Apr 28, 2020
James: Hey, audience and listeners, this is James Kandasamy from
Achieved Wealth Through Value Add Real Estate Investing Podcasts.
Today I have Jeremy Cyrier from Boston. Jeremy is one of my
mentors, you know, I'm happy to have him here to talk about
commercial real estate and Jeremy has been focusing on taxes and a
lot of markets out of North East U.S like Rhode Island and you know
Massachusetts and of course Texas and he have done a lot of bills,
you know, I think he used to syndicate and now he's also investing
as a passive investor and he focuses a lot on multifamily medical
office buildings, retail and also office.
Hey, Jeremy, welcome to the show.
Jeremy: Hey thanks, James.
James: So, what's happening? I mean with all this covid 19, I
know you're not in New York, but you're in Boston, which is, you
know, almost near to epicenter there. I mean, what's happening with
you personally and the commercial real estate business right
now?
Jeremy: That's a great question, we're all healthy,
we’re home. I've got four kids, eight and under and it's a little
crazy, but we're feeling just frankly blessed at this time to have
a moment of pause in our lives to focus on the basics together. I
think, you know, amidst all the tragedy that's unfolding around us,
that's actually a blessing.
James: Yeah. Sometimes you know, you have to look for positive things in a, you know, whatever situation that we are in right now. Right? So tell me, I mean, about what are you seeing right now in the commercial real estate space? What was happening in February before this whole covid 19 and now we are in the middle of it. This is like almost in April, mid April to, you know, towards the end of April. What are you seeing right now that has completely caught your attention and create that "aha" moment for you?
Jeremy: Well, I'll tell you the interesting thing is we've been over the last three or so years saying, well, when's the recession coming? And we were looking for it, we're looking for leading indicators of a recession and here it is, it's upon us and it's more of a black swan event than really any of us would have expected to have happened to such a point where I've been talking to people about this being similar to our country being invaded and the government shutting down our economy is a defense mechanism. So, that's a pretty fascinating set of circumstances for us to be operating within right now in any business, let alone the commercial real estate space.
James: So do you see a lot of transaction has died down right now from what you were doing two months ago and
Jeremy: Yeah, so the, one of the things I do is I track data, so I live outside of the Boston market. I track that data very closely to see what the volumes look like and I'll tell you the 2020 Q1 data was up 75% in terms of sales volume over Q1 of 19 and so it was a very healthy start to the year but as soon as you go and you shut down the economy, all the volatility comes into the market and buyers start to pull back, lenders try to figure out what to do, who to lend to, how to lend and then you've got sellers pulling back saying, am I exposed here? Is this a dangerous time for me to be selling my property?
So, I'd say the first month of this event was really characterized by people trying to figure out what's going on, what's happening and this last month it's being characterized with more intentionality. Okay, here's what I'd like to see happen in three months, six months, nine months, twelve months. So the discussions are moving forward to a, I'm going to stop focusing on the hourly new cycle and I can see more of a two to three day new cycle and within that environment I can start to think strategically about what's next for me.
James: Got it. So do you see, so you're saying sellers are starting to look at more strategically, so, I know some people were talking about V-shape versus U-shape and I think some of the V would have changed to U right now, right? I don't know where the Nike swish. Right. So where do you think we are heading from March, 2020 you know?
Jeremy: Yeah. What's the letter of the alphabet are we going to see? You know, I listened to a great webinar, which was done with KC Conway and Eddie Blanton, Eddie's the president of the CCIM Institute. KC is the chief economist, they got on a webinar and I think you can see this; you can catch on YouTube and KC got on and he talked about the letters and he goes through the different shapes. Some of them I'd never heard of before, but they, like, what happens when you have a fiat currency recession, it's a Q, I guess but he said, you know, if early on we were hoping for a V he thinks it's going to be a W and I think he's right, I think the W is, we go through an initial dip, we have a recession now.
We start to rebound and recover, in the summer, people start to
get outside and start to circulate and you know, return the flow of
capital but we go back into a secondary recession in the fall
driven by two primary things. One a concern over covid, you know,
spiking again and the second being the, all the bad news that
accumulated from March through September that shows up and we see a
secondary recession as a result of what's happening right now. He
said it's probably, and I think he's right, we probably don't start
to see the volatility come out of the market until this time next
year, 2021 and it's just going to be a matter of writing this, you
know, writing things out the best we can in 2020
James: So, when you talk about the second V, right, I mean, I
think first of the V and after that is another V which is coming
in, which makes it a W? Right? So are you saying the,
from your perspective, do you think the second lowest point will be
lower than the first low point or will be higher than the
Jeremy: I don't know but I know those low points take a lot of pain
and they dish it out and so in our business, in commercial real
estate investing, is it, people have been asking me: Okay, so when
one of the deals are going to show up, you know, where are all
these distressed sellers? Well, it takes time.
Right?
James: What kind of time, why do you think we need to take
time?
Jeremy: Well, if you look back historically when we go through,
we've gone through recessions and they happen just about every 10
years in the last four years. This one was a longer cycle than we'd
seen.
