We Study Billionaires - The Investor’s Podcast Network - TIP564: Capitalizing on Commercial Real Estate Trends w/ Charles Clinton

Starting point is 00:00:00 You're listening to TIP. On today's episode, I sit down with Charles Clinton to chat about the ins and outs of the commercial real estate market and Charles' platform equity multiple. Charles is the co-founder and CEO of Equity Multiple, which is a leading online investment platform that is leveraging technology to help modernize the real estate industry. During this conversation, we cover the macro trends that stand out in commercial real estate over the past decade, how Charles is seeing commercial real estate prices trending in light of interest rate hikes. What attracted equity multiple to get into investing in these niche

Starting point is 00:00:35 asset classes like storage units and car washes and much more? Charles is a wealth of knowledge when it comes to the commercial real estate space and I certainly learned a lot from this discussion. Without further delay, here's my chat with Charles Clinton. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Welcome to the Investors Podcast. I'm your host, Clay Fink, and today I have the pleasure of being joined by Charles Clinton with Equity Multiple. Charles, it's first time on the show.

Starting point is 00:01:22 Thanks for joining me. Yeah, really excited to be here. Thanks for having me out. Well, as the CEO of Equity Multiple, you're an expert when it comes to the real estate market. And I'm excited to chat about that as well as some of the various offerings. that your platform offers on equity multiple. I wanted to kick this off to hear your take on commercial real estate. You've been in the industry for a number of years.

Starting point is 00:01:44 So I'm curious how you've seen the commercial real estate market evolve and what sort of opportunities you've seen come to light in with things like the pandemic and other trends that are happening. You know, I think one of the most interesting things that's changed over the last decade Plus is just the position of real estate and kind of the broader investing market. It's really moved from being a alternative asset into one of the primary asset categories alongside stocks, bonds, and cash. And I think about that really is the way that institutions have adopted it.

Starting point is 00:02:22 So, you know, real estate's long been a part of institutional portfolios, but there's really been a secular trend over the last decade. Private equity in particular has really come to be dominated by real estate in particular. I think Blackstone is kind of the bellwether of this. So 2010 Blackstone had around 100 billion of assets and obviously a very large number, but that was also split, not just in real estate, but in more traditional private equity. And today that number is close to a trillion dollars. I think they're on pace to break a trillion dollars, maybe even this quarter.

Starting point is 00:02:57 and that is almost entirely real estate. So, you know, that's had a huge impact on valuations, just with that amount of institutional capital moving into the market, I think that's really pushed things forward from a value perspective. I mean, there's lots of reasons why valuations have really risen dramatically over the last 10 years. One of them, of course, is just this really prolonged period of low interest rates that we've seen that's, you know, reversed heavily over the last year or so. In terms of other kind of really macro trends, I think that the affordability crisis and housing is something that really colors the real estate market, both, you know, looking backwards and looking forwards. You know, no secret to probably anyone

Starting point is 00:03:38 listening to this podcast, whether you own your home or rent. Rental rates have moved up. Home prices have moved up. You know, obviously that was accelerated by the pandemic. But that's a trend we've seen over the course of a decade. And, you know, the reason for that is really construction can't keep up with need. And every time you have, you know, moments of market volatility, whether that's the pandemic, whether that's, you know, right now with interest rates rising, that causes this slowdown of construction. And then two, three, four down, years down the road, there aren't as many new units coming into supply as we might have planned. So, you know, there just isn't really a catch-up path. So, you know, I think in thinking about

Starting point is 00:04:22 investing in the future, we continue to look at housing. We continue to believe in housing for that reason. Another big one is industrial. So, you know, looking back, it's kind of hard to imagine now, but looking back, you know, industrial real estate was a disfavored property type, you know, really tied to the slow demise of industry in America, you know, everything getting offshort. But that trend has really reversed in the last 10 years and really last five years even more. you know, first, I think, driven by e-commerce. The uses of industrial are changing. It's less about on-site manufacturing and more about logistics. But it's really become one of the darlings of commercial real estate investing as a result. And, you know, I think there's some interesting kind of

Starting point is 00:05:06 tailwinds behind that, too, over the next five or 10 years. Whether they end up coming true or not, I think that there's a lot of momentum right now behind unshoring, you know, given the way that supply chains broke down during the pandemic, given how reliant we realized we are on China in particular, I think there is both political and also at the ground roots kind of move towards onshoreing that could be a major tailwind over the next decade. So, you know, I know that's a little bit all over the place, but those are definitely some things that are standing out to me at the moment. Yeah, you bring up some really good points there, especially with the onshoreing. And I think about trends like the mass exodus from states like New York and California due to affordability issues being one of the main reasons and then the trend to work from home.

