Bruce Stachenfeld, Chairman at Duval & Stachenfeld, joined us on the podcast to discuss his predictions for the real estate industry based on conversations he is having with industry experts.
Bruce is one of the nation’s preeminent real estate attorneys. He is a founding partner of Duval & Stachenfeld, the founder of the Firm’s high-profile Real Estate Practice Group, and he is also the Firm’s Chairman.
He previously served as Managing Partner from the Firm’s inception until 2018. Mr. Stachenfeld is known to be one of the most “connected” real estate lawyers throughout the worldwide real estate community. Mr. Stachenfeld is also an industry thought leader in both the law firm and real estate worlds. This includes Opportunity Zones and our mission to "Help Our Clients Grow Their Businesses", which results in our being able to mix clients, friends of the firm and relationships together to create opportunity zone deals and relationships.
As a lawyer, Mr. Stachenfeld has over 30 years of real estate law experience encompassing tens of billions of dollars of real estate transactions of all kinds. As a real estate lawyer, Mr. Stachenfeld distinguishes himself by seeking out areas of real estate law that are more difficult and in which he and his team can provide particular value.
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Tyler Stewart (00:00):
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.
Bruce Stachenfeld (00:23):
All of our clients, as I mentioned, have dry powder. They all want to invest, but the markets are largely frozen; deals are still not happening. They're happening more and more every day. And I actually anticipate within, I don't know, a day or a week or a couple of weeks, there's going to be a lot of deal activity.
Adam Hooper (00:45):
Tyler Stewart (00:46):
Hey Adam, how are you today?
Adam Hooper (00:47):
Tyler Stewart, you know what, I feel like a bit of a broken record, but I'm doing pretty well. All things considered it's a good day.
Tyler Stewart (00:55):
It's a good day, a nice sunny day here in Portland, Oregon, which those are hard to find. So it's always a great day when we get a little sunshine.
Adam Hooper (01:02):
There we go. So who do we have on the podcast today, Tyler Stewart?
Tyler Stewart (01:05):
Today we had Bruce Stachenfeld, who is a real estate attorney and founding partner at Duval & Stachenfeld.
Adam Hooper (01:12):
Yeah. Bruce, we've known him for quite some time. He's also the author of The Real Estate Philosopher, just a fantastic, very deep and thoughtful newsletter that he puts out. Check the show notes for how you, listeners out there can get involved in and get subscribed to that, again, just really awesome content that he puts out. It takes another level of thought and care and how he positions rather than just regurgitating stats. I think, it's pretty refreshing reads.
Tyler Stewart (01:40):
Yeah. I love his humble approach. I know I always look forward to seeing his newsletter appear in my inbox. And Bruce has a unique perspective just with his daily practice as a real estate attorney. He's working with clients all over the capital stack, whether it's institutions, sponsors, investors, lenders. And so through those relationships he's built, he's able to offer a pretty unique perspective on what's happening within the overall real estate space.
Adam Hooper (02:07):
Yeah. And today conversation was spurred by a recent newsletter he put out about what he's calling the Big V Recovery. There's some interesting anecdotes in there. We even got a story about mice. I didn't expect that, that was unexpected. But again, just very thoughtful in how he approaches things. He's making some bold claims, but has the rationale and the reasoning to back it up, which is again, I think a unique perspective in these current times. A lot of really good nuggets in there, I think you guys will enjoy this conversation today. So as always, if you have any comments or questions, feedback, anything, please send us a note to firstname.lastname@example.org. And with that, Tyler Stewart Let's get to it.
Adam Hooper (02:53):
All right, Bruce, thank you so much for joining us today. As we were talking before we've started here, I've been a long time reader of The Real Estate Philosopher and we're excited to have you on the show today and talk about some of your thoughts and views on what we're up to you right now.
Bruce Stachenfeld (03:10):
Well, look, thank you for having me here. I'm honored to be here and looking forward to this presentation.
Adam Hooper (03:17):
So why don't you tell us a little bit about what you do, your current practice where you guys fit in the real estate picture and then we'll talk about some of your recent writings and where we find ourselves these days.
Bruce Stachenfeld (03:31):
Okay, well, let's see, I'm a real estate lawyer from New York City. I can't hide that. I have a law firm, it's called Duval & Stachenfeld and I'm Stachenfeld. And we've got about 40 lawyers and we only do real estate which puts us kind of in a nice spot because we represent, I can't say everyone but we represent everyone. Meaning we represent buyers, sellers, landlords, tenants, investors, lenders at all levels of the capital stack. We do a ton in New York, we do a ton nationwide and even a fair map internationally. The reason I'm probably useful on this podcast is I basically see so many different peoples doing so many different things.
