned because there's a concentration of what used to be call it core office markets and uh and those stocks have all been you know obliterated and you think you want like the san francisco footprint with all the high paying tech companies and whatnot but yeah um and then that's not even getting in we're just talking commercial office space but all the commercial rates have gotten slaughtered right like malls malls started way before covid but yep are there any that are surviving in that space that's not my expertise uh i know some have held up better than others. Like some of the industrial guys or storage guys haven't been hit like the office guys or malls as an example, which I think is the market's way of telling you, you know,

kind of what they think is going to happen, which is a structural shift in how we office. And then, you know, like apartments and storage have been darling asset classes. And a lot of that is the ability to reset rents, you know, like apartments and storage have been darling asset classes. And a lot of that is the ability to reset rents, you know, monthly instead of long term and annually a little bit less capex intensive businesses. And, you know, broader, probably geographic concentration of your assets relative to like some of the core office or mall people. I'm one of these idiots with all this extra furniture that's sitting in a storage unit. And I did, I'm like, hold on, we could just literally leave that out on the street, let someone take it. And in two and a half years time, have like the money we'd save by not paying

the storage, just buy new stuff. So like that's going on across America. Like what are you paying for? Yeah. That's a part of the American dream, I think, is renting a storage locker. Yeah. But for what? And then talk to me a little bit about the leverage factors that typically get used. And some of you said some guys are way over levered. Some are like, what's the, what would you say is normal leverage and versus some of the more aggressive sponsors? How far out on the leverage scale did they go? Sure.

So on the, you know, on the public side, those groups might have like 10 to 35% leverage on their portfolio. Get the best rates, but right. You're just, you have less leverage. And then on the private side, that's where things get wild. I mean, an aggressive private side guy is 75% to 80% leverage, right? And without the balance sheet or ability to issue money in the capital markets. And the private equity shops, like the big private equity guys that everyone would know, the Blackstones, KKRs, they're probably more in the 60 to 70% loan to value area. But some

of the newer sponsors, you know, would have these aggressive business plans to where they're going to grow the net operating income and start at like 75 or 80% leverage. And that's before, you know, some of the more esoteric guys that might get into like Mezpat to really actually up that even further. That's just like a plain call it senior loan and equity. And take me through, what does that look like? I'm building a Walmart or a Target or are those, I don't know if those are corporately built, but like for the sake of argument, say we're building a Target. What's that cost to build? Say it's a hundred million, they're putting up 20 million, borrowing the 80. Yep. Yeah. So that, you know, target's going to be less than that, but let's just say it's a big target anchored center with some other tenants too,

becomes a hundred million dollar development. You know, some of the most aggressive guys are probably going, you know, 20 million in equity, 80 million in debt, or, you know, some of the most aggressive guys are probably going, you know, 20 million in equity, 80 million in debt, or, you know, maybe 30 million or 70 million in debt. But if you kind of miss your lease up projections, right, that can, that can get out of hand quick. I would say lenders were a lot more disciplined in this cycle. So some of those hope notes and lack of debt service coverage that you would see in 07 or 08 didn't exist today. So people weren't funding dreams as much in this past cycle. Yeah. What's a hope note? I like that one. Yeah. I mean, there were deals where people would just look at your year two or year three

on paper, perform a debt service coverage and be like, oh yeah, we'll loan off that even if very limited amounts were in place. And so when the cycle shifted and that didn't happen, you know, people just got annihilated and that, that largely wasn't happening without like substantial personal guarantees or some sort of other collateral, this go around, I would say the lending standards remained kind of pretty healthy from everyone. You think that was hangover from 08, 09? Yeah. We're not falling for that again?

Yeah. You mentioned SOFR. I had a quick, we were at the EQD conference in Vegas, equity derivatives conference, and was marveling with someone of like, did you think that would happen that fast from LIBOR to SOFR, right? It seemed like there was no pain period. Everyone's just like woke up on a Tuesday and was like, we're using SOFR now. Total aside, but like, did you experience any lag in that? Or it's just like, okay, doesn't matter to me and call it whatever you want, basically.