Starting point is 00:05:54 I'm curious throughout the past decade, if any of these trends are sort of bigger trends that have really surprised you and maybe some that you've been riding. Yeah, I mean, look, I would say we've been riding housing. You know, that's been over 50% of all the investments we've done, you know, since 2015 has been housing, kind of thinking about that long-term trend. And honestly, the same thing, industrial, I think we were a little later to that. You know, we came more into focus in probably 2018 or 2019 for us. You know, the most surprising one, which I'm sure we can spend some time on at some point today, is office. You know, I think that the idea of remote work certainly existed before the pandemic, you know, smart people, may have been saying that there's some long-term pressure there, but office in many ways was the most institutional part of the commercial real estate market, you know, really dominated by big private funds. And, you know, now the future is incredibly uncertain. And I think that caught the whole industry by surprise, the way that this moment in time really accelerated, it didn't create it, but it accelerated it to a degree that I don't know if anyone could have imagined.

Starting point is 00:07:05 Traditionally, I think a lot of people, when they hear about commercial real estate, they naturally just sort of think of office space, but there's actually much more than that. I'm curious if you could expand on what are some of the other segments of commercial real estate that exist and how large this commercial real estate market is to the residential space? Yeah, no, that's a great question. I think it's a pretty common misconception when you hear commercial. You think it's office, but it really encompasses all real estate that's owned. and rented for business purposes. So even when you're thinking about residential, you know,

Starting point is 00:07:40 anything that's multifamily apartments that are for rent, that's really in the commercial real estate bucket. I think traditionally there's six categories, multifamily, industrial, office, retail, hospitality, which is mostly hotels, but also things like casinos, resorts, that sort of thing. And then this big bucket of specialty. So that's a huge range. You know, big subcategories there are healthcare, data centers, self-storage, sports and entertainment. And then you get even to, you know, tiny your categories like car washes or dealerships. You know, it's really a giant universe.

Starting point is 00:08:21 And oh, speaking of the size of the universe, market size. So residential market is huge. You know, it's roughly the same size as the stock market, $40 trillion. And the commercial real estate market's about half that, about $20 trillion or just over. As we've been chatting and connecting, you mentioned to me that you've actually been entering these more niche markets, such as you mentioned self-storage and car washes. And these are sectors that really, I think, as not being fully institutionalized. You see a lot of mom-and-pop type, you know, people owning these types of properties. Talk about the dynamics of these more niche

Starting point is 00:08:58 markets relative to your traditional real estate, commercial real estate deal. Big picture. investing is a constant search for relative value. And it's a bit of a game of whackamol. So something is interesting and has value. Money goes into it. Valuations drive up. And then the value proposition goes down. Right. So it leads to this constant search for new opportunities. You know, I think multifamily for as attractive as it is, a lot of people know it's attractive. So, you know, valuations have really soared. You know, that leads us and a lot of other players in commercial real estate to, you know, look for things that haven't seen as much institutional investment over time. Self storage and car wash are two that we've, you know, identified and

Starting point is 00:09:41 made investments in, you know, over the last five years. And, you know, you're right. The common characteristic here is that they've basically been mom and pop. They're really fragmented, you know, owned by non-professional owners who aren't as good at driving rents or managing bottom line. These were historically cash-based businesses also, particularly on the car wash side. So I think there was a little bit of sketchiness on how much income these things were actually producing. And then, you know, I think as private equity style investors have come into both, they really look at these as subscription revenue opportunities.

Starting point is 00:10:20 So self-storage, you know, it's still rental-based, you know, it's not really a new revenue opportunity to turn it into a subscription. But I think the commonality is that the customers, once they're in, are incredibly sticky, right? And that's, we all have software subscriptions that we don't realize we have for six months until we see them on a credit card bill. And I think for many people, self-storage is like that. Once it goes in, you kind of don't think about it anymore. So as a result, you know, a lot of professional owners realize that they can kind of keep slowly escalating

Starting point is 00:10:52 rents. And then basically, people aren't going to move out because people don't want to move. And they can also manage expenses better and have bigger portfolios, which gives you some economies of scale. On car washes, the subscription revenue is just a new way of thinking about it. You know, everyone obviously is used to shelling out their 10, 20 bucks or whatever when they go to the car wash. But, you know, increasingly, especially in kind of high traffic areas in states where people like to get their car wash the most, car washes are increasingly offering monthly memberships, you know, converting some of that one-time revenue into subscription. and, you know, getting higher multiples when they, when they sell as a result. So, you know, I would say with both, they're kind of midway through the institutional capital

Starting point is 00:11:36 attraction process. Self-storage is probably further along than, than car washes are. But, you know, for both, you know, you've seen car washes get sold in big portfolios to, you know, multi-billion dollar private equity companies in the last three years. So, you know, I think the window is, is now because once you have the opportunity to, you know, buy now from a mom and pop, but maybe sell later to a institution that's willing to pay more of a premium for something that's already been brought up to standard, that's a really nice point in the market cycle to participate. Yeah, I find these more niche asset classes to be really interesting.