So typically you see expansion kickoff and the third year of a decade, you see a transition year in the eighth year of the decade we go into a recession, then we come back up and out. This one didn't happen that way. I think it's because the Obama administration didn't push the FDIC to recycle assets like we'd seen in prior recessions, which extended the recovery period, it took longer to recover and expand in this last cycle, so as a result of that, the cycle lasted longer. I think it just was a longer period of protracted growth. So we have, you know, in the time frame of how things tend to play out, on the inside, you might see real estate deals two quarters after a Dow correction, but typically I see like a fourth to six quarter lag off the Dow.
And there's a reason for that, if you follow the money, so start with the Dow. What is the Dow? The Dow is a highly liquid market people are trading on nanoseconds and they're trading based on projections and perceptions. So from their companies, their shares are devalued, they, report, you know, revenue, they have revenues coming in lower, their earnings are lower, they start adjusting their P and L's, they lay off people. Okay, so unemployment comes up. Then they start to look at their real estate and they say, well, we need to reduce our exposure of real estate, we're not demanding as much square footage. Let's give some back. That goes back to the landlords. The landlords get the space back, they rent it for less or they can't rent it. They burn through cash?
Then they go to the bank and they say, hey bank, I'm having some issues. Bank says, okay, well let's work with you for a little while and see if you can get through it. That takes another three or six months before ultimately hits the point where the bank says you have to get out of the asset, we've got to take it. So, it's a slower moving asset class. That's one of the reasons why people like it. I mean, when you're buying, you want it to happen now you want it to be fast, but when you own this, it has less volatility than the stock market does and that's one of the reasons why people get excited about building durable wealth in the space.
James: Really interesting. So, I just want to touch back on what
you mentioned just now. So you said during the Obama
administration, the 2008 crisis, you said FDIC did not recycle
assets as quickly as you know. So can you clarify that because
that's completely new and I never learn about that.
Jeremy: So, if you look back at the savings and loan crisis, this
was back in the late eighties, the tax reform act. What happened
was depreciation schedules were changed on how real estate was
owned and written off. The tax world had distorted real estate
evaluations, that combined with the junk bond industry and banks
investing in junk bonds, chasing yield, okay, to make money. So,
those two things together broke down the system and what happened
was banks, the FDIC went into banks and said, we've got a lot of,
your balance sheets are a mess, your ratios are out of alignment,
we want you to call your notes and recapitalize. So, banks actually
started calling owners up and saying, you have to pay us in 30, 60,
90 days. Pay off your mortgage.
Well, okay, but when all the banks are doing the same thing,
there's a problem. So owners were foreclosed on, they dropped their
prices to liquidate their buildings. They filed bankruptcy and all
this real estate ended up coming onto the bank balance sheets and
the FDIC came in and said, okay, well now we're going to set up a
corporation called the resolution trust corporation to liquidate
all this stuff, flush it out. Okay? Establish the market bottom and
then we'll come out of it. So, in 08', a lot of people were
thinking that was what we were going to see. We had finance and
demand induced recession and so we expected to see real estate
defaults go back to the banks.
The banks would take the properties over, the FDIC would come in and say, push the stuff back out on the street, market down, recapitalize, and then we'll get back to business, they didn't do that. Instead what they did was they came in, they closed the really sick banks and they, a lot of them were set up as M and A deals. So they had other banks buy out the sick banks to dilute the balance sheets and then clear off the sick real estate. But what they ended up doing was they did a lot of forbearance agreements and they extended loan terms so that they could keep the owners operating the assets even through all the pain of the recession. So as a result of that, we never saw a real mark down or mark to market on all those properties. They weren't quote and quote recycled.
So if the idea was to keep all the real estate and everyone's in
all the owner's hands, you saw fewer deals on the buy side and you
just saw these owners just barely making it, holding onto these
things, waiting for the economy to start to pick back up and for
demand to come back into the space so they could recover the
valuations and ultimately refinance the bank off the asset or sell
the asset and recover or just break even on it. That takes a little
while to do that. So I think that's one of the reasons why we saw
this sort of longer cycle this time. I mean, a lot of people were
looking at Trump's administration and his policies for continuation
of this. I do think that was part of it but I think what we really
had was, we had a long recovery and it took us until 2013 to really
jump into an expansion phase from 08' but it wasn't like a jump,
you know, it, it was kind of a slog to get there.
James: Yeah. You can see 2013 onwards and other property, the
caplets not comprising a lot more compared to, you know, from 2008
to 2012 right.
Jeremy: Yes.
James: So do you think that's gonna happen in this market cycle
where somewhere there's going to be, you know, FDIC going to come
and do inaudible15:42
Jeremy: I don't, I kind of think that's not going to happen because
if you follow the logic here with me. So country gets invaded,
government shuts down the economy. People are forced out of
business. Landlords default on mortgages. Banks have to foreclose
on property. FDIC makes them and says; now you got to recycle the
buildings. So if I'm the owner of the building that went
through that whole horrendous experience, I'm looking at the
government going, “Well, wait a second, you shut down the economy
and now you're telling the bank to take my building away. How can
you do that?”
