December 2024
Here are some key takeaways from their conversation:
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Ep. 116 Time's Running Out: Financial To-Dos Before 2025
Ep. 115 Would You Rather Give to Charity or the IRS?
We have with us three of our equity managers who are buying, purchasing, owning properties long term. And specifically, just quick, quick introduction, because each of them actually focuses on a very different niche of the real estate market. So it should be interesting to get their thoughts on these different areas. So Shawn Clark is with USLF/CRG.
They focus on industrial properties. They build large modern industrial properties. Think those used by Amazon and Walmart type of buildings. Megan is with KCB Management. Many of you here are familiar with them.
Morton's been investing with them for over two decades. We've been in all eight of their real estate equity funds over the years. And they are very much generalists. They will look to invest in different areas of the real estate market depending upon what's attractive, what's available at any given moment. And then Todd Williams is with Grubb Properties.
Grubb is focused on multifamily or apartment buildings. And their key area of focus is what they call essential housing. So building apartments for typically young professionals, things that are a little bit more affordable in certain markets where there is a lack of that today. So today we're going to delve into a number of different things related to real estate.
But starting out, just talking a little bit about the challenges that the current market faces and then get a little more, I promise, more cheerful into the opportunities. But in terms of the challenges right now, anyone in here own investment, real estate? How about homes? It's interesting for those who might just own their homes versus owning both.
It can feel very different because right now, I mean, in Southern California, housing prices are at all time high. So real estate markets doing great. On the commercial side though, and especially if you're looking to transact, buy and sell, it's been really challenging the past couple of years. And all of it's driven by interest rates. So interest rates were at all time lows.
We have the fastest rate hiking cycle in history. And that really created a lot of challenges because real estate is such a heavily driven debt investment. The debt that you use to buy real estate makes the interest rate part of it just really impactful.
And even less impactful on price, more just even in how you operate. So let's say you have a $10 million property. A couple of years ago, you'd go borrow 8 million bucks from the bank. You had a really low interest rate. The income from that property covered, you know, the debt service. No problem. And then you fast forward to today and maybe the bank would say, hey, we'll refinance that, but we're going to give you 5 or 6 million.
And all of a sudden your income doesn't cover it. And so it's been really tough for a lot of, different kinds of properties, let's say commercial properties. Broadly, if you're going to paint with a really broad brush down maybe 15 to 20% from previous highs and certain kinds like office things like that, you know, much, much worse, as many of you know.
And so let's go ahead and maybe get into your specific areas of focus, because again, we have a really good wide variety here. And just talk through kind of what the recent history has been like with what's happening with rates. So we'll start with you Shawn.
Okay. Great. I'll give just a little bit of a bigger backdrop for the USLF CRG Clayco. Clayco is sort of the top Co and its main business is construction. So we kind of live inside of a construction atmosphere. CRG is the real estate development business. That's one of the subsidiary companies of calico. And then USLF is our fund vehicle that invest into the ground up development of industrial assets across the United States.
Our business, CRG, has seven regional offices across the country that cover from Philadelphia doing the northeast region, Atlanta doing the southeast region, Chicago with with two partners that cover the Ohio Valley and the Midwest regions. Saint Louis kind of helps with that as well. Phoenix in the southwest. LA Culver City for the for the inland Empire, Southern California market, and then in Seattle as well.
So we're geographically diversified and how we pursue that. I think the question was specific to interest rates or...
Industrial had a really hot run for a very long time, was incredibly strong. And it was not immune from interest rate rises.
No. That's right. So we're just to paint the picture for those who don't live in industrial real estate every day. The industrial real estate asset class was benefiting from e-commerce and was in a really strong position way before the pandemic had happened. So coming out of 2013, really the rise of Amazon, 2014 and 15, what you were seeing was demand for a modern industrial facility.
And what that means to me is, larger buildings. So maybe normal sized buildings in the past for 300 to 500,000, I mean, obviously all the way down to 50,000. But the new buildings were 1,000,000ft² plus taller, clear heights. These buildings, were no longer 28ft clear, 32ft clear, 36ft clear. They're now 40ft clear from the floor to the ceiling joist.
Way more car parking. 1,000,000 square foot building actually needs at least 500 car parking spots and, tons of trailer storage to meet sort of the e-commerce needs that are happening. And so, if you think about all of the industrial buildings built before 2010, they didn't have those features. A developer would build the biggest building that they could on the piece of land that they had.