Starting point is 00:12:14 Relating to self-storage, you have so many units and you're diversified and you're not when you're buying a duplex. You have two different units. So it can be a bit more difficult if you have trouble with one of the tenants or whatnot, whereas self-storage, you may have 100 or 200 units just in one property. And relating to the car wash, I was just recently getting my car wash for the first time, probably in April. And I could tell the guy there was trained to sell that subscription hard.

Starting point is 00:12:39 I say no, one or two times. And he's giving me discounts and just pushing that subscription really hard. So it's apparent that that is sort of a trend that a lot of these bigger, more institutionalized car washes are going. on. You know, and your first point on self-storage, I think, is generally a good point on just the argument for investing in these larger commercial real estate deals, right? It's the economy's a scale that you start to realize and you just have more diversified risk, right? I mean, there's a huge difference in losing a tenant in a two-unit building, which you own personally, versus, you know, losing a tenant in a hundred unit building that you own a small part of. We've talked a lot. We've talked a

Starting point is 00:13:21 lot about the pace of interest rate hikes on the show and how that can put a lot of pressure on a lot of real estate sectors, especially some being commercial real estate due to higher borrowing costs. How have you seen prices trending within some of these different segments? Since you talked about earlier, you're always looking at where you can get the best bank for your buck and get the most value. So how have you seen prices trending in some of these sectors. I guess to give a very, very mini primer on how commercial real estate's valued, commercial real estate's bought and sold on the basis of what's called a cap rate, which is essentially an inverse of a multiple on net income. So as interest rates go up, this puts

Starting point is 00:14:05 pressure on cap rates to go up to and multiples to go down. You know, ultimately, you think about it as your on levered yields on whatever you pay for it has to be higher than your your cost of putting leverage on it. You know, you don't want to buy something at a 7% cap rate and take out 9% debt because then you're, you know, taking any kind of return out of your equity and paying it to your your mortgage lender. So, you know, basically right now all valuations are getting crunched in commercial real estate. The big difference with, uh, private market like commercial real estate versus a public market, of course, is that pricing is just much more opaque and much less instantaneous.

Starting point is 00:14:48 So it's hard to say exactly how much valuations have moved in part because there's just a lot less market activity today than there was a year ago. There's kind of a classic bid ask spread, right? I mean, a seller thinks that their property is worth more than a buyer thinks it's worth today. And as a result, sellers don't want to sell and buyers don't want to buy. So, you know, that will start to crack. You know, it kind of always does, but there's definitely a delay between interest rates going up, putting that pressure on prices and when that actually starts to play out in the market,

Starting point is 00:15:24 at least in a big way. But, you know, from an estimated perspective, kind of a more theoretical perspective and, you know, tracking the sales that are happening, I would say you're looking at 10 to 15 percent dip in valuations, you know, kind of as a big picture matter. When you think about the way interest rates rose the way they did, a lot of times when you run the numbers, you see your monthly payments going up 40 or 50 percent, assuming you're paying the same price. So what do you think is making up for that difference of valuations only coming down 10 percent, 15 percent or so? You know, it's honestly much easier to show

Starting point is 00:16:01 you in an Excel spreadsheet, but, you know, the gap in interest rates, is kind of magnified by leverage effectively, right? Or your gap in purchase price and cap rates is magnified by leverage. So your cap rate can go up 10 or 15 percent and, you know, you're not seeing that same translation down below to the cash yields. The other fact is, is, you know, cap rates and interest rates are related, but it's not a perfect relationship, right? It's not like the cap rate is always 2% above the interest rate.

Starting point is 00:16:35 It will get closer. It'll get wider depending on other factors in the market. So right now, I would say it's trending. They're trending closer together. And then if that expands more over time, then you'll start to see more dip in valuation. So I think, you know, for many of us, that's the moment that we're waiting for, right? You know, it's when is the point to start pouncing? When do we feel like valuations are at their endpoint, at their bottom?

Starting point is 00:17:02 when is that buying opportunity really going to be there? So right now it's happening on a one-off basis. You know, everything's a little bit more idiosyncratic. But that will start to hit the market, you know, more broadly over the next year. And I think then you'll start to see that pace of transaction volume, you know, really, really start to pick up. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer.

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Starting point is 00:21:30 All right. Back to the show. Yeah, so it sounds like profit margins are definitely getting squeezed to some degree for some in the real estate market. For sure. The other thing, though, is there's also the forecasting into the future, right? So you're with a real estate investment, for most of them, you're making some of your return through cash flow, which is definitely more hit now. but you're also making a big junk for most deals in your kind of back end appreciation. And where the forecast happens there is what are cap rates and interest rates going to be

Starting point is 00:22:06 in three years or in five years when I go to sell this? So, you know, some of the things that make cap rates stickier are, you know, exactly that, right? Oh, well, interest rates are high now, but the Fed is indicating that interest rates might be 2% lower in three years. So, you know, we think there's a little light at the end of the tunnel. Another thing that really stuck out to me as we've been chatting is that you guys then to avoid office base at least at current prices.

