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This week, we sat down with Brian Neltner and Reynolds Thompson of Select Strategies Realty to discuss the current retail climate, where retail is in the cycle, and why retail might not deserve all the negative headlines.

Brian Neltner is the CEO at Select Strategies and is responsible for the overall direction and management of the company.

Prior to joining Select Strategies he managed all retail real estate activities for Colonial Properties Trust as their Senior Vice President of Real Estate.  Brian’s position involved the direct oversight of all operational functions including leasing, management, construction, development and redevelopment of a portfolio of enclosed malls and open air shopping centers.  Previously, Brian was responsible for all real estate development, management, leasing and construction activities for over 125 open air shopping centers for Kimco Realty Corporation as their Vice President of Real Estate.  He played a significant role in the repositioning of many assets in various portfolio acquisitions creating significant value and directly contributing to success of the ventures.

Reynolds Thompson is the Chief Investment Officer at Select Strategies and is responsible for the company’s investment activities and investment management services.

Prior to joining Select, Reynolds was President and Chief Financial Officer of Colonial Properties Trust, a $4 billion publicly traded REIT with a portfolio of multifamily, office, retail and mixed-use assets. During a 16-year career with Colonial, he also served as CEO, COO and CIO. He has extensive public company management, operating and investment experience having raised $950 million in equity, $2.5 billion in debt and completed acquisitions totaling $4.1 billion, developments totaling $1.5 billion, dispositions totaling $5 billion and joint ventures totaling $3.5 billion. Reynolds also has expertise in strategic planning, investment analysis, capital markets, financial reporting, regulatory compliance and investor relations.

Reynolds currently serves on the Board of Directors for Medical Properties Trust, a $7 billion publicly traded REIT.

*If you like this post, be sure to enroll in our free six week course on the fundamentals of commercial real estate investing — RealCrowd University.*



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RealCrowd – All opinions expressed by Adam, Tyler, and podcast guests are solely their own opinions and do not reflect the opinion of RealCrowd. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. To gain a better understanding of the risks associated with commercial real estate investing, please consult your advisors.

Brian Nelter – We’re seeing these really innovative things that grocery stores are doing that they’re both going after the online stuff. But then they’re really creating these great experiences inside. The very same consumer might say, “I’m going to buy all my canned goods online, but I don’t want to buy my cheese or my bread and my fruits and vegetables online, because I don’t know what I’m going to get.”

Adam Hooper – Hey Tyler.

Tyler Stewart – Hey Adam, how are you today?

Adam Hooper – Tyler great, I’m excited to have a two, a twofer today.

Tyler Stewart – We have Brian Neltner, CEO of Select Strategies. Prior to Select Strategies, he ran all real estate activities for Colonial Properties.

Adam Hooper – We also have Reynolds Thompson, current Chairman and Chief Investment Officer of Select Strategies. Prior to that, he held a lot of titles. He was the CEO, COO, CIO, and most recently the CFO of Colonial Properties Trust.

Tyler Stewart – A storied past.

Adam Hooper – Between these two guys we’ve definitely got a ton of experience in the industry. Deep dive on retail today. Talked about the different kinds of retail. Retail just as a, an industry, that’s a pretty broad brush, right. We broke that down into the different kinds of retail strategies, talked about some of the different demographic trends that we’re seeing. Interesting stat too to start out that you’ll hear in there is how many of the store closures and all these negative headlines are attributed to just 16 different retailers. Lot of doom and gloom for such a small percentage of the actual retail operators out there.

Tyler Stewart – Yeah, a small percentage. Some big names in there and so they get the big headlines. But overall, it was a small percentage of the real estate industry.

Adam Hooper – One of the big trends that we’ve talked about a lot on the show and continue to talk about here is this merging of brick and mortar and internet based retailing. That was one of the most interesting conversations. Talked a little bit about where do those lines start to blur in the future, and how does that change the nature of the retail space, and where does that create opportunities for investors out there today. That’s enough of us talking. Another great episode today. As always, if you have any comments or questions, please send us a note to podcast@realcrowd.com. With that, let’s get to it. Well, Brian, Reynolds thanks for joining us this morning. We lucky to have you guys on the show and excited to talk a little bit about the state of the retail industry today.

Brian Nelter – Well, thank you for having us.

Reynolds Thompson – Looking forward to it.

Adam Hooper – Perfect, well, Brian why don’t you kick us off here and tell us a little bit about your background, how you got in the industry, experience in the retail space? And then, and Reynolds maybe you can fill in as well after Brian?

Brian Nelter – Great, well, I got in the industry directly out of college. I had studied real estate development and finance in college, and then, and also in my undergraduate and my graduate work. I went directly to work for a local Midwest developer who was actually regional over the eastern half of the United States. Moved from there into the public companies at Chemco and then eventually worked where I oversaw all the commercial real estate at Colonial Properties Trust, which is where I met Reynolds Thompson. My specialty and where I’ve really focused is mostly geographically in the Midwest and the Southern states and the Southeast, all the way from Dallas, all the way through Virginia and from Minnesota, through Iowa, Kansas, all the way through Ohio and Pennsylvania. I’ve worked on pretty much all food groups of retail. I’ve really specialized my whole life in retail. I’ve worked on everything from lifestyle centers to power centers, malls, grocery centers, neighborhood and necessity based shopping centers, pretty much the whole gamut. In there I oversaw and directly performed leasing, property management, development, re-development, construction, and pretty much all legal aspects of the shopping centers and asset management. I’ve kind of worked on all different aspects of the shopping centers, many different types of shopping centers and geographically in kind of the eastern half of the United States.

Adam Hooper – Perfect, so you’ve been at this retail game for a while then.

Brian Nelter – Since 1988, so it’s been a while.

Adam Hooper – Very good. Reynolds, why don’t you give a little bit about your background and kind of what you guys are up to today?

Reynolds Thompson – Sure. I began my career as a banker, and after a few years in the banking business had an opportunity to join a developer in Atlanta, Georgia who specialized in suburban, office, and industrial development. I came up through the leasing side of the business. After about a 10 year career there, I had an opportunity to go to work for a public company, and was again was focused on the office sector, but that really evolved into more of a investment role and ended up picking up responsibilities for both multi-family and retail investment as my career progressed. Ended up focusing on the acquisition, development, and disposition of business. And later, as a chief operating officer running multi-family office and retail for a diversified REIT that grew to about eight billion in size over kind of a 15, 16 year career there. We focused in the Southwestern United States, the Southeastern United States and more recently have worked in the Midwest. Have experience in joint ventures, equity and debt placement, financial reporting, operations, really the whole gamut of investor relations and reporting.

Adam Hooper – Good. You’re the ones to talk to then. They’ve been through cycles, have seen different markets, you different product types. This is going to be a really interesting conversation today. Before we started recording, Reynolds, you and I were discussing there’s a big convention out there, a retail real estate new industry group called International Council of Shopping Centers, ICSC. They have a big convention every year. For me that always served as a good barometer of the sentiment of the industry. Maybe you can kind of go over some of what we were talking about before of kind of how that sentiment has maybe evolved over the last few years and where you think that might be going now?

Reynolds Thompson – Sure, I’ll focus on the investor perspective. I’ll let Brian weigh in on what’s happening from a tenant perspective, because we see a disconnect between investor perception and what we see at the operating level in terms of kind of what we call reality. Over the fast few years, let’s say the investor sentiment has morphed from being very cautious to one of somewhat cautious optimism. And more recently investors are at the point of thinking about opportunities in retail. And we, as, because we operate, we’ve seen opportunities throughout that over the last three or four years, but investor sentiment has evolved. It’s the idea that the headlines are really negative in retail, but everything that’s gone on in retail is, isn’t negative. The headlines are getting a disproportionate amount of the airtime, if you will, more of that kind of bad news sells. There really are some good things going on in retail. We’re finding that institutional investors are becoming more and more interested in those opportunities, because it’s affected pricing. And so pricing has become more attractive. And whenever pricing, there was a point where the risk and the reward come together. And that’s where we believe we are today.

Adam Hooper – Perfect and then Brian what have you seen from the tenant side, the operation side of the users of the space? How’s their sentiment changed, evolved or kind of what’s the temperature out there? And again, I know that’s a broad brush to paint the entire retail user base with. But maybe you can talk about some of the bigger segments, right, obviously kind of your smaller mom and pop shops, bigger national chain retailers, discounters? Just spend a few minutes on that.

Brian Nelter – It’s a tale of two cities really. It’s the best of times or it’s the worst of times, and it all depends on what perspective you’re coming from as a tenant. If you’re one of the tenants that are very susceptible to internet pressure or that you’re in a product line that is declining, we’re talking to them about taking space back, downsizing their stores, really trying to redefine who they are. And it can be the worst of times. But there is a lot of people out there where it’s the best of times. And those are, you’ve got this burgeoning and very large health club. If you think about it just 30 years ago you had Gold’s Gym, and that was about it, and maybe some seedy gyms in different places. Now there’s a whole plethora of different gyms and health clubs and ladies only and yoga studios and full on gyms and things that are, all these different types of health clubs that are out there that were never there before. You’ve got a lot of those guys. The restaurant business has just exploded with different types of restaurants that are available. Then you have people that are really more experiential. That can be everything from a TJ Maxx where the hunt of the deal is exciting. It doesn’t really translate. Their sales are off the charts. That’s true for Burlington Coat Factory and a few of these others, where you can’t, you don’t get that hunt, where you’re going through racks and finding a really good deal online. It just doesn’t work the same.

Brian Nelter – You have those tenants that are out there. You’ve got tenants that are trying to redefine who they are which is really exciting stuff. Pet stores, if they’re just going to sell supplies, they’re not going to compete very well. But if they sell shampoo or where they’re actually, they have washing stations. And they’ve got grooming stations and veterinarians. Those are all things that can’t happen online. If they’ve got, selling live pets, and you might buy a hamster for five bucks. But you buy the hamster supplies are $150. And you can’t take the hamster home without a cage and wait for 24 hours for the cage to show up. Those guys are thinking very intelligently. Some of the office supply stores, instead of going away they’re finding that the copy centers and all these different things that are service oriented really have a real value, because people don’t have the same quality of copiers, for example, in a home office, so that there’s things there for them. You have these people that are redefining who they are which involves us downsizing and making our discussions might be, “Hey, we got to remodel. We have to recreate who we are. But when we do that, we’re much more productive, and we can pay a greater rent.” You kind of got both. And then you have some that are just dying. Their time is up and they’re going away. In many of those cases, they’ve, they’re very old tenants and so very old leases. We’re kind of really anxious to get those spaces back

Brian Nelter – in many cases, because they’re paying a very low market, below market rent, and those can be exciting too

Adam Hooper – There’s a couple threads I want to explore there. First is you said the businesses that are more susceptible to internet sells are the ones that are struggling a little bit more right now. I think the numbers somewhere between near 9 1/2ish percent of total retail sales happen online. We had a show, I guess that was season one, with Eric Hohmann. Anyway, we were talking about the retail’s gone through a couple different phases of this disruption of kind of that last model of deliver, right. You had the Sears catalogs that just completely changed the whole nature of the landscape, right. And the concept of this internet shopping was basically kind of the catalog version of that disruption today. How much of an impact to the broader industry? Are we going to see that 9% grow to 50%? That’s just kind of crystal balling, but it seems like for as much attention as internet sales and e-commerce is getting for it still to only be 9% of overall activity, do we think that’s going to peak at some point or does it have the room to run another 5X that?

Brian Nelter – It’s interesting. I kind of am in the camp that it’s not really going to, we, it’s going to eventually merge. It sounds strange to say that. But we’re seeing these examples to where some retailers had stores that on the retail only were not profitable. But they said if we close in a zip code that we see our internet sales completely plummet in that zip code. Then we’ve seen some giant online retailers buy very large grocery chains, because they know they need that to make their online successful. Do I think that it’s going to continue to go up? I do. I don’t know what the tipping point is. We know it’s not going to, we know all retail’s not going to, it won’t go away, because it seems like the bricks and mortar are more, are becoming more important than ever. It seems like we have seen the tipping point to where I don’t think anybody believes any more that we will be a nation where 100% of our goods and services are going to be coming online. How much of that stuff? In some industries I believe it’ll be 100% or close to it. There’s, I don’t know how many people, how many bookstores. It’ll probably be one bookstore maybe for 2 million people demographic, because it’s that one bookstore where you get coffee table books and art type books and things like that. That’s an industry that has just completely found itself at the whims of technology. Then we’re seeing these really innovative things that grocery stores are doing, that they’re both going after the online stuff.

Brian Nelter – But then they’re really creating these great experiences inside. The very same consumer might say I’m going to buy all my canned goods online. I don’t want to buy my cheese or my bread and my fruits and vegetables online, because I don’t know what I’m going to get. I’d rather go in there. That’s actually kind of a fun Saturday afternoon thing to do is to go to the cheese shop or go to the meat shop or go to do these some of these different things to do when there’s nothing else going on. I don’t know what the percentage is, but I think the successful retailers are going to be the ones that do a little bit of both.

Adam Hooper – To build off of that, the changing nature of what a retailer does in the space, right. So, more of this experiential. We’re seeing more kind of showroom space right. Maybe you’re not having to stock 40,000 skews anymore. Maybe you’ve got just display products. Then you can have fulfillment come through this industrial channels. How much do you think that changing nature of this move towards more experiential? Is that a reaction to or is that caused by e-commerce or is that just kind of an evolution of the retail space?

Brian Nelter – It’s getting back to fundamentals in some ways. We saw retail go just strictly for a long time they were focused on just price. Way before the internet phenomenon, the online purchasing phenomenon really took off. We were all, I was laughing with other industry guys, saying some day our kids are going to discover that service is really a cool thing, because retailers just gave up on it. It was, it just became product, cheap, and big box, and that’s all it was about. And now all of a sudden the experiential is really just another name for service. It’s another name for just really giving the customer a lot of care, really giving them an experience when they go in there that makes it worth it for them to drive five minutes to go up the street. It’s kind of getting back to basics. I definitely think it is a response. It’s a response to the online retailing. However, it was an overdue response, because I think we had to get back to that regardless.

Adam Hooper – Perfect. Well, I think that’s a really good background. Now, kind of switching to the current state of retail, right. We said earlier the headlines haven’t been kind to this space, lots of kind of doom and gloom about stores closing and just the death, this retail apocalypse, right. Is that justified? Is that real? Is that too broad of a paintbrush to try to characterize a whole industry as?

Brian Nelter – It’s way overblown. If you look statistically in 2017, 40, almost half, 48% of all the retail closing was by 16 retailers. In 2018, it was, the top 16 retailers that were closing stores accounted for 66%. Ehen you’re bad, you’re real bad. You also get the attention. I had an older guy once tell me that our problem in the industry is not that we’re overdeveloped it’s that we’re under-demolished. You got all these, if you think about it, there are homes that have gone through the development phase where it was a great neighborhood. Maybe it peaked as a great neighborhood. And now all of a sudden, the neighborhood’s not so good anymore. Well, they haven’t built new malls really since the ’80s. A lot of these malls are surrounded by, where the demographics have moved on. The concept of the mall is not real anymore. Those big, dark boxes stare people in the eyes, and those are the things that get all the attention. And the major retailers that are closing, the Sears. Everybody’s focused on how many square feet Sears and is giving up or how much Office Depot or Office Max is giving up or Barnes & Noble and the closing of Borders and Toys R Us. But nobody’s really focusing on LA Fitness and Planet Fitness and Crunch Fitness and Anytime Fitness and through all of those or all the medical uses that are opening up. It’s a lot easier to focus on the negative, because it, people are losing jobs. And when they lose jobs that’s what you kind of focus on. Is it justified?

Brian Nelter – Sure, it’s justified whenever anything that major is happening, but it’s way overblown, I think.

Adam Hooper – Reynolds, maybe you can kind of take us through the, what are those kind of major classifications or groups of tenants, right? Big Box, you’ve got fitness. You’ve got food and beverage. Maybe kind of walk us through some of those major groupings of tenants, so that we can have a little bit more context as we work through the conversation.

Reynolds Thompson – I’ll start by kind of a, with one, with a little bit of number background. It’s important to realize that retail sales are continuing to grow in this country. While the online sales are growing at a pretty significant rate, brick and mortar sales are still growing. The brick and mortar portion is..

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DJ Van Keuren joined us on the podcast to discuss how family offices evaluate real estate sponsors and their deals.

Mr. Van Keuren currently works for a Family Office who has over 30 years of experience in contrarian and distressed real estate investing producing a gross IRR of 32% on over 200 deals since 1998. Individually, Mr. Van Keuren has over 25 years’ experience in finance, investment banking, and real estate. Among DJ’s experience includes; Raising and securing over $350MM in capital from Institutional Investors, Private Equity Funds, Family Offices, and Direct Capital Sources. Mr. Van Keuren has been a Director of capital markets (equity & debt) for both a domestic and international real estate development company with a focus on luxury condominiums, luxury multifamily apartments, active adult communities & hotels. Additional experience includes acting Director at a boutique investment banking firm where he focused on real estate and energy, COO for ONYX Capital, an alternative asset, real estate due diligence and capital markets group and Managing Director for the Horison Management Group where he acted as the Fund Manager for the American Dream Real Estate Fund.

Mr. Van Keuren is a member of the Harvard Alumni Association, past President and Board Member for the Harvard Real Estate Alumni Organization (HREAO) and a Board Member for the Alumni Advisory Board at the Real Estate Academic Initiative at Harvard (REAI). Mr. Van Keuren is also the founder of www.usfamilyofficerealestate.com. DJ received his B.A. from Ball State University, attended graduate studies in Real Estate from the NYU Schack Real Estate Institute, and received his Masters Degree from Harvard University in Management and Finance.​

*If you like this post, be sure to enroll in our free six week course on the fundamentals of commercial real estate investing — RealCrowd University.*


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RealCrowd – All opinions expressed by Adam, Tyler, and podcast guests are solely their own opinions and do not reflect the opinion of RealCrowd. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. To gain a better understanding of the risks associated with commercial real estate investing, please consult your advisors.

DJ Van Keuren – First off, you got to make sure that you’ve got a quality sponsor, and you know there’s various components that you want to look for to see that they sort of check the boxes because that’s who you’re working with, that’s who you’re trusting, that’s who you’re putting your faith into and the deals–

Adam Hooper – Hey, Tyler.

Tyler Stewart – Hey, Adam, how are you today?

Adam Hooper – I’m fantastic.

Tyler Stewart – Doing well?

Adam Hooper – Doing really good.

Tyler Stewart – Nice sunny day outside. Adam , who do we have on today?