Yeah, I mean, everyone got out ahead of it. I would say the most interesting part, and I'd have to go back and look at the actual years, but it may be three or four years ago, we're originating loans based on LIBOR and with some like, relatively sophisticated counterparties. And I'm like, hey, don't we need some language for SOFR? And they're like, ah, don't worry about it. Well, the whole world already agreed that SOFR is not new. They're just like, ah, we'll deal with it when we get there, which made us a little uncomfortable, but we did.

It was painless. They basically kind of just, not in the way you would execute a swap, but swapped the rating so it was the same thing and you know slightly different pricing and uh and we just worked through it but all our counterparties were i'd say a couple months out ahead of it and then you know we just switched the index one day uh and the paperwork you know to match but it was amazing that it was public knowledge and well agreed upon and nobody wanted to deal with it until it was amazing that it was public knowledge and well agreed upon and nobody wanted to deal with it until it was like that tuesday you mentioned it seems like hey okay we got the memo

it's time to actually care about sofa right where do i pull that up what's the bloomberg ticket and talk to me like right before covid right after covid actually even i was getting pitched on a lot of these like hey put into money with some money with me. We're going to build an Airbnb down in Reynolds Lake, Georgia, $3 million house. We rent it out for $35,000 a week. A few of these things, I'm like, well, what if the people who can pay $35,000 a week disappear? I know that's not necessarily your specialty. What do you call that? That's not commercial.

It's not residential. It's somewhere in between. Yeah. So look, their vernacular is probably short-term rental, but that means different things to different people. There's a couple of guys out there doing really big properties at scale and they're sophisticated, but they know that they're in the hospitality business and they would probably identify a lot more with a boutique hospitality owner and like trying to provide Ritz Carlton level experiences at homes than like, you know, the group of guys who went and bought a lake house and said they're going to rent it out. Yeah. Which I'm like, well, yeah, rates go up. I was I had the negative hat on in that scenario. Thank goodness, because I can't imagine those guys have done well now they're right it's the same scenario they're probably some floating rate interest rate only or something that now is a much higher cost to carry

yeah the the smaller guys there were probably able to get more conventional like long-term thing closer to home maybe have some bad 30 year but the you know the whole break even on occupancy is the question there. And then there's a much more extreme regulatory risk in that asset class than a lot of others. There's some towns that are trying to ban them completely and retroactively too. So not saying, hey, like in a lot of the commercial assets, if somebody changes zoning, like the assets grandfathered in like a major change, but not on the short term rental side. Yeah, I've stayed in some Colorado and elsewhere that you can tell were built specifically for that purpose. So like if that happened and they have to resell it to someone to live in, like they're like, this isn't livable, right? It's good for 10 guys on a ski trip or whatever

but it's not you wouldn't want to raise a family in here um so i don't know was that armageddon enough i don't know some listeners might be like that's not too bad what give me give me one more thing of like how really terribly bad it could be weird yeah so i think the asset classes, so the kind of three darlings of the last cycle were self-storage, multifamily, industrial. Most of the industrial deals that people are really attracted to have triple net leases, which means you pass through common area maintenance, taxes, and insurance to your tenant. And if those go up, that might eventually become a problem, but it's an overall affordability problem from your tenant. And the market amongst assets will be different, but kind of the same, right? Like insurance and taxes throughout Houston are going to be relatively similar, whatever your city, but on storage and multifamily, you don't get to pass through your taxes, right? You pass them, or insurance, you pass them through via rent. And if taxes and insurance go up and rent doesn't, that decreases your margin.

And so there's a lot of investment in areas prone to natural disasters, be it California, Florida, other parts of the Sun Belt, Texas, where insurance costs have skyrocketed, taxes have continued to go up, and you're racing against rent and maybe your debt at that point too. And so as I look to allocate personal side, interested in the tailwinds of storage and multifamily, because I think we're becoming a nation of renters and that we like to store stuff too. But one of the things I couldn't get over is in some of my favorite markets is the insurance and tax risk. And insurance premiums are up in a lot of Florida markets, like a couple hundred percent over the last few years. And