Starting point is 00:22:36 I'm curious what your view is of office space and maybe what's keeping prices from coming down as much as some people might expect with all the headwinds they're facing. Yeah, and I may have expressed this wrong when we were talking up. Prices are definitely coming down in office. I would say it's more the famous expression you don't want to try to catch a falling knife. As much as they have dropped for things that have actually sold, I don't think we've seen the bottom yet. And I think that's the general feeling within the industry. You know, if you look at it, you have foreclosures or defaults in major office buildings, major cities with the biggest landlords in the world. And when you start to see that at the top of the market, you know, you can only imagine what's happening in the bottom of the market, you know, in those three units kind of office buildings that were built in 1970, because those always feel to pinch, you know, much more than the kind of big New York City glass tower does. So, you know, from our perspective, I think that there will always be a point at which asset prices will make

Starting point is 00:23:48 sense for the opportunity. We just don't have conviction that that point is here yet or a lot of visibility into when it'll arrive, right? And you can tell yourself a lot of stories right now about what the future of office usage and remote work looks like. You know, I think there is certainly a gang that says the traditional office is basically over. This is going to be the, you know, you know, longest going out of business sale possible. What was it Kmart that, you know, basically went out of business over the course of 15 years. I think there's definitely the, the strong advocates that feel like we don't need office. It's over. On the other hand, I think you have people saying, well, let's see what a recession does if that puts butts back in seats

Starting point is 00:24:30 because there's a perception true or not that, you know, it's a lot easier for a employee who doesn't know their boss to get cut than an employee who does see their boss. And, you know, right now, employment is at an all-time low or close to an all-time low, so that's not getting tested. But from my perspective, I don't know how it's going to play out candidly. And until we have conviction about what the trend is actually going to be over the next few years, we're approaching it incredibly cautiously. Yeah, it sounds to me like you need a pretty large margin of safety when you're getting into these office deals just to do to where this could be five, ten years from now.

Starting point is 00:25:08 Yeah, absolutely. And, you know, again, right, if you are in investing, you know, there's definitely a school of thought that everything has a price that will settle and will make sense. You know, some people don't like that. They like to take only investments with things that have true deep underlying value. It's two different schools. But I think you've seen in commercial real estate in particular that the market will drive value to where it needs to be over time. And that can create opportunity in things that. that, you know, three, five years ago were really disfavored. Retail is actually a good example of that. So with the rise of Amazon and the acceleration of it, I think there was this sense that retail is dead and, you know, no one's ever going to go to a store again. And there's really been a post-pandemic bounceback. You know, people are using traditional brick-and-mortar stores a lot more. A lot of e-commerce sites continue to open brick-and-mortar locations.

Starting point is 00:26:05 So, you know, valuations needed to change. but they're now at a point where people feel like, wow, the opportunity here is great, and they're starting to be bid up again, though tempered, of course, by the interest rate environment. One theme that's been recurring in the residential housing market has been the historically low inventory with much of the current market locked in at a really low interest rate. I'm curious if a similar dynamic is playing out in the commercial real estate market as it is in the residential. Yeah, it's a great question. And I would say just if you tell people at a cocktail party that you work in real estate, you know, the first thing they ask you about is homes, right? And what's happening in that market. The big difference that you see in commercial real estate that I think drives more transaction momentum is the duration of the debt. So a typical mortgage in commercial real estate is not 30 years. Really the longest you ever see is 10 years. And that's a pretty small slice. of the market, relatively speaking. You have a ton of mortgage debt that is two years, five years.

Starting point is 00:27:14 So, and also more, I think, floating rate debt than fixed. Fixed really has come to dominate the single family home market residential lending. So those really become the debt becomes the catalyst for needing to sell. And, you know, I think that even for owners who believe in the long-term future, right? Interest rate hikes are temporary. If they can't get a loan to replace a loan at a price that makes sense, at an interest rate that makes sense, that's when they're really forced sellers. And, you know, I think the low inventory that you're hinting at issue in the housing market is just driven by the fact that, you know, no one is selling if they have a mortgage at 3% unless they absolutely have to. And, you know, life happens, right? People need to move.

Starting point is 00:28:02 They have a job. They need to move for family reasons, whatever. But at the end of the day, you know, you really almost look at that 3% mortgage as an asset right now, which is creating a lot of reluctance. Yeah. When people say that commercial real estate's the next shoot to drop, it makes a lot of sense when you think about the floating rate debt. If their costs are going up substantially, it goes above the rents that they're bringing in, then, you know, something eventually has to give. And something you mentioned there that really stuck out to me was that this debt on commercial real estate is much more short term. You know, tends to be 10 years or less.