Adam Hooper – Oh switched it up there, I get to intro. Today we’ve got DJ Van Keuren, he’s currently works for a large family office down in Southern California, been in the real estate space for gosh, 30 years, and is also the founder of the US Family Office Real Estate which is a educational base where family offices that are interested in real estate can come learn and network and just figure out what’s going on in the space.

Tyler Stewart – He’s a thought leader in the space if you go to any conferences that have family offices, odds are you’ll see DJ there, trying to help educate family offices on what to look for across the industry.

Adam Hooper – He did a survey across a bunch of family offices and his network, that’s really the first time that a survey of this scale has been done to get the temperature on how family offices are looking at this asset class. Family offices are either often shrouded in mystic and they’re shrouded in mystery but, you know we talk about kind of some of the differences, what make family office approaches unique and also what makes them more like traditional investors than we might think.

Tyler Stewart – Absolutely, it still came down to the fundamentals of you’re building a relationship with a sponsor, doing your due diligence and it wasn’t too far off from what everyday investors try to do when they’re looking at real estate.

Adam Hooper – Quick break down, we would look at how family offices look at real estate, talked a little bit about their allocations of the cycle how that’s maybe changed, strategy at the stage of the cycle product type, product mix. I thought also interesting that DJ commented that real estate is often times the second largest wealth creation tool outside of how they make their primary capital. Again, kind of underscores real estate can be a great wealth generation tool and those that have access to it tend to use it.

Tyler Stewart – This was a good episode to hear inside the minds of investors who really invest into real estate all the time and how they look at the space.

Adam Hooper – We’ll go over the results of the survey, you’ll hear from DJ on all types of things about famiLy offices and again drilling back down to wrap it up with those fundamentals so, I think that’s a good overview. As always, we appreciate your comments, feedbacks, ratings, wherever you listen to the podcast, we appreciate those ratings and reviews. If you have any questions or comments, send us a note to podcast@realcrowd.com and with that, let’s get to it. Alright DJ, thanks for coming on the show today, joining us from the beautiful state of Colorado, we appreciate you coming on.

DJ Van Keuren – Well thanks for having me guys.

Adam Hooper – Well, why don’t you start us, tell us a little bit about your journey in the real estate space, and how you got specifically into the family office business, tell us a little bit about that world.

DJ Van Keuren – Sure. My delve into real estate goes back to actually 2003. I was coming back from Asia, I was working on a project in Vietnam and, literally was, I remember sitting over in Saigon saying, “Okay, what do I want to do next? Because I’m leaving here and I’m going back to the States.” I was like, “I want to get into well real estate. Real estate’s always excited me.” I went out raised some private money and I started what was going to be the first single family REIT at the time so, I was about 10 years ahead of the curve and one of the things that I really delve into which I think is applicable to what’s happening today is a book about market cycles. I started to see some things that were happening that weren’t really making sense, and so I ended up selling the portfolio before the down turn. I went back to grad school and then stayed within the real estate space and you know through that I ended up doing some investment banking on the real estate side, so structuring some transactions, with the equity in debt and what not. What’s interesting with my background is in the 90’s I was an advisor so I totally get that retail side. Then I ended up moving into working with the big institutions like Carlyle and Apollo and what not and, and this all came about because one of the things that I realized was look if I want to be doing deals, I’ve got to be able to build up that investor database and investor know-how so that I can go out and, and circle back and raise money later on.

DJ Van Keuren – I’d been working for another number of operators and had just moved to Denver from New York City where I was working with a major developer at Mumbai. We were doing a lot of luxury hotels and condos in New York City and, and believe it or not I, I was a year and a half into Denver and I was like I haven’t met anybody here. I just started sending out some emails and meeting with people. I ran across a very wealthy gentleman out of Boulder, Colorado and he was a family office and when he died all his assets was going to his foundation because he didn’t have, really he had one kid he was going to leave some money to, but the amount of wealth that he had, he had to figure out a way to keep the business going to manage those assets and allow those people to help them build as well as stay employed. They asked me, “DJ we’re going to raise a fund, what do you think we should do?” And I said, “Well, you know we could the institutional route where often relationships were family offices,” and at the time I only knew two families. A year later I knew about 200 families and that’s where I came into the family office space. Believe it or not, 95% of the people that end up working for a family, they do it, they just fall into it, and the majority of time is because somebody has a big exit from the sale of their business, they’re now sitting on a couple hundred million dollars and they’re like, “Okay now what do I do? And well I trust my accountant, I trust my banker, I trust my advisor,

DJ Van Keuren – and you know, can you help me with this money?” That’s sort of the same way that I came into it, I just fell into it now I’m working with my second family for about two years now so I’ve been in a total of about five years and my passion has been real estate, and so that’s really been where I’ve I’ve focused on is real estate, in the family office space.

Adam Hooper – Let’s maybe take a step backwards and define what is a family office right? At what point do you go from being a high net worth, ultra high net worth to a “family office?” Is it a structure thing? Is it a net worth thing? Take us a little bit through that.

DJ Van Keuren – Yeah that’s a good question because a lot of the, over the years that name has been thrown around more and more that you’re a family office, the real number that ultimately comes out is that you have a net worth of 250 million or more. Along with that, not only do you have issues that you’re dealing with on the finance side so you’re, how do we allocate this money? How do we plan for future generations? But you’re also dealing with a lot of family issues, so that could be nuances between the family because now there’s all this wealth and you get some inner fighting or sometimes there’s just some inner issues that you’re dealing with. It’s also planning for future generations. It’s also making sure that you’ve got the best tax strategies that are possible et cetera. It just gets, it’s just more complex, there are people that might be worth a hundred million that have a family office but if you hire somebody internally, you really need to have those hundreds of millions of dollars in order to justify the cost to have somebody internally helping with that. It’s more of a holistic approach that’s being taken to with the wealth, and the family and the future generations. And that’s where they’ll have family meetings, they’ll have family retreats the whole deal. It’s just taking that next step, a lot of times people will say well they’re family office but they’re just managing the, the asset component, which is an important component, I call those the hard components so then you have the soft components

DJ Van Keuren – which are dealing with the family, relationships and what not so, that’s really what the major definition of a, a family office would be, is that holistic approach to the family and everything associated with it.

Adam Hooper – Perfect, and then how about a single family office versus multi family?

DJ Van Keuren – Sure. The biggest difference is that a single family office is just that, it’s one family. When they’re large enough they’ll have somebody internally that’s able to help with all the difference aspects that I brought up before, not only the hard components of the, of the investment side but also the softer, dealing with the holistic family component. A single family is just that. It’s one single family, could be Michael Dell’s family, could be the family, Hayman family that I worked for or the, the Gates family et cetera. On a multi family office, that’s a family that might not want somebody for themselves, working internally, they may not want the cost, they may want to go, to have more help with somebody that’s got a lot more experience and so a multi family is just that. They’re actually serving as that chief investment officer or that person overseeing the holistic component for the family, but they’re not just doing it for one family, they’re doing it for a multi, a number of families that are doing that. You look at somebody like a CTC, my CFO, they’re owned by the Bank of Montreal, they’ve got over 300 families for example, and one of the advisors might be working with 10 to 12 families, because you are limited as to how many families you can actually service, and service properly. It’s really just working with multiple family and using the resources internally in order to give those families the support that they’re looking for.

Adam Hooper – Got it. Now you said you were a financial advisor in prior career, how would you say the investing habits of a family office differ from that of just a high net worth individual?

DJ Van Keuren – That’s a great question. I’m also going to answer a little bit more to that too, because a lot of times people think of family offices as a institutional investor, right? You hear that name a lot. The reality is is that they’re much closer to the retail investor than they are on the institutional side. Now institutional side, they’ve got their boxes, right? They’re typically investing other people’s moneys. A lot of them are compensated for getting money out the door, to be honest with you. They’re looking at their box to invest into in their specific area, usually they’ve got to write a lot bigger checks, starting at 20 million let’s say on the equity side, so now you’re looking at real estate that’s 75 million plus. They’ve got their box of what they’re looking for and they’ve got to in the marketplace. The retail side, high net worth side, and the family office side, this is personal money, you have emotions that’s a part of it. What’s great is that family offices, they don’t have to invest, you know? They can wait and they can be particular on what they want to allocate to or what they want to invest into. The bigger difference, back to your, the biggest difference between what you’re saying, between the high net worth and the family office is that they’re usually taking into consideration, it could be multiple generations. My friend of mine is dealing with, his family office is 800 family members.

Adam Hooper – Wow.

DJ Van Keuren – That’s how far down it goes. I was talking to a friend of mine that runs the family office for the Rockefellers, there’s 300 and it could, they’re on their fourth generation and the first three have passed and they’re deceased and now they’re, they’re trying to make sure that that money’s there for, they’ve got a lot of mouths to feed basically, right? With a high net worth, they’re trying to create, really create their wealth primarily for their family and so they don’t necessarily have to think about how that’s going to affect hundreds of people or tens of tens of people. You’re not having to worry about as much necessarily, obviously you want to make sure that you’re getting the best returns possible and that you’re allocating et cetera, but you don’t have a lot of that other issues that comes with having a lot more mouths to feed.

Adam Hooper – Perfect. That’s a really good overview to kind of frame the work that you’ve done recently with the survey that you did to kind of get the temperature of how family offices are viewing real estate right now. Why don’t you tell us a little bit about what that survey was, some of the things that you were trying to look for, and then we’ll dig into a few of the kind of key takeaways from there.

DJ Van Keuren – Sure. I work for one single family, the Hayman family and they’re based out of, it’s a Beverly Hills Family. About a year and a half into working for the prior family, I’ll never forget because one of the first people who happened to be well known in the industry on office industry when I was trying to understand it, I said, she said, “Hey we had a conference, we had 60 families in Israel,” and I said, “Well what did you guys talk about?” She goes, “Well, you know, hedge funds 101.” I’m thinking to myself hedge funds 101? These are very intelligent smart people, successful people who have a lot of money, I can’t believe that. But the reality is is that, families who they created their money in chemicals or rubber tires or whatever the case is, they’re an expert in that field, but they don’t necessarily really understand hedge funds or real estate or private equity, ya know? Stocks, bonds, to that extent. There is an education factor there. So I started back about four years ago, just starting to provide that whether it was through a book or occasional podcasts or just materials to share. One of the things that I did about three months ago through the Family Office Real Estate Magazine is I put together a study which is the largest comprehensive, most comprehensive study of family offices and the real estate holdings that’s been put out there. We had over a hundred families. We had a good dataset. We did about 60 questions in there. And it was really to try and get an idea

DJ Van Keuren – so that other families could know, “Hey what are others doing?” They have this in like the insurance industry with the insurance investors and stuff, so that there can be an understanding to what the peers are doing. There’s definitely some reports that have been put out for high net worth that give some information and background about what their habits are. Eventually we’ll try to combine that to really compare what a high net worth is doing compared to family offices. Because I think that’ll be interesting too, to see where the real difference is there. And so that’s what we just finished up and that’s, so we’ve got some intel into some information that nobody’s really been able to have access to.

Adam Hooper – Perfect. What was the most surprising thing that you found when looking over the results of that survey?

DJ Van Keuren – You know there’s a couple things that was really interesting, one has to do with the big talking point, which has been, at least for six to nine months and I’m sure you guys have talked about opportunity zones, right? And there was always talk that well, family offices are going to be the ones that are really funding this. And from the surveys, only 24% of the families said that they were going to invest in an opportunity zone and the remaining was either maybe or no. And so it’s, and a lot of it has to do with that wait and see mode, because we’re still waiting for the regulations to come out. Where the monies are coming from, outside of the large institutions like an insurance company or a bank or whatnot, but the individual check writers are really, are coming more from the high net worth than it is coming from the family offices. That was quite interesting to me. Another thing too is that one of the areas of allocations, there’s a huge and has been a huge push for doing direct deals from family offices over the last couple years. But there is also a significant amount of families that were looking to invest into private funds of sorts. So not just a one off deal, but a fund that would have multiple deals. Those were two big areas that I think really stick out. Because there is, has been a big push toward direct and also the discussion with the opportunity zones.

Adam Hooper – Now with direct versus funds, maybe we could take again a second to go over that. Direct in the family office space, is that them acquiring assets and operating themselves with their internal management? Or is that partnering with a third party sponsor, that we would in our world call them sponsors?

DJ Van Keuren – Well, there’s two types. That’s a good question. On the direct side I think I want to clarify something that I think’s very important. Because and this is something I don’t think people realize. When people go out searching for capital and they’re like, “Well, I’m going to call one of these large families or they can write me a $5 million check,” and, “Hey, they’ve been doing real estate for 30 years,” the reality is is that the family offices that participate in investments, let’s say directly into real estate, They’re not the real estate families. Because their attitude is that look, we’re going to do it ourselves rather than give somebody else the money. Now if you look at a tech side and you went to a Mark Zuckerberg or whatnot and said, “Hey here’s this great tech company, there’s a great opportunity.” They’ll write a personal check for that because they understand the industry, they’re going to understand what’s happening per se, but it’s like look, you got to have somebody that really specializes and really understands that niche, whereas real estate they’re like look, I’ll just invest it into my own deals. For that family offices, you do get some families that will do deals themselves, but over 40% are looking to invest as the LP. And that could be, obviously working with others. One of the biggest things to do, because they don’t have that expertise, is they do like to look for local operators that they feel good about working with. Because they only want to find three or four different operators to really work with,

DJ Van Keuren – so that they don’t have to continue to go over and over and over again. It’s all about trust, it’s all about a relationship. Once there’s that trust there, then they can, they’ll continue to support that operator into multiple deals, which is what operators want, right? They want to be able to have one source, or the ability to raise money, which is great with what you guys do because it gives them one point of access for..

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Welcome to the kickoff episode of the Goodwin Proptech Series, where Minta Kay & Salil Gandhi discuss how the coming technology wave will impact real estate.

Minta Kay is a partner in and chair of Goodwin’s Real Estate Industry group and a member of its Real Estate Joint Ventures, Real Estate Finance and Hospitality & Leisure practices. For more than 28 years, Ms. Kay has represented institutional investors, tax-exempts, real estate funds and owner/operators in connection with all aspects of their real estate investment transactions. She regularly advises clients on joint venture formation and restructuring, senior and junior debt origination, acquisition and restructuring, portfolio transactions, development transactions, and property sales and acquisitions. In the past five years, she has closed over 55 transactions totaling in excess of $8.5 billion.

Salil Gandhi is a partner in Goodwin’s Technology & Life Sciences group. Mr. Gandhi specializes in the representation of emerging growth companies throughout their lifecycles as well as venture capital funds and other private equity funds. For emerging companies, Mr. Gandhi advises on a variety of general corporate and governance issues, including corporate formation, venture capital financing and exit transactions. For venture capital and other strategic investors, he advises on structuring and executing investment transactions ranging from angel to control investments as well as portfolio dispositions. He also advises investors and companies in emerging markets, with a focus on India & South East Asia. 


– Learn more about the Goodwin PropTech Series by clicking here.

– Sign up for a special live webinar with Goodwin to go over how the next wave of technology will impact real estate investors at: RealCrowd.com/PropTech

*If you like this post, be sure to enroll in our free six week course on the fundamentals of commercial real estate investing — RealCrowd University.*


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RealCrowd – All opinions expressed by Adam, Tyler and podcast guests, are solely their own opinions, and do not reflect the opinion of RealCrowd. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Comments and observations made during the podcast do not constitute legal advice and should not be taken as such. To gain a better understanding of the risks associated with commercial real estate investing, please consult your advisers.

Salil Gandhi – When you look ahead 10, 15 years and you know this technology is coming, but you’re building a building today, you really have to ask yourself, kind of how has this technology that’s not necessarily proptech-specific, how is that going to change uses of buildings?

Adam Hooper – Welcome listeners to the first episode of The Goodwin PropTech Series. The intersection between real estate and technology is ever evolving, presenting challenges and opportunities to companies, their investors and consumers. Technology underpins the real estate space in all of its forms, from artificial intelligence to smart cities, the adaptation of existing buildings into tech hubs, the rise in financial modeling and the emergence of cryptocurrencies in shared economies. Follow along as we discuss the key findings and industry trends with a team leading the charge on The Goodwin PropTech Initiative. Our first episode serves as an Intro to the top 10 biggest forces driving the PropTech movement. We’re joined by Salil Gandhi and Minta Kay, both partners at Goodwin and experts in all things PropTech. For more information and to stay up to date on future episodes, go to realcrowd.com/proptech. If you have any questions or feedback, send us an email to propech@realcrowd.com and with that, let’s get it. Alright, Minta and Salil, thank you so much for joining us today to kick off The Goodwin PropTech Initiative, we’re glad you can come on the show and excited to talk about what you guys are seeing in the space today.

Salil Gandhi – Thanks for having us.

Minta Kay – Likewise

Adam Hooper – Minta why don’t you take a minute and tell us a little bit about yourself, your practice at Goodwin and what you’re doing on the PropTech initiative.

Minta Kay – Thank you, together with Salil, I am co-leader of the firm’s PropTech initiative. I also am the global leader of our real estate business industry unit, which is a unit that spans fundraising in the real estate space through capital deployment, transaction work in the real estate space. Then harvesting the value that’s rigged in that space into public company works. It’s quite a broad spectrum of what we do at our group, we’re roughly 200 lawyers with people sitting in 10 offices or so. My own personal practice is on the transactional side, and that led me into a tremendous amount of interest in the PropTech space because I work with property owners, developers and investors, who work with the hardscape and who handled bricks and mortar and started coming to us with a lot of questions about what all this tech stuff was.

Adam Hooper – Perfect, great, and then Salil, a little bit of the same what you’re up to with Goodwin and were you involved or are involved in this PropTech initiative?

Salil Gandhi – Happy to. I’m a partner in the technology group, and my practice really focuses on representing companies through their full lifecycle, so from incorporation through exit, in any number of industries, as long as they are utilizing technology to essentially push that industry forward. As part of that practice, a growing amount of the work we’ve been doing is around the PropTech space, as we’ve seen more entrepreneurs entering the space, both from the traditional tech side as well as from the real estate side. It’s been a great opportunity to partner with our real estate team and really see where the synergies are coming together as more and more people are crossing the aisle.

Adam Hooper – As introduction to the series, so we’re partnering with Goodwin here and we’re going to be going over, your verbal episode, essentially of some of the content that you guys are putting out. We’ll talk a little bit more about, at the end of this episode, kind of what you can expect to see from the PropTech Initiative and we’ll preview a few of the articles that are going to be coming down the line. But Minta you mentioned this came about from your work with the real estate practitioners, identifying technology and trying to get a better understanding of that. Where are we at in real estate technologies adoption? I think we’ve seen some shifts towards that becoming more of an issue on everybody’s mind, and it sounds like that’s what you guys saw as well to spur this initiative.