that's because one, it costs more to rebuild stuff. And two, the frequency of natural disasters has gone up. And then taxes are going up with that. And those are two big line items that really affect your margin. I just couldn't get comfortable with kind of mitigating insurance or tax risk. Do you see Texas and Florida, Florida commercial property taxes going up to offset all the influx of people coming in that are paying no income tax? Yeah, definitely. Texas is famous for large tax reassessments. And it's interesting. Their taxes are technically a nondisclosure state. So when you sell a a property you don't have to disclose the sales price which is very unique relative to most parts of the country but you know they're so how do they assess it yeah that's what you're getting well sometimes

randomly or you know they're it's not a secret that like the assessors now are have subscribed to all the like commercial databases and trying to pay appraisers and stuff for comps, basically anything they can do to try to see what things were sold for, they're trying to get their tax revenue, which is reasonable and fair, but it's a whole different risk of there's a lot of negotiated language around what you can and cannot disclose upon sale in Texas specifically. Florida is maybe a little bit better, but Texas is very good at trying to figure out what your property's worth and assessing you to it. And property tax appeals are big business in both those states. Yeah. Hey, that's the business in Chicago.

That's true. So what does that look like? So those two areas, cautionary, that's just more competition or it's higher price for the end? Like eventually it will get passed through and higher rents, but then you're saying it'll be basically lower buy in. Like people won't buy that single family. They won't rent from there because it's higher than this older one or whatever. Like you're just going to prefer a lower price comp, I guess. Yeah, or that really sophisticated and well-heeled sponsors are very realistic in where they think taxes and insurance will shake out. And other people may get caught off guard and say, oh, you know, the last guy's insurance was this per square foot and not realize that they're going to have a higher value, a higher replacement cost, and maybe not as much scale. And that could be two or three times what the previous guy was paying and increasing rapidly. Right. So they're eventually bust through that whole equation. And so you don't have any good stories from your XYZ pension is going to go bust because they're

all up in CRE or whatnot. That's what all the private credit funds are going to go, the regional banks are going to go, the big banks are going to go have CRE. Yeah, if you wanted to find Payne, I would see who had the biggest exposure to office and office in New York,

San Fran, Chicago. That could be anywhere from pensions to banks. I mean, there's a couple of banks that would have had that and they'll have pain, but that's where I see the major impairments because you have this kind of perfect storm of high asset prices and deteriorating fundamentals. And you'll hear in the bull case, I'd say fundamentals are really strong in the majority of asset classes, but office. So you've got this debt wall, high valuations, and right coming out of the last cycle. I mean, some of the kind of, or maybe one of the most famous sales, right. Was Blackstone buying Sam Zell's equity office portfolio at a huge valuation. Blackstone simultaneously sold off a bunch of the prime assets to REITs that ended up giving it back

co-terminus to lower their basis, co-terminus with closing on Sam's stuff. But that was like the darling asset class. So it wasn't long ago that core office buildings and major markets, that was just last cycle, really, where that was like, one of the asset classes. And now it's, you know, probably going to be the face of the largest amount of impairments in the cycle. Part of me thinks that multifamily and storage and right, like, those are now the new darlings. And it's just going to keep cycling of like, the new darlings will become the the dogs eventually before we leave armageddon to bull bull town down at the hedge fund conference met back in february in miami met with a lot of private credit groups it was kind of this talk like what if rates go up what if you and they were like, no, we like it when they can't pay anymore and we take possession of the property.

Usually we make more money on that because we can sell it at which I've had red flags going off of like, that doesn't sound great. That doesn't sound like your normal model. But like, what's the reality of that? There's a mass like if all these people have these properties that they need to either manage, live through for however many years or sell, like, what does that look like? That puts pressure on everything, right? Yeah. And I'd say to your comment on the debt groups, there are a few debt funds and kind of a slang is loan to own. And there's a handful of groups that, you know, their motto was loan to own, and they really do want to do that. And there's others that'll tell you they don't. And I'd say the way they act, they truly don't want to be operators of real estate.