Starting point is 00:28:38 I'm curious why that is and what sort of led to one segment of the real estate market being long term fixed 30 year and another segment being much more short term. I think that it goes back to a ownership horizon versus an investment horizon. So, you know, for, of course, people move now, I think more than they have. ever did in the past. But when the 30-year commercial mortgage was created, it was really on the premise of you buy your house and you live there. And then eventually you own it and it's an asset for your family and it can get passed on. And you're really trying to build that intergenerational wealth. When people are approaching, you know, commercial real estate as a business, you know, it's really to make money in a defined period of time. And particularly, you know, a really common

Starting point is 00:29:25 strategy you see is a value add business plan. So, you know, buy a 20-year-old building that hasn't been well maintained where rents are, you know, a thousand dollars cheaper than they are across the street and then go in, fix it up, bring it up to standard, raise rents, and then look to sell because, you know, you've already created the value and now you're just waiting for the market. So, you know, everyone in commercial real estate has investors and whether that's a fund that, you know, their time rising is five years, seven years, 10 years, or in the private markets, that tends to be even shorter. It's really about what your patience is. You do, of course, have these family offices and folks who are approaching real estate in this intergenerational way that they want to be

Starting point is 00:30:14 forever holders. And, you know, they're tending to look at debt markets as in a much more long-term way than I think the majority of the players are. Another thing that sticks out to me in our discussion here is that you mentioned that cash tends to chase where the biggest profit opportunities are. So if one sector is really offering high returns, then money's going to start flowing that direction. I think about the residential space and how there's this super low inventory, no one's wanting to sell their home because they have this low interest rate debt tied to it. And then I think about things like Airbnb units with all these people purchasing Airbnb's 2020 and after, you know, starting their own side business. And, you know, that might not be something that they traditionally have a good background

Starting point is 00:31:00 in. So they might have paid way too high of prices. And now they kind of find themselves in trouble. I'm thinking that might lead to be some sort of catalyst to unlocking some of that supply. But another thing that comes to mind, since you mentioned cash flowing where there's profit opportunity is part of me wonders why home builders aren't, you know, trying to fill in the gap on that, you know, still strong demand. I'm curious what your thoughts are on how the low inventory and this residential housing situation might play out over the medium to long term. I think there's a lot

Starting point is 00:31:33 of pieces there. I guess starting with the kind of top level question first, you know, how this might play out. I think that, you know, even though there's not a mortgage gun to your head to sell your home, there still is this sort of rising pent up demand to move that does happen, right? So people will hold out longer than they typically do right now because their cost to replace their house is just going to be higher because the debt's more expensive. But at the end of the day, life factors are life factors. And whether it's someone passing away, someone getting married, someone moving away from home, someone graduating college, you know, whatever it is, people's circumstances change. And you can only resist your change in circumstances

Starting point is 00:32:21 in terms of where you live for so long and so hard. So I do think that at some point, it is going to have to break for that reason. And then once you get a little momentum in the market, right, more inventory is going to depress prices. Once people start to see that happening, they go, I don't want to be the last person to sell because then my price is going to be way down. So these things can turn relatively quickly. I do think that the short-term rental is a really interesting thing. I mean, you know, there's, of course, a plethora of businesses that have been built around short-term rentals. And I know people personally, you know, who did this over the last few years and are now feeling like, oh, man, there's way, way more competition in this town and wherever than there was when I bought this place a few years ago.

Starting point is 00:33:09 So I don't really know if this is viable in the same way. But in terms of impacting the market overall, I just don't know if it's enough total units compared to a massive size of the housing market. And I think you also tend to see more of those short-term rental strategies outside of core urban areas, especially since a lot of cities have made it really difficult to use Airbnb. You know, they've really pushed against it. But no doubt that that group is feeling the pressure right now. Another area that...

Starting point is 00:33:41 Was there one other question in there that I missed? Let's see. I just mentioned the home builders. If there's an opportunity... Oh, home builders. Yeah. So they are actually starting to get moving again. But for a while, you know, they're forecasting future market conditions, right?

Starting point is 00:33:57 Because they takes them, you know, 12 to 18 months to deliver new homes longer than that if there's a, you know, planning and permitting cycle. So they're trying to say in 2020, they're looking ahead at 2022 and what demand is going to be there. So that's been one of the funky things over the last few years is the way things have played out versus the way people thought they would play out have been really different. So at the pandemic, home builders slowed down because they didn't see this big pop coming, which then creates this tale that happens years in the future.

Starting point is 00:34:32 And I think the same is true for the course of the last year. When interest rates go up, the home builders all say, oh, man, our profit margin is about to get squeezed. and it looks like the economy is headed for a recession, housing prices are about to fall. So, you know, they slowed down and, you know, as we've seen it today, housing prices aren't really falling. I mean, they're falling in some places, of course, but not at the level that I think people had forecasted six months ago, 12 months ago. Yeah, that home builder dynamic with the huge delay 18 to 24 months.