Minta Kay – We’re still early days in my view. Real estate is an industry that’s quite traditional at approach, it’s not an industry that will adopt new technology or new ideas without a lot of thought and consideration, it’s also an industry that has very familiar ways of underwriting assets, developing and operating them in running businesses, assembling portfolios, Et cetera. However, as I noted in what gave spark to our interest in this sector was a new interest within all of the real estate industry from traditional to more innovative around ways in which technology could help maximize value by improving tenant experiences, by allowing investors and operators to be smarter about decisions they were making and allowing processes to just work more efficiently. As I said, early days with a lot of interest and with a lot of our clients from many different sectors actively looking at lots of the different products that are out there.

Adam Hooper – Great, and then Salil similar, we’re from more of the technology side, how have you seen the interest in the real estate space as an industry within the technology world developing?

Salil Gandhi – Technologists have been coming to us because they, for two reasons, first of all, real estate obviously, is a asset class, that everyone knows and kind of participates in and so it’s something that people are kind of now looking to more so, than then kind of the direct consumer goods. Two, I think it’s obviously a big global business, and so I think when technologists are looking around and saying, “Hey, what are our other issues that we can help solve? Where can we deploy some of the technologies and solutions?” I think they’re looking at real estate as something that’s both local to them in whatever city they may be in, but also global because obviously, it is truly a global universal business.

Adam Hooper – Definitely, perfect. Well, so let’s talk a little bit about the first article that you guys put out, which was The 10 Biggest Forces Driving the PropTech Movement. Maybe tell us a little bit about some of the work that went into developing this, some of the research behind it and then we’ll just dive into the top 10.

Minta Kay – Sure, so as I mentioned, I believe I did, we have a very large group that practices in the real estate space. We have a very large group that practices in the tech space. And then we have a large group that’s formed out of both of those set is focusing on PropTech. When we began to think about this, we were reacting to incoming calls in both practice areas, asking about what was going on in the other. We took some time to talk amongst our groups and just step back, and at that point think about what was driving activity and interest in the sector that. That led to the publication of our first article. I will say this space moves phenomenally quickly and the minute you publish something it becomes somewhat outdated. That was great when we did it and it still remains relevant, but the lightning speed with which things move keeps us very much on our toes and very much, staying abreast of the latest and greatest developments.

Adam Hooper – Salil and I were talking before we started recording, we’ve been in the industry now and the real estate side for the last six years and seeing the acceleration of interest in the space and this plethora of new startups and new capital coming in just over the last even, 12 to 18 months, has just accelerated tremendously. It’s a really exciting time in the industry and I agree, it definitely moves at a pretty quick pace. We’re going to go a little bit out of order here, so Salil, why don’t you tell us a little bit about the FOMO factor? What do you guys mean with the FOMO factor?

Salil Gandhi – Sure, I think this is, kind of the first and primary driver given the speed, and FOMO was obviously the fear of missing out. And I think that really has materialized in a few different ways. First, within the traditional tech community, I think we see more traditional tech investors, the VCs looking at this space. Whether they were industry specific or not, I think they’re really looking at the PropTech move in the PropTech community as a place to invest dollars. I think more and more VCs are coming to it because they realize that it’s a growing marketplace and 2they certainly don’t want to miss out. And I think that we’re seeing that on the other side of the aisle as well in terms of the real estate community. Coming to this and saying, you know, we also don’t want to miss out. I think that’s missing out in two ways. One, in thinking about how that actually affects and is changing their business, and we’ll kind of be talking about some of those early stage impacts and some of the more global ones in a moment. But it’s also to the extent that these technologies are coming, they are going to change portions of the business. They also don’t want to miss out in terms of investments and making sure that they’re part of the story as it’s being written.

Adam Hooper – Yeah, and it feels like there’s definitely been a pendulum shift, of our industry was historically one of the slowest industries to adopt new technology. And with this latest kind of acceleration, there’s definitely a feel of we’re not going to miss what’s next, we want to make sure that everybody’s in it and embracing and realizing how can this really affect their operations? So it’s again, I think a bit of the pendulum shifting to the other side of the aisle there.

Minta Kay – With that. I will comment though, and I will say it’s not as if the real estate industry has decided to go 900 miles an hour. They are cautious and they’re thoughtful and they’re exploring the new technologies out there in terms of deciding whether they’re worthwhile deciding how many of them are worthwhile deciding how they impact building operations in what could be a profitable, productive greenway. Deciding how the hardscape should shift and how they should be reacting to technology that’s not purely real estate-driven, such as AI and autonomous vehicles. This will be something that I think will evolve over the next several years. The easy technology to adopt on the operational side, and on the 10X side will go quickly, but there will be a lot that will take a longer time to absorb and react to.

Adam Hooper – Definitely, well in the ink what we are kind what we’re underlying here is another point on your list is this change in attitude, so maybe we can talk a little bit about, how the attitudes have changed.

Minta Kay – Sure, there’s much more of an openness on the traditional real estate side to think about different ways of doing things and to think about how tech can help make investment decisions, and make investments more profitable. There are people who were looking at, as I’ve said, the operational aspects of it, but those are pretty straight forward. There are others and including governmental agencies who are really looking at how technology for the next five, 10, 15, 20, 30 years, should be impacting in a positive way, the way our communities are shaped, the way our hardscapes are shaped, the way we plan and put communities together. That’s a longer term process and that’s more of the unknown that no one really can predict at this point in time, as to how it will evolve. But everyone knows it will, and many of the early movers in this space on the real estate side are starting to change the way they look at parking Change the way they look at retail chains, change the way they look at drop off lines, change the way they look at setbacks. They’re really starting to think about ways that they can advantage communities and themselves thinking about the hardpiece in a different way.

Adam Hooper – And then Salil you mentioned, venture capital as one of the areas that’s kind of driving this desire to get into the real estate asset class. From the technology perspective, how have you seen the attitude change on the technology side towards our industry?

Salil Gandhi – It’s still an education process for the technology side. It really is thinking about, what are the issues that we’re tackling? How does, yeah, how do those business function and how do we help integrate into those businesses and make sure that were really value-add. There’s still a great deal of education that’s happening in a very excited way and a very quick way. But I think people will know it’s an important segment and we’re still at the early days of that.

Adam Hooper – Perfect, well let’s move on then to robots at the wheel. Where are we going with robots at the wheel?

Salil Gandhi – Well, so this is a great example of what Minta was just describing. Obviously there’s so much development and so much talk about autonomous vehicles, and as part of that, even even how ride-sharing has it has shifted the way that people, transport themselves within cities and moving beyond just the major commercial areas. When you look ahead, 10, 15 years and you know this technology is coming, but you’re building a building today, you really have to ask yourself kind of how has this technology that’s not necessarily PropTech specific, but more a way of life, how is that going to change uses of buildings? So, is that we need to think about including more dedicated lanes for pickups and drop-offs, since people aren’t going to necessarily need parking garages. Is if you’re introducing parking garages, do you need to use all those spots? If at some point in the future you don’t utilize as many parking spaces, can you repurpose that into retail, into hospitality? Into all other uses? And so I think that’s what’s really fascinating about how technology that is kind of adjacent to the real estate sector is really changing the way we talk about the hardscape, how we utilize businesses. And you can expand that out then even further to what is a suburb? If people are in autonomous vehicles and they can work or sleep or just use that as a space for entertainment. Does a relationship between suburb and cities change? Where businesses that are actually set up? So I think there’s a really global issue that’s coming, that I think that if any of us had the answer to,

Salil Gandhi – we probably stopped doing our day jobs and be really really wealthy. But it’s a really fun part of thinking about the sector.

Adam Hooper – Perfect, and Minta any thoughts on how that’s going to be impacting more from the real estate operator side?

Minta Kay – That’s going to be profound. We’re seeing clients at this point in time as Salil has alluded to really changing plans for the use of existing real estate, which will need to be repurposed in many instances and thinking differently about the way they’re going to plan the development of their real estate going forward. One of the interesting things about this that hearkens a little bit back to the question you asked before, and our discussion around the speed of shift here, is that the money that’s coming into PropTech now from the VC space is more frequently coming in from investors and funds that have a real estate background. It ceasing to be just classic VC that’s putting money in and watching what happens, and it’s shifting to money coming in with investors who can help guide young companies with investors who have a view to how things should shift or where there could be opportunities that haven’t yet been realized. That’s an interesting thing to observe, and as we look at what’s happening in the space, we see the impact of that in a pretty profound way, a bit of a diversion, but reverting back to your question about the hardscape and the change in use, I think buildings will get smaller, I think there will be less parking, everybody agrees with that. There is a jury out on whether with the advancement of autonomous vehicles, the suburbs will become more popular or less popular, that remains to be seen, but it’s something people talk a lot about.

Minta Kay – Because the technology that is the result of the digital revolution moving into the mobility revolution is now going to move into what people anticipate to be the transportation revolution, where all of these things are now in service and we can access all data everywhere all day long. The transportation opportunities that will be afforded to have your office in something that someone else or something moves for you, well, present opportunities both locally and I think longer term.

Adam Hooper – Yeah, definitely, and to your prior point of the nature of the capital coming into this space. I think that’s one of the most interesting things that we’ve seen as well is this understanding of how the real estate industry works is now behind a lot of that capital. For a long time, our industry is just different than others. Just again, the speed that the caution, some of the different pain points that these companies are trying to solve, has a different profile than what you would expect to see from a consumer scale Internet startup. That is something that we’ve definitely noticed is the changing nature of the capital that’s coming into the space is much more familiar with our asset class, with our industry and maybe more patient in terms of how long it takes to deploy some of these changes. That’s been a big shift and I think you again, will continue to grow and change the dynamic of when companies are out seeking funding, who they partner with, how those partners can add value. Which will hopefully change for the better. How these different technologies can be adopted as well, down the line.

Minta Kay – One other comment on that. We are starting to see traditional funds allocate a bit of a fund-raise to the opportunity to do direct investing. They’re getting approval from their investors at the fund-raise stage, to be able to put some money directly into tech. We’re seeing other traditional investment advisory clients go direct into some of the VCs that are going direct into technology, so the traditional investors are slowly and within their time parameters. But in an interesting way to them finding opportunities to invest directly in tech.

Adam Hooper – Very interesting, okay. Well let’s move on to another bullet point. What have you done for mother Earth lately?

Minta Kay – Everyone knows that there’s been a tremendous focus paid on being more environmentally conscious with respect to the way that we live our lives going forward. Many of the technological tools that are coming out support those efforts, so some of them on the operational side in particular, are very focused on energy efficiency, on much more laser-like deployment of heat and AC, of movement of waste out of buildings, and of use of space in a way that can add a more..

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Jamie Woodwell, Vice President of Research and Economics at Mortgage Bankers Association (MBA), joined us on the podcast to discuss their most recent research on how lenders view the current market.

Jamie Woodwell is Vice President in the Research and Economics group at the Mortgage Bankers Association (MBA), where he oversees MBA’s research on the commercial and multifamily real estate markets.  Jamie’s work covers the macro-economy, commercial and multifamily property markets, real estate finance, servicing, mortgage banking benchmarking and more.

Jamie is an expert on the commercial real estate finance markets and he and his work are regularly cited in the media, on Capitol Hill and in regulatory settings.  He is a regular speaker at industry and corporate events; has appeared on CNBC, Bloomberg and in other popular and trade press; and testified before the Congressional Oversight Panel for TARP.

Jamie also oversees MBA’s commercial peer business roundtables including CFOs, CTOs, HR and marketing heads, and leads special MBA projects, including its CREF Careers, Council to Shape Change and the Council on Ensuring Mortgage Liquidity.

Jamie joined MBA in 2004 from Fannie Mae’s multifamily group, where he was responsible for multifamily data initiatives.  He has also served as senior director of business development at CapitalThinking in New York, research director at the WMF Group in Virginia, and research manager at the National League of Cities in Washington, D.C.

Jamie is a member of the Urban Land Institute, American Real Estate and Urban Economics Association, the Housing Statistics Users Group and the Real Estate Associations Research Directors.  He is the past president of the ELH Management Corp. which oversees the financing of charter school buildings in Washington DC.

Jamie Woodwell’s Links

MBA’s Research and Economics – Covers the economy, commercial real estate fundamentals, and finance markets.

*If you like this post, be sure to enroll in our free six week course on the fundamentals of commercial real estate investing — RealCrowd University.*


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RealCrowd – All opinions expressed by Adam, Tyler and podcast guests are solely their own opinions and do not reflect the opinion of RealCrowd. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. To gain a better understanding of the risks associated with commercial real estate investing, please consult your advisors.

Tyler Stewart – Hey, listeners, Tyler here. Before we start today’s episode, I wanted to quickly remind you to head to RealCrowdUniversity.com to enroll into our free six-week course on the fundamentals behind commercial real estate investing. That’s RealCrowdUniversity.com Thanks.

Adam Hooper – Hey, Tyler.

Tyler Stewart – Hey, Adam. How are you today?

Adam Hooper – I’m excited to keep season three rolling along here.

Tyler Stewart – Yeah, we’ve had a lot of good guests so far.

Adam Hooper – We’ve got a lot more in the lineup. Who do we have today, though?

Tyler Stewart – We’ve got Jamie Woodwell, Vice President of Research and Economics at MBA.

Adam Hooper – The Mortgage Bankers Association, they do an annual survey. So this episode we’re talking about the 2019 CREF Outlook survey. They basically ask all of their members, who are professionals in the mortgage industry, commercial mortgage industry, what they’re looking forward to and kind of what their thoughts are on 2019.

Tyler Stewart – Anytime you get a researcher on your podcast, you know it’s going to be a deep dive. This certainly was. After we talk about the survey, Jamie dove into the supply and demand of the four major property types within commercial real estate, which is a very interesting topic.

Adam Hooper – One of the themes that you’ll hear probably throughout the episode is the concept of steady and strong. Nothing too crazy that lenders are expecting this year. But kind of more of the same and expecting it to be a fairly healthy lending environment.

Tyler Stewart – Sometimes not exciting can be the best thing to look forward to.

Adam Hooper – Travel and doctors, boring is good.

Tyler Stewart – That’s right.

Adam Hooper – Also talked about changing expectations, where returns are coming from in terms of cash flow and appreciation. We’ll get the lender’s perspective there. But overall great episode. Really appreciate Jamie coming back on the show and giving us what the landscape is for the mortgage market here in 2019.

Tyler Stewart – We’ll be sure to include a link to their survey. It’s a pretty interesting read.

Adam Hooper – All right, Tyler, well, I think that’s enough of us talking right now. As always, we appreciate your comments or feedback. Ratings are very helpful. Every rating gets us in front of a broader audience. If you have any questions, send us an email to podcast@realcrowd.com. With that, let’s get to it.

RealCrowd – This podcast is brought to you by RealCrowd, the leader in online real estate investing. Visit RealCrowd.com to learn more a about how we provide our members with direct access to commercial real estate investments. Don’t forget to subscribe to the podcast on iTunes, Google Music, or Soundcloud. RealCrowd, invest smarter.

Adam Hooper – Jamie, thanks for coming back on the show and joining us today here in early 2019. Excited to hear what the latest in your world is and talk about this survey that you guys recently have released.

Jamie Woodwell – Sounds great. It’s always fun to sort of take a look at things at the beginning of the year based on the numbers that are coming in from the previous year and people’s sort of outlooks for the year ahead. Looking forward to the conversation.

Adam Hooper – Perfect. As we said in the intro, listeners out there we’ll have a link to the actual survey and the show notes. If you want to download that as you’re listening to this episode. Highly recommend that as we’ll be referencing some results from that survey throughout. But before we get into the survey, you just wrapped up a conference down in Southern California, maybe just spend a couple minutes, kind of how is the overall market looking? Maybe what’s changed since we were last on and kind of how things are looking in the mortgage industry right now.

Jamie Woodwell – We got back from MBA’s Commercial Real Estate Finance Convention out in San Diego, which is always a great way to start the year for us to talk to our members, hear what they’re talking about, what their issues are, how they’re viewing the market. In some ways this year what we heard was steady and strong, that people looking back at 2018 had seen the year really shape up, strong levels of originations, folks doing what they felt were good loans, lots of activity And we can talk a little bit about how that’s spread across different property types and different capital sources. But then a lot of talk that 2019 is already shaping up to be kind of similar, that when you talk to people in terms of their appetites, in terms of what they’re seeing in the market, again, maybe some of that momentum and strengths from 2018 really carrying through to this year as well.

Adam Hooper – Good, and that’s something that, in a recent episode, we had Dr. Lynn Miller talk about the market cycles and similar sentiment. It’s not going to be a massive slamming on the breaks. But it may be not going to be as a aggressive as it’s been the last few years and still kind of overall positive sentiment out there, which is good to hear.

Jamie Woodwell – Yeah, it’s funny. We tend to think of real estate as a very cyclical industry. I remember one of my favorite quotes was from someone a few years back who said, “Commercial real estate is incredibly cyclical, especially now.” Which I don’t whether that proves a point or not. But one of the things that we’ve sort of noticed is that we’re used to these ups and downs on the market, either, sort of, if you look at a chart. The line either going up at a pretty good slope or down at a pretty good slope. Rhe last couple of years and what we’re anticipating this year or next is more of a plateau, which is kind of different for us. We certainly haven’t see that going back to the early 2000s, and even before that I think was kind of rare. It’s a really interesting time right now in the market.

Adam Hooper – One of the things that’s affecting that and I’d love to get your thoughts on the difference of maybe how an investor that’s listening to this episode might differ from a lender or from someone who’s looking to take out a loan. But we’ve heard a lot lately about volatility in the stock market, kind of overall uncertainty around, you know, are we near the end? Are we going to hit that plateau? Is there going to be a bit of a pullback? How much does that kind of current economic picture play into your forecasting or some of these surveys or results that you’re seeing from a lender’s perspective? Maybe contrast that with what you’d think an investor perspective might be.

Jamie Woodwell – It’s a great point. When we talk about 2019 maybe being sort of kind of similar to 2018, you think about a lot of the key commercial real estate drivers. And they’re pretty similar. So the economy remains pretty strong, interest rates remain low, property markets are steady, financing’s remaining competitive. For maybe the one big change out there a change is a little bit more uncertainty probably this year than last, and a lot of that uncertainty coming from places outside of commercial real estate, whether that be global growth, maybe some trade questions, things like that. When you put that question before maybe a commercial real estate investor versus a lender, an investor is tending to look at more for the upside on properties and a lender is going to be more concerned about the downside. That foundational piece still makes people feel pretty good about the downsides or managing those. I think there are some questions on the upside about where upsides come from and maybe a little bit more focus today on incomes that properties are driving, more so than maybe upside in just market appreciation.