And so now stepping back, you needed a bigger piece of land to accommodate all of the site circulation and the parking and the things that I just described. So there was massive demand for these new facilities prior to the pandemic and then the pandemic forced everybody to go home and, really, you know, didn't create a new trend.
It put fuel on the fire for the trend that was already happening for folks buying online. So just also painting some, some backdrop is history 2018, 2019, maybe 200,000,000ft² of annual net absorption of industrial buildings in those years.
What do you mean absorption? So people leasing those buildings.
And not just total leasing. You know, the total leasing might be call it 600 million, but 400 million of that might be someone moving from one building to another or releasing space that they already have. When I say net absorption, it's new space being absorbed, by growing tenants or new tenants. And so it was about 200 million, 100 to 200 million a year, prior to the pandemic, 2020 was 300,000,000ft² of net absorption.
And then 2021 and 2022 were both over 500,000,000ft² of net absorption. So what you saw was massive demand. But at the same time, sort of a delayed reaction, but a lot of new supply out to go meet that demand. And so we reached a spot now where in 2023, we still had over 250,000,000ft² of net absorption.
But we're coming off record supply. And so you have a little bit, of supply that's being burned off today. And then combined with the fed rate hike, sort of slowed leasing decision sort of in anticipation of a potential harder landing. And really, the positive of all of that is the new, the cost of debt has changed, the capabilities to go start new development.
So new development starts are way down.
So with that, I think we'll get maybe this more in the opportunity section, but the, the idea being that there's going to be less supply in the future. So existing buildings or what you can build will be more valuable.
That's exactly right. So we're the new supply coming on line is, under 300,000,000ft², is under construction, which is as low as it's been since 2017. And so that's a good thing.
Thank you. I'm actually gonna do Todd next as we'll get specific and then we'll let Megan do a broader view. But you know apartments really to a large degree I think we're touted as sort of this safe haven asset class. It almost felt different from other kinds of real estate where lots that secure it's safe but not immune from interest rates.
And even in particular where you guys are building. I think there's there's been challenges.
Yeah. Let me just start with, kind of the context of multifamily housing. Really starting almost a decade ago, we've seen unparalleled demand for for housing in general, in particular for multifamily rental housing. We've been, really over the last ten years and probably likely for the next ten years, we will under build housing in the United States.
We have about a 3.5 million unit shortfall, including both single family and multifamily housing demand. So that's sort of the backdrop. But the last five years have been probably the most volatile years, at least in my, my career. And if you think about kind of the, you know, major events that have occurred over the last five years, they've been, you know, volatility in good ways in housing and volatility in bad ways and housing.
And I'll just kind of march through them. And that might be helpful as context. So you know, first obviously with Covid we had, you know, very significant changes to the availability of construction materials. For example, you know, wood trades on a linear thousand board foot metric, and and that metric in 2019 was about $280 a square foot above a little bit of volatility.
But around that number, it had spiked post Covid to over $1,400 per linear, thousand board feet. That was kind of the volatility we saw early on. Yeah. So inflation became a real issue. That was further fueled by both fiscal and monetary decisions. Inflation by comparison. And a great example of this in terms of how it affected housing for us is a project, that I like to use is a great example of, of inflation.
In Chapel Hill, North Carolina. So Chapel Hill is a market where we own significant assets. And we were building, a four phase link apartment project, like parts, apartments are our national brand. Our first phase cost us 238,000, per unit to build. We constructed that or priced that in 2019 and delivered it in late 2020.
Fast forward just, two years later, our second project, we constructed for, $285,000 per unit, and delivered that in 2021. I'm sorry, in 2022. And the last phase that we price but have not started construction yet. Priced at 348,000 a unit. So in the span of call it three, three and a half years, you're talking about over $100,000 per unit increase in the cost to produce housing.
That's what inflation, that's the impact that inflation had on on the housing industry, at least in the multifamily rental sector. Fast forward then to the Fed's response to that inflation. That cost is big and said at the outset the fastest rate hike in modern history. So that rate hike, to put it in perspective, moved Sofr.
Sofr is the benchmark index for most construction financing by over 2,200% in less than 17 months. We've never seen anything like that. And, that created a lot of challenges in our, in, in our industry, as you can imagine. Because interest, is also a cost element. You have interest reserve as part of your construction cost, and then you, ultimately have to pay, interest, even post occupancy prior to, refinancing that property.
But not only did short term rates go up affecting construction interest rates, but so did long term rates. And so, the example that, Megan gave earlier on refinancing also became a problem in the multifamily industry. Now, one of the ways we mitigated that was we used a lot of long term fixed rate. Construction to permanent, one of those vehicles, for example, that we utilize often is a program called a 221 D4.