But if you look at some of these guys and forget what podcast he was on, but I believe was the CEO of Acor Capital, which is one of the leading debt funds, he was looking at debt IRRs at like 60% to 70% leverage higher than he thinks the equity would be on sophisticated sponsors. So like a lot of, I would say, big money or bigger allocators we've talked to over the last couple of years were like, hey, we think the debt space is a lot more attractive than the equity space because we think we're going to get the same return and have a 30 or 40% cushion in values before there's any sort of impairment. And the ability to own it at the very worst. Correct. Correct. And if you can reposition it, then that's like, you know,

that's big upside. All right. I wanted you to slam the private credit guys, but they're all right. Now the credit, you know,'re all right yeah now the credit you know it's kind of like the the public markets you know the the bond guys which is the credit guys in real estate are you know usually a little bit more kind of less optimistic and more cautious and maybe a little savvier than some of the equity guys yeah yeah um that just seemed weird to me like well what's your job lending or owning or running like well yeah and depends on the scenario we're flexible uh all right any any other fire and

brimstone no no i don't think so all right um so you mentioned that you're more bullish than most so let's get into the bullish side yeah so I think contrast this with 07 or 08, you had tighter lending standards and most assets could support themselves and less overbuilding. So real estate and RIP Sam Zell, very famous for being a supply and demand guy, right? Like real simple economics and where a lot of people have historically really blown up in commercial real estate are bringing projects out of the ground or investing heavily when supply is growing rapidly and then the cycle turns and the demand doesn't catch up with the supply coming online. And because of this inflation environment, the last couple of years, it's been very,

very hard for developers to make new supply deals pencil. So starts on almost every asset class are within balance relative to where they were last cycle or close to non-existent. And a lot of asset owners who bought stuff and didn't develop it are at a basis such that if you wanted to go build the product today and earn a similar return, you'd probably have to spend 30 or 40 or have to command rents that are 30 or 40% higher than the guy who bought the assets. And that's a function of today's interest rates and today's construction pricing. And so that's going to keep- You're saying even if you own the land, you're not really incented to do

anything with it. Yeah. Because of where interest rates went in construction. And so the way a lot of people look at real estate development is what they would call an unlevered yield on costs. So that's your net operating income divided by your total costs. And with higher interest rates, well, I said unlevered, but eventually you put debt on it, but your costs are up in the inflation side. And then if you do have debt, your cost to carry it's much higher. And so it's the risk premium you're going to command to do a project.

So those two created this very unique storm to where it's really, really hard to justify new development across the whole country. And that's before you get into unrealistic seller expectations on land values and a whole host of other things. It's just, it's hard to build. And by the way, with lending freezing up or people having deposit issues and whatnot, if you're going to get a loan,

a construction loan is harder to get than an acquisition loan because you got a year of nothing, a year or two of nothing while you build it. And it's just more risk. So the loans that are getting done are, the guys getting kind of the most traction are usually acquisition guys or people focused on buying pre-existing income streams as opposed to development. It doesn't mean

new development won't happen, but there's a pretty solid storm of events that have made it insanely hard to bring on new supply. And so in certain kind of industries or segments like housing, like we need more and more housing each year. So call it like multifamily or build to rent homes. Storage, you know, seems to be going up in terms of the amount of crap Americans just accumulate and need to store industrial, you know, even retail is so severely underbuilt. If you look at the starts throughout the last 10 years of retail, as opposed to like, call it 2000 through 2009, it's just dramatically underbuilt. Not that we needed it. We were probably over retail. And then healthcare demand is a little bit less elastic,

right? Because you don't necessarily choose to see a lot of doctors unless it's cosmetic. And so as we age as a population, we need more and more call it healthcare services. So you have this kind of supply demand imbalance. And then there's a real cost thing we had a story of you know call it a tenant who was thinking about leaving one of our buildings and i think got a very harsh reality check when they went and priced out what it would cost to you know find a new space or build a new building in the market and i would guess based on where their rent is it it was probably an 80% to 100% increase. And we're in like a class B or A minus building. But if they were going to go recreate

it today, their cost would be double or close to it. So let's unpack there. So part of me is like, no, you just made the bearish case with all those bad sounding things. But you're just saying that's all constricting supply to the standpoint where rents have to go up, everything has to go up. And from an investor standpoint, that's better. From a tenant standpoint, it doesn't sound so good. Then it sounds like more inflation and causes more recession that causes less demand. So it's kind of like you have to strike that good balance there, right? It is. And then the other interesting side of, so debt is by far kind of the biggest