So I'm not sure that's the outlet on this one, I think the outlet's
probably going to be just a market and it's going to be buyer
demand and what buyers are willing to pay but it's going to be
driven by two things over the next couple of years. One is who your
tenant is, their stability and their durability to pay rent and
number two, the lending resources that you have
available.
My concern about this situation we're in is banks freezing
lending, to attempt to reduce their exposure to the degradation of
net operating income? That's a concern because they take the debt
liquidity out of the market, when that happens, that slows
transaction velocity down considerably and that will bring pricing
down and that's, you know, if you're buying and that's the time to
buy, when money's hard to get, when it's easy to buy and money's
hard to get.
James: Would you still be you have a challenge in terms of lending,
right? The terms may not be as favorable during the peak
tomorrow.
Jeremy: But it's interesting, I think the lenders, when we go through recessions, they get picky about who they lend to, having relationships with your lenders is critical so your local banks are extremely valuable. They want to know that they've got strong hands operating these assets and using the money correctly. So those are elements to be very focused on in maintaining those relationships. It's the national banks that concerned me with inaudible18:30, so working on a deal last week and well as Fargo said, well, we're not doing it, we're not doing the deal, we're not lending period. Just shut it off.
James: Yeah. Except for multifamily, I presume all of the asset
classes, like very less in terms of landing multifamily. I know
Fannie and Freddie still doing it even though they have additional
visa requirement, which is good for multifamily, but I think it's
just hard to do any deals anyway right now because no one knows
what's the price.
Jeremy: What's the price?
James: And no one knows what the cap rate, I definitely know Capita
has expanded, right? Definitely not compressed as they, from what,
two months ago but how much it has expanded, right? And who's going
to take the risk of, what are they buying? Right? No one
knows.
Jeremy: You get back to good old fashioned cash flow and I always tell people, there's always a market for cash flow in any market cycle, there's a market for cash flow. So the key is figuring out who the tenants are and in multifamily, where do they work? It amazes me when I talked to multifamily investors about their properties, I asked them, when your tenants fill out credit apps, you know, our rental application, you get their place of business, wherever they work, you should be cataloging every single employment center in your portfolio and finding out which industry sector they're in because you could, I mean for all you know, you might have 60% of your tenants working in the cruise industry. You just don't know, you know? So having an idea of what your economic footprint is by income diversity in your multifamily properties is really valuable information to have.
James: Yeah. Even multifamily near to airports, right? Where
there's a lot of workers from airports and the airports are shut
down, right? So that can be a bigger issue as well in terms of
demographic, right? So yeah, we never really looked at it because,
you know, but I recently looked at, it looks like we have really
good diversified in my portfolio, but I don't think so many
multifamily bias have done, you know, demographic analysis until
now, recently, right?
Jeremy: Yeah, it's good to do.
James: Now, it's like, okay, you better know who are your
dynamics.
Jeremy: Yeah, you want to know who is paying rent. So I have a
question for you.
James: Sure.
Jeremy: Okay, so multifamily deal making, where the deals are,
where are they going to be. One of the things that KC Conway
mentioned on his webinar that fascinated me was he said he expects
to see hotels converted into multifamily housing and he also said,
we may even see cruise ships become multifamily housing.
James: I just heard recently, I mean in fact, this morning I was
listening to a podcast, by Robert Kiyosaki and Ken McElroy, who are
talking about 10 years ago, someone was pitching this idea, let's
convert the cruise ship into a moving condos and sell the condos as
an apartment. I mean, if you heard about that, I was like, wow,
really? Maybe that's coming back.
Jeremy: It may, these crew lines they're going to have
surplus cruise ships, aren't they?
James: Yeah, absolutely.
Jeremy: I don't imagine demand will drop off for a considerable
period of time and hotels.
James: Yeah. So let's go back to the tenant demographic analysis
and the economy. Right? So, looking at what happened 2008, we did
some kind of a benchmark with what happened then and what happened
now but what happened now is basically the service industry and the
people who want a paycheck, you know, paycheck to paycheck,
right?
People are living paycheck to paycheck, they are the biggest
impacted because everything stopped, right? So the people who have
higher pay, who are basically living in A class or you know who are
working on a normal, you know, highly paid job, they are working
from home, they didn't lose their job, right? So, this is my
thinking, right? My thinking is just like, yeah, I mean people,
once everything opens back up, you know, the paycheck to paycheck
is going to go back to work, right? But there's also going to be a
global economy slow down because now this virus has impacted almost
every country, right? The whole economy, the whole global economy
is gonna slow down. So, my thinking is, you wanna multifamily class
B and C, you know, where people are living paycheck to paycheck,
they're going to go back to work and they might be a quick
recovery, but people want class A, who are, you know, who are
working from home, the company is going to have impact, right?
That's where the Dow is going to have impact cause now your
corporate profits going to come down because now you have a global
economy slow down, right? So, I think even though now you're saying
this is just my thinking, maybe we can just, you can figure it out
whether you're thinking of the same,
the class B and C is gonna is getting impacted right now. Class A
not so much, but it's going to swamp later on, maybe in the second
part of the W right? Or the V in the second.