It's, HUD program. That's a construction financing rate that's typically 70 to 80 basis points inside market rates, and it's a 40 year amortization. Following two years of construction interest.
Well, it is a very difficult loan to get. And yes, I thank my firstborn is, pledged to HUD at this point, but, but that, that financing is really interesting because, you know, we've got several loans that have you know, 2.39%, two point, you know, eight 9%, 2.82% type financing rates, fully amortizing over 40 years.
And by the way, these loans are a symbol. So I can sell the loan with the property and so many of those properties while the valuations are way down. The the value of the loan is now an asset and and can be sold with those properties. So that's one way we've, we've, we've combated not been able to do that on every property, many of these HUD loans, as I think, Megan is alluding to, can take 15 to 18 months in some cases to secure.
And, and you have to be obviously qualified with a lot of experience with HUD. But that's one way we combat against that. And, you know, now what we're seeing is obviously a fed pivot. We'll, we'll talk a little bit about that and what the impact of that will be on on the opportunity set that we see right now.
Megan, for you guys, I'm curious, since you you have some exposure or at least view to a lot of different kinds of real estate, you know, what was sort of most resilient through some of the challenges. And then even, you know, where, where, where were there interesting opportunities or we'll get a little more, I get excited. The the other piece, though, is I think there are a lot of investors who have been on the sidelines kind of more short term investors.
And so the dynamics of your market have definitely been shifting as well with interest rates.
Yeah. So, we are a long term cash flow oriented opportunistic investor. We partner with best in class operators like Shawn and Todd across the country doing everything from ground up to stabilized type deals. And like Todd, we like to go in having long term fixed rate debt so we don't have that volatility. For our long term hold.
So if we look at going back to when Covid happened, we really were on the sidelines from an acquisition standpoint and became a very active seller of our real estate. And I should step back. Something that's different from our peer group is we create our fund vehicles in a way that allows us to hold indefinitely. So we have the ability to sell in markets when they're hot and be buyers when the markets are a little bit softer.
So we became very active sellers of our multifamily properties because prices were extremely high. Why were they high? Partly because some of our properties were seeing double digit rent growth. Also, interest rates were extremely low, debt was affordable. And we were concerned at the time that there was this eviction moratorium. So essentially, if we had tenants that stopped paying rent, we were not allowed to evict them.
So we were concerned that we were going to start to have lower cash collections and have to support these apartments if that ended up happening. So we had very nice exits for most of our multifamily properties that we sold during that time. Switch to 2022 when the when the fed started escalating rates, we also saw lenders expanding their spread out, as well as giving us lower proceeds when we were buying properties.
And this really had an impact on volume. So in 2022, there was about 400 billion of transactions that took place. 2024 that's expected to be about 150 billion. So only about 40% of what it was just a couple of years ago. Well, that's an issue because there's very little pricing discovery. So when people are going in to try to value the assets, they don't have a good president transaction to look at, to say, this is how much we think that we can actually sell our property for in a couple of years.
And most of our peers are looking at 3 to 5 year hold periods at the most. And so not only are they having an issue, we're trying to figure out what their cap rate would be when they exit, unlike being in Sean's place, I think at the time which got the benefit of the E-com boom, a lot of property types started struggling from a rent growth standpoint and ended up, in many cases, declining.
So you had declining rent growth and higher operating expenses. So not only could they not figure out the exit cap rate, they also didn't know what their net operating income was going to look like in the next few years for us, because we're a long term holder, and we like to go in with the assumption that we're comfortable holding these properties forever.
We've always used historical growth rates over several decades when determining how we're going to underwrite these deals. So we're focused on cash flow generation over time. We know that there's going to be some years where they'll be softer growth and other years will there be more robust growth. But at the end of the day, it should normalize. So with our peers on the sideline, we were able to become much more aggressive from a pricing perspective because sellers really didn't have many options and they were struggling with how from a seller standpoint, do we refi and we put in cash in because the new loans that were coming due were much cheaper than where they are today. Some had lifecycle issues where their LPs needed to exit. So we've found some really tremendous deals in the last couple of years. They tend to look like strong cash flow going in day one. High cap rates, really accretive leverage. And while we don't underwrite to predictions of what's going to happen with the fed rate going forward, we do know that the fed has a target of 2%.
And so we should, over time, benefit from interest rates and hopefully more affordable debt.