capital challenge, but the amount of like rescue capital or opportunistic money that's on the sidelines is near record highs. So there's like, I don't know where that floor is, but it's kind of going to be like, I don't know if you see free fall because there's so much dry powder out there that as soon as things hit somebody's, you know, underwritten returns, and it's going to just be how aggressive they want to be versus how conservative in their underwriting, you know, they're going to start buying up assets. I mean, we saw it during COVID and that was obviously a much different time and a little bit less macro and kind of unpredictable episodic event. But a bunch of people raised opportunistic funds and then, you know, still have them because the floor got hit so hard that people just kept buying stuff. And there was really no kind of fallout or blowback from the pandemic. And so a lot of that... Those are like, we're saying private equity funds or private, just opportunistic real estate funds? How big are those? Are there big players there? Yeah. I mean, like some of the big boys, we're talking billions of dry powder. So levered, call it two or three times, you start to get a lot of buying power there. But I mean,

well into the billions, like tens of billions, maybe hundreds of billions of opportunistic capital out there. Right now, the one thing we didn't touch on in the bear case that is probably prudent is because of where rates have gone, people now have a yield alternative, right? So we're talking about these capital flows for a while there, right? Real estate was three or 400 basis points above whatever treasury you want, even on high quality real estate.

Now that's not the case, right? Those are closer to par and there's no illiquidity discount or premium depending on how you're trying to view or spin that, right? And so people can buy treasuries and get relatively similar returns, at least on the current income side, right? So if you're like a tactical pension or endowment, big allocator, I feel like moving forward right now, they're going to have trouble saying, hey, we think this is going to be a great vintage year for real estate.

Like, let's go into real estate instead of just parking our cash and something backed by the U.S. government. Right. And some T-bills. And what does that look like for, like, say, multifamily, right? Like unlevered. You're saying in the two, three years ago, they were looking at 2%, 3% over the 10-year? Yeah. So like a cap rate, so call it the yield based on an all-cash purchase. For the highest quality stuff, you'd probably see like three and a half or four caps if you could have some rent growth. And you're talking really big assets and really prime markets. Today, there's probably some cap rate softening,

but I'm a multifamily tourist, not an expert, but you're still probably around four and a half or five caps for that highest quality stuff. But now that's par with short-term paper here, right? And so three or four years ago, when it was count on your hands level of basis points, and you had a story of rent growth, then it was like, oh, this is really attractive. And now at the allocation level, that changes. Right. A lot of risk to it. so back to the bull case all this way less supply too much cost to come in and just

dampen that's like to say like cool we get it here's more more more more that you're saying it's too much cost to build that all out but at some point there they will come in that's where you're saying the dry powder yeah what what does that point look like that's you think based on rates that's where you're going with it yeah or you know rates or mild distress and not distress in the way that we knew it in like a way but distress of like oh this is finally you know getting to my more opportunistic kind of return profile. Like I'm just going to hit the bin and buy something in place because of development challenges and kind of unknowns with costs. And so the biggest difference I think from what we're seeing relative to the last cycle is just

the fundamentals of the real estate, which is mainly supply and demand dynamics relative to like occupancy costs and rent trends. The, all right, what else you got on the bull case? So what does that look like in terms of, you still think it's these leaders, the storage multifamily industrial? You know, we're, I guess we're a little biased based on what we do. You know, we think healthcare and the service oriented retail, we've been able to maintain tenancy and grow rents strong. Um, I think there'll be. And explain to me what service oriented retail looks like. Yeah. So restaurants, pet stores, nail salons, health and wellness, things you can't do online, mainly. And also things you can't do online that we also think have a future. So like if it's a Hallmark card store, we're less interested than if it's like a restaurant and a gym.

