Today, my guest is Jaspreet Baveja. Jaspreet is the director of funds strategies. And he has a BA in Management Information Systems from Florida International University and a computer engineering degree from Penn State University. He has been investing in real estate since 2013. And full time since 2019.
J Darrin Gross
I'd like to ask you Jaspreet Baveja, What is the Biggest Risk?
Oh, man, I think I think shifting market trends is the biggest risk, because you never know exactly when it's going to start, you could be in the middle of a transaction when it hits you the hardest. And that makes you lose a deal. Because the market shift changed the valuation, the market shift changed the loan, the lender was willing to give you the market shift changed the rent rates you were expecting to put on your underwriting. And so it's the overall market. Because whether the market is changing because of interest rates, or geopolitical or any, you know, natural risks like Hurricane Ian, that we have now, anything that changes the market to shift, I think is the biggest risk because that is something that is not entirely in your control. And like you said, it's not easy. If you have an insurance claim, sure, it's easy to transfer risk to that insurance company and say, Alright, well, that's what we got you for, let's file a claim. But if you have a deal that's going south, because the property was worth 25 million when you put the offer in for 25 million, and now the market shifted, because the rent rates slowed down, and the interest rates went up. And the biggest job provider that was in the market in that particular area just decided to up and leave like Apple decides to leave San Jose for all this, you know, for some reason, that's going to be a big market shift that you as an operator or as an investor or anything, have no control over. And so that's going to automatically shift all your underwriting all your projections of returns. And so I think the biggest risk is the market shift, whatever the cause may be.
Today, my guest is Joanna Frank. Joanna is the CEO of Fitwel, where she advances design and development practices to foster healthy and engaged communities. And in just a minute, we're gonna speak with Joanna about healthy building designs.
I'd like to ask you, Joanna Frank, what is the Biggest Risk?
Joanna Frank 36:51
the people in your buildings, because as we've talked about it is people that really decide value by what we value as people and our society translates into the value of your asset. So that kind of comes back to why location, why is this location more valuable than another location it is because we, as people value those attributes. And we can see that and we can correlate it with real data, right. So we as people value being in a neighborhood that is walkable, and there is a lot of data, a lot of stats that shows the direct correlation between the increasing amount of walkability of the location and that increase in value. So, so we as people are going to, we're going to decide when a building or when a property is really good for us and good for our businesses way before the physical risk that we're going to see if we're talking about climate change as an example. flood risk is a good one, just because if you're looking at flood risk from a When will my property flood physically, that is obviously the risk to the bricks and mortar way in advance of that physical event of flooding, that property is going to lose value, because of the perception from people of the risk of that flood, I am not going to move my business into that building, because that building is in a flood zone. And I don't want to take the risk of whenever that flood occurs because of the disruption to my business because of putting my people in harm's way. So the value and the risk associated with that flood is happening way in advance of the physical flooding, because we as people aren't going to be building that into our assessment of value. Likewise, the temperature change, right, some cities, some regions are going to become less and less optimum for people to thrive, and therefore that's going to start to affect people's willingness to move there. Right? If it's 120 degrees on the high street, like that is no longer an optimum environment for people it is actually suboptimal, right. So now you have an issue about value for that real estate, the buildings will be fine. But as people will say, I don't want to live that right, that's too hot. I don't want to have air conditioning on all the time. And then of course, we can have a whole energy conversation. Likewise, air quality, the air quality is going to affect my quality of life, my tenants and my my family. I'm going to start to bake that into whether I value this location or how I value this location. So it is people that are really driving value of real estate and it is people who are going to be the greatest risk factor because of climate change. And because of all of these other societal changes way in advance of buildings starting to have the Like, you know, physical implications on buildings?
Today, my guest is Kevin Swill. Kevin is the CEO of Thirty Capital Financial, a commercial real estate debt advisory firm and pioneer in the defeasance space. Kevin is an accomplished executive with experience in acquisitions does dispositions, financing, capital raising asset and property management.
J Darrin Gross
I'd like to ask you, Kevin Swill, what is the Biggest Risk?