Thank you. I think what we've seen in the last couple years. So you alluded to this about the short term investors. So a lot of people just waiting. So just just on pause where they did almost didn't know what to do. And that that definitely translated how I get the opportunities into the I think it does throw space a little bit where you saw some of the big tenants, even Amazon was like, okay, let's let's pause this.
And if Amazon hits pause, it's like it's at the end of the world. You know, it's are we going to continue? But I think they're back. So kind of what's the outlook I guess going forward for, for this the sector of the market.
There's a lot there. So, I would say yes, they're back. I giving some history to it. Amazon was the first to take a lot of space in the e-commerce race. They were also the first to sort of admit when they had over overbuilt and overly so. They were the first to stop, and, in good news, earlier this year, they were sort of the first to get back in.
And so they've, they've leased over 18,000,000ft² in the first half of the year. I don't have the the latest figures I was trying to find them for what's what's happened lately? I do know lately, as a matter of fact, that AWS has been on a complete, tear. Our our company is building over $2 billion of data centers for for Amazon Web Services, right now.
And that's a whole nother topic. But they are back in the market in a meaningful way. I'd also add that after a good 12 months of, of, slow decision making by tenants and, and, and really delayed lease signings, delayed lease signings. We've we have executed 4.5 million square feet of, of leases and losses in the last month and a half or two months, and across our portfolio and we continue to see even more, opportunity every day across the portfolio.
So it does feel like tenants are back in the market and making decisions again. I think I would give we in the good news section yet. Okay. So, you know, and just another kind of spot point. There's, we feel like we're at the bottom of the market. That and coming out of it for sure. I think the the rate cut that Todd alluded to is obviously helpful.
We have a data point, for example, that that we had sold and Megan wanted real example. So I'm going to give a real one. We sold a legacy asset, turned out to be a really great asset for us, but it was the Amazon deal we did in, in Phoenix. We sold out about six months ago at like a 5.7 cap rate.
And we're getting guidance that a different Amazon with the same term, a ten year term, is going to get awarded about at a five, three, five cap rate.
And just say this microphone's exciting. For people don't know, cap rate is basically it. It's you. Stop it. It's the, without debt. What's your yield from a property? So when it's a higher cap rate, it's actually a cheaper price and vice versa. So basically they were able to sell at you know, at a good price.
And then they're seeing that even prices are continuing to go up.
Just like bond yields. When when interest rates go down the bond values go up. So so pretty meaningful. About 35 basis point reduction in cap rates following a 50 basis point, reduction in the fed rate. So, I think that's good news. At the same time, just for another data point, I know in in Columbus, Ohio, there's 1,000,000 square foot class, a sort of high, credit tenant.
Not not our deal, but, that we think is going to sell at a five, seven five cap rate. So that's Columbus. And, in Columbus as well. There's another million square foot deal that only has five years of, of term on it. Lower credit. And we're hearing they can't get anything better than a six and a half cap rate.
So so there's definitely money today for and this is just sort of how we see the cycle go. There's money today for the high credit long term. But once all the there's not many of those. So once those get bought up we see pricing coming in for the for the rest.
To where there's more security, good tenants in place. They're locked in. They're back in that market specifically.
And I think we've seen that too. With the fed rate cuts felt like something that a lot of people were waiting for. So, Megan, I don't know if you've seen people starting to come back in. And then also just in the vein of opportunities, I know senior senior housing is something you guys are looking at a lot, but what are the interesting segments right there today?
Yeah. So just to piggyback off of Shawn's point of kind of seeing this trough in our pricing pick back up, we actually follow the Green Street Commercial Property Price index. And it essentially trends property prices over the years. So if we go back to GFC, the down point was about a 31% drop. If we look at where it was end of 2023, today it's around a 28% drop.
So this is the time to be actively buying which is broadly across all property types. So it's not just one in particular that we think is extremely discounted, even though we know there's out of property types today, such as office.
Sometimes there's a reason they're out of here.
Yeah. But to Todd's point, I mean, there's a there is a national housing shortage. We know that there wasn't a lot of new construction that came online. And so we like apartment exposure over time. There's strong long term fundamentals there. We also like senior care. But the baby boomer population aging, we know that there is going to need to be more supply, to keep up with that demand.
You know, Megan, it's interesting you mentioned the Green Street Index. There's a small emerging manager called Blackstone that, did a, an interesting piece a couple months back that, well, I guess was back in July. And, the title of the piece was called investing Before the all Clear signal. And the thesis behind it was essentially that we are in this trough and that, you know, you have to look at the numerator denominator effect, right.