Yeah. That area was probably the least built, like that service oriented retail was probably the least built area. And some of that's maybe because we're a little overbuilt after call it 08, 09, but that was like the least built area kind of multifamily guys see pain or start to get in trouble. It was a valuation issue on the front end. And that's because they got too aggressive the last few years on their purchase basis relative to where they could grow rents. But I think moving forward, there probably won't be that. There'll be pockets of kind of maybe slight losses, but I think everyone is kind of long American housing, whether that's home starts, build-to-rent communities, or multifamily. I mean, you have kind of this background story over the last 10 years. We weigh underbuilt single-family homes relative to any time in the history of this country too. So like people need a place to live. I think that's a lot of the attractiveness to multifamily.

It's just this gut or intuition level thing of like Americans need a place and shelter. And, you know, if not a single family home, then apartments. And what's your thoughts like the outgoing, I guess she's gone, mayor here in Chicago was floating, turning LaSalle Street, our financial district, into low income housing. But we'll ignore the low income versus high income part and just say like, okay, if you have all this office space problem and you have this dearth of supply on housing, why not convert all those office spaces into housing? Yeah. So it's the short is it's super costly and hard to do and the floor plates don't always match up, but that's where that basis kind of changes everything. And who knows if, you know, if somebody gets aggressive, like at a government level and call it like san fran or chicago and you know a lot

of development is somehow you know funded or subsidized yeah by local governments in a whole handful of ways if somebody comes up with a program to make that pencil a lot better for developers then everyone probably wins and by the way like developers are gonna they while they are profit motivated they are going to probably while they are profit motivated, they are going to probably deliver it at a more effective cost per square foot than the government would based on being private enterprise and not government based. So, you know, I think everyone could win in that world. And I think there's a lot of people trying to figure out, hey, like, how do we programatize

to the extent we can trying to convert some of these office towers to residential units, whether that's high-end, low-end, mixed, condos, apartments. I think, you know, there's a lot of people out there trying to figure out the design aspect and conversion of that. But then that's weird because like, where are they working? I guess they're just working from home.

So it's like, we're not going into an office, but now we live in an office where I work from home. Hurts my brain. Right now it's two success stories there. Like one, my good friend, she lived in that AIG building and down Wall Street area was converted, like super nice condos, bowling alleys, gyms, like the whole nine yards in there. But yeah, must have cost a fortune to convert that. And then here in Chicago, the old post office where the road goes under the building, right? Sat there for, I don't know what it was, 15, 20 years. And now there's CBOEs in there and some other tenants.

So yeah, there are few and far between success stories on the conversions. But for sure, that post office was backstopped by the city i'm sure uh i don't know exactly but so talk to me a little bit of like what i was going to say part of the bull case to me is like if i'm looking at a hedge fund or something i'm like okay their drawdown could be 20 or 40 or 80 like what does that look like and i know it's totally deal dependent on whatnot, but if you have a fund, if you've put a bunch of these deals together, what does that look like? What is the actual downside? Yeah, I think so. I'd have to look and double check to make sure this is true. But if it's

not 100% accurate, it's directionally correct. But I've seen a couple of times that no one has ever lost money broad-based in commercial real estate over the course of 10 years. And it didn't mean that they made great returns and that some vintages aren't better than others. I think it's better as just a parable or an example of like staying power is what matters having you know enough cash uh in a partnership or in a fund for a rainy day to make sure that you don't have a debt maturity mismatch if you do that and you buy it well to okay then you're going to be some semblance of all right over the long term you know barring maybe some very isolated examples and you know horrible city selection or horrible asset class selection.

But surely there's been tons of individual players or individual companies spectacularly blown out where you're just saying that property, maybe that person or group blew out on that property, but the property itself over 10 years was just fine. Yeah. And that's where, right. You get the, some of the stigmas or stories around, like, you know, everybody at the country club or whatever talks about their best deal. It doesn't talk about the ones they lost money on relative to like, some of the professionals are like,

Hey, I allocated at this fund and I'm really excited about my 11% return. And, you know, the other guy's like, well, I want three times my money in three years but they don't understand the like idiosyncratic risk of like you know that sponsor's other deal could have been a goose egg or whatever um so that's where some of it gets into the like diversification and kind of thematic investing across more than just call it commercial real estate, right? Like even like if you take office, which we were picking on earlier, like office in Miami or Dallas or Nashville is probably gonna fare a lot differently

than like office in New York, Chicago, LA, San Fran, right? And so there's like nuance in the portfolio construction and how you kind of spread risk against your investments relative to like, you know, the people who are tweeting them, you know, everyone's a hero on Twitter, and it's all great deals. And we've had our fair share of those. But you know, at right, hey, that's, it's all part of a fund, like, yeah, we're gonna have that happen. But there's also going to be some things that don't go according to plan. And we want to, you know, we want to bet on ourselves over 10 or 20 assets in a portfolio rather than, hey, pick your winner.