Jeremy: Well it's starting already. If you look at, office work
and employment and you read the news, you're going to see that
companies that didn't lay off office workers are reducing their
salaries.
James: Okay.
Jeremy: And you're hearing about owners saying, you know, the
owner of the company saying, okay, I'm going to waive my salary,
everybody in the organization is going to take 10, 20, 30% pay cut
with a floor, you know, not to be no less than. So following that
logic, you're taking all that money out of circulation and it's not
being spent, of course that slows things down so the question is
how long you, you definitely have a slowdown, that's, inevitable
but the second piece is how long those people stay employed? And
are they able to get through this and operate at a level that with
those cuts they can sustain operations and then start to pick back
up when spending returns and it's going to be incrementally
returning. It's not, it doesn't just, this won't be a
light switch so we're talking about W's and then I talk about it's
a dimmer switch, you know the dials so you go and you can flip the
switch in the room and the lights come on, but there's the round
dial, you kind of push the knob and then you can adjust the, I
think we're going to be doing that for a little while, turning the
lights up, turning them back down, turning them back up and it's
going to be partially in response to people hearing about hotspots
or breakouts of covid until we have a situation where majority of
the population has been exposed and we've processed the virus or we
have a vaccine to manage the virus.
James: Yeah but this is going beyond the virus, right? So, I
mean maybe the vaccine is already up in the next, you know, eight
months or one year. I'm sure people are saying one to one and a
half, but I'm sure the administration is going to cut a lot of red
tape too, you know, well that.
Jeremy: Hey, they built a nuclear bomb pretty fast, right?
They had to.
James: Yeah because you know, during these times, everything is
all hands on deck, right? So all the processes get thrown away or
you know, there need to be some kind of leadership happening there
but I think it's happening, but I just think the second order
effect right on the overall slow down on the job losses on how the
world is going to change. Right? And how it's going to impact
commercial real estate. So, well, what do you think would be
impacting a commercial real estate? Let's say, you know, you have
experience in office, multifamily, retail. So let's go to each
asset class and see, you know, what do you see it?
Jeremy: All right, retail, very, you know significant damage to
retail. Okay? I mean, department stores are pretty much talking
about the end of their era here this may be an extinction event for
the department store.
James: So do you think if today we have a vaccine, what would
the impact be if you already have a vaccine?
Jeremy: If we had a vaccine, for the department
stores?
James: Yeah, for the department store for the retail industry.
Jeremy: I don't know that they really cut, they survive longer, but
this is devastating for them when Walmart, Target, Costco and
Amazon are seeing 25 to 35% revenue growth, all that money is
flowing, you know, flowing in different directions than Macy's and
Lord and Taylor and Nordstrom's.
So the department stores are definitely, they were weak coming
into this, this is terrible for them. General retail, you know, I
think quick service restaurants like with drive-thru's come back
very quickly, the drive thru is kind of an ideal service model for
this environment where we'll be going through and coming out of and
the cost hits a point, it's a low cost dinner, you know, dinner for
the family, to go to Chick-fil-A, you know, and grab, you know,
feed the family for 50 bucks. So quick service comes back quickly,
I think some of the other sectors where we've got, you know,
experiences, you know, it's interesting, services and experiences
were really kind of the bellwether in this e-com impact on retail
real estate but they're getting hammered and so you're going to
have some service and experience spaces return, they'll reemerge
from this and the weaker ones, they just won't make it
back. They won't make it back, so it's, I think in
restaurants, full service restaurants, maybe half of them come back
from this. It's just going to be very difficult to reopen all
those.
James: But don't you think someone is definitely going to buy that
space? Somebody else that have the same vision as the previous
owner. I mean, maybe the original owner is no more there, 50% have
gone right because they kinda lost it.
Jeremy: You're going to see new operators come in and it's, that's,
look restaurant, full service restaurants, they can be recycled and
you're going to have operators say, well we, you know, we made it
through, let's open another location cause it's on sale. We can get
the equipment and refurnish it and open and go. So there'll be
opportunity there for new operators.
James: So the industry is not going away, it's just the operators
are disappearing.
Jeremy: The operators that disappear, it's a slow recovery for
them. It's a difficult recovery and the real estate; there will be
some good restaurant real estate that will become available. It
will happen. Okay, so I know retail, that's sort of my take on it.
I wish I did.
James: Are you seeing a lot of distressed sellers right now. I mean are you doing a lot of transactions right now?
Jeremy: No, not right now. I think it's early.
James: Yeah, I think it's still early. I think people are just riding through their cash flow. Just walk up and watching and nobody knows what's the price and nobody, not many people are distressed.
Jeremy: Yeah. Multifamily, I agree with you, if you
segment by class ABC, you look at the populations that are renting
from those units. The A-class seemed to be more insulated because
they tend to be professional, high-income office working
James: Those that work from home as well, right?