The fall is pretty significant. But the opportunity, coming back in the recovery is very, very significant from a valuation perspective. So, you know, I don't often, reference emerging managers like that, so pardon that, but, you know, on the housing side, you know, in terms of opportunity, we think of kind of, a couple of things, really A Tale of Two Cities right now.
And, you know, following, the pandemic, we had population migration changes, albeit temporary, and we also had capital flow migration, some of that temporary as well, some of it more permanent. That created, different effects in different cities. And so in, early 2019, we had started looking at gateway cities like New York, DC, LA, San Francisco as examples because these were markets where housing was very, very difficult to, to procure.
And, and we felt like, you know, being long term housing investors, why wouldn't you want to be in a place like that? Right. And, and then the pandemic changed all that, and we saw a temporary population migration go to places like Texas and Florida and of course, to the Carolinas, where we are. And and like you, we sold, you know, portions of historic portfolios and incredible values in 2021, when we were seeing 18%, 21% year over year rent growth in Atlanta, Charlotte, Raleigh, Nashville, you name it.
But, but what happened is that became a buying opportunity in some of these gateway markets. And so and, you know, places like New York and LA, we went in and bought sites and started working on development. And with the bet that these markets would be coming back. We've been incredibly right about New York. We've been not so right about San Francisco so far.
And so that's been a little bit more of a challenging market for us, although I'm confident that San Francisco will be back, it's just taking a lot slower than we thought. LA's more in the new York cap. DC was felt a little bit more like San Francisco. But now, DC just saw 11% year over year growth in the third.
In the second quarter. So, we're, you know, we're seeing these markets start to normalize again. And, and that's, that's powerful for those sites that we acquired. And so one opportunity is to continue to build in those markets where there is really, really restrictive housing. However, the opposite is true in some of the, growth markets, like in the southeast where there's been temporary oversupply.
So take a market like, Dallas, Texas, I think they have something like 78,000 units under construction right now. Now it's a big market, 380,000 unit market, but 78,000 units is a lot to absorb. Market like, Charlotte, North Carolina, where I flew in from is, you know, has 17,000 units under construction and regularly absorbs about 7500 a year.
So, some of that is coming off. We know it is because, new supply, new starts in housing dropped significantly as, I think Megan alluded to. And, and so as a result, 20, 26, 27, 28 and, and all of these markets look like they're going to be banner year, banner year for multifamily rental housing.
But 2025, for example, in some of these southeast markets may still be a little bit rough. So, as you can imagine, from an opportunity perspective, you know, we've got kind of three, we've got, you know, our existing portfolio, which we want to hold, and participate in that recovery. We've got, you know, some select development that we want to do in markets like New York or LA where we think we can get it to work and where there is, significant housing shortfall.
And then we've got, you know, markets like in the Carolinas where I would love to buy some more, more, more assets at that $238,000 unit price tag, which is about what you can buy some of these assets at today, even though it costs 350,000 a unit to, to buy a to to build them. So that's the the discount to replacement costs that we like to look for, for acquisitions.
I'm going to ask you all about the election. But no one say who you're voting for. Right. I think it's it's interesting how the election, if obviously there's so many different pieces involved with that, but real estate isn't immune from that in terms of both short term volatility but also potentially positive things that can come out of it.
So, maybe I guess, Megan, you want I want to go first pass down the line of how does that impact what you guys are seeing today or even end of the year type rush?
Right. So, we have seen a flurry of deals with sellers who have been more flexible on pricing. And really, the goal for them is to have the surety that there's a closing that's going to happen before a year end. And their concern is depending on who wins the election, the capital gains tax could go up. And so the net tax return for them, even if they were to hold and get a little bit higher purchase price, will still be lower next year than had they just go ahead and sell today.
For us, we do not make decisions based on what we think is going to happen in the election. You know, we hold long term, so it all depends on when we're selling, in the very long future.
I think, Sean, you had an interesting example of a deal that you got to take advantage of. Someone panicked. But four or eight years ago. Yeah. And I think that was perfectly outlined of what the fear is. And we we did have a seller, in the last four years ago, I guess now, which is crazy to think about, but who was nervous that Biden was going to win and, and, raise capital gains taxes for several hundred acres. It's actually that same site that we sold the Amazon on that I was just telling you about that land.
We were able to buy that land at a steep discount because the seller, wanted to urine clothes before the election would happen. And, and that really worked out in our favor. We also don't make any net tax decisions. We think about the market holistically and don't want to be, provoked by what's going to happen in an election and the volatility that can happen with that.