Adam Hooper – Okay, now, you’re going to send me on a little tangent here of these kind of opposing forces, which I’ve always thought fascinating. You’ve got, as you said, investors and managers that are out buying these assets. You’re there in it see what is that upside. You’ve got this opposing view of the lender that’s figuring out how do we mitigate or prevent or limit our downside? Do the best real estate investors share that similar downside protection view, or are they more looking for the upside? Maybe we can just kind of pick that apart a little bit. Because I think that’s always been fascinating to me of how these opposing views somehow come together and this whole system works when you’ve got such differing focuses or basis of opinions here.

Jamie Woodwell – Right, and it’s one of the… Not to get too theoretical, but one of the beauties of the capital stack, that you can have investors putting money into a commercial real estate project at the level of risk and return that they both feel most comfortable with and that best matches their, either their investment objectives or asset liability matches or what not. It’s really neat the way then that you do have those different places to play. Rather than them being on opposite sides, I think they’re just, you can think of it as them taking different, holding different places in that capital stack, and one being more comfortable with one type of investment, say, a lower risk, lower yielding investment, and another being willing to take on a little bit more risk but with the potential for more upside as well. Does that make sense?

Adam Hooper – It does. Everybody in the ecosystem, there goal is to make money. Right? That’s why we’re investing in these deals is to have a good financial return. And that is interesting, right? That’s all kind of on the same team, it’s just like you said, maybe one is willing to accept a little different risk profile and they’re more focused on mitigating those downsides. And a guy I used to work with, he said when he went through credit training school, if you originate a portfolio of 20 loans, and you have one loan take a loss, you can wipe out the other 19. And so from a lender’s perspective, whether that still holds true from just a numerical perspective, but from a lender’s perspective, mitigating that downside is their sole focus and getting an appropriate return for that, whereas, equity investors are more looking for what that upside is. I guess should equity investors take a more downside protection approach, given where we’re heading into, given the stage of the cycle where things are maturing a little bit more. Are you starting to see more of that kind of downside mitigation view from equity investors or has that not changed much?

Jamie Woodwell – What you’re seeing if you look at things like the Pension Real Estate Association survey, you’re seeing changing expectations for where the returns on commercial real estate will be coming from. Again, more focus on the income side than on the appreciation side. That changes then maybe a little bit the types of deals you might be focused on or how you’re looking at those deals. That would be the way I’d think of it is that investors are always adjusting to the market, looking at what opportunities are available, again, what the risks are versus the rewards there and making the decision about how comfortable they are or not about that trade-off.

Adam Hooper – And then when a lender or an equity investor, when they’re looking at some of these trends, they’re looking at some of these factors that impact these decisions, are they looking at similar datasets or are there datasets that are more important for a lender’s perspective versus an equity investor’s perspective?

Jamie Woodwell – I think there’s probably a good Venn diagram there where the investor is certainly looking more granularly at the operations of the property and how to maximize the operations there. The lender’s getting a lot of great information from that borrower, not just at originations but then generally ongoing. They might be getting regular property inspections to sort of check on the physical well-being of that asset. They’ll be getting some income statements to look at how the property’s cash flows are doing. They might be reviewing leases as those come up. A lot of good information going to the lenders to help them assess the ongoing health of the property. That’s after a pretty rigorous underwriting up front where they’re really getting into the nuts and bolts of that property. There’s a great flow of information where the lender is getting a lot of that information that the investor has. And then the lender has got that folio look, too, of across a book of loans, what kind of mix do they have geographically, what kind of of a mix do they have by property type? What are their alternative investments, whether that be corporate bonds or something else. So there, I think the lender goes to a place that the property investor really isn’t looking.

Adam Hooper – Then in terms of other, again, we talked about kind of stock market volatility and some of these other economic indicators, have you seen any changes in some of the indices or factors that you look at now. Or are you looking at any additional factors now, given where we’re at in a cycle, and then heading into 2019 here, or does that remain fairly consistent?

Jamie Woodwell – There’s a fair amount of consistency so the two sort of long-term keys for lenders to look at have been loan-to-value and debt service coverage ratio. The first being if you look at how much money you’re lending, how does that compare to the value of the asset? So is there value in that asset? If it needs to go be claimed to support the loan, do you have the value there? So that’s a pretty steady one that folks have looked at. And there you’re looking at property value appreciation and we’ve seen very strong appreciation over recent years. That PREA survey, I think that’s expected to slow some. The other key measure, the debt service coverage ratio of the cash flow from the property. How does that relate to the mortgage payments that are required for that loan? And there, again, the lender wanting to make sure that the property throws off sufficient income that the loan can continue to be paid. There, it’s been interesting with a low interest rate environment that’s not been as binding as it sometimes could be. That’s one that I think probably in the coming years we’ll be seeing a little bit more focus on if we didn’t see interest rates rising.

Adam Hooper – And have the debt service coverage ratios, so that sounds like that’s remained relatively consistent over the last little while?

Jamie Woodwell – Those–

Adam Hooper – Handful of years?

Jamie Woodwell – Yes, an actually when rates have been low, you’ve seen what would have been traditionally probably some pretty sturdy debt service coverage ratios out there, again, because of the lower interest rates. Lender may look at, when they’re stressing a loan, may look at if rates rise, then what might the debt service coverage ratio look lik at payoffs.

Adam Hooper – And is 1.2 still kind of the barometer standard-ish level of a debt service coverage ratio? Or where has that kind of settled out?

Jamie Woodwell – That’s certainly one that you hear a lot about. One of the really interesting things, I think, in the market today is the variety of different lenders out there. We were talking a little bit earlier about the ability for investors to be at different places in the capital stack, based on their risk-reward tolerances. You have different lenders who are willing to take different levels of risk. And some may be comfortable only with really conservative loans, so they would be looking for lower LTVs and higher debt service coverage ratios. And they would have a different set of thresholds than a lender who’s maybe looking to try and take on a little bit higher return and willing to take on more risk associated with that. So they might have a lower DSCR and a higher LTV.

Adam Hooper – And just for listeners out there, just to put some actual numbers around this, again, debt service coverage ratio, that’s that ratio of cashflow from the property that’s available to pay mortgage payments, essentially. If you’re property’s throwing off a million two in cashflow and you’ve got a million of debt service, you’re at 1.2 debt service coverage ratio. A million of cashflow, a million of debt service, that would be a 1.0, which would be inherently riskier than something that’s a 2.0%.

Jamie Woodwell – Exactly right.

Adam Hooper – Yep. We kind of will see those, again, sounds like not much is going to change there. Kind of steady state.

Jamie Woodwell – That’s right. One of the other interesting things we are seeing in the market right now is that if you think about a traditional capital source having a particular type of money, a bank having a particular type of money available, Life Company, the GSEs, CMBS, debt funds. As different lenders have gotten comfortable with their own lending and are then looking to try and put money to work, you are seeing a little bit more blurring of some of those lines. So you might see Life Companies, do some loans that aren’t traditionally what you might think of as a Life Company loan. And similarly for banks and debt funds and others. So it’s, again, a market where a lot of lenders really like what they’ve been doing in commercial real estate and want to do more and are trying to figure out the ways to go ahead and do that.

Adam Hooper – Yeah, and also we talked awhile ago on the show about a trend where we were seeing traditionally equity investors getting into the debt space. And so if they were feeling that the prices were maybe overheated from an equity perspective, they were going to come out with a debt fund and maybe they can get into these properties at a higher loan-to-value, 80, 85%. And then if they had to take it back, they like that basis of 85% much better than paying full market value today. Have you seen that continue? Has there been any shifts in that kind of typical equity player getting involved in the debt space?

Jamie Woodwell – Well, it’s a great question. And we actually, to close out the opening general session at our CREF convention, Mike Fratantoni, our Chief Economist, and I closed with a bingo card. Of the key words that you would be hearing over the next number of days. And it wasn’t quite right in the middle, but pretty close there was the word debt funds. It was a hot topic at our convention. And so without a doubt, we’ve been seeing a lot of activity from those groups. I think when you look back at 2016, we tracked about $32 billion of loans that were originated by intermediaries for debt funds, mortgage REITs and other investor-driven lenders. We saw that grow to 52 billion in 2017. And our early estimate for 2018 was about 67 billion.

Adam Hooper –..

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As you may know, success in commercial real estate requires careful study of the fundamentals. Especially in today’s volatile markets, where “scary dips” and “rapid climbs” dominate the news cycle, the diligent investor must side step the drama and stay focused on his goals.

Fundamentals such as housing supply, wage growth, vacancy, and rental rates provide information to help you make clear and purposeful investment choices.

In this article, we apply these fundamentals across popular real estate assets. So that you can see for yourself how these fundamentals play key roles in predicting market demand.


Multi-family properties were one of the first asset classes to start performing well after the 2008 financial crisis. And today, this high-performer continues to rise with the tide.

One reason for its stellar returns is record-low vacancy. That’s the fundamental I’ll focus on here. Vacancy rates provide investors a predictable method to measure risk. Namely, the likelihood of renting a multifamily unit in a given area.

Up until a year ago, vacancy rates were the lowest since the mid-80s. These spectacularly low rates – hovering around the low 4% range –  drove the demand for multifamily way up.

Today, we’ve got levels of multi-family units under construction we haven’t seen since the mid-70s. The demand is still there, but now you have supply coming in to meet it head on. While this is stabilizing vacancy rates, it has done little to slow the growth in rents and NOIs.

That’s why multifamily continues to be a great addition to any real estate portfolio. Especially when purchased in areas of high population growth.


You can’t talk about office properties without mentioning employment growth. This fundamental has been a leading driver in many of the 18-hour cities we’ve discussed in previous articles. Afterall, people go where the jobs are.

U.S. employment growth has been strong since about 2014. And that’s good for office demand. But an unexpected response to this demand is space utilization. Instead of entire office buildings going up, we’ve seen increased efficiency in available spaces.

This is often referred to as hoteling. The hoteling office model is where employees schedule their use of workspaces (including desks, cubicles, equipment, and conference rooms) before they arrive at the office and only on an as-needed basis.

According to Global Workplace Analytics, 90% of the U.S. workforce says they would like to work from home – at least part time. So it’s no wonder real estate has evolved to meet this demand. While this trend has been met with some push and pull, forward-thinking organizations are adapting to attract top talent and retain employees.

As an investor, keeping up with employment is one thing. But digging deeper to understand how this employment growth can shift the modern workplace is much more interesting.


We’ve had guests on the podcast discuss the future of retail. And it seems there’s a seismic shift taking place with the rise of eCommerce giants like Amazon.

To give you an idea of the eCommerce force, consider the second quarter data that shows 9.6% of all retail sales came through eCommerce. That’s up from about 8.8% a year earlier.

At the same time, you still have more than 90% of retail sales going through bricks and mortar. So you can’t discount the power of physical presence just yet. Even Amazon seems to think so – having recently announced the opening of more of their own bricks and mortar stores.

Keep an eye out for companies like this – those that combine an online presence with a physical space. Especially with the rise of IOT technology, where sensors, apps, and mobile devices work in tandem to provide shoppers with immersive experiences.

Because at the end of the day, population concentrations exist in attractive areas. And people get enjoyment from physical spaces that keep them entertained. Just because retail is changing, doesn’t mean it won’t evolve into something more exciting.


Recently, the industrial asset class has been a darling for investors and lenders.

Companies looking to capture the last mile of the supply chain are utilizing industrial warehouses to store their products. As a result, we’ve seen lots of demand, lots of absorption, and some changes in the types of industrial spaces available.

This includes changes in construction techniques. You might see second floors get added, layouts change, or complete interior makeovers. It all depends on the property type and the individual market.

As an investor, now is the time to explore different industrial property types and consider what their future might hold. An industrial space in an area that is gentrifying might turn into the next crossfit gym, craft beer hall, or farmer’s market.

The possibilities are endless. But it all stems from a new trend among younger demographics. People want great experiences. And are willing to pay for it. More and more local residents demand these experiences from large, unused spaces. So don’t be surprised to see industrial turn into something you’ve never expect.


You might be wondering how long the commercial real estate boom will last? In some ways, this comes down to expectations. While the commercial real estate market has had all tailwinds coming out of the recession, it’s important to remember it’s still picking up lost ground.

While the tailwinds continue, there have been some headwinds as well. Whether that be the recent rise in interest rates, a slowdown in property price appreciation, or cap rates not compressing the way they have. Stability in commercial real estate metrics has begun.

One of the best ways to combat changing markets and sensationalized headlines is by sticking to the fundamentals. Your goal should be to identify what fundamentals are key for you, write them down, and stick to them.

*If you like this post, be sure to enroll in our free six week course on the fundamentals of commercial real estate investing — RealCrowd University.*

The post Stick To Fundamentals When Choosing Your Next Real Estate Asset appeared first on RealCrowd.

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Andrew Modrall, Chief Financial Officer at Select Strategies Realty, joined us on the podcast to discuss how to understand the different line items found in a Pro Forma. 

Andrew Modrall is Chief Financial Officer and a founding partner of Select Strategies Realty. Mr. Modrall directs the financial strategies of the organization and oversees the day to day asset management of client portfolios. In addition Mr. Modrall provides financial analysis with regard to the positioning and disposition of client assets.

Mr. Modrall is a retail real estate accounting and asset management executive with over 25 years of experience working with a wide range of retail assets. Prior to joining Select Strategies, Mr. Modrall held the position of CFO for North American Properties, a privately-held, multi-regional real estate operating company that has acquired, developed and managed more than $4 billion of retail, multifamily, mixed-use and office properties across the United States. During his 14 year tenure as CFO he oversaw all accounting functions, systems implementation and selection as well as tax and financing management. While Mr. Modrall has in-depth experience in accounting for a wide range of real estate assets, the majority of his experience encompasses his work with super regional centers, lifestyle centers and power centers.

Mr. Modrall began his career as a CPA with Deloitte. Mr. Modrall holds a Master of Business Administration in Accounting & Finance from Tulane University and a Bachelor in Economics from Earlham College. Mr. Modrall became a CPA in 1977.

*If you like this post, be sure to enroll in our free six week course on the fundamentals of commercial real estate investing — RealCrowd University.*


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RealCrowd – All opinions expressed by Adam, Tyler and podcast guests are solely their own opinions and do not reflect the opinion of RealCrowd. This podcast is for informational purposes only and should not be relied upon as basis for investment decisions. To gain a better understanding of the risks associated with commercial real estate investing, please consult your advisors.

Tyler Stewart – Hey listeners, Tyler here. Before we start today’s episode, I wanted to quickly remind you to head to realcrowduniversity.com to enroll into our free six week course on the fundamentals behind commercial real estate investing. That’s realcrowduniversity.com Thanks.

Adam Hooper – Hey, Tyler.

Tyler Stewart – Hey, Adam. How are you today?

Adam Hooper – Tyler, I’m doing well. I’m excited.

Tyler Stewart – Why are you excited?

Adam Hooper – Well, we’ve got some snowflakes falling outside.

Tyler Stewart – It’s kind of beautiful, isn’t it?

Adam Hooper – Finally getting our winter here in Portland.

Tyler Stewart – Yeah, it just took March.

Adam Hooper – That’s all it took. Well, why don’t you tell us who we have on the show today.

Tyler Stewart – Well, today we have Andrew Modrall from Select Strategies Realty. He’s the Chief Financial Officer over there.

Adam Hooper – He’s been in the business for a long time. Started at Deloitte in Audit and Tax. Ended up getting into the real estate space, CFO for quite some time. We did a deep, deep dive on the construction of a proforma today.

Tyler Stewart – We went from top to bottom and asked every question in between.

Adam Hooper – We had the story of the proforma with Joe on a prior episode and this is really the nuts and bolts of how do you construct a proforma, what are the main components of it? Starting everywhere from, like you said, top to bottom. How do we generate the income? How do we pay for that income? How do we pay our mortgage and what’s left over? Hopefully, hopefully what’s left over.

Tyler Stewart – That’s right. The goal here is for listeners to be able to then go out and read proformas and be able to look and see where the assumptions are being made, what’s realistic, what questions should I ask the sponsor?

Adam Hooper – How do I identify those questions and then also again, you know feel empowered to ask those questions. I think that’s a big part of it. Again, fairly nerdy on this one. We got into some pretty detailed topics, but pretty good base level information about how to look at proforma, where they’re built. Talked about some of the expense ratios. Where some of those different expenses are paid. Some lease structure issues. But, overall, really good kind of foundational episode for listeners out there.

Tyler Stewart – It may be a good idea to open up a proforma if you can download one and just kind of follow along as we go through this episode.

Adam Hooper – Great idea.

Tyler Stewart – Thank you.

Adam Hooper – I think that’s enough of us so… As always, though, if you have questions or comments, if you like this episode or more detailed dives like this, let us know. Send us a note to podcast@realcrowd.com and with that, let’s get to it.

RealCrowd – This podcast is brought to you by RealCrowd, the leader in online real estate investing. Visit RealCrowd.com to learn more about how we provide our members with direct access to commercial real estate investments. Don’t forget to subscribe to the podcast on iTunes, Google Music, or SoundCloud. RealCrowd, invest smarter.

Adam Hooper – Well, Andrew, thanks for joining us on the show today. Why don’t you give us a quick update on how things are going out in the Midwest.

Andrew Mondrall – Well, it’s sunny and cold here at the moment. But the Midwest is a great area to invest in. It has fallen out of favor over, perhaps, the last eight to ten years because it’s not as glamorous as some of the coastal areas of our country. There are a lot of people who live in the Midwest and they buy groceries and they buy clothes and they shop and they are just rank and file people. There’s a lot of them and that’s what makes the Midwest a great place.

Adam Hooper – Towards the end of the episode we’ll definitely dig in on retail specifically. That’s, obviously, a very hot topic of what’s ecommerce going to do and is retail… I think it’s very misunderstood right now for most of the folks we’re talking with. Why don’t you take us back to your entry into the real estate world. I know you’ve been in it for a long time as CFO. Why don’t you tell us kind of how you got your start, what got you into the finance side of things and why real estate specifically?

Andrew Mondrall – Alright, my education is in both accounting and finance. I have an MBA. Coming out of school, I went to work for one of the big CPA firms. It was called Deloitte and did audit and tax work there for a variety of clients, but that included some real estate development companies. One of those companies made me an offer to come to work for them as their Controller and I did accept that offer. I worked there a total of fourteen years. First as Controller, later as VP of Finance. That was a company that was invested both in multifamily

Tyler Stewart – and also in retail. They are based in the Cincinnati area, but they are a multi-regional company throughout the eastern half of the United States. That’s where I really learned a great deal about real estate and sort of cut my teeth as a CFO.