And so along those lines, you'd think you'd want to diversify across as so i'm not going to blow out with any one goes wrong um and you think if you took that to its far conclusion be like i want to be in every piece of real estate every geography everywhere right but only probably black stone can do that or black rock um so how do you think about that like okay i want to diversify but a i don't have enough money to completely diversify. So at some point you have to choose which path to take, right? Yeah. And so I write the caveat, like not financial advice and also like financial advisors saw my asset allocation. I'd say you're nuts, right? Because we're betting on ourselves and heavily investing in every deal we do. And right. I think some of that speaks for itself, but I've invested with other sponsors and have always taken the approach of like, I don't mind the extra fees at the fund level.

Cause I kind of want like, uh, for lack of a better term, maybe like thematic asset class and or geography beta more so than like fee load. And I'm not smart enough to pick like the hottest multifamily deal, but I think I can back a jockey and pick MSAs and trends that we can do better over time from a call it. If you're looking at like the normal distribution or the curve of potential outcomes, I would rather try to chop off the left tail and have a positive expected return. And I think that gets better with diversification over multiple deals. But I don't know. I don't think everything is created equal, but I don't know if that's the best advice for everyone.

Because that's like, right, all we do every day is like, eat, breathe and sleep real estate and talk to other people in the industry so you know for people that are practitioners we might have a unique take on that but there's also right with where valuations are like if you want that broad-based exposure then buy some sort of re-index right it's cheap it's liquid it's not over levered you know that's an easier way to get that kind of broad base closer to black rock blackstone exposure than call it in privates yeah and how do we convince people like you to diversify themselves personally into things like managed

futures that do great when rates spike right like it always surprises me i'm like no i'm fine and you talk with a lot of family offices with tons of this exposure and they're like no like they don't get it they see a track record oh i don't like this period where it was down i'm like so how do you think about that of like okay i get it sort of diversifying but and you play managed futures tourist a little bit right yeah yeah i'd say i'm i'm bad to ask because I have a lot of managed futures and trend following. Right. You're the smart one. Well, I don't know. Time will tell. But I've been a math guy, right? So it's like, let the data guide you. And I think Matt Faber, somebody who's done a really good job of blindly showing return streams and portfolio construction and what would you pick and the actual answer blindly is always you know three or four x of the managed future cta exposure than one actually has um but i was that kid in college right and i was in college

during part of the gfc and i'm like what do you mean like you know this eight percent annualized return with the periodic 50 or 60 percent drawdown is the way to go, right? There's got to be a better way, even if you're just improving the drawdown profile, not the overall return profile. And that's before anything like strategic rebalancing or allocations, right? But I invest for like, growth and then income and like real estate and private debt is on my income side. And then on the gross side is like managed future CTA trend volatility, but it's all some sort of trend derivative. So you're not even considering how it tends to do well when real estate does poorly, or you are? I am. I think that a lot of people

lose that environment, right? Of like the tail hedge funds might have, call it like negative carry on an annualized basis. But if you lump in any sort of allocation to, hey, those do really well when everything else is burning and you can buy everything else in your portfolio cheaper, it changes the math. I think a lot of people get lost with that kind of second or third level of thinking. I think everyone needs a little tail risk too, but I think trend is a more noble, explainable cause. And trend has better, I'll do air quotes, better exposure to interest rates, right? So should and could do much better when there's either a big shift in the curve or a big absolute increase in rates. But yeah, it always surprises me of like,

hey, here's this thing that does really, what hurts your business, Mr. Developer of Reels? Oh, if rates went up huge, I would really hurt my business. Okay, here's something that does well when rates go up. Like, nah, I didn't like that in 09 when it lost 8%. Looks like it's too lumpy and all this stuff. But the lumps are exactly when you want the lumps. Anyway, I digress, but I'm glad to hear you're a convert on that side. Well, I wanted to ask you, do you see a willingness of these healthcare groups to like go into lower and lower class building? Like it seems to me in the old days, like no way I would have gone to one of these urgent cares in where some of them are at now.