We think a little bit longer term, even though our development period and whole periods are still meant to be 3 to 5 years. But we don't we don't need to do anything rash.
For more of a long term standpoint. Some of the fiscal imbalances that we're dealing with from a political standpoint, I think also, we'll see how it unfolds as it relates to inflation and to real estate. Todd, I know that you've talked about this a lot, where, the fed brought up interest rates to combat inflation, but specifically in real estate, which is a big piece of actually the long term inflation numbers.
It had to some degree the opposite effect.
No question. I mean, to me, neither party has really addressed the fiscal side. In fact, if anything, fiscal side has been fuel to the fire for inflation. Inflation. And that's been a real challenge. As you know, some of the examples I gave earlier. But the monetary side has been a roller coaster. So we had, you know, zero interest rates forever.
And, you know, that created, you know, a fairly artificial environment. And then we had, you know, an incredible spike in a very short window of time. And that created calamity. We literally lost the capital debt markets for the better part of a year. We had a regional banking crisis that everybody's forgotten about by now. And maybe not so much over here on the West Coast, but, you know, that, that literally shut down the, the debt capital markets and the equity capital markets, they weren't even around at all.
And so we, you know, 20, 23 is, like a dark year for us, in the real estate industry because you just couldn't get anything done. That's changed enormous enormously. So, you know, we've seen, just to give you an example, I think in 2023, we did, I don't know, 100 and roundabouts, around about $140 million, a little bit less than that of of financings.
To put it in perspective, by the end of this year, we will, in 2024, likely complete closings on over $1.2 billion for the Refinancings. So that's just the that's just the debt capital markets, that faucet being turned on. And it's made of meaningful difference. Now the cost of that capital is extremely high. And in many cases, I can't remember what Megan or Sean pointed out.
But you know, the amount of debt proceeds available, is significantly lower than it had been in the past. And so that means in many cases that you have to, you know, in order to capitalize your project, seek some structured financing, meaning, you know, layering in between a senior note and the common equity, you know, what might be referred to as mezzanine financing or preferred equity or what have you, in order to, to fill in that gap.
You know, especially for midstream type projects. So, you know, that's become an issue. But now we've seen obviously with the fed pivot and, you know, if, if Blackstone's correct and, and we're at the trough and going to hit a recovery, that likely means that we'll see further interest rate relief over the next 12 months. And, and that that, again, will likely start a new real estate cycle.
Real estate cycles are so interesting to me. I think, Sean, maybe you and I were talking about this last night, but they are uncannily 16 year cycles and, I don't believe in just cycle theory for cycle theory reason, but the last four, that I've been through not, you know, excluding obviously the, the Covid, issue, have been exactly 16 years, which is just fascinating to me.
How many years we have left?
So. Yeah, exactly. Well, I'm a I was I was thinking we were over and starting a new 16 years. That was. That's my thesis. Anyway, so.
I think that for you, Megan. When we're looking at a lot of real estate deals today, we've seen stuff where people are so excited about relative deal pricing. So people come in, they're like, oh, it was it was really expensive before, and now it's just moderately expensive. And so it's it's tough to get excited there.
But I think that you guys see things that are a lot under the radar because I'd say more the broad real estate market, you're starting to see this loosening up where there are opportunities, but it's not this broad based thing where like, let's all go by as quickly as we can. But I don't know if you can share an example of something you've seen that may be a particular case today that was attractive or even a situation where because it was smaller, that's why you guys got a better deal.
Yeah I was I need to think through that a little bit. So our deal volume actually doubled between 2022 and 2024. And that was partly because our peers were sitting on the sideline, and they were having a hard time figuring out what the future was going to look like. And in 2022, 2023, sides were still increasing rates.
So no one knew what was going to happen and how quickly it was going to come back down. So we could be very, very selective of the deals that we did and really drive the purchase price that we were willing to accommodate. And that also was partly driven by what available proceeds there were. So, like Todd, we also have a relationship with HUD.
We've done over 40 agency loans at this point. So we were getting pricing that was much tighter than most other, groups would be able to get in the market. And because we're opportunistic, I mean, we were buying actually a lot of single tenant absolute triple, not least deal. So the tenant pays for all expenses. And, for something that we would normally never be able to access.
What kind of industrial. Yeah. So industrial has been something that we've always wanted to get into. We really hadn't had an opportunity to until the past couple of years, and that's been the majority of our purchases.