Bruce Stachenfeld (04:09):
I see some developers struggling to get money to do a deal. I see mega players with many billions of dollars trying to figure out how to invest it. I know what everyone's doing and my job, it used to be cranking out pieces of paper with words on it as a lawyer, my jobs' really evolved to I guess, to be honest, about trying to bring business into my law firm which is very important and also trying to be a thought leader. By the way, I hate the idea of thought leader because it sounds so pompous, but that is really what I'm trying to do.
Bruce Stachenfeld (04:39):
And the articles you referenced that we'll talk about, what I try to do is use the fact that I am all over the real estate world talking to everybody and then thinking, trying to create different ways of looking at the situation and then being I guess, gutsy enough to put it down on a piece of paper and sending it out to our distribution list which is now about 60,000 people in the real estate world nationwide, probably half in the New York area, half nationwide. I really just try to think, and then be useful to people in terms of what I do. That's kind of me in a big picture sense in my firm. I don't know if you want to delve any deeper into me or we can move onto something else.
Adam Hooper (05:20):
Yeah. And I think that's why I'm so excited about our conversation today is because you find yourself at the center of so many of these transactions in different perspectives. Again, the impression I get from the content you're putting out is, it's not just a regurgitation of stats or updates, there is critical thought behind it which I think is becoming a superpower these days. So again, I think we're definitely interested in digging into your perspectives on these things rather than just like we were talking before another market update, those are everywhere. So how do we get to the actual insights from that information?
Adam Hooper (05:57):
This is a time where our industry is obviously going through some pretty big struggles and challenges, depending upon where you're at in the asset class or product types. And so maybe just from a 30,000 foot view, how is this different from some of the previous cycles that you've seen? What are you paying attention to in this crisis that maybe you weren't in the global financial crisis or some of the prior economic cycles that we've seen?
Bruce Stachenfeld (06:27):
There's a fair number of ways I could answer that, but here's the most obvious and powerful one. During the global financial crisis, I mean, there used to be a little joke we had at the firm that my preferred course of action was to curl up in a fetal position under my desk and just lie there, I think I probably did that a fair amount. I remember I couldn't sleep. I was really filled with enormous anxiety. I recall my clients were too, they really hadn't seen anything like it, it just crushed them, crushed all of our spirits. We all were kind of almost like zombies for a period of time. That lasted roughly nine months. It started kind of the middle of 2008 and ended kind of the end of the first quarter of 2019; things just got worse and worse and worse with no end in sight and no kind of repeat of everything.
Bruce Stachenfeld (07:13):
So then what happened in 2009 is the more intrepid clients started buying things and the other sat at the sidelines, and then things started to come back and then things came back and then things went crazy for 10 years. And the parties that didn't buy early in 2009 or 2010, most of them were kind of bummed out. It was like, "Hey, I missed my chance to make an utter killing." That was the global financial crisis. This time around forgetting about me and my humanistic emotions, my clients, every single one. And I'm not even saying most of them, I'm saying every single one of my clients has a pile of cash. It's called dry powder. They all have piles of cash.
Bruce Stachenfeld (07:53):
And every single one, instead of seeing what they used to say in 2009 which is, God, I remember the horrible phrase, "Bruce, we're not doing anything right now." That was like the kiss of death. Come back from lunch after three hours and to have one email from my wife saying, "When am I home for dinner?" Today, it's the exact opposite. And it was the exact opposite, even as far back as March and April this year when everybody was a little shell shocked, every one of my clients had the same thing, "Bruce, we are open for business. We have dry powder. We think this is a chance to find some great opportunities, looking to take advantage of the bubble, we think this is a great time." And then they would say, "Yes, our existing portfolio got hurt. We see so much opportunity."
Bruce Stachenfeld (08:35):
So the big, big, big difference is kind of, I guess it was two mixed together. Attitude of the people in the real estate industry, they're all thinking like, "I don't want to do what I did last time and miss out on all this upside." And then the second piece which goes hand in hand with that is, there is an absolutely ridiculous amount of cash on it. It's double ridiculous. Before this whole COVID thing happened, I remember reading anecdotally, I'm not sure I can quote it, but that there was something like $600 billion of dry powder lying around for real estate deals. The lament of our clients for the past 10 years is, "I got all this money, I can't find deals. I can't find deals. I can't find deals." So now that money didn't disappear. I mean, it was sitting there, right?
Adam Hooper (09:20):
Bruce Stachenfeld (09:20):
It's still there. And then you say, in March, the world started to fall apart, actually really fast. A lot of our clients said, "Oh, well, this is a great time. Let's raise more money." And you've been reading, if you read the real estate trades, you see Blackstone raised 20 billion and this one and that one, and I'll make a guess another 100, maybe 200 billion more has been raised for rescue capital, distress debt and all these other things. So doing the math, I was a math major who is really bad at math if that means anything, I'm guessing there's like seven, eight, $900 billion of dry powder sitting around, all these parties eager to put it to work. You want to know the difference between the GFC, the global financial crisis and today? It's that; you've got a ton of money just lying there and 10 years ago, you didn't.