Seems like they're just in a strip mall and in a weird place. Like 10 years ago, I don't think you would have gone to a doctor in one of those places, but maybe I just have selective memory or is that something that's happening? Yeah, I think access and kind of convenience to the consumer for them is becoming more and more of a hot button. And a lot of the places most available and closest to kind of their customers are going to be these retail centers because they're in the high traffic areas close to the population. So you're going to continue to see this prevalence of healthcare users taking retail or being closer to the population. And, you know, there was a kind of, you mentioned 10 years ago, right? But that was the perfect storm of major recession,

lots of vacancy in retail and hey, this use that's like, Hey, we're still growing during this downtime. We're kind of counter cyclical, right? Like healthcare users are almost the managed futures version of real estate users because demand has continued to go up as we age as a population. So I think you're going to continue to see that trend and it's just, it's hard to build now. So like converting a space or some sort of reuse of retail, converting it to medical right now, in a lot of cases is going to be more affordable

than building something new even though that is that on the expensive side of converting for medical purposes or it depends what sort of machinery whether they have x-ray and all that yeah i mean at most you know at most retail places all you need are the outer walls and you're basically starting from scratch on the interior and you know the mechanicals and stuff there help but it's an expensive endeavor it's probably you know from kind of the walls and mechanicals every bit of 150 or more a square foot and All right, let's finish up. Give me the, this time next year, this time, five years from now, are we talking about Siri? Do we care? Is it just back into the background in my world, in your world, in the foreground, but is it just back to its normal long-term averages? I'd say yes. I think we're going to talk a lot about the people who are really

good operators. It's no longer like the last three years, to use trading terms, you could have been kind of a levered beta player and done well. And now you're not going to just buy high and sell higher. You're going to have to really be an operator. So I think there's going to be this bifurcation of the operator class who really got in the trenches and drove investment performance through their operations. And then there's going to be these other guys or gals who hopped into the asset class and maybe bit off more than they could chew. And I think scale is going to continue to win because the guys who are well enough capitalized

to hang on to assets or work through some of these things or even get banks attention, right? If somebody's signing on a loan is worth 500 million versus somebody who's worth 3 million, they're going to probably get more attention or get further in kind of growing through this, whatever that means. And so I think scale is going to continue to matter. And that's going to kind of be a self-reinforcing feedback on better performance through operations, better scale, and that's going to kind of continue to go around and around. But I also think people will be surprised in that. And we're not working on this or smart enough, but I think there will be some big winners in office in like growing markets or the South as kind of some of the baby gets thrown out with the bathwater.

And there might be some broader based portfolios or systemic issues or, but also some guys who, you know, look like heroes and caught the bottom. You know, that might be the mall buyers of like 08 or 09 or something like the big contrarians down in some of the Florida, Texas, Sunbelt markets that are office guys and are able to kind of strategically pick their spots and do really well. I love it. We'll be hearing of like oh that that guy at the party he bought a bunch of office space back in 23 24 like killing it now um i don't know if i'd make that bet i'd be yeah look but someone is yeah i'm not doing it yeah yeah no i love it but it's like that's the ones that work out ones they're like i wouldn't do that but he's the guy i did uh awesome matt, Matt. Well, thanks for coming on. It's been fun. When you back in Chicago,

I see you post it Twitter sometimes your Chicago picks and give us a call. Yeah, we will. We, summertime is great and maple and ash holds a near and dear spot to my heart. So I haven't been there in a while. So yeah, we'll hit that. All right. All right. Thanks so much. We'll talk to you soon. Great. Appreciate it. Okay. That's it for the show. Thanks to Matt. Let's hope he's not right about downtown Chicago. Thanks to Jeff Berger for producing and RCM for supporting. And as mentioned, tune in next week where Jason Buck and I do our second annual EQD Vegas Conference Breakdown.

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