Adam Hooper – Okay, and then so the real estate industry that was the area you were doing in Deloitte. Anything specific about that was interesting to you or that’s always been near your…

Andrew Mondrall – I could see that some people had developed and built quite a bit of wealth through their investments in real estate and I found that attractive. I said “Hey” and I figured I’m smarter than the average bear if these people can do it, I ought to be able to learn how to do it.

Adam Hooper – Right, right.

Andrew Mondrall – Going to work for that multi-regional company was good for them and very good for me as well. We both learned a lot and as a result I was able to leave there and do some real estate investing on my own and then help to form the company that we’re a part of right now.

Tyler Stewart – What were some of those early lessons you learned?

Andrew Mondrall – I learned about how much money is worthwhile to spend, that is how much cost can you afford to incur based on your expected return. I also learned a great deal about debt. That is, how to find it, how to structure it, what to look for, what to look out for in terms of debt. Those are some of the things.

Adam Hooper – A lot of our listeners are professionals, entrepreneurs, successful in their own right. Some maybe have a finance background, some maybe not. Why don’t you tell us a little bit about what the role of a CFO is in a real estate management company today.

Andrew Mondrall – The CFO is in charge of all things financial related to that company. That is overseeing the accounting, overseeing collections of money from tenants and others who might owe the company some money. Making sure all the bills get paid. Making sure that monthly financial reporting takes place and it’s appropriate. Tax returns get prepared and sent where they need to get to. That debt gets attended to, it gets initiated, it gets serviced appropriately, it gets extinguished when the time is right. It’s just pretty much all things financial, which is why they call a CFO the Chief Financial Officer .

Adam Hooper – Makes sense. From the overall management role down to the actual hands on asset level finances, which we’re going to dig into today on the nuts and bolts of a proforma. How much has that role changed? Are you very involved in the proformas? In the financial forecasting and projecting in actual asset level finances or is that more operating company level that you’re involved with now?

Andrew Mondrall – The answer to your question there depends on how big of an organization you’re dealing with. Our group is relatively small in size and so as the Chief Financial Officer here, I do actively get involved in proformas and that sort of thing. If this was a company that was ten times larger than this one is then I might simply oversee that and direct other people to do that kind of work. But as it is, it’s pretty hands on here.

Adam Hooper – Perfect. Well then let’s dive right in. Why don’t you tell us a little bit about what is a proforma? What purpose does it serve? As a listener to this show and as a potential investor in these, we peel back and see what we can learn from reviewing a proforma, but maybe lets start super high level for people who have never heard that term before, what is a proforma?

Andrew Mondrall – A proforma is a forward look at what will be the income statement, or sometimes called the profit and loss statement, of an investment property. You are projecting usually one year at a time, but it could be quarterly or some other period, but you’re projecting into the future what you think revenues and expenses of that property are going to be.

Adam Hooper – As an investor looking at a deal, this is kind of their road map to their financial projections. This is how they can see as the real estate manager how you guys are thinking about the cash flows, what’s coming in and what’s going out and ultimately, hopefully, get a feel for how profitable or the actual financial aspects of the deal are going to be.

Andrew Mondrall – Exactly. If someone were considering making an investment in a particular property, they would want to examine that proforma pretty closely to get to the ultimate cash flows that are expected to come from this property because an investor’s putting some money in and the natural thing that he or she wants to know is what am I going to get back out?

Adam Hooper – Got to get some money back out. Exactly.

Andrew Mondrall – And when?

Adam Hooper – How are they typically structured? Is there a standard format for proformas across the industry, everyone’s going to be a little bit different? How do they usually look?

Andrew Mondrall – Well, no doubt they will look different just because different people put them together, but as I said a minute ago, they tend to mimic profit and loss statement. So they will start at revenues at the top, operating expenses in the middle, coming to a subtotal, which would be net operating income and then below that talking about any kind of debt service that’s appropriate. That’s the general look that any proforma’s going to have.

Adam Hooper – Perfect. Then again you mentioned depending on size of the operations, maybe it’s the CFO, maybe it’s the analyst that will be putting these together, where does the information that goes into this proforma usually come from? Is it internal models? Is it internal marketing information? Reliance on external sources? How does all this information come together to get into this proforma?

Andrew Mondrall – It will be a combination of sources. First of all, you’ve got to think about are you putting together a proforma for an existing property that is going to be acquired? And if so, there has got to be some historical track record from that property that shows what it’s revenues and expenses have been. Now, you may intend to change those, but at least you’ve got a starting point. Or on the other hand, perhaps you’re talking about creating an investment property such as building an apartment complex or building a retail center from scratch, there it becomes a lot more theoretical and you’re dealing with what you think you can accomplish.

Adam Hooper – And that’s where, again, whether it’s reliance on past numbers you have internally or looking to external data sources to support some of the aspects we’ll talk about, market rents, vacancies and all that.

Andrew Mondrall – It’s going to be a combination of internal and external. If there are existing leases, for example, whether it be retail, office or apartment complex, you can look at those leases and you can understand what are the rents that are going to be paid by the tenants behind those leases. That’s internal. External is, I’m looking at real estate taxes, a pretty significant expenditure for any investment property. Well, what’s the tax rate in that particular locality? What’s the approximate fair market value of this property based on my acquisition of it? You can, therefore, develop an expectation of what the real estate tax expense will be. If you’re not sure about what insurance is going to cost, well, call up your insurance agent. Tell him or her what your investment is going to consist of and get a quote. It’s a combination of internal and external sources.

Adam Hooper – Perfect. The general setup is income, expenses that gets you to net operating income and then there’s debt service and capital expenditures we’ll get through. So let’s start with the rental income. That’s coming from tenants, whether again multifamily, office, retail, industrial, the whole point of owning an asset is so that you can lease it to someone who’s going to pay you for that. Right?

Andrew Mondrall – Yes.

Adam Hooper – Those numbers you can either get from, like you said, leases in place or if it’s a development, you’re going to have maybe some projections as to what you might be able to rent it for. Let’s dive a little bit into where that information is coming from, how an investor might be able to look at is that a reasonable assumption or are these reasonable rents and maybe some resources that investors can look to when they’re trying to figure out how is this rental income is derived?

Andrew Mondrall – Well, the sponsor of an investment is going to be reading the actual leases that already exist and making sure that he or she understands what rent income can be expected from these existing leases. But if it is a to-be-built property or if there is some vacancy in the existing property that needs to be filled up then you’ve got to be doing some market research or talking to brokers in the area to understand what are some reasonable rents that you might be able to overlay on top of that vacancy or on top of this to-be-built property. So that’s where you’ve got to come up with the rent income side of this.

Adam Hooper – Is that something that a manager would usually provide to a prospective investor or how much fidelity does a prospective investor usually have into some of these assumptions or sources of information?

Andrew Mondrall – A prospective investor probably would not be able to actually get a hold of the leases and read them themselves, nor would they probably want to…

Adam Hooper – Right.

Andrew Mondrall – Because leases can be pretty voluminous and pretty legalistic, but a summary of those leases, is what’s called a rent roll, and most offering memorandums would include a rent roll showing either the existing tenants or tenant spaces expected to be filled by future leases and there, which is sort of summarized, you can see how many square feet is this space, who is the tenant, what is the rent that they’re scheduled to pay? You can look at that and begin to get a sense of does this make sense to me? Is it reasonable in the market place that this property is located within?

Adam Hooper – Then for an investor, again to help to determine the reasonableness of some of these projections or rental rates, are there resources that they might be able to look to, either within a typical offering package or maybe some external resources where they can sniff test whether or not some of these assumptions are accurate?

Andrew Mondrall – Well, it depends on how much time and effort that prospective investor wants to put into this. At first glance, I would just say look at the rent roll that’s in the offering memorandum and see how consistent are these rents per square foot. See if that makes sense to you. You could also talk to brokers in that community. Or you might possibly be able to look at offering memorandums of other properties in the same general area to see if the rent per square foot seem comparable.

Adam Hooper – I think what you mentioned there too would be interesting. If you’ve got a rent roll that paints one picture for what the current rents are and if the proforma is showing rents that are wildly different one way or the other, maybe that’s a point where an investor could have that question of what is the strategy that’s going to make that swing one way or the other?

Andrew Mondrall – I agree. I think if anytime you see just differences or discrepancies there it’s worth asking a question.

Adam Hooper – When you’re forecasting these rental rates, what kind of information goes into that? We’ve talked a lot on the show with economists and some other kind of market cycle folks, but what are some of those nuts and bolts things, when you’re looking at forecasting and projecting a proforma that’s, maybe, five or seven years long, what’s the source of that information and how do you look at forecasting where those rental rates are going to go?

Andrew Mondrall – Well, our particular company is very retail focused and if we’re looking at filling up space or we see that a property we’re going to acquire has some space that is going to expire, the lease is going to expire, say two, three, four years from now and our whole time our horizon is longer than that, we’ll talk with our own leasing specialist, who are on our own staff, about that space and about that particular tenant. How likely is that tenant to renew? And if it happens to be a national or regional tenant, what rents have we seen them pay in other instances? We get a feel for what’s realistic in terms of what we can expect to have happen at the time that that lease matures or that we try to fill an existing vacant space.

Adam Hooper – Then are there any other major macroeconomic trends that investors would have access to that might indicate the general trend of where rental markets are going? Or is that more of a market by market specific property?

Andrew Mondrall – It’s so specific from market to market. Yes, you can say the Trump tax cuts, perhaps, have boosted the entire economy. That may be a true statement, but that doesn’t tell me whether I want to make an investment in this particular property, in this particular city, in this particular market. I think it’s too broad for that.

Adam Hooper – That’s where the investor’s going to be relying on the manager to have done that work and to have been making those decisions?

Andrew Mondrall – Yes.

Adam Hooper – What are some of the red flags or warning signs when an investor’s looking at the rental income side of a proforma right now that would cause him to pause and ask some of those questions?

Andrew Mondrall – I keep coming back to rent per square foot because that is a way you can compare rents between different spaces. A given space might be a thousand square feet within a shopping center, might be five thousand,..

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David Bodamer, Executive Director at National Real Estate Investor (NREI) joined us on the podcast to discuss research on what wealth managers look for in real estate.

David Bodamer is Executive Director of Content & User Engagement for NREI. He has been with NREI since September 2011 and has been covering the commercial real estate sector since 1999 for Retail Traffic, Commercial Property News and Shopping Centers Today. He also previously worked for Civil Engineering magazine. His writings on real estate have also appeared in REP.and the Wall Street Journal’s online real estate news site. He has won multiple awards from the National Association of Real Estate Editors and is a past finalist for a Jesse H. Neal Award.

David Bodamer’s Links

Check out NREI’s research reports on high net worth investment trends in commercial real estate:

Exclusive Research: Deep Pockets

What HNWIs Want from Commercial Real Estate

You can reach out to David Bodamer directly at david.bodamer@informa.com.

*If you like this post, be sure to enroll in our free six week course on the fundamentals of commercial real estate investing — RealCrowd University.*


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RealCrowd – All opinions expressed by Adam, Tyler, and podcast guests are solely their own opinions and do not reflect the opinion of RealCrowd. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. To gain a better understanding of the risks associated with commercial real estate investing, please consult your advisors.

Tyler Stewart – Hey listeners, Tyler here. Before we start today’s episode I wanted to quickly remind you to head to RealCrowdUniversity.com to enroll into our free six week course on the fundamentals behind commercial real estate investing. That’s RealCrowdUniversity.com. Thanks.

Adam Hooper – Hey Tyler.

Tyler Stewart – Hey Adam, how are you today?

Adam Hooper – I’m great. Yeah, it’s a good day.

Tyler Stewart – Another good day in Portland, Oregon.

Adam Hooper – Yep, I got my coffee. We had another great podcast episode this morning.

Tyler Stewart – We had David Bodamer who is the Executive Director of Content and User Engagement for both WealthManagement.com and NREI.com.

Adam Hooper – NREI is National Real Estate Investor. We’ve known David for a while. We’ve done some webinars and some other stuff with them, but they did a really interesting research project, because they’re at the intersection of these two audiences that we work with, one being real estate practitioners, investors, managers, service providers and the other is this WealthManagement.com audience which are investment advisors, brokered you as registered reps. And so they did some really unique research that we’ll talk about today in the episode. Listeners out there would be, I know I was certainly surprised how to kind of compare and contrast the perceptions of these two different audiences, where they overlap and largely where they differ.

Tyler Stewart – It was interesting to have two different sides, both experts in what they do look at the same product type and have a completely different view.

Adam Hooper – Completely different views.

Tyler Stewart – Completely different views.

Adam Hooper – We talked about kind of the overall size of the markets. What are some the driving factors for why they invest in these asset classes? What their views on different product type is? Just fascinating.

Tyler Stewart – It was. Yeah, and part of the research was showing what respondents said over the previous years. It was interesting to see those trends.

Adam Hooper – We talked and the projections to of our, where are allocations going, the increasing decreasing. What product types are going to be a hot topic. In the show notes you guys will find the links to both of these articles that were on NREI online.com, WealthManagement.com. Stay tuned to the end. Dave graciously gave out his email. And if you have any feedback or thoughts on this episode, ping him. Also, again, we’re happy to hear comments and reviews everything on iTunes or wherever you listen to us or just send us a note to podcast@realcrowd.com. Click on the show notes, would recommend having these articles up so you can kind of cross reference some of the charts that we talked about. Go ahead and get that going. With that Tyler, I think, let’s get to it.

RealCrowd – This podcast is brought to you by RealCrowd, the leader in online real estate investing. Visit RealCrowd.com to learn more about how we provide our members with direct access to commercial real estate investments. Don’t forget to subscribe to the podcast on iTunes, Google Music or SoundCloud. RealCrowd, invest smarter.

Adam Hooper – Well Dave thanks for joining us this morning. We’re excited to dig in on some of the research that you guys have found between high net worth individuals, wealth managers, how they mirror each other, where they differ, and should be a really good conversation, Dave. Thanks for joining us.

Dave Bodamer – Absolutely, thank you for inviting me.

Adam Hooper – Well, why don’t you take us a little bit of your background, and this is a different episode than what we’ve done before. Care tell us a little bit about how you got involved with NREI, with WealthManagement.com and kind of what you do there today in your day-to-day.

Dave Bodamer – Sure, so I’m the basically the Editorial Director for National Real Estate Investor which has been around for about 60 years covering commercial real estate. I myself have been covering commercial real estate for almost 20 years. Before I was here I was with Commercial Property, then it was Commercial Property Executive. Then it was Commercial Property News. Now it’s CPE and also I was with Shopping Centers Today before that. I’ve been around commercial real estate for a while. NREI is part of a bigger company called Informa which has all sorts of publications and data products and a bunch of other things. One of our sister publications is WealthManagement.com which primarily goes to financial advisors, registered representatives, wealth managers, that sort of audience. That gives us some opportunities, given that we have the commercial real estate audience. We also then have access to this wealth management office. That’s stuff where some of this research sort of came about.

Adam Hooper – Tell us a little bit about the audience of NREI. That would be, I would assume, more of our typical listener, right, either real estate manager or someone that’s looking to invest in the asset class themselves.

Dave Bodamer – Exactly. It’s people that who are day-to-day in this business, owners, investors, brokers, lenders, intermediaries, a little bit of and then some consultants, contractors. But the bulk of the audience is, are people that invest in this space on a day-to-day basis. Whereas Wealth Management is your advisors who are working with clients of all kinds who may have exposure to commercial real estate as part of a broader, as, part of a broader investment strategy but are not, that’s not their primary what they’re doing. So, but yeah that, that’s a much bigger audience. And so they cover investment into every kind of ETFs, mutual funds, everything.

Adam Hooper – Broad and wealth management. As we said in the intro, before we get into too much of this research here in discussion, it would probably be good listeners out there for you to go to those articles, so you can see some of these slides that we’re going to be referencing that Dave’s talking about, this research that they did in kind of combining this project. Why don’t you walk us through kind of 30,000 foot level, what you guys are looking for? I think you guys have done this over a number of years. Why don’t you just kind of set the groundwork of the study that you guys did?

Dave Bodamer – It started with, we’ve been doing it targeting to the NREI audience now for four straight years. Now we do have, it’s interesting to sort of see what has stayed the same and what has changed in that time. That’s asking the commercial real estate pros what their understanding of specifically high net worth investors and what they are trying to get out of commercial real estate, how they are investing in the business. Some of that came from just, I, from my conversations with people in the industry. It just, this is us growing pot of money that’s out there that, and they are advised to have some percentage of their portfolios in commercial real estate. So, there’s, but then the question is how do you reach them, because a lot of times these are not people that you can just get on the phone. It’s either you have to try to find your way to their wealth managers or get in front of them in some other ways. So that’s, parks, so part of it was trying to understand how much business companies in our space are already doing. What, you got how they understand the audience and that sort of thing. Then this past year we decided to, since we’ve been doing it for a few years and asking the commercial real estate , we decided well why don’t we also, since we have this other audience that which is dedicated, are dedicated wealth managers a similar set of questions around commercial real estate. That then yielded some, I found to be pretty interesting results in terms of again what, how they saw things as a,

Dave Bodamer – where the perceptions aligned and where they misaligned, and then trying to figure out why, what that might be. Now that we’ve sort of established this as a baseline, we’ll kind of keep doing these on a regular basis. Then both for our NREI and Wealth Management, we are kind of cross pollinating our content so that some of our stories appear, some stories appear on both of those sites as a way of… Since we sit as a potential intersection.

Adam Hooper – That’s again a really interesting point where you guys are at with both sides of the access to this audience, right. You can really make some interesting inferences there. Why don’t we take a look first at the NREI and the high net worth research side? We can then kind of look at the wealth manager side and then kind of compare and contrast, if that makes sense?

Dave Bodamer – Yep.

Adam Hooper – Starting with the survey that you did, again, four years running through NREI audience, more focused on how high net worth individuals themselves are interacting with this asset class. What have you seen in terms of just total volume or growth of interest from that audience in terms of when you first started the survey to today?

Dave Bodamer – I also pulled some data from Capgemini’s World Wealth Report, since that’s they take a good look at this. And in terms of the total universe, they estimated that now that high net worth investors which I believe they define as anyone with over a million dollar in liquid assets, that now accounts for $60 trillion of wealth as of their 2018 report. They are projecting that that will reach $100 trillion by 2025. Then, a subset of that are the ultra high net worths who have at least 30 million in liquid assets. That universe is also growing as well. I think they saw that… The total amount of wealth that that group had grew 11% from 2017 to 2018 alone.

Adam Hooper – Wow.