Jeremy: Yep. The B's and C's tend to be more service level and
they've got a lot more exposure in this environment. So, you know,
they get laid off quickly, but they get rehired first because
they're lower cost, the office workers, they get hit later and
they, you know, they're slower to come back. I mean, what's that
rule of thumb, if you've got, for every $10,000 in salary, it takes
you a month to replace, to find a new job.
James: This new ratio.
Jeremy: I know this new ratio if it's true, but I've heard that. So
the bigger question that I've got on multi-family is the suburban
versus urban, we've been in an urban cycle the last 10
years.
James:Yes.
Jeremy: And I've been.
James: Explain that a bit, what do you mean by urban cycle? Is it
people building more multifamily in the urban areas?
Jeremy: Yeah, it's the live, work, play, lifestyle,
millennial, you know, millennials and baby boomers wanting to live
in the city near where they work, walkability people that live in
rich environments. There was a quote that I was reading today from
Goldman Sachs and they're saying, they're expecting a flight of
millennials to the suburbs from urban markets and it makes
sense.
What does this suburb offer? Less density, more value for what you
rent, you know, you may be working from home more so they may be
making decisions about, well I could have done a one bed but I have
to get two bed cause I need a home office, that's a consideration
to take into or keep in mind and then there's just the overall
comfort of, hey, you know, I don't want to be in downtown New York
right now. That's not a good place to be, I want to get out to the
burbs and just have some more space. So I think the idea of urban
versus suburban is it's going to be a big topic here over the next
four or five, six years.
James: Got it. So I think that's very prevalent in where you are, but you also buy in Texas, right? I mean, from what I see in Texas, everything is a suburban mid-rise apartment, not in style apartment. So I mean there is very people I know who buy apartments near downtown, even though they [33:34unclear]
Jeremy: Sure
James: It could be depends on which market you're talking
about.
Jeremy: Yeah, I agree with you on that. In Northeast, we have a
very clear urban, suburban experience. You know, Texas, you guys
just keep building rings.
James: Yeah, we have a lot of land here, right? So everything is garden style and [33:58unclear]
Jeremy:
Yeah, as long as you got the water.
James: Yeah but there could be like tertiary market where it
could be more interesting. I'm not sure it would be less density or
not, I mean everything seems to be less density for me in
Texas just because we have a lot of land here, you know, people
move around pretty well, everybody, I guess so.
Jeremy: Yeah, you got a lot of roadway.
James: Yeah. Could that also mean that there's a lot more
investment coming from the coastal city to places like Texas or
Florida or where
Jeremy: It could mean that, yeah. What's interesting about the last
cycle nationally, the suburbs have been kind of out of fashion. So,
it didn't have the same run up in value that the urban markets did
so I started to see that the last couple of years where investors
were starting to look at suburban markets and say, well, I can
still get some yield there, so I'm going to go invest in the
suburbs. This is now going to really bring that conversation to the
forefront.
James: Yeah, I think that's why I like places where you are like
Boston is called like gateway cities versus you know, places like
where I inaudible35:17.
Jeremy: Yeah.
James: Suburban market, I would say so.
Jeremy: Yeah. So industrial, I'm still bullish on industrial. I
think we'll see some dislocation in distribution and port
industrial, I don't know what the future looks like with China. I
mean we import a lot from China through Long Beach and it goes to
the inland empire and I think we're going to see some of that shift
to other port markets as we start importing from other parts of the
world but overall with consumer behavior shifting, it had already
started before this. If there's been anything that's going to
accelerate the demand for industrial spaces, it's this because
you're going to have ghost kitchens, you know, restaurants that
basically just, they're like catering kitchens that they just run
full time, they have no seating and they deliver food, you know,
basically meal prep. You're going to have more demand for online
consumption and distribution and shopping, that's going to put more
pressure on existing in industrial inventory, I sort of thought the
industrial market was peaking in the last couple of years, but that
may not be the case, there may still be some runway in that
market.
James: So when you're talking about industrials,
basically, warehouses where, you know, products made and
distributed, I would say, right? I mean, I can see that with more
manufacturing going to be coming in house right now, I mean, with
all this, that's one shift that's going to be permanent.
Jeremy: Yeah.
James: Everybody knows that, right? So, do you think industrial
would be the asset class that most beneficial from that? I mean,
because I'm looking it’s going to be a lot more manufacturing
factories coming here; I just don't know which assets.
Jeremy: Yeah and that's really, I mean, if you remember doing
102 in CCIM and we talked about basic employment.
James: Yes, absolutely.
Jeremy: As soon as you start to see manufacturing coming back into
the United States, that's going to be really good thing for our
economy.
James: Correct.
Jeremy: It's going to really boost multifamily, a lot and it will
help retail and it'll help office but you know, it's really a
value, it's a power source, it's an economic engine for importing
money into economies, local economies. So, I think industrial
overall in terms of, if you're on the buy side, it's like you want
to be really careful about industrial exposure to China, but the
rest of the industrial story I think it's going to be a good place
to be, I think it's going to be a good asset to own.
James: So, is industrial equaling to manufacturing
factories.