Right now the Biggest Risk that we have our borrowers that are out there that either need to sell their asset, one because their partner is a fund, and the fund will only hold an asset for five years. And their underwriting and their performers over the last. You know, look, we've been in a great situation for the last What 10 to 12 years where interest rates have been historically low. But again, people that have been in the industry for 20 years know that you know, the average loan should be on a commercial real estate should be anywhere between Let's say six and a half to 9%, based on the asset class, but people have forgotten that. So for me right now, where I see the greatest risk are people that were involved with partners that have a hold period, and are now in a situation right today, as we speak today on this on this call, that have no choice but to sell their asset, or refinance to buy their partners out. And they're in an environment where they may have a loan that they were only paying two and a half 3% on when they got that loan. But now, they're looking at paying almost 6%. And the question is, who's gonna buy that? Who's gonna buy that if you understand the market, but to understand the underwriting of the asset, it can become cost prohibitive. So I have, for example, the founder of our company, Rob Finley has a portfolio, and he has put up a couple of his assets for sale, every one of them has now been retreated, and retreated to the point where he's taken it off the market, because it doesn't make sense. Because interest rates keep rising to the point where for buyer, it's almost becoming cost prohibitive. And they're waiting for the markets to really slow down, let's see what happens. You know, everyone talks about recession, where is the risk for the borrower, it's when they're being pushed or forced forced to sell their asset, because they have partners that it's their mandate. That's where I find some risk. Whether or not, it makes an opportunity for someone that is going to buy and be able to renegotiate almost like a distressed asset, they may get lucky. Or the borrower is going to have to renegotiate with that fund, or that, that borrower that partner, and ask for a one year extension, because of where the market is. But that's where I think the risk is, I think the risk is anyone that's trying to sell right now are being forced to sell is going to have a difficult time finding a buyer that makes the numbers work. Until we can really figure out because, again, for the last 10 to 12 years, anyone that owned property, they were making cash. Just it was like a cash cow. And you know, and unfortunately, we're in different times now. And the cash slows down. And it's it's an interesting, it could be an opportunity for some, but it's a very high risk for others. And you know, interest rate risk is hurting everybody in every industry, I think, right now until we can figure out what's going on with the inflation, until we can figure out what really is going on with interest rates. And on top of all of this in commercial real estate, you have no more LIBOR than we've had for almost a century. And now all of a sudden, it is converting to Sofer. So again, it goes back to the floating rate and the bridge loans that were based on LIBOR, come July of 2023. If you're not a sophisticated borrower, overnight, you're gonna get a letter that just said, By the way, by by, by not law, but by regulation, we have to change your LIBOR to sofr. And your LIBOR might have been when you got it very, very low. But in July of 2023, it might be double. And that's a risk you're going to take so we tell everybody, let us help you, or review your loan documents. Make sure that if you have a LIBOR loan, that you call your advisor, you figure out a way to convert it today over to Sofer while they're pretty pretty close in pricing. Because you don't know what's going to happen by next year and July of 23 There isn't any extension to that there will no longer be any LIBOR. That's the risks.
Today my guest is Jason Astor. Jason is the managing director at KBA Lease Services nationwide lease auditing service that works on behalf of commercial tenants to recover rent overcharges and reduce occupancy cost.
J Darrin Gross
I'd like to ask you, Jason Aster, What is the Biggest Risk?
In my little space, the Biggest Risk is willful blindness to what you should be paying for your lease. You spend a lot of money and time getting into these major leases, hundreds of 1000s of dollars in legal fees, brokerage millions and brokerage fees depending on what party you are, you know, FF and E fit out for you 200 bucks a square foot a huge amount of money getting into them. I think you mentioned this before. It shouldn't be your duty, if you're going to spend this amount of resource to get into it to make sure you're getting what you're supposed to add of it. So the biggest risk is just being willfully blind and not having an expert. Look at it behind the scenes. The interesting thing about risking our space and kind of in relation to the way you describe your day to day work is is operating expense pass throughs is a risk adjustment. That's what it is the landlords back in the 70s, they just charged rent. Like a lease when you were a kid in an apartment, like you paid your rent, and they factored in some amount into it. And then one day, their insurance policies when there was a fire now the rent another, what do you do? You got to pass it through, you have to shift the risk. operating expense theory is a shifting of the risks that landlords have said, You're backing this up, it's too much risk. look and think about all the things inflation is happening too fast rents not enough, I don't have the ability to Jack my rent though. My insurance policy taxes are going up. Right, the union rebar bargained for something right 32, BJ in New York bargained for better fringe benefits. And now I have to pay that, I have to figure out how to reallocate the risk of operating my building across my tenant that basis because I can't bear it anymore. That's