What's your target return profile on those acquisitions for? So it's over a ten year period that question.
The target return and kind of the profile of what they're able to buy.
Yeah. So for a ten year period triple not least still single tenant. We're in the mid teens. Not to us. Which is is quite nice over A3X multiple.
Again though. Does that feel like it's something more. It's one off versus it's something where everybody can go buy that today.
I think it's hard for other people to buy it today because their returns are, based primarily on cap rates and ours are cash flow oriented over time. So we care less about, cap rate volatility because we have the ability to hold and then exercise in a market that's extremely hot, or cap rates compress.
We do not take negative leverage.
Yeah. There's a lot of I may say negative leverage. The idea you borrow today and basically you're not making enough cash flow from the property to cover your debt cost. But you're really hopeful that in the future your rent's going to grow and it'll be enough to cover it, or that interest rates will come down and you'll refinance.
And I think we saw a lot of that in recent years. And, we like to say also that hope, hope not a great strategy.
But it's one thing about these triple net deals is there's a there's a built in, rent growth, you know, in the leasing that there's either 2 or 3 and that's grown. So, you know, one of the positives of of all of these, you know, volatility that has happened in the industrial space specifically is there was massive rent growth that that paired with the inflation that was happening, and that rent growth really help stabilize values even in sort of, tough interest rate environment where valuations are coming down on a cap rate basis.
But, but the values of the building stayed high on a, on a, on a lease rate basis. And so we were doing deals four years ago with 2% lease bumps on an annual basis. But anything you've done really since 22, really late 2122 just with the inflationary, activity is in the 3 to 4% annual rent growth.
And that has a major impact on what about if a buyer will even buy the property?
Do you have any favorites, favorite properties?
Well, you know, one thing we don't... I'm kind of the industrial guy here today, but we are a large student housing developer. And so as it relates to sort of multifamily student housing, we're we're probably going to start 3 to 5 new projects next year. And the $100 million average deal size range.
I just delivered two, student projects, one at the University of Madison and one at the University of Oregon. Both of them are 100% leased. I've already pre leased my 2025 school year of the Madison projects, 70% at 10%. Rate rent growth of 10% higher than what I'm currently getting in the building, which was already over the proforma that I was, that I went into the deal with.
So I think tier one universities and top five college conferences, we love we love that student play. Data centers are going to be the next big industrial hyped thing. AI language learning models. We're talking about not just inference and sort of cloud storage, but we're talking about compute. And there's a massive change in what's happening, around where these can be.
They can be anywhere for the AI models. They don't have to have some latency. And so there's a, there's a power grab happening today across the country that we're, we're participating in. And I still, you know, fundamentally believe really strongly about industrial long term. We we haven't lost our conviction there. We are getting more starts this year.
We've gotten a lot more thumbs up from, lenders and capital partners for for land that we've been sitting on for the last 18 to 24 months, that will that we're going to get in production, that we're getting into production now. We have a closing this week in new Jersey. And so we have, new product, that we're excited about getting out of the ground.
You know, I was just going to offer a little bit of a contrast, to the, you know, I think, John, we were told to pick a fight. Yeah, yeah. Okay.
I have this thesis, panels that it's a lot more exciting if someone fight. So if you don't actually pick it in verbal fight, one of you has to punch someone else.
Today, I just want to offer a little bit of a contrasting view on on cap rates, because I think in really volatile times, like the time we're in, we just don't spend a whole lot of time thinking about cap rates. And I know that sounds completely controversial, with respect to real estate folks, but we focus on what's the per pound price we're paying for, for real estate.
And so in that example I gave earlier, you know, and I'll give a live one here in, in LA, I was just to our site a couple of days ago that we were considering for our fund A, where we can potentially acquire a property for roughly about 350,000 a unit in L.A. Now, this is a mark that it cost $550,000 a unit to build.
So that feels like a pretty good price to me. But, you know, the in place cap rate on it, it's probably a four, but it's broken. It needs work. It needs fixing. It needs somebody to come in there and think about how to improve that, improve that property. Now, you could argue, well, maybe I should be paying 250,000 a unit for it, but I think, yeah, there's, there's a certain bottom to real estate and, and, and some of that is, is driven, you know, by, by replaced by the discount to replacement cost.
So we tend to focus more on that, especially in big volatile times than we do on, on Capri, because Capri is just really hard to pin down when there's not a lot of trades happening. When you get a lot of noise with, monetary policy like we've had, and when you have a lot of volatility in the equity and debt capital markets there.