Dave Bodamer – We don’t know yet what the figure went from 2018 to 2019. But again, they’re projecting 70 trillion now to 100 trillion by 2025. That’s a fairly significant increase.

Adam Hooper – That’s a pretty big increase. And is that just kind of general market trends or is there anything specific that you attribute that growth to?

Dave Bodamer – They pointed to the both, the growth in both the returns that the assets of those investors and also the population of investors that qualify has also grown. Primarily, they track that in North America and Asia as being the fastest growing regions for high net worth.

Adam Hooper – Now drilling down into real estate, how does that fit into the typical portfolio makeup of a high net worth individual?

Dave Bodamer – They estimated, again, from Capgemini estimated that real estate is the third largest asset class for high net worth investors overall accounts for 17% of their total assets. That then further breaks down into, about half of that is in residential real estate. Another share, about 13% of that is in land. Then 15, and then they break, then they sort of break commercial real estate down in to sort of different, in, it’s a separate bucket. They have 15% in what they classify as commercial real estate. And they break off hotels as a separate thing that 6% of their assets are in hotels. And then they say 6% are in equities, including REITs. So, I think if… And again, for, I, what, I’m also not clear if they consider multi-family just part of their residential bucket or commercial. There might be some definitional, things that we would look at differently in the commercial real estate space that may be defining differently, since their wealth, a wealth manager.

Adam Hooper – Then when we look at your research it seemed like the majority of, at least again the NREI audience, was investing in private equity funds or multi-family. Those were pretty close at the top, right? And then it kind of fell off from there. Can you maybe walk us through the asset profile for the that you found in the NREI audience?

Dave Bodamer – What wee found is again asking the NREI audience what they think the high net worth are doing. We sort of, we asked both by property type, and then we also asked by the method, whether it was direct or equities or those kind of things. On the property type side we found not surprisingly that multi-family was the top rated. They feel like that multi-family is the top rated asset that high net worth prefer. That number has, that’s consistently been the top rated asset. The share has gone up a little bit. In survey was, I think it was, we also allowed people to select all asset classes that apply. So they didn’t have to just pick one or the other. They could pick whatever they thought that high net worth preferred. But overall at 76% of respondents in this year identified multi-family. Secondarily, industrial has now outgrown three to the number two, where they in this year’s survey it was 48% that grew from 36% 2016 and 40% 2017 to 48%. Medical office was actually third. And then office and that number has gone up. Actually sorry, that one’s gone down. That one used to be 36%. Now it’s about 30. And then the numbers for office and retail have also gone down in the recent years compared to when we first started asking the question. Then we, then there’s smaller numbers for things like self-storage and seniors housing. And all of this, seniors was interesting to me which it more than double. The number of people that have made seniors housing doubled from 2017 to 2018. I don’t know if that is just some. We have a baseline of

Dave Bodamer – about usually, we had 600 respondents this year. In past years we’ve had 400 and 500. It’s a good sample size, but I think there might be a little bit of noise in that number particularly, because the other ones are, you don’t see that much variation. I’m curious to see what happens with the seniors housing number when we ask again in 2019.

Adam Hooper – Yeah and that’s interesting. That that’s been a hot topic in the industry, right, as this boomer generation continues to age, senior housing is going to be much higher in demand. I wonder if there’s a bit of projection of the real estate practitioners hope that that’s where people are going to be investing? that upcoming demand.

Dave Bodamer – When we talk about the wealth numbers later, I think it is their property type right now is different. I am curious about in some of these answers whether this is because of what real estate experts know which of the property types are in better, if there’s some projection around like, okay, well these are where they should be investing versus where they are. I don’t know, but we can talk about that when we get to it. I think you also asked about the how they’re investing. And yes we did find that private equity real estate funds were the most popular answer for asking the NREI audience for how high net worth are investing. That was followed by direct investment in multi-finance and direct investment in that lease and then publicly traded REITs were next. And then smaller answers were things like private real estate debt funds, mutual funds, non-rated, non-traded REITs and club deals.

Adam Hooper – Okay. And I wonder again, how much of the bias of this audience. They typically are private equity fund managers themselves. Right, so that’s a little bit of self-serving there, but again, from our perspective you could classify what we see on our space as a private equity fund, right. We’ve seen a number of funds on our platform. That is something that the audience that is listening to the show and uses our platform do like to invest in as well. We touched a little bit on this demographic from the other side with the senior housing increase. How are you seeing the demographics across your investors or respondents to the survey? Are you seeing any difference with different audience segments or different ages, different demographics and how they’re anticipating investing in this class?

Dave Bodamer – That information I got more from the Capgemini, because that’s not a question that we per, we specifically ask. In the Caggemini report they found that investor high net worth over the age of 60 had higher allocations to residential, something out of like 64%. Whereas high net worth under the age of 40 were only 40% residential. Seems like some the older investors are gravitating towards whatever Capgemini’s definition of residential is versus the younger audience liked being more actively pursuant of actual commercial real estate assets.

Adam Hooper – And again, their definition of resi likely includes primary residence would be my guess on that.

Dave Bodamer – I believe so. You’re probably primary residence and then guess their secondary residences, since we’re talking about high net worth.

Adam Hooper – Second or third or fourth or fifth.

Dave Bodamer – And potentially, but I guess the other question that I don’t know the answer is whether if for a high net worth and owns an apartment building, do they just classify that as residential, which they might.

Adam Hooper – They might yeah.

Dave Bodamer – Yeah, I mean, but based on those percentages.

Adam Hooper – Okay, so now we’ve got this pool of wealth growing fairly substantially. We know that there’s a focus on real estate. That would probably suggest that some more of that is going to go into real estate. Do you, did you see within your survey any increase or decrease in their expected activity or expected allocation going forward into real estate?

Dave Bodamer – Overall about from their commercial real estate audience 44% of respondents said they expect high net worth to increase their allocations and then another 36% said they think it would be flat. Only about and then 1/5, so they thought it would fall. Which I thought it was interesting. I think that was slightly more bearish than we had in some of the previous years. We also, I think we asked our audience to, what they thought the average real estate allocations for high net worth are for that audience, and generally I think it fell into a range of about the most popular answers were between 6% and 50%. We have that further broken down which people could see in the chart. But that’s kind of the, their estimate of how much of their portfolio is dedicated to real estate. And then whether it’s increasing, decreasing. The sentiment was just slightly more bearish this year than it had been in the previous two.

Adam Hooper – Did you guys do any further research in terms of what some of those factors are that are helping people make those decisions or the reasoning behind that increase or decrease call?

Dave Bodamer – We had some open ended questions. And we did, some of that stuff we didn’t include in the write-up. There were concerns just about the overall where we are in the economic cycle, where we are in the real estate cycle as being, the rising interest rates and the potential relative returns of commercial real estate to other assets as being some reasons why high net worth may back off. That’s at least, that was at least the NREI percept, the NREI audience perception.

Adam Hooper – Did you have that from prior years? Was there change there? Was it a similar concern? Or was it a different set of concerns in the earlier surveys?

Dave Bodamer – A similar set of concerns..

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Brandon Hall, Founder and CEO at The Real Estate CPA, joined us on the podcast to discuss tax strategies that real estate investors can use. 

Brandon is the Founder/CEO of The Real Estate CPA. Brandon works with real estate investors, syndicates, and private equity funds to optimize tax positions and streamline accounting and business functions.

He believes that real estate investing is critical to building sustainable and generational wealth.

Brandon worked at PricewaterhouseCoopers and Ernst & Young prior to launching his own CPA firm, Hall CPA PLLC (The Real Estate CPA). Through the knowledge gain by working with real estate investors, Brandon invests in multi-family properties personally and through his capital group, Naked Capital.

Brandon is a Certified Public Accountant and national speaker. Brandon holds degrees in both Accounting and Finance from East Carolina University.

Brandon Hall’s Links

Learn more about The Real Estate CPA and check out their Virtual Workshops for real estate investors.

Connect with Brandon on LinkedIn.

*If you like this post, be sure to enroll in our free six week course on the fundamentals of commercial real estate investing — RealCrowd University.*


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Tyler Stewart – All opinions expressed by Adam, Tyler, and podcast guests are solely their own opinions, and do not reflect the opinion of RealCrowd. This podcast is for informational purposes only, and should not be relied upon as a basis for investment decisions. To gain a better understanding of the risks associated with commercial real estate investing, please consult your advisors. Hey listeners, Tyler here. Before we start today’s episode, I wanted to quickly remind you to head to www.realcrowduniversity.com to enroll into our free, six week course on the fundamentals behind commercial real estate investing. That’s www.realcrowduniversity.com. Thanks.

Adam Hooper – Hey listeners, Adam here. Since tax season is upon us, we thought we’d do a quick episode with Brandon Hall of www.therealestatecpa.com. They were gracious enough to have me on their podcast, so check a link in the show notes for that. And this will hopefully answer a lot of the questions that we’ve been receiving from our users and listeners about taxing, so we talked about K1s. We talked about opportunity zones. We talked about some cost segregation analyses. A lot of really good tax information, as we prepare for that April 15 deadline, so as always we appreciate your reviews, feedback. If you have any comments, please send us a note to podcast@realcrowd.com, and with that let’s get to it.

RealCrowd – This podcast is brought to you by RealCrowd, the leader in online real estate investing. Visit www.realcrowd.com to learn more about how we provide our members with direct access to commercial real estate investments. Don’t forget to subscribe to the podcast on iTunes, Google Music, or SoundCloud. ReadCrowd, invest smarter.

Adam Hooper – Brandon, well thank you for joining us today. We’re excited to jump onto some tax related issues. Hope all is well back east. You’re in the Carolinas, right?

Brandon Hall – Yeah, it’s getting a little colder. Not a lot of fun for me. I like warmer weather, but other than that, yeah. We’re good.

Adam Hooper – Good. Well why don’t we start and give us a little bit of the background on kind of how you got to where you are. I know you were at some bigger firms before you split off to do the Real Estate CPA, and tell us a little bit about your background.

Brandon Hall – Yeah, yeah, so I started at PricewaterhouseCoopers, and did a stint there for a little over a year. I was in their advisory practice, and then moved over to Ernst and Young after that, and pretty much during that time frame I was at the big four for maybe three years total before I broke off on my own, and started my firm, but the idea kind of generated during my time at PwC and Ernst and Young. I kind of recognized really early on that corporate life wasn’t really for me, so I started looking for a way out pretty soon into my corporate career. I found rental real estate to be one of those potential ways out, and then also found that as a CPA I could service a lot of the people that had rental real estate, so was kind of able to mesh the two together and build a business off of it.

Adam Hooper – And so what was it that drew you to real estate as an asset class? Was it anything in your experience at PwC or Ernst and Young, or just something you were just attracted to generally and started to explore?

Brandon Hall – I think it was the cash flow at the end of the day, like I would sit in my cube at PwC and trade stocks, and I think I was trading volatility funds at the time, and while it’s fun, you have to get in and out, and it’s a lot of stress, and I don’t know. I bought my first three unit property toward the end of my PwC stint, and it started cash flowing about 700 bucks a month, and I was like, all right, this is the way to do it. The problem was is that 700 bucks a month, while great, if I continue investing in real estate, it’s going to take me a decade to get out of my corporate job. I was like, that’s way to long for me, so then I started looking for other ways out, which is where the idea for the business came along.

Adam Hooper – Good. Well, and tell us a little bit about what you do now, since you left corporate and went out on your own. Tell us a little bit about what you do at Real Estate CPA.

Brandon Hall – Yeah, so it all kind of started accidentally. I invested in that first property. I was an active participant on a forum called www.biggerpockets.com. Kind of became their tax person. People started tagging me in posts. I would just try to answer the questions to the best of my ability, and that snowballed into actually landing clients, and building a small tax practice, and that was cool because I could see all the real estate investors, and if real estate actually makes sense for wealth building, and pro tip, it does. So kind of just doubled down and decided, you know what? I’m going to niche in real estate. I’m going to create a virtual CPA firm, ’cause I hate coming into the office. I don’t understand why you have to wear a suit and tie every day. I don’t even see the clients, so what’s the deal? So I was like all right, virtual CPA firm. Going to niche in real estate, ’cause real estate’s awesome, a big, awesome wealth building tool. There’s a ton of tax benefits with real estate, so I’ll probably always have a job, or I’ll always have a business that somebody needs me. I mean that’s kind of how it all started, and now we have about 320 clients across the United States.

Adam Hooper – Nice.

Brandon Hall – Our smallest client has one rental property. Our biggest client’s a over 100 million dollar real estate fund.

Adam Hooper – Good, so you run the gamut from, again, starting with your personal investing, all the way up to professional investors and mangers, so you’ve seen it from all sides.

Brandon Hall – Yeah, yeah, absolutely. We have a team of 12 people made up of CPAs, EAs, just generally smart people. About half of them also invest in real estate, which is really cool, so we definitely have a neat edge that we bring to the table when we work with clients.

Adam Hooper – And now as an investor getting involved in the real estate space, they probably have maybe our investors do their taxes on their own, and maybe they have a tax consultant, but what is the biggest benefit from working with a CPA when you’re looking at investing in real estate, either wholly owned properties or investing in syndications?

Brandon Hall – Yeah, we often get clients that come in and they’re like, I just don’t know what I don’t know. I don’t know what questions to ask, and what that’s going to lead to is not structuring your investments correctly, and it could be simple things like throwing the property into an LLC versus a corporation versus your personal name. How do you understand which route to take there? But from not only a tax perspective, but also a liability perspective, so it’s like little things like that that end up adding a lot of value. We’ve had people come in, they go to an attorney and they get all these crazy entity plans drawn up and we come in and we’re like, whoa, that’s going to cost you an arm and a leg every single year. Why don’t you just do something like this? So we also save money that’s really not even related to taxes. It’s just the experience that we have of helping build real estate businesses, helping people place investments in syndications or buy their own rental properties. A lot on the structuring side, and then a lot of it is too is on the tax strategy side, there’s all sorts of strategies that you can use. You can go all the way down to simply use a home office, right? Set your home office up, make it business purpose, and you’re good. All the way up to big land conservation easements, and so our job kind of comes in, we come in and we analyze the situation, and we look for the hardest hitting things that we can do, and then there’s always the timing aspect of it, so anybody can tell you to go be a real estate professional,

Brandon Hall – but is it going to be relevant to you at all? So why waste time explaining something to somebody and having them get their head around a relatively complex topic if they can’t even use it now or even in the near future? So that’s really where we come in on the tax strategy side.

Adam Hooper – And then on timing, you said the example you mentioned where maybe someone has met with attorneys and they’ve got a strategy that’s blessed by legal but maybe not thought through from a tax perspective, when is the best time to engage with a CPA, whether you’re looking again either at crowd funding or platforms like ours or out buying assets individually?

Brandon Hall – Yeah, so it really depends on a couple things. One, it depends on the deal size, and two, it depends on your analytical ability, so we’ve had some people come through that have a portfolio of 10, 20 units, or 10, 20 properties, and they’re super analytical. We take a look at their tax returns and we’re like, honestly, you’re already doing everything that we would recommend, so don’t pay us. You’re fine. And then we have other people that have one property, and they’re just totally overwhelmed. So it depends on your analytical ability first, but in general if we’re talking to like the syndicators. We work with a lot of these general partners in the big syndications, we do not want them to sign mortgage documents without us taking a look, so we want to be involved in the due diligence of the property from a very early stage.

Adam Hooper – And then in that case you’re working, again, like you said, with the general partner, the manager of whatever the asset is. Do you guys do much work with individual passive LP investors in these deals, or is your practice primarily focused on the actual manager side of the equation?

Brandon Hall – Both, both, so by working with managers, we typically get a lot of the LPs as well, and something that makes our practice a little bit unique is that all of our accredited investors that are clients are always looking for deals to invest in, so we can actually make those connections and it becomes this big Petri dish of activity, which is a lot of fun. Yeah, so when working with the accredited investors, it’s a little bit different, because you have to, one you’re looking at the actual person’s tax and financial position, not necessarily the company’s, so we’ll help with personal tax strategies, and especially if we’re getting to the higher net worth folks, we’ve got a lot of really hard hitting strategies that can eliminate taxation, but one of the key things that we do with our accredited investors who are investing into these syndications is we help them understand what questions to ask. So we will tell, we’ll give a list of questions and we’ll go over it with these guys on the phone and like, okay, ask this general partner in the syndication about how they’re going to handle the business interest limitations, and if that general partner turns back to you and says, what are business interest limitations? Then it’s not necessarily, we don’t expect the general partners to know what that is off the bat, but we do expect them to be able to say, I have an awesome team in place, which includes a CPA, so let me get you connected there, but if they can’t say that, then that’s an issue. Then they might not have an awesome team in place, so we kind of work with our accredited investors

Brandon Hall – from that aspect of helping them do due diligence on the sponsors of the deals.

Adam Hooper – Yeah, and I guess to kind of expand on that, general partner’s going to set the overall tax strategy at the asset level, right? So what is the ability for an accredited investor or a limited partner investing in these deals, what is their responsibility from a tax perspective? They obviously can’t drive the overall structure at the asset level, but how much can they control their own cash flow that comes down into their accounts?

Brandon Hall – Yeah, so it’s really important to understand capitalization policies. So if I’m a sponsor, if I’m a general partner, I can set my capitalization policy to be whatever I want, and a capitalization policy means that if there’s an expense that comes in, if it’s over whatever threshold I set, then I automatically book it to the balance sheet, instead of writing it off as a current year expense, and what that does is it inflates profits, right? So it could theoretically make the deal look a little bit better, but at the same time it doesn’t necessarily affect the cash flow, so that’s something to understand. Most syndicators will use a $2,500 capitalization policy, or if they have more strenuous financial reporting, they’ll use a $5,000 capitalization policy, so that’s one thing to understand. The other thing to understand is just what is the actual strategy with the deal? Are we doing a value add deal? Is it not a value add deal? Are we just investing for cash flow, or are we investing on the debt side? Am I investing in a debt syndicate? Am I earning interest income? If I’m investing in value add opportunities, and that capitalization policy is $5,000 bucks, then I can expect a lot of write offs in that first year, as we’re rehabbing the property, because most of that rehab or the individual items will be less than that $5,000, which obviously helps pass through bigger losses to me, but to really kind of make a good point here about just kind of circling back to the timing thing that I was talking about, that’s really where I think the accredited investors

Brandon Hall – have the biggest responsibility is understanding the timing of the various deals that they’re invested in. Let’s say that you’ve invested in a deal five years ago and it was a five to seven year hold, and this year it’s liquidating, and let’s say that it liquidates in November 2018. Your responsibility there would be to understand what that capital gain looks like and if you can invest in another deal before the end of the year that might be doing some sort of cost segregation study, or something that’s going to give you a big first year write off for investing in that deal. That cost seg study will produce a passive loss on the new deal that could offset the gain on the deal that just liquidated, so it’s a lot of the timing stuff. It’s making sure that you’re asking questions related to timing. So I don’t want to go into any syndication without understanding if they’re doing a cost segregation study, and if they understand business interest limitations, ’cause that’s going to tell me a whole lot about how much they’ve thought through their tax strategy.