what operating expenses are, they're an adjustment of risk. What's happening now from a risk perspective, other than just please Don't bury your head in the sand, pay whatever the landlord tells you is inflation. How do you avoid inflation? It's hard. And Elise, because least has happened one time and then you sit in, right? In your world insurance, landlords pay a fortune, as you know, for insurance, and they have every right to pass that through, guess what they can't control the cost of insurance. So if inflation increases the cost of insurance or some pandemic increases the cost of insurance or some you know, environmental thing, they got to pass that through. So that's construct that's considered an uncontrollable cost, right landlord can't control insurance, they can't control taxes, they can't really control within reason, the amount of money they spent for utilities. So when you negotiate a lease, landlords will fight as they should, to say, I can't control these these things, we're gonna call them costs, I can't control, you just gotta pay your pro rata share, it is what it is, I'm not going to fluff it up, I'm not going to put a percentage on top of it. So if I pay $1, for insurance, and you have half my building, I'm passing through 50 cents to you. And that's fair. The other bucket of things, all the other things cleaning security, right? You know, certain common use of things that is controllable, who you hire, what rate you pay for it would cost to manage your building is a big number. Sometimes those are controllable expenses. And that's where tenants can start to adjust their risk, including caps to, I guess, Cap inflation, right? If inflation is causing the rise of payroll, payroll is going up in the CPI is going crazy. What do you do? Well, if I think about it in advance, well, you know, inflation is usually around four to 5%. What if I kept kept some of these costs that the landlord can control? Now I'm adjusting my risk, because I don't have to worry that if we hit a hyperinflationary period that I'm ever going to pay more than this 5% cap on these costs. Now these this is only fair to a landlord, if these are costs the landlord can purportedly control. That's the road, right? That's where you need lawyers. How do you argue what's controllable, if I'm a landlord, I would go I can't control payroll, I'm in I'm in a union state. They tell me pretty good argument that I call BS. But you know, if you're a tenant, you're not well represented, you know, you're right, you can't control, right. But there's all these like, really interesting nuances. And it's all about shifting risk. It's all about shifting the risk of operating one way or another. And the bigger the better the tenant, the less risk they're going to assume. And the more they're going to push back on the landlord. And in today's market, landlords are happy to have tenants. So you will see, if you are a company looking to negotiate a lease, maybe you're negotiating a smaller one, but you're still negotiating, you might actually have an opportunity to adjust some of their shifts, some of them it's back to the landlord in the operating costs of us. That's what I would say in the landlords are going to do the opposite. Right, rents are going down in some markets. I mean, I mean, this is insane market, right? You go to the middle of Manhattan, and rents have never been higher commercial office rents. One Vanderbilt Hudson Yards one Manhattan recipe show $250 a square foot people are gobbling it up. Three blocks over on Third Avenue. Can't give it away for free, crazy. So if you're a landlord, and you happen to have great product, you're pushing the rest of your tenant. You want to be in here. If you have a half empty building that was built in 1976, and nobody wants to be there, it's a free for all.
Today, my guest is Craig Berger. Craig founded Avid Realty Partners in 2015. After spending more than a decade on Wall Street as a multi award winning equity research analyst. The firm's portfolio has grown meaningfully in recent years, and includes acquisitions and operations of over 14 150 units in secondary and tertiary markets throughout the United States.
I'd like to ask you, Craig Berger, what is the biggest risk?
Craig Berger 42:57
Darrin, you're really good interviewer, you're asked some great questions, and you're really smart. Our biggest risk, my biggest risk is taking a finite amount of personal resources and growing a business. I'm hiring I'm buying deals and having the investor of last resort or the backstop in any of my deals if if a deal needs more money, I really don't do capital calls. I've I've always invested out of my own pocket and the very few limited cases where one of our deals or properties is needed more money. So I've got a number of demands on my personal resources, most of which revolve around growing a business. So that's my biggest risk. How do I hire top flight and top quality, talented sea level executives, investor management, personnel, acquisition personnel, back office personnel, with my resources, how do I go out and buy quality deals when when I have to raise the money in a finite period of time. And so those are those are some of the biggest risks on our assets, we've really paid mostly prices that I feel really good about. So I don't feel like any of our projects are a risk. You know, again, that's one of the great things about multifamily. We're buying below replacement cost we're buying into a business that is fairly stable overall so I like the the multifamily and commercial real estate business. And we've never lost money on any deal yet knock on wood. And hopefully, hopefully we won't. So you know, my risks are more around corporate level. risks and how to scale a business with, you know, limited limited personal resources. We have exited, you know, a number of properties over the last year. So my resources are a lot less limited than they were a year or two ago. But they're still limited in terms of growing the business and hiring talented people that need and deserve to make, make a make a living.