Starting point is 00:35:04 And that just, I don't know how anyone can forecast, how that's all going to play out with all the different factors. but I want to transition here to private credit. It's an area that equity multiple is very involved with your platform and what you guys offer. So maybe you can give just a general overview of what private credit is and what sort of attracts investors to it on your platform. Yeah, yeah, absolutely. Private credit's obviously a big bucket, but it's lending instead of making investments in inequity, simply put.

Starting point is 00:35:34 And from a real estate perspective, there's definitely a lot of different flage. of it. We've mostly approached it through bridge lending. So, you know, essentially lending to someone who needs one, two, three, four years to execute a business plan. And their plan is to then refinance where the new loan pay you back and continue to own the property. We think that the opportunity set in private credit is massive, you know, the best that it's been in at least a decade. And the factors are pretty simple, right? I mean, interest rates go up. So that, of course, just drives absolute returns up. And the other factors are a little bit more below the surface. So I'm sure, I'm guessing you guys have covered in a podcast at some point, you know, everything that happened

Starting point is 00:36:20 with the banking crisis a few months ago with, you know, a few of the larger mid-tier banks going bust. And that's had some downstream ripples on commercial real estate lending, in part because regional banks are maybe the most important player in commercial real estate lending. You know, the big banks certainly do it, but that's to a pretty limited slice of the market, you know, really doing it to the largest deals in the largest markets. In most places, regional banks are kind of the default lender. And now they're scared, you know, they're working with regulators who are looking at their balance sheets more tightly than ever.

Starting point is 00:36:59 You know, they made a bunch of investments at interest rates that don't make sense now, which is putting more pressure on their balance sheet. So they're just pulling back from lending. They're doing a lot less of it. And that opens up more opportunity for non-bank lenders. And for us, you know, we've historically done about 50% in the lending side and about 50% in the equity side. And we really switch that mix based on where we are in the market cycle, you know, what's happening with interest rates. And right now we want to do as much credit as possible because these are generally short-term opportunities.

Starting point is 00:37:35 if the value of a property falls by 10 or 20 percent, it doesn't impact you in the same way as an equity holder. And then you're recycling your money relatively quickly. So if you feel conviction, which we do, that in 12 months or 24 months, there's going to be major buying opportunity on the equity side. It becomes this great place to make income as you watch the market unfold more.

Starting point is 00:38:03 I think a lot of our listeners know the benefit of getting exposure to real estate. I'm curious if you could share some of the benefits that investors are looking at when they're investing in private credit. Assuming it's somewhat like a bond allocation, maybe a bit higher of a rate, so maybe you can expand also on what sort of rates people

Starting point is 00:38:21 are getting in private credit. Yeah, absolutely. I mean, that's exactly how we think about it, right? Is that we think you should think about real estate the same way you do your stock and bond portfolio, right? That it's a matter of allocations. that's driven by your own risk preferences, your duration horizon. You know, obviously your focus on income versus appreciation could be a big factor and build

Starting point is 00:38:46 that portfolio that works for you. I do think, though, that unlike the horizon in the public market where, you know, many folks are kind of what's put my money in and I'm going to ride this pretty passively until my retirement, I think you can really find advantage by being a little bit more active in the private markets where the durations have started end dates. So you're trying to, you know, match your investment to what's happening at that particular point in the market cycle a little bit more. So, as I said, today, we see there's a premium on income, just overall across the market. And the equity volatility is high. So that's, you know, naturally a kind of flight to safety and a

Starting point is 00:39:29 flight to some safety with shorter duration. In terms of those yields, we're targeting in the 12 percent range, something like that. You know, it's pretty variable depending on the type of underlying real estate project. Debt now is starts at a similar rate to your home mortgage, probably in the 7% range, and then, you know, can go all the way up into the midteens if it's for for construction. So we're falling somewhere in that, in that middle zone, you know, focusing on these kind of value ad investments. They have income, but, you know, they have a business plan to improve value. And that's really what they want the money for. They're like, we think we. We can execute in 12 to 24 months.

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Starting point is 00:43:31 at Fundrise.com slash income. This is a paid advertisement. All right. Back to the show. I'd love for you to talk more about equity multiple, which is a company you founded in 2015, and today you're the CEO of. Talk about what led you to start this company and how that sort of evolved and what types of offerings you guys have. So I was working as a real estate lawyer from Colt Simpson-Thatcher for big private equity companies. So most of my work was with Blackstone and then KKR and Carlisle, you know, really was steeped in that kind of real estate private equity world. And a few things, I think, really made this look like a big opportunity. So the first was simple change in law.