Jeremy: Yeah, so manufacturing, flex R&D, so that's
research and development, Warehousing, distribution, bulk storage,
cold food storage. Just there, you're going to see that stuff
cranking.
James: Cold food storage
Jeremy:Yeah, cold food storage.
James: This is not the same storage that we are talking about
now?
Jeremy: No, we're talking about like freezer facilities that type
of thing, yeah.
James: Why is that?
Jeremy: It's because people are going to be continuing to demand
home delivery of food and you got to store it somewhere.
James: Well, I never seen one when I drive around, so I don't know.
Jeremy: Kinda funny looking, you know, if you, sometimes on the outside they're a little funny look.
James: Now, it's going to be looking nicer because it makes more
money. So how do I position myself or anybody else listening? Let's
say if I want to take advantage of this manufacturing coming in
house right now. I mean, how would a commercial real estate
investor should be able to position?
Jeremy: It's a good question. So you want to, you know, the main
thing about manufacturing is you want to find buildings that have
good characteristics for an efficient manufacturing operation. So
grade level, you know, Celeste slab on grade buildings with ceiling
heights in them that are preferably 16, 18 feet or higher, that
have good loading access, you can get a truck, tractor trailer,
multiple tractor trailers in and around the building to access it,
plentiful parking for labor so typically you're gonna see, you
know, one parking space per 800 square feet is kind of the building
code standard for manufacturing warehouse but depending, you know,
power supply, how do you have enough power coming into the property
and utility services.
So you could probably, you know, you're probably going to be
able to find some outlier properties that you can bring into that
market and you know, convert over and, I mean, the other thing is
you might want to be looking at retail and converting that to
distribution, zoning is restrictive for that because typically
municipalities don't like to see industrial uses in retail
locations but you may end up seeing big box or department store or
retail buildings that have those characteristics of what I just
described cause a lot of them do being converted to that use, it
could be manufacturing or it could even be distribution.
James: So which market should we be looking at to position
ourselves for this kind of industrial asset class?
Jeremy: I think you can look at pretty much any market in the U.S,
I think this is not a specific market, now if I, you know, I think
you do this, you to follow that formula in any market in the U.S
now if you want to do a, let's look at the demographics and the
economic drivers in a market. You want to look for population
growth, employment growth, that it's, you know, if there are more
people move in there and live in there and it's growing, that's a
good thing because people demand space.
James: Yeah. Well I mean the other way to look at it also is like,
if there's already a manufacturing hub in that city or state, you
know, that could be a good expansion place, right, if you find some
assets around it. I guess
Jeremy: It could be, the other thing you're going to see are companies trying to find manufacturing redundancy. So if they've got a facility that goes down in their location, they can continue supplying from an alternate, which is, it's really interesting cause it's sort of contrary to what Gordon Gekko would tell us to do, right? Build shareholder value, become more efficient and be more profitable, do things faster and increase volume and the way you do that as you bring everything into one location and make it as streamlined as possible but now we're looking at a situation where, and this has been going on in manufacturing for a little while, customers demand redundancy because if there's an event or a disruption to a location, they want to make sure that they still have a continuity of supply chain.
And so they're getting what they need so that's even more
important now than it ever was. So we'll see some of that. So I
think you gotta kind of get into that world and talk to people and
find out you know who's looking at bringing things home who isn't,
and then start to think about the properties that they could be
using and you might even have the opportunity to go out and pick up
some land and put something on the land for someone.
James: Yeah. And I'm sure there's going to be some kind of
government incentive to do that, right? Because now the government
wants lot more manufacturing.
Jeremy: So I think so. Yeah. So office.
James: Yeah, let’s go to office.
Jeremy: You working from home, if you had a choice today to go to
the office or work from home, which would you prefer? Is the
question and I got to imagine a lot of people are saying, I'd love
to get back to the office. I miss talking to people, socializing
that's missed and I think the home office thing is great, but boy,
when it's home officing and schools are shut down, it's really
hard.
James: That's a good point.
Jeremy: This sort of experiment is, you know, forced home officing
can companies do it? We've got a variable that shouldn't be there
and that is the kids, the kids should be in school. But it's, I
think people go back to the offices, but they, you know, offices
may end up seeing a similar thought, which is, hey, instead of
piling everybody on the train or getting their buddy into the
center of the city to work, maybe we need to have a smaller office
in the center of the city and then have some suburban offices,
spread people out, improve their commutability and create
redundancy in our workforce.
You know, with people being closer to their smaller offices. So I
think that, I'm hearing that a little bit in the market now with
people I talk to, I think that's something to keep an eye on that.
So again, I kinda like the suburbs, I think there's an opportunity
in the suburbs and office may actually be a suburban opportunity
here.
James: Got it. So what you're saying is people are just going to go
back to office. I mean, it's not going to die.