Adam Hooper – Okay, let’s do a little bit of a detour here for listeners that might not have heard about a cost segregation study. Can you just kind of overview on that real quick?

Brandon Hall – Yeah, so a cost segregation study is the practice of identifying components of the property and assigning a different useful life to that component, so every property has a roof, and a roof is a 27 and a half year property. Without a cost segregation study, though, we’re just going to book the entire building as whatever the purchase price is. Let’s call it a million bucks. With a cost seg study, we’re going to go through and we’re going to say, well, the roof is $20,000. We’re going to assign a value to the roof, but we’re also going to do that for all of the components. We’re going to do it for the carpeting. We’re going to do it for the appliances, the windows, the countertops, the bathrooms, everything is going to have a value, and what happens with cost seg studies is you can generally allocate anywhere between 20 to 30% of the value of the purchase price of a multi family property, you can allocate 20 to 30% to components with a useful life of less than 20 years, so we’re talking about five, seven, and 15 year property. Five year property, seven year property, generally personal property, so like the appliances, things that you can easily move around. 15 year property is a land improvement, so I don’t know, you get a driveway installed or a parking pad installed. That’s all land improvement. You cut down trees. You plant new trees. All land improvements. A cost seg study is going to identify those five, seven, 15 year components. It’s also going to identify all of the 27 and a half year components, but the key now with 2018 tax law changes

Brandon Hall – is that if you do a cost segregation study in the first year that you own the asset, before you file that first tax return, then you could take 100% bonus depreciation on any component with a useful life of less than 20 years. So I just said that a cost seg study will generally break out anywhere between 20 to 30% of the purchase price or the basis, will be able to allocate that to components with a useful life of less than 20 years, so if I buy a million dollar property, I might get a $300,000 allocation to these components with a useful life of less than 20 years, and then with bonus depreciation, I can immediately write off that 300K and pass that back to my investors.

Adam Hooper – That’s huge.

Brandon Hall – Oh it’s massive, yeah, yeah. So think about it, right? You go and you buy, you put 50K in some deal, and it’s liquidating this year. You’re getting 100K total return, 50K principal plus a 50K cap gain, and you’re like okay, well what do I do for this $50,000 capital gain? And there’s some other things that we can talk about too, but one thing that you can definitely do is you can say can I invest 50,000 bucks in a new syndication if that syndication is going to do a cost seg study? And the answer is yes, but we want to make sure that we ask about the cost seg study and what the expected results are. These guys already have it all planned out. Like there should be no surprises, so I invest $50,000, in a new property doing a cost seg study, I could probably get a $50,000 write off, or a $75,000 write off, the first year, which could eliminate my gain from my other paths of investment.

Adam Hooper – And so where does that depreciation flow down to in the investor’s mindset, right? If I’m an investor in this case and I’ve put that 50K in, and I get a $75,000 allocation for this deduction, what does that allow me to do?

Brandon Hall – Yeah, so that would, it depends on your allocated profit and loss, so if you, I don’t know, let’s just say that the net profits were 10,000 bucks. They do the cost seg study, and they’re able to allocate 75K to you, so you would have a $65,000 loss, and it’s just a passive loss that passes all the way through and offsets passive income or capital gain from rental real estate sales.

Adam Hooper – So that’s, I mean again, if you’re in a situation where you have other income, you have other capital gains, this could be huge in reducing that tax burden for your other business activities, your other income, the other gains that you’re seeing as well.

Brandon Hall – Absolutely, and again it’s all about timing, right? So that’s a same year type of thing, like okay, we have this big liquidation. We want to make sure that we can offset it, so let’s aim for syndications that are doing cost seg studies, but there’s also another aspect too. Let’s say that you’re investing in your very first syndication ever, and they’re going to do a cost seg study. Let’s say that you earn over 150K. The passive losses coming back to you, they’re going to be big in that first year, ’cause that’s the point of a cost seg study, with the 100% bonus depreciation and everything, but because you earned over 150K, you can’t take the passive losses, so instead they become suspended. That’s not necessarily bad. You can basically protect yourself from future passive income by taking a current year big passive loss that becomes suspended, so there’s a future aspect to it as well, like if you invest today.

Adam Hooper – Like you said, it kind of carries forward for future passive income.

Brandon Hall – Absolutely,..

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Having a deep understanding of local markets is essential in commercial real estate to spot new opportunities and create strategies. But the investor who stays on top of macroeconomic forces can make preemptive strikes and defensive plays before anyone else.

That’s why we’ve created a guide on how the Federal Reserve impacts commercial real estate. To give you an inside look at how the central bank of the United States—one of the most powerful agencies in the world—impacts your investments.  

In this guide, we’ll provide a background into the Federal Reserve system, its influential Funds Rate, and how a global financial system affects your bottom line.

Purpose and Structure of the Federal Reserve

The Federal Reserve (or simply “the Fed”) was established on December 23, 1913, when President Woodrow Wilson signed the Federal Reserve Act into law. The idea was to reform the nation’s banking system and prevent the financial disasters prevalent at the time.

According to the Fed’s website, modern day responsibilities include:

  • Conducting the nation’s monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates in the U.S. economy;
  • Promoting the stability of the financial system and seeking to minimize and contain systemic risks through active monitoring and engagement in the U.S. and abroad;
  • Promoting the safety and soundness of individual financial institutions and monitoring their impact on the financial system as a whole;
  • Fostering payment and settlement system safety and efficiency through services to the banking industry and the U.S. government that facilitate U.S.-dollar transactions and payments; and
  • Promoting consumer protection and community development through consumer-focused supervision and examination, research and analysis of emerging consumer issues and trends, community economic development activities, and the administration of consumer laws and regulations.

As the central bank of the United States, it’s composed of three entities:

  1. The Board of Governors
  2. 12 Federal Reserve Banks
  3. The Federal Open Market Committee (FOMC)

Source: The Federal Reserve System

The Board of Governors and the Fed Chair are appointed by the President and confirmed by the Senate. Heads of regional banks are chosen by local boards of directors and are meant to represent their communities.

The Federal Funds Rate

The main mechanism the Fed employs to influence the U.S. economy is the Federal Funds rate. This is the rate at which banks lend “reserve balances” to other banks on an overnight basis and is a vital barometer of the American economy.

The Funds Rate is set by the FOMC, which meets eight times a year to evaluate its monetary strategy, based on its outlook for growth and inflation.

FED Latest Interest Rate Change

Change date Percentage
September 26 2018 2.250 %
June 13 2018 2.000 %
March 21 2018 1.750 %
December 13 2017 1.500 %
June 14 2017 1.250 %
March 16 2017 1.000 %
December 14 2016 0.750 %
December 16 2015 0.500 %
December 16 2008 0.250 %
October 29 2008 1.000 %

Source: Global Rates

Contractionary Monetary Policy

As of September 2018, the Fed has increased the Funds Rate three times. We are now in what is called a contractionary monetary policy—a period in which the FOMC wishes to slow the economy.

It’s a little more complicated than simply raising the rate. In fact, what the Fed does is sell government securities to individuals and institutions. This decreases the amount of money left for commercial banks to lend. It effectively takes money out of the system, thus increasing the cost of borrowing and increasing interest rates, including the federal funds rate.

When the cost of debt goes up, individuals and businesses are discouraged from borrowing, and will opt to save their money. The higher interest rate means that the interest in savings accounts and certificates of deposit (CDs) will also be higher. To take advantage of the savings rates, entities will spend less in the economy and invest less in the capital markets, thereby, slowing inflation and economic growth.

Expansionary Monetary Policy

What we saw back in 2008 was known as an expansionary monetary policy. The FOMC increases the money supply to lower the target rate when the economy is sluggish and inflation is benign. This is partly why we’ve seen a 0% Funds Rate in past few years.

In this case, the Fed purchases government securities through private bond dealers and deposits payment into the bank accounts of the individuals or organizations that sold the bonds. The deposits become part of the cash that commercial banks hold at the Fed, and therefore increase the amount of money that commercial banks have available to lend. Commercial banks actively want to loan cash reserves and try to attract borrowers by lowering interest rates, which includes the federal funds rate.

When the amounts of funds available to loan increases, interest rates go down. A decrease in the cost of borrowing means that more people and businesses have access to funds at a cheaper rate. This leads to less savings and more spending. And that increase in spending fuels the economy, leading to lower unemployment.

Quantitative Easing

A modern and rather unconventional monetary policy used by the Fed during the crisis and the aftermath is something called quantitative easing. This is where the Fed enters the marketplace to purchase bonds, effectively lowering interest rates and increasing the money supply

The Fed purchased treasuries and mortgage-backed securities, but has since stopped and is starting to slowly sell-off that portfolio.

The Global Effect

The monetary policies of the Federal Reserve have a strong influence on the global economy. For example, its Fund Rate is closely watched by the Intercontinental Exchange London Interbank Offered Rate (LIBOR). This is a benchmark rate used by some of the world’s leading banks to charge each other for short-term loans.

LIBOR is important because over $250 trillion of instruments and derivatives are pegged to it. That’s a quarter of a quadrillion dollars! A huge number considering the entire US economy for a year’s output is about $10-$12 trillion.

LIBOR is administered by the ICE Benchmark Administration (IBA) and is based on five currencies: the U.S. dollar (USD), euro (EUR), pound sterling (GBP), Japanese yen (JPY), and Swiss franc (CHF).

Did you know?

In recent years, the LIBOR has seen a few price rigging scandals that has prompted the U.S. to switch to the Secured Overnight Financing Rate (SOFR).

This is an overnight cost of funds rate set by the New York Fed, based on actual transactions, instead of a survey.

The British are going to have their own rate, often called S-O-N-I-A, the Japanese will have their own floating rate called T-O-N-I-A and LIBOR is scheduled to go away in the end of 2021.

So while the world is entering a new transition point, these new cost of funds will still closely track the Fed rate because the Fed is so dominant.

Ultra-Low Rates and Ultra-Low Inflation?

As mentioned above, the Fed aims to keep its citizens employed and prices stable. As a benchmark, the Fed uses 4% unemployment and 2% inflation as its optimal rates for a stable economy.

We are in an era of unprecedented low rates. Unemployment is low, interest rates are low and surprisingly, inflation remains flat. (Only recently, has inflation began to rise.)

The chart below shows inflation collapse in 2008. As a result of the crisis, the Fed enacted expansionary monetary policy and dropped the Fed Funds Rate to 0%.

U.S. Inflation Rate by Year from 2005 to 2020

Year Inflation Rate YOY Fed Funds Rate Business Cycle (GDP Growth)     
2005 3.4% 4.25% Expansion (3.3%)
2006 2.5% 5.25% Expansion (2.7%)
2007 4.1% 4.25% Dec peak (1.8%)
2008 0.1% 0% Contraction (-.3%)
2009 2.7% 0% Jun trough (2.8%)
2010 1.5% 0% Expansion (2.5%)
2011 3.0% 0% Expansion (1.6%)
2012 1.7% 0% Expansion (2.2%)
2013 1.5% 0% Expansion (1.7%)
2014 0.8% 0% Expansion (2.4%)
2015 0.7% 0.25% Expansion (2.6%)
2016 2.1% 0.75% Expansion (1.6%)
2017 2.1% 1.50% Core inflation rate 1.8%. The current rate is updated monthly.
2018 1.9% 2.0% Forecast. Core rate 1.9 %
2019 2.0% 2.5% Forecast. Core rate 2.0%
2020 2.0% 3.0% Forecast. Core rate 2.0%

Source: The Balance

On December 17, 2015, Janet Yellen came out in a press conference and raised the rate. The markets were shocked having grown used to seven years of a basically a 0% Fed rate and ultra-low cost of funds, which some people called the “punch bowl effect.”

And what a party it was. With the DOW hitting record-high numbers, unemployment falling, and growth seen in all sectors of the economy, the market was indeed shocked to have the punch bowl pulled away.

The Fed then went on to increase rates in 2015, once in 2016, and three times in 2017. The third raise of 2018 occurred in September which brings the rate to 2.25%.

The Fed expects to continue this trend as it closely watches the price level within the economy. Instead of the Consumer Price Index (CPI), the Fed looks at the Consumption Expenditures (PCE) since it believes this basket of goods is more accurate for a typical American family.

Impact on Commercial Real Estate

Everything we’ve discussed so far in this guide affects local markets you’re invested in. When inflation goes up for example, cost of goods rises, including building materials, construction costs, and labor. So it’s important to stay on top of the macroeconomic trends.

But perhaps the most direct impact felt by investors is the cost to borrow.  

The key thing to remember about the Funds Rate is that it is a floating rate — an overnight borrowing rate that the financial markets keep a close eye on.

The banks use it to set their prime rate and price their products, including credit cards, auto loans, home loans, and yes, even commercial real estate loans.  

Having a floating versus fixed rate depends on your business plan.

In this industry, floating rate loans are for construction or renovation of properties and fixed-rate loans are for stabilized properties.

And there’s also certain borrowers who put a floating rate loan on a stabilized property to stay flexible. They want to be able to sell without a hefty prepayment that comes along with a fixed rate.

These real estate investors borrowing on a floating-rate basis do see their rate go up every time the Fed raises the Funds Rate. So most investors with this type of rate are definitely racing to complete their business plans and lock in a fixed rate before they rise further.

Fixed-rate borrowers won’t see a change if the rate is locked. These rates are based on treasuries and treasury buyers and sellers often watch LIBOR and the Fed for clues and direction.

The proper rate for the Treasury is really set by the appetite for buyers at that rate. So the more people buy treasuries, the lower the rate goes.

The Treasury Rate is really an expectation by the markets as to long-term inflation and growth. So we’ve had a little disconnect lately. We’ve had the Fed raising rates, LIBOR going up, floating rates going up and fixed rates staying low.

An Expert’s Perspective

David Pascale is SVP at George Smith Partners where he oversees the placement of nearly $4 billion capital into commercial real estate. He offers his expertise via a weekly column in FINfacts known as the hugely popular “Pascale’s Perspective,” where you can get detailed information on trends affecting the United States Real Estate Markets by combining national/international macro overviews with specific microeconomic events.

Mr. Pascale shares his thoughts on the Treasury rate.

The reason the Treasury has not been moved up more I think is two major reasons. One is the relative value to the German bonds in the Euro. Because the Euro is a little behind the U.S. in growth and their central bank is still doing ultra accommodative measures such as buying bonds etc, which our Federal Reserve has stopped doing.

So the German bond ten-year bond is about 0.4 right now, and the relative value between the German bond and the U.S. Treasury, the U.S. Treasury is at 240 basis point premium on that. Until the German bond breaks out of that range, I feel that the Treasury will remain under 3% because there’s always going to be a buyer that sees the Treasury as a safe asset.

The other thing that affects Treasuries is U.S. deficits which are really exploding right now and that’s something for everyone to watch. Because at some point the supply-demand ratio can cause a problem. If there’s not enough buyers for our bonds, the yields will spike dramatically but so far that has not happened.

Historical Borrowing Rates for Commercial Mortgages

They didn’t call it the “housing crisis” for nothing. Real estate was hit hard in 2008. Since then, the Fed has focused its policy to incentivize private investments in this area.

For many years since 2008, the LIBOR was virtually at 0% or 0.25%. And so a typical LIBOR loan is anywhere from 1%-6% percent above the LIBOR. LIBOR borrowers have seen about 1.75% increase in LIBOR during that time, but interestingly, spreads have compressed slightly.

From 2012 to 2015, fixed-rate loans from both Fannie Mae and Freddie Mac, 10-year CMBS loans, and 10-year life company were being done in the high threes—3.75 to 3.8 or the low fours.

Today, rates are 4.5%-5.25%, so there’s been about a 1%-1.5% increase in fixed-rate loans overall.

The big banks have been aggressive for low-leverage loans for good sponsors. They’ve been lending in the high 100 into the 200s for good transactions.

Increased Competition from the Unregulated Sector

When it comes to floating rates, there’s been increased competition.

Recently, there has been a massive amount of money in the unregulated debt fund market. This elevates the competition for transactions and loan volume that forces some of the major banks to cut spreads.

Private lenders will raise equity from hedge funds, pension funds, or giant family offices, borrow money on a bank line over LIBOR—at a very low rate—as low as LIBOR plus 100-200 basis points and then lend the money out at LIBOR plus 200- 500.

The equity in the fund can get a return anywhere from 8%-11%. And that equity has been willing to take a lower return, which results in lower rates for borrowers.

The Collateralized Loan Obligation (CLO) Market

There is also a securitized market for floating rate loans. The collateralized loan obligation market, which is like a floating rate CMBS for summary purposes.

That market has been very active lately because as rates go up, there are more buyers for LIBOR-based securities because they can protect themselves against rate increases.

The CMBS bond buyer buys a fixed-rate, 10-year security. This is a higher risk instrument with a lower yield than a Treasury. Conversely, as the Fed raises rates, the CLO market has been on fire lately, with tons of buyers and which has compressed spreads. In an inflationary environment, where interest rates are going up, having that ten-year fixed rate is far more attractive than floating rates.

Real Estate Investors Deal with Inflation

“I still think commercial real estate is an attractive investment because it allows you to go at all levels of the risk spectrum.”  — David Pascale, SVP at George Smith Partners

We asked David Pascale of George Smith Partners to share his thoughts on what it means to be a real estate investor moving into 2019.

Mr. Pascale believes that real estate has served as an inflation hedge from post-World War 2 right up to around 2006. There are many reasons for this. “Other than the tax benefits with depreciation, the general idea is that as prices go up, rental rates go up as well,” Mr. Pascale says.

“I still think commercial real estate is an attractive investment because it allows you to go at all levels of the risk spectrum. From low-risk apartments that receive the ‘first dollar’ from consumers, to industrial buildings playing a key supply chain role in the internet age.”

Going forward, Mr. Pascale envisions a lot of investing being “deal-specific and market-specific, since different parts of the country are growing at different levels.”

He states, “I think that there’s been a continuing kind of wealth gap in America, where there’s the very rich and the working poor.” So he sees investors betting on working-class stores— the discount stores, the daily needs stores—in particular markets across the country.

On the other end you have investments in the very top 1%—the ultra luxurious category of high-street retail for example.