Starting point is 00:44:16 So in 2013, past the Jobs Act, which really let you put investing online in a different way. And second is my own attempts to invest in commercial real estate privately, just not finding a lot. lot of access. And theoretically, living in New York City, working on deals for Blackstone, I was about as well situated as anyone to put $30,000 into a real estate project, but I just didn't find it. And really, this is something that has been operated out of country clubs and friend of a friend kind of connections. That's what's dominated these kind of private market real estate investments. And I think that any time a business has moved online, you've seen a lot more transparency, a lot more efficiency. And that really felt like the opportunity is,

Starting point is 00:45:09 wow, now money can flow from this whole new group of investors who's really been kind of kept out by a combination of market practice and regulation. What sort of offerings are the main ones that people most get interested in on equity multiple. Yeah, we divide our offerings into three buckets, which we call keep earn grow. So we have a very diversified, very short term note, three months, six months, nine months backed by a pool of real estate that's really a kind of dip your toe cash management sort of investments. The earn bucket is income oriented real estate. So kind of that middle bucket of risk. And that could be preferred equity. It could be mortgage debt. In some cases, it might be an equity investment,

Starting point is 00:45:59 but something in a stabilized property that has either contractual cash flow from a long-term tenant or really has been operating at a similar level for a long time. And then the grow bucket is more that upside kind of equity-oriented investments. And within these, we generally have individual property investments and then funds. So individual property, you can Come on our website, you can see here's a property in Charlotte, and this is a multifamily value ad. These are the rents today. These are the rents at comparable properties. Here's how much people are going to spend to improve the units to where they think they can drive rents to. And we find a lot of investors like the transparency of knowing exactly the type of property they're investing in.

Starting point is 00:46:47 But on the other hand, I think strategy investments make sense for a lot of people too. So we have portfolios where it might be five or six multifamily properties. So you're not picking yourself, but if you believe in housing, that could be a good, good entry points. You know, really, I would say the calling card here is just kind of information transparency, right? We're trying to expose all the work we're doing in the background in a way that's understandable, digestible to investors who might be new to commercial real estate. You mentioned the changes in law in 2013, the Jobs Act, that in my mind sort of led to this rise of different crowdfunding platforms in recent years. I'm curious if you could share what you think your guys' edge is relative to other platforms that's really

Starting point is 00:47:35 allowed you to be so successful in your continued growth. I think it comes down to two things. One is a business model thing. So a lot of crowdfunding platforms are just that. They're platforms, their marketplaces. It's kind of come on here and buyer beware. We really operate more as a private equity style model. So, you know, all of folks on the real estate team who are finding investments, vetting them, they all come from more institutional real estate backgrounds. We're doing site tours. We're doing due diligence. We're looking at comparable property values. We're talking to brokers in market, really working to validate out that this is a business plan that can be successful, which is why we accept very few investments, you know, compared to what

Starting point is 00:48:23 we look at. Historically, I think averaging around 5% of the investments we see actually make it onto our platform for investments. The other big piece is the diversification in terms of the offerings. I think that our market has really been dominated by equity investments. And the reason for that is for the real estate companies, equity is the hardest thing to find. And so they're trying to make fees from that side. So they want to bring investors into the equity and try to drive their bottom line that way.

Starting point is 00:48:55 For us, we're thinking about it more in terms of that portfolio construction I mentioned, right? Which is equity is great for some investors. Debt's great for other investors, but a mix is great for most investors. You've also mentioned to me that value ad is something you really focus on. Is that sort of part of your criteria when you're narrowing down to? to 5% of investments? Is that something you guys really hone in and focus on? Yeah, I would say we have a heavy leaning towards it. It's not 100% of what we do. We'll do some properties that have less value add or the cash flow is kind of more

Starting point is 00:49:31 where we think it will be in two to three years already. We do some ground up development where obviously that's kind of more opportunistic and speculative. But for the most part, we think the sweet spot for risk and return, you know, lies in value add. And I'm, And obviously, over a large number of transactions, we've done about 185, you start to develop poor expertise that helps you with the evaluation. So that can be how much is it really going to cost to renovate a unit and put in a new kitchen and a washer dryer and new floors? How long will that actually take?

Starting point is 00:50:05 Are the market rents that people are saying they're going to hit after those renovations really achievable? And the more you do the same thing like that, the more data you can bring to bear, third-party data sources, you know, our own asset management team, the data they collect on our existing portfolio of properties, and really kind of hone in on this as that sweet spot, but also that sweet spot where we have built up expertise. I'm also curious how sort of your users view their experience. They see a deal on your site and there might be some sort of targeted return, but how do you sort of communicate the risk associated with the property? Is

Starting point is 00:50:44 Is there ever a case where the capital is returned back to investors? Or how does that sort of process work in terms of one investment doing really well and investors benefiting and other investments, maybe not up to par with some of the ones that succeed? Yeah, it's a great question. I mean, that of course is the nature of investing, right, is that you can forecast all you want, but some investments are going to outperform and some are going to underperform. And you're hoping that you do well through good process over the average of all of them. So, you know, I'd say one very simple thing is we always, always, always preach diversification. I think that if an investor comes to us and says, I have $200,000, I want to invest.