That was the fight. Good. Okay. Response was perfectly, firmly said, all right. We have just a couple of minutes left. Does anyone want to ask any questions from the panel? We it's not that I have some. You get the faulty microphone.
You know, there's lots of different food groups to the commercial area. And I know that you haven't spoken about the two dogs, which is office and retail. And but you talked about a lot of bright spots. So my question is the redevelopment or repurposing of office or retail for the different food groups you've been addressing.
I'm happy to jump in a little bit. We own, unfortunately, I guess I should say, about two point 8,000,000ft² of office. Now, it's only about, 7% of our portfolio. And probably next quarter it'll be 6% of our portfolio without be selling anything. But, but the the the issue is I would describe it is you get kind of three classes of office right now.
You've got trophy office and we own a bunch of that and it's doing exceptionally well. I mean we're seeing leasing pay pace. It and record levels again in some of that product. Valuations are down of course, because there's not a lot of transaction comps, but we're getting higher rents and and we're filling up those buildings. These are highly amenities.
The opposite extreme is what I call class C buildings. These are buildings that were on their way out last cycle. And this is going to put the nail in the coffin. They're done. They're going to they're going to land minus demo. That's that's the price. They're going to trade at ultimately. And then you got a whole bunch of stuff in between.
Think class B product. And that's going to sort itself out as to whether it can be adaptively reused. And if not, it will likely go by the way of the C properties. Now we have a little bit of a unique strategy in that we look for, you know, when we're looking for office, we typically look for office that comes with excess land, meaning surface parking lots.
And then we utilize the surface parking lots to build multifamily and share the parking. And so that way we generate, you know, three forms of subsidy for our housing and quite frankly, for our office, which is we get free land for apartments, we get, shared parking. So shared capital cost for parking between the two uses and then, reduced operating expenses for the sharing of that parking between the two uses.
And so those that forms kind of a subsidy. We're not we're not executing on a lot of that right now. We've got one project in Atlanta, that Megan's probably, well aware of called Lake Apartments, Lake Park, where we got caught midstream. And that execution right in the middle of all of this, capital calamity.
And so we had a lender pull out on the multifamily portion of it literally at the 11th hour, and had to replace that capital, with more expensive capital just to get executed. So, yeah, office is a really tricky area. You could have stuff that's down 15%. You can have stuff that's down 78%. You know, I've just.
You could have 36 30s.
I got 30s. So, I think there's a few interesting things happening in office, which is currently pretty much decimated, except for the Class-A office. One, Chicago, sort of the market that I know, because that's where we're we're based. We we actually, we at least 100,000ft² out of a 500,000 square foot class B building. So in the middle called the Jewelers Building, which is a really historic icon in Chicago.
And we actually bought the building out of bankruptcy for 60 bucks a foot, which I don't know what the demo prices, but we're not going to demo it. It's a beautiful building. And it's 70% leased. And so what we're seeing, at least in Chicago, which is really exciting, is, that space being backfilled in a multitude of ways.
We're going to put 100 hotel keys in our building that's going to take up 100,000ft² of the building. Between our lease and the hotel lease will actually cover our our debt, costs and give ourselves time. And and that'll be the amenity to the building. And then two, we're seeing, a lot of, affordable housing conversion.
So in Chicago, there's a big program on LaSalle Street to, to convert and take a bunch of how old these are, the buildings that should be taken down classy and make it housing, which we we desperately need. And then lastly, if you have the power we're seeing, you know, the metas of the world, happy to put racks in any building that'll give them power.
So, on top of that, just last thing, I think it's very interesting that, Amazon's requiring 100% back to office starting in 2025, and you're starting to see CEO sentiment greatly grow, that it will be 100% back to office over the next three years. And so this this kind of reminds me of 911 when people said they'd never come back to the office.
I've always felt like, you know, long term, that's that's not a real solution to not not be in the air.
It's interesting. It's true in, New York as well. The investment banks are, you know, back and see and it when you go to New York, it's alive and well San Francisco and quite got there yet. But the interesting thing in that market is we're seeing some of these AI companies actually take space now because San Francisco has become so cheap.
Which, you know, of course, it was the exact opposite in 2019.
Thank you all so much for joining us. I think the, when we look at our portfolios in real estate, real estate is unique in the sense that typically investments we look at are either more growth focused or more income focused. And I think here we can have a a wonderful blend of both. And they've been great long term builders of wealth.
I know for our clients as well as yours. So thank you so much for joining us. The managers will be out by by their booth.
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