“So there’s a lot of trends to watch as America changes and you want to buy real estate that is going to be functional five years from now,” Mr. Pascale says. “You have to look into the future and watch for trends. Especially in the case of retail right now, what will be a viable piece of real estate.”

The Final Forecast

Mr. Pascale believes a December rate hike is still on the table, despite what some investors think. After the third this September, Mr. Pascale expects 2-4 further increases in 2019.

As investors, the best thing to do is watch the markets. But also trade agreements (or trade disagreements), including tariffs and the like. The recent trade deals between the U.S., Mexico, and Canada is being called “the new NAFTA”  and Mr. Pascale believes it is reassuring for the U.S.

“A lot of people don’t realize that Canada is our biggest trading partner and Mexico is a massive trading partner,” Mr. Pascale says.  

“The big kahunas in this world are watching the U.S.-China trade talks which haven’t been going well, but there’s some speculation of a big breakthrough coincidently timed for the November elections.” Either way, those talks are being watched closely as well.

“Finally, the US and Europe recently came up with a major agreement. So that was something that could produce a lot of headwinds to the economy’s trade,” Mr. Pascale says.  “We’re watching the midterm elections and political tumult in Washington and some economists think that gridlock is the best thing because things just keep puttering along.”

Speaking of Washington, Mr. Pascale would like to see a major infrastructure bill come out of there to help real estate and all other aspects of life in America. “I think a lot of the highway system we built in the 50s and 60s needs an upgrade with new trucks and everything like that.”

The tailing effects of the recent tax cuts saw a big boon to corporations but Mr. Pascale wonders whether corporations are investing that money or are they just doing stock buybacks? “Stock buybacks will be a short-lived spike, real investment in the economy, new equipment, payroll bonuses for the working man and women are what was hoped for and we’ll see how that turns out,” Mr. Pascale says.

*If you like this post, be sure to enroll in our free six week course on the fundamentals of commercial real estate investing — RealCrowd University.*

The post How the Federal Reserve Impacts Commercial Real Estate appeared first on RealCrowd.

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Dr. Glenn Mueller, Professor for the Burns School of Real Estate and Construction Management at Denver University, joined us on the podcast to discuss how to master real estate cycles

Download This Report Before Listening

Please download Dr. Glenn Mueller’s cycle report so you can follow along as he discusses the charts: Real Estate Cycle Monitor Report.


With 35 years of real estate industry experience, including 26 years of research, Glenn Mueller is a professor for the Burns School of Real Estate and Construction Management at Denver University, one of the oldest and largest programs in the country. Mueller’s research experience includes real estate market-cycle analysis, real estate securities analysis, real estate capital markets, portfolio and diversification analysis, seniors housing analysis and both public and private market-investment strategies. He is also the real estate investment strategist at Dividend Capital Group, where he provides real estate market-cycle research and investment strategy for Dividend Capital’s Real Estate Securities, Private Real Estate Investment, Private REIT and Real Estate Debt groups. He is also the co-editor of the Journal of Real Estate Portfolio Management.


PhD, Real Estate and Finance, Georgia State University, 1990
MBA, Babson College, 1975
BSBA, Finance, University of Denver, 1974

Awards and Honors
  • Awarded Richard Ratcliff Award by the American Real Estate Society (ARES) based on his groundbreaking research on real estate market cycles, 2010
  • Awarded the Red Pen Award for editorial work on the Journal of Real Estate Portfolio Management
  • Ernst & Young Visiting Professor at the European Business School
  • Visiting Professor at Harvard University 2002 to Current
  • Graaskamp Award for Research Leadership from the American Real Estate Society in 2004
  • Graaskamp Award for Research Excellence from the Pension Real Estate Association in 2001housing and real estate markets.

Market Insights from Black Creek Group

Real Estate Market Cycle Report – Scroll down the page to locate the report.

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RealCrowd – All opinions expressed by Adam, Tyler, and podcast guests are solely their own opinions and do not reflect the opinion of RealCrowd. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. To gain a better understanding of the risks associated with commercial real estate investing, please consult your advisors.

Tyler Stewart – Hey listeners, Tyler here. Before we start today’s episode I wanted to quickly remind you to head to realcrowduniversity.com to enroll into our free six-week course on the fundamentals behind commercial real estate investing. That’s realcrowduniversity.com. Thanks.

Adam Hooper – Hey, Tyler.

Tyler Stewart – Hey, Adam, how are you today?

Adam Hooper – Tyler, I’m doing well. We’re just ripping into Season Three here.

Tyler Stewart – We are. It’s been a good start so far to Season Three, hasn’t it?

Adam Hooper – It has been. Joe kicked us off great, and we’ve got another just awesome, solid guest today with a ton of information.

Tyler Stewart – Yeah, we have Glenn Mueller, PhD in real estate finance and real estate investment strategist for Black Creek.

Adam Hooper – He’s a professor at Denver University. He’s taught all around the country. Real estate, finance, and market cycle is his expertise, so fair warning for listeners out there: highly, highly recommend check the show notes, download at least one of these charts that we’ll reference today that shows the market cycle, because we talk about some of the different stages in there. We think it would be really helpful for you to have that, that you can kind of reference as we’re talking about these different phases of the cycle, and different components of it, because there’s a lot of information in this one, and it would really, really help to have that chart handy. Talk generally about the physical market cycle, how that differs from the financial market cycle, internal factors, external factors, how real estate reacts to the overall economy. Really good to kind of tie a lot of these concepts we’ve talked about in the last couple of seasons into how to synthesize that into an actionable look at where we’re at in the real estate cycle.

Tyler Stewart – Glenn’s really about what I call visual analytics, so be sure to download his chart so you can see, visually, what we’re talking about when we talk about supply, and demand, and price, and Glenn will show you how the market moves.

Adam Hooper – Some of the key points, again, referencing real estate as a delayed mirror for the economy, so you’ll listen in and hear what we talked about that. Talked about the pace of growth, how we’ve been kind of plodding along at a fairly sustainable pace, increased that a little bit last year, and still the forecast for continued growth, but maybe we’re not going at 35 miles an hour. You’ll hear, maybe, what speed we’re going at here as you listen to the episode. Again, ton of really good information. Give us some feedback, too. Is this too much information? Is this too dense, or do you like getting nerdy with us on some of these topics? Send us a note to podcast@realcrowd.com, and with that, let’s get to it.

RealCrowd – This podcast is brought to you by RealCrowd, the leader in online real estate investing. Visit realcrowd.com to learn more about how we provide our members with direct access to commercial real estate investments. Don’t forget to subscribe to the podcast in iTunes, Google Music, or SoundCloud. RealCrowd, invest smarter.

Adam Hooper – Well, Glenn, thanks for joining us this morning. We’ve got an exciting episode, dig into market cycles here. Thanks for coming on today.

Glenn Mueller – Yes, thanks for having me.

Adam Hooper – You’re joining us from Denver?

Glenn Mueller – I am.

Adam Hooper – Perfect. How are things out that way?

Glenn Mueller – Well, it was snowing up in the mountains this morning when I left to drop my wife off at the airport, and it is fairly clear here, which is typical for Colorado.

Adam Hooper – Nice, well, we appreciate you taking the time to spend with us on the show, rather than being on the slopes this morning. Why don’t you take us back a little ways and just kind of get us some background on how you got into real estate, kind of where your career has taken you, and then how you got into more of this market cycles and research area of our industry.

Glenn Mueller – Sure. My undergraduate degree was in finance from University of Denver, where I now teach. Went east to Boston to do my MBA, and wanted to come back to Colorado. My first job was as a Loan Analyst at United Bank of Denver, where totally by chance I got put into the real estate group. I did loan underwriting for acquisitions as well as new development for a couple of years, realized that real estate developers made a lot of money, and went back east and started my own company developing and building. Did that for seven years. Got tired of the frustration of subcontractors who didn’t show up on time, and tried teaching a class at DU, actually, loved it, went back to school, got my PhD in real estate, which is actually fairly unique. Most professors either have a PhD in economics or in finance. Then a job opened back up at University of Denver, so was there from ’86 to ’90. Then ’90, along comes Prudential Real Estate Investors, the largest investors in commercial income-producing real estate in the United States, and I got offered a job as a Vice President making four times what I was making as a professor. When I arrived in 1990, for those that have been around for a while, they may remember that we had a recession and a pretty good crash in real estate as well from overbuilding, mainly office, in the 1980s. When I arrived, they said, figure out what happened, why it happened, and whether or not we can watch it, and therefore prepare for it for the future. In that research is when I started to look at real estate cycles. I was at Prudential for a couple of years as a Vice President.

Glenn Mueller – Became the head research guy for another big brokerage firm called Alex. Brown Kleinwort Benson. We basically invested money for institutional investors, and by institutional I mean pension funds like California Public Employees’ Retirement System, Colorado Public Employees’ Retirement Association, all the major state pension funds, and as well as endowments. Harvard has the largest endowment in the country, followed by Emory University, and Yale, and stuff like that. They all invest in real estate as well. After being at Alex. Brown, got hired as the national director of real estate research for Price Waterhouse. Couple years there. All along I’m continuing to develop my cycle expertise, and started putting out a report called the Real Estate Cycle Monitor, which I’ve now been doing for 25 years. Went on to another company called Legg Mason. If you’re from the East Coast you’ve heard of them. Big stock brokerage and mutual fund firm, and there I worked with publicly traded REITs, and the cycle research still very relevant there. Then came back to Denver in 2006, back to teaching at University of Denver, and also doing investment strategy work for a company called Black Creek Group here in Denver. I’ve been there for 13 years, and continue to produce my Market Cycle Reports that are read by both investors and real estate brokers, and all kinds of other real estate people.

Adam Hooper – Perfect. We’re going to put links in the bottom of the show notes to these resources. I will say I think I’ve got more printouts on my desk here today for this show than any in the show’s history. Again, you are just chock-full of information, and we’ll have links down there for all the listeners to get to the Cycle Monitor, specifically, is a just awesome piece of research that I think everybody would be well-served to check out. Prior to your engagement at Pru, how much work had been done on identifying cycles specifically within the real estate asset class?

Glenn Mueller – Well, I actually credit Homer Hoyt, who was a researcher. He produced what I consider to be the first idea on cycles back in 1933, by doing some research in Chicago. Actually, I’m a member of the Homer Hoyt Institute, which was started in honor of him. It’s basically a small school where real estate people that are in real estate, PhDs in real estate, professors, and researchers get together and talk about what we’re doing next. He kind of got things started. Real estate cycles like the economy. I’ll leave it at that at the moment because you’ve got more questions.

Adam Hooper – Perfect. Let’s get into that. How do you define a real estate cycle?

Glenn Mueller – Okay, great. As I started into it, many people tried to describe the real estate cycle by looking at total return, and that is difficult and challenging. What I found is that there’s really two major parts to the real estate cycle: the physical real estate cycle, which I describe as demand and supply for space. That is very local in nature, so the demand for office space in New York City is going to be different for the demand for office space in Philadelphia. Then supply, if we’ve got demand then we need to put up more supply, that is, again, very local in nature. Demand and supply, when we bring the two together, will tell us what’s happening with occupancy levels, or its inverse, vacancy. My market cycle research I use occupancy levels as opposed to vacancy, because the level of occupancy will tell us very clearly what kind of rent growth there might be, and the income portion of real estate that you’re getting comes from increases in occupancies and increases in rent, so there’s the physical cycle to start with. The financial cycle is the price of real estate, if you will, and that is very clearly driven by capital flows. If a lot of people want to buy, prices are going to go up. If there are no buyers, prices are going to drop, so we got a physical cycle and a financial cycle. They logically should follow each other fairly closely, and do much of the time, but there are times when they don’t, and that’s when it gets a little bit unique. That’s how I define market cycles, physical market cycle and financial market cycle.

Adam Hooper – Perfect, and then, in the cycle, hoping listeners will be able to, again, maybe look at some of these resources before getting too deep in this episode. If you’re listening now, and you have the opportunity to pause and go get a market cycle chart, would highly recommend that. We’ve got four phases of the cycle. You’ve got recovery, expansion, hypersupply, recession.

Glenn Mueller – Correct.

Adam Hooper – Can you maybe just, very high level, paint us a picture of what some of the main attributes of those four different phases of the cycle might be?

Glenn Mueller – Sure. One of the things I’ll drop in right now is, every city is different because every city is driven by different industries. We actually use the term economic base industries. An economic base industry produces a good or service that it exports outside of that local economy, outside of the city, that brings money in to help the city grow. Easiest example: Detroit, Michigan is driven by automobiles, or historically has been driven by automobiles. New York City, obviously, the finance industry. If employment is growing, and that’s really my key, if employment is growing in a city, then that creates more demand for space, and then the amount of supply coming along. If we create, as an example, 1,000 new office jobs in any given city, and the average square feet per person in office space is about 200, that means we need 200,000 square feet of office space. If there’s been a recession, and there have been layoffs, then people aren’t renting space, and occupancies drop off, and so at the end of a recession we start to get employment growth. That starts to create demand, and we start to soak up the existing, available space that’s there. In the recovery phase we’re coming from the bottom of a recession. We’ve got a lot of excess space available, and we start to rent that space up, and occupancies start to rise towards a long-term average. One of the things about my cycle charts is that each city has a different long-term occupancy level average, depending upon its size, and its growth rate, and everything else.

Glenn Mueller – As an example, in New York City, one of the biggest office markets in the country, and a market where it’s hard to build something new, the average occupancy level over the long term has been 91%. In Denver, a smaller, faster-growing market, the long-term average has been 87%. People looking at my cycle chart from points one to point six, we’re recovering and renting up all that excess space till we get to that long-term average occupancy level: 91% New York, 87% in Denver. Above that we’re in the growth phases, where demand is moving up. We now start to get new construction trying to meet that new demand. Readers will notice that on point eight, that’s in green, and that green dot stands for cost feasible new rents. By that I mean if it costs $400 a square foot to build a new building in Denver, Colorado today, and investors are looking for a minimum 10% rate of return, 10% of 400 equals $40 a square foot, hence rents need to be $40 a square foot to cost-justify building that new building. Of course we can’t turn on the widget machine and pop out buildings overnight, so we end up making the market tighter and tighter until we get to peak occupancy, which happens in each real estate cycle. Peak occupancy might be 95, 96% in New York, and 94% in Denver, as an example, but that’s also a point where demand, which has been growing, supply has caught up to it, and now they’re growing at the exact same rate. If demand is growing at 2 1/2 percent, and supply is growing at 2 1/2 percent, your old Econ 101 class would call that equilibrium.

Glenn Mueller – Markets can get to peak occupancy and be in equilibrium, and they could stay there for a long time until one of two things happens. Either demand starts to drop off due to a slowing economy or a recession, or we put up more than we need, developers start to build more than is necessary. If either one of those happens, now supply is growing at a faster rate than demand, hence we’re in the third phase, or the hypersupply phase. As more comes along, eventually occupancies drop back off to that long-term average. Point six on my graph and then point 14 on my graph are the same occupancy level, just that in one case occupancies are on their way up, and in the other case occupancies are on the way down, crossing that average. Once we cross the average, then we’re into a recession phase. We’re basically constructing above the long-term average. Typically we don’t start anything below the long-term average, although in the recession phase, many times there are buildings that have been started that get completed and just add to the oversupply in the market. It’s a 16-point cycle that you’ll see my graph on, because historically real estate cycles have lasted in the neighborhood of 16 to 17 years. If you look at what’s going on, if they followed history fairly closely, they move one point forward each year on the graph. That doesn’t always happen, though. Sometimes cities sit at one point for a long time. Right now, as you go look at my reports, a lot of cities are at equilibrium, are at that point 11, the peak occupancy level, which is equilibrium,

Glenn Mueller – and they could sit there for a long time. I think that will happen in a couple of the property types. We’ll talk about those, I’m sure, in a few minutes.

Adam Hooper – That’s, again, an awesome overview. A couple of things that are interesting: the time that it takes to move from one of these points to the next. It’s not a calendar-framed decision. This is purely a measure of both, again, like you said, supply and demand, so the question of, “Okay, hey, we’re nine years into this recovery. It’s got to start to turn the corner soon.” That doesn’t necessarily have to happen based on a time-based factor just because it has historically. Maybe we can talk a little bit about–

Glenn Mueller – Sure, well, and that’s a great tee-up for me. I believe that real estate is a delayed mirror of the economy. By that I mean that if the economy is expanding, demand for real estate’s expanding, hence we should be in the up cycle. When the economy is contracting, and people are getting laid off, then demand for real estate is contracting. Literally it is employment growth that is the key driver of real estate demand, in my opinion, in all the major property types. We are in an economic cycle where I could go back to 2015 and show you economists’ forecasts that in 2018 we’d be in a recession. Obviously, that has not happened. Last year was the best year for economic growth, and the two ways most people measure it are either by GDP growth, which is going to be, when we get the final numbers out, is going to be above 3% for all of 2018, or by employment growth, and we were adding over 200,000 jobs a month during that time frame. A lot of people say, well, why are you using employment growth? Why not just look at unemployment? Well, unemployment has about six different definitions to it. It’s collected by a different government agency. It’s very inaccurate. Whereas employment growth is a very, very accurate statistic, because every time someone gets a job, they fill out a W-2 that goes to the government, and the government literally, within a week of the end of every single month, puts out an employment growth number. Last month, so the month of December is already out, it was 315,000 jobs, and yet the unemployment rate did not change at all.

Glenn Mueller – That’s always a quiz question for my students: how is it possible that employment could grow when unemployment didn’t change? They all scratch their heads, and I say, “Okay, how many of you in the room are on unemployment?” Nobody raises their hand. I say, “Okay, and when you get a job, does that decrease unemployment?” Answer: no. These are people coming into the workforce, and right now we’ve got strong workforce growth from the millennial generation getting out of school and getting their first jobs. We have about four or five more years, just demographically, of a large wave of millennials coming out of school and getting their first job, that really recreates what happened in my generation, the baby boom generation, back in the ’70s. We had great economic growth because you get out of school, you get your first job, you actually spend more than you make because you got to buy clothes, and furniture, and a car, and all that kind of stuff. That just creates economic growth. 70% of GDP growth is actually consumer spending. A very easy number. Employment growth is going to decelerate. It’s still going to be positive, but it’s going to slow down, only because there are going to be more baby boomers like me retiring than there are millennials coming into the workforce. That’s assuming that baby boomers actually do retire. More and more of them are continuing to work longer, or they may end their current career, but within a year or two they’re bored, and they come back, and are doing something else, whether that’s driving the shuttle bus

Glenn Mueller – to pick up your rental car. I see semi-retired people doing that all the time. A lot of my friends are now, I got a friend who’s 75 years old who’s a ski instructor at..

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