Starting point is 00:51:27 We don't say, all right, put it in the first deal you like. The recommendation is always build, if you want to select your own investments, that is great, but build a portfolio. That's how you should be thinking about this. You know, the same way that there's been such a move in public investing towards index funds. For a non-professional investor, I think diversification is always a great rule. And, you know, kind of going back to that portfolio construction, having debt and equity investments, shorter term and longer term, really giving people options in terms of matching what their level of volatility might be. I'm also curious the range of your deal sizes. Is there some sort of tight range that your deals typically tend to, you know,

Starting point is 00:52:10 to be, or is it really vary in terms from being a million bucks to tens of millions, or what's that sort of look like? We generally operate in what we call the middle market. So deals between 10 million and about 50 million in total value. And that cap, we certainly have gone past that with. We love the real estate operator we're working with. They're incredibly experienced. They're doing a larger transaction. But as a general matter, we just think that there's more value in that slice of the market than up in the larger deal sizes. Because, you know, I guess going back to our original portion of the conversation, there's just less institutional capital there. Most funds don't want to write checks below $20 million. So if you take $20 million of equity, $30 million

Starting point is 00:53:01 of debt, you're at a $50 million transaction. So kind of below that, you're getting a lot of lot less institutional capital competition. So there's a little bit more room in terms of margin. That also brings to a question, you know, how much leverage is used? Are these deals typical amount of leverage or what does that look like? I would say it's variable. Generally, we put leverage, we use leverage caps. So it varies also by point in the market. I would say right now across the board, just leverage is lower. Leverage is not as high in commercial real estate as it is. in residential real estate, generally you're not taking out at 80%. Mortgage, hardly ever. Usually, the mortgage falls somewhere in the 60s, something like that between 60 and 70%. There are cases where you

Starting point is 00:53:50 would opportunistically say, all right, we'll use more leverage because we like the risk and it increases the risk, but it's also commensurably increasing the return. But I would say as a general rule, we're kind of looking at that 65% and less leverage. I'm also curious with your guys' continued growth and continued success and all the different offerings you've launched over the past eight years that you guys been in operation. Is there any new types of offerings you're looking to cleverly users in the future? In near term, we're launching a debt fund. We've had a prior iteration of a debt fund that we launched a couple years ago. we're launching a new one that strategy is tightly tied to where the market is today.

Starting point is 00:54:36 And still investors will be able to invest in the individual loans that the fund's doing. But for folks who want to, you know, who believe the thesis that bridge lending is going to be a great opportunity for the next 12 to 24 months, this is a way to kind of buy that basket. So very excited to launch that one that will probably be coming in the next few weeks. And I would say beyond that, we're looking at. It's a similar equity fund timing kind of TBD, but as the market opportunity comes, you know, we want to offer something similar to investors on the equity side as on the debt side. And the last thing is we're been diving deep over the last six months at other potential

Starting point is 00:55:18 alternative investments outside of real estate. I think this point in the market cycle definitely breeds interesting opportunities. We're really reluctant to get over our skis. We're experts in real estate. So, you know, there's a lot to say stick to your knitting. So we're being, I would say, really cautious in how we approach any expansion there. But I've definitely been digging in. And I think we'll get something out to market sometime in the next six to 12 months.

Starting point is 00:55:46 All right. Well, Charles, this is great. I really appreciate you coming on. This is, I know I learned a lot during this conversation. Before we close it out, I'd like to hand it off to you. So you can give a hand off to the audience on how they can learn more. more about you, learn more about equity multiple, and anything else that the listeners should know. Yeah, yeah, absolutely. Well, first, thanks so much for having me on and for everyone who made it

Starting point is 00:56:10 to the end of the podcast. Thanks for listening. If you want to learn more about equity multiple, you know, simple thing is just go to equity multiple.com. And one thing I would encourage is we are an online platform, but very, very human-backed. We're not just a bunch of bots on a website. So, if you have questions about signing up, about us, about investing in real estate, about any investment we have on our platform, you can chat with someone, you can call someone. We see investor education and direct communication is a big part of this because we know for many investors this is either something new for them or something that they're looking to grow allocation into. So definitely have a lot of resources available for folks.

Starting point is 00:56:54 Great. Thanks so much again, Charles. Really appreciate it. All right. Thanks again for having me on, Clay. Good talking to you. Thank you for listening to TIP. Make sure to subscribe to Millennial Investing by the Investors Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision consultant professional. This show is copyrighted by the Investors Podcast Network. Written permission must be granted before syndication or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - TIP564: Capitalizing on Commercial Real Estate Trends w/ Charles Clinton

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