Jeremy: I don't think it dies. No. I mean if anything, you know,
we've gone from, in the office space, I mean you see these offices
where people are like in their benching and I mean I went into an
office building and people were waiting in line to get in the
bathroom, in an office building and the reason is that the building
was built for more or less one employee for every 300 square feet
and when companies come in and they go, we're going to be more
efficient, we're going to get 1 employee in for 135 square feet,
all of a sudden the bathrooms are overloaded, the parking is
overloaded and that the buildings, it's too dense. The amount of
people in there, it's not designed to carry that density. We'll
throw a pandemic in the mix and the idea is for us to be six feet
together in this world we're in right now. Maybe we're going to see
that, you know, that office demand change where you know, I want to
be able to shut my door to an office, I don't want to be at an open
bench next to my colleague sneezing on my keyboard, you know, so
that, I think we would go back to the office.
It's important, the nature of the office is to bring us together
and for us to work and collaborate, share ideas, but also to have
deep work time, need to be able to do deep work and we need to go
somewhere to do that. So maybe it's not about packing as many
people in and forcing them to assemble and work together rather
spreading them back out a bit, providing some, you know, some work
from home, some work from the office days, maybe your home two
days, three days in the office. So I, this is a fluid one, but I
think we go back to offices. I think it's how we do work. We can do
it this way, you know, we can talk to each other, but it's not as
fast in my opinion, information slower than it is in
person.
James: Oh yeah, absolutely. Yeah, I was talking to a doctor, Glenn
Mueller, right? So I'm sure you know him, right? This was like two
months ago when we're looking at all of the asset class and office
was the opportunity it was going from, into the expansion cycle.
Right? So, and I asked him the same question, what about people
working from home? He said, well, you know, humans are social
creatures, you know, they like to be together, right? And you're
absolutely right about communication and deep work and all that,
just so hard to do working from home. Right? So I think people are
going to go back to the office, especially after the vaccines
is [48:47unclear] right?
Jeremy: Yeah, I will make this prediction. So just like after 9/11,
the U S government moved in security and defense. This is a
healthcare crisis; I think the next decade will be a healthcare
decade. We tend as people, we tend to overcompensate for a trauma
that we just experienced so that we never have to feel it again and
so I think we're going to see when we rebound from this, healthcare
will come back very quickly because there'll be such a backlog of
demand for everybody else who's not suffering from Covid but has a
knee replacement or you know, an oncology treatment and everything,
they're going to be there, they need to get in for services but
we're going to have a situation where healthcare is going to be at
the forefront of government decision-making, investment and in
development of protective and planned responses to anything like
this coming again. So I see that space is a very fascinating space
to watch and get involved in as you see us start to come out of
this and these discussions come to the forefront.
James: So how should we prepare for that opportunity too?
Jeremy: Well, it centers around the hospitals and if you follow
a hospital strategy, they've been merging with each other to become
more efficient as they struggle to operate profitably in a very
narrow margin environment and one of the things they've done is
they've expanded by going out into retail locations and creating
outpatient and urgent care services that essentially become a
feeder for the hospital. So I expect to see more of that because
that's a lower cost way for hospitals to expand. Hospitals are very
expensive and they tend to be constrained geographically because of
where they were cited. You don't see a lot of just new hospitals
being built around the country. They tend to have additions put on
them. So as a result they expand out into multiple locations that
become more like a hub and spoke model. So I'd be looking at
anything in the healthcare space in the next several years. I think
it's just going to be really good place to be.
James: So are you talking about like medical offices or you're
talking about labs or life sciences
Jeremy: Medical office, yes, I can't really comment on life
science, I don't follow it very closely, it's so specialized, but I
probably should know more being out of Boston cause it's just a
center for it, I hear about all the time. I just kind of go,"...oh
yeah, labs, ugh"
But, that I, anything with healthcare, I'm loving it in the next
several years.
James: But even on medical offices, I mean, the tenants have a long
lease terms, right? I mean, how would that increase the valuation
of the property as a real estate investor? One is, we look at the
cash flow, the other thing we want to look at value increase as
well.
Jeremy: Well, there's, it's durability, yeah, that's one of the
great things that medical office offers you is 90% and higher
renewal probability rate. The you know, historically it's been a
recession, quote and quote proof, investment class, not this time.
I mean, I was looking at data last week 42,000 healthcare
professionals lost their jobs, were laid off. I mean, you go, what,
no way.
James: Why is that?
Jeremy: Why is that? Because hospitals aren't allowing for elective
procedures, urgent care only. So they're laying people off, it's a
fiscal nightmare for the healthcare system right now. So they,
that's short term, okay? There was the version, what is it, version
three of the P we're on now that just came out and there's billions
of dollars going to the healthcare system, which is a good
thing.
James: Got it.
Jeremy: Good thing. So short term healthcare is volatile that may
be the opportunity to pick up some property, I think that over the
next decade it's going to be a wealth builder.
James: Okay, so you mentioned about some of the healthcare which is
located in the retail centers and all of that become like a hub and
spoke model. So that's like single tenant healthcare, right?
Compared to a multi-tenant.
Jeremy: It could be single tenant, could be multitenant. You might
have a medical office building with four practices in it. Sure.
Yeah.
James: Got it.
Jeremy: Yeah, I think those are really good
investments.
James: Okay and it could be offices converted to medical
offices.
Jeremy: Yeah, it could be. Yeah, I mean it's, I just looked back at
2001. I mean if you were in the like the metal detector, you know,
security business in 2000, probably not really interesting.
James: Right, like 2001 [54:48unclear]
Jeremy: Yeah, so that's what I see here. I'm like, this is going to
be interesting, there's going to be an overreaction in healthcare.
I think there's going to be opportunity there.
James: Could there be like construction of healthcare facilities
like medical offices or do you think just buying new medical
offices.
Jeremy: I think there could be development, we're early on that. I
don't know that's anything that we're going to see probably for
three years. I'm just following the trend, I'm kind of
following how people are, what they react to and then where they go
and for us to come out of this and not have a national discussion
about how are we going to be prepared for the next
pandemic.
James: Yeah.
Jeremy: Yeah, it's going to happen and money is going to flow there
and, and there's going to be a lot of pain and people are going to
say, I don't want to do that again.
James: Yeah.
Jeremy: I don't want to hear about ventilators next time. You know?
And so, I think that presents an opportunity for investors to get
in front of that now.
James: Yeah. I'm sure for the next three, four years people are
going to say we didn't want to have that healthcare problem again.
Right? And I don't mind paying for this. Right? Some kind of thing.
It's going to be a lot more investment. So I think medical offices
would be a really good investment.
Jeremy: Yeah. I liked it before this and I like it even more after
that.
James: Awesome. Good. So what about other asset classes like self
storage or mobile home parks and you know, what else is there,
warehouse I think is probably part of the industry.
Jeremy: We talked about warehouse, hey, you know, self storage,
kind of a maturing asset class in this last cycle but I think it's
still very viable and it's a good place to be. You are going to
have dislocation of residences the next couple of years so self
storage is going to be valuable to people who need to store their
belongings, mobile home parks, I mean, look, everybody needs a
place to live and if it's affordable, you know, it's gonna work. So
again, there I think I see an opportunity too.
James: Got it. I think multifamily; we did talk to her in detail
about it, right? Do you think there's going to be a lot of crash
happening in the single family space because there's so much short
term rentals, people bought a lot of short term rentals as second
houses and probably right now there's no short term rentals
happening.
Jeremy: Yeah, that's not so good like kind of the Airbnb, I mean
you're sort of in the hospitality business there so yeah, those
folks are gonna need to convert to long term or sell.
James: Correct. So I think there's going to be, you know, a lot of
people, you know, giving up their second short term rental houses
that way to the banks. It could be a lot more houses available I
guess. Right?
Jeremy: Yeah. That could be an opportunity, you know, if you
want to buy and rent or buy in rehab and then resell that space
could have some volume coming through. Yeah.
James: Okay. Got it. Interesting, yeah, I mean, did I miss out
on any asset classes? I think that's the more important.
Jeremy: I think we got most of them.
James: Yeah and do you think we are going to be much better in
terms of economy wise? Just because there's going to be a lot more
base employment, which is manufacturing happening in the U.S.
Jeremy: I'd love to see that, I hope our companies can come home
with that and who knows, I mean with the unemployment rate being
what it's going to be for a while and the wage growth that we
didn't really see in the last 10 years, and we just lost on that,
maybe there's an opportunity for us to employ people that otherwise
we couldn't have a manufacturing basis to make it make sense. I
don't know. I'll leave that up to the manufacturers to figure
out.
James: Got it. So, I didn't want to forget one asset class, which
is hotels, right? I'm not sure whether we went deep into hotel. So
that's going to be, I think the hotels are really suffering right
now.
Jeremy: Oh, it's terrible.
James: Right now.
Jeremy: When I hear 9% occupancy rates.
James: Yeah.
Jeremy: That's bad news.
James: Yeah, that's crazy right now. So hopefully hotels survive
through this downturn, I guess. Right?
Jeremy: Some will, look, we still need hotels.
James: Yeah, I know.
Jeremy: We still need them so they're the strongest, best located
hotels will come out of this thing, others, you know, they'll fail
and they'll either get bought at the discount and with a lower
basis they can compete in the market and grow back out or you're
going to see them reused for something else.
James: Got it.
Jeremy: That's maybe the multifamily conversion.
James: Yeah, if the city allows it of course, then they can be a
lot of studios and efficiencies, I guess and I've seen that
happening in some cities and some projects. All right, Jeremy,
thanks for all the value, can you tell our audience and listeners
how to get hold of you?
Jeremy: Sure. So you can check out our stuff on
CREinvested.com, that's C R E I N V E S T E D.com, I've got an
investment course there, that is available and if you ever want to
chat with me, you can email me @jeremy that's
JEREMY@creinvested.com
James: Yeah, Jeremy is a wealth of knowledge. I mean, he's also a
senior CCIM instructor, right. So that's a lot of knowledge if we
came in, absolutely, you will be a really huge value to connect
with you and just to learn from you. So thank you very much for
coming on the show.
Jeremy: Hey, thanks James, it's a pleasure.
James: Alright.