Adam Hooper (10:07):
Yeah. And that's something that we've tried to think through. How was that going to potentially insulate some of the distress that you would normally expect in a crisis of this magnitude? You've got so much capital that was there ready for whenever this economic cycle happened pre COVID, and now you have this extra trigger with COVID and again, like you said, this additional wave of money that's coming in for these potential opportunities, how much of an impact will that much available capital insulator impact the potential for that distress to come through in those opportunities?
Bruce Stachenfeld (10:45):
The answer to that is my answer and I put it in some of my publications is this, let's start with distress debt. So many of my clients are saying, "We want to buy distress debt. We want to buy distress debt. We've never done this before, but we want to buy distress debt." Distress debt just constantly; everybody wanted to buy it. Why? Well, because the GFC, loans were trading at 70 cents on the dollar and people who scooped them up, mostly got paid back 100 cents on the dollar. And they were like, "Wow, we just cleaned up." So people thought that that's going to happen this time.
Bruce Stachenfeld (11:17):
I predicted the exact opposite, and I think it's turning out I'm right. What I thought was going to happen is that there's going to be distress debt around, of course there is. But unless you were like super over-leveraged through the capital stack, mostly on the lender side, by kind of building a castle on the air with too much leverage, I just don't see as much of today. What happens is there's something distressed around somebody who says, "Okay, I've got a loan, it's in trouble and I want to sell it." So then they go to a broker, the broker puts it out for bid and people start bidding on it.
Bruce Stachenfeld (11:52):
Well, if you think about it, if you have a zillion bidders with zillions of dollars, what happens? Well, it gets beat up to fair market value immediately. What is fair market value? Well, if it's a project, let's say it's a piece of junk. The project is a disaster. There's 100 million of debt, it's worth 50 million. That's what the project is worth. I'm not sure it's a bargain that you're paying 50 million for debt on a project that's worth 50 million. If the project on the other hand is worth 150 million and your 100 million dollar loan is in the money and maybe you rocket again at 70 cents on the dollar because someone will pay 71 cents 72, 78, 80, 83, 88, 94, pretty soon there's just not that much there.
Bruce Stachenfeld (12:34):
So in a big picture sense on distress debt, I think what happens and it's already happened is the piles of money just bid the price of the debt up to fair market value or above. And my conclusion then is this, if you are a player that has been buying distress debt for years and understands the game, understands that buying the debt doesn't mean you get the real estate, there could be delays, there could be this, there could be that, all these things that could go wrong. If you're an expert in this space, by all means be in this space, you'll probably find some good opportunities, maybe not great ones, but good solid opportunities. If on the other hand you're a developer and suddenly wants to go change your business model to buying distress debt, I do think that's a business mistake.
Bruce Stachenfeld (13:18):
And I think that it's better not to do that because I just don't think there's going to be that many opportunities to begin with. And also you're playing in the game against more experienced players and probably y'll heard of Warren Buffett's famous saying, if you come to a poker game, you look around the table, you can't find the sucker, it's you, right?
Adam Hooper (13:37):
Bruce Stachenfeld (13:38):
I mean, you don't want to be that guy. You want to be the stronger player. And this is sort of a thing I'll get to even more in this discussion. I think if you've got a competitive advantage like you're a brilliant developer who's got inspiration and brilliance and creativity, why negate all your competitive advantages and go into a game where none of that matters at all? You're just bidding higher than somebody else to buy distress debt. So anyway, punctuate it, distress debt, I don't see there's going to be great opportunities. As far as actual buying of real estate, we can go through them one by one during this call, I think there will be some opportunities in certain asset classes and probably not as much in others.
Adam Hooper (14:15):
And on you sticking with the distress debt side, the lender community in reaction has been just completely night and day different from what it was back in the global financial crisis. The desire to, and the approvals to do forbearance and to be much more flexible and lenient with where the debt capital markets entered into this crisis, versus it being driven by these lending issues and the global financial crisis. I mean, that's a completely different dynamic today than it was back then.
Bruce Stachenfeld (14:43):
Yes, it is. I'm trying to remember what the lenders did in 2009. And I think what they did was they stopped answering the phones. They were in the fetal position under their desks as well, and nobody did anything. I don't know that anyone gave a forbearance or didn't give a forbearance. Nobody knew what to do. This time around, everybody knows what to do. And most lenders said, "All right, we're going to give you 90 days," because you don't want to be bad people. There's COVID, people are dying.
Bruce Stachenfeld (15:10):
So most lenders kind of gave the borrower 90 days, mostly a free pass saying, "Look take the money that you owe me, pay it later, add it in, do this, do that, pay me some extension fees," whatever it is, but they mostly let the borrowers go 90 days. And now, the borrowers are going back asking for more to the extent they needed or they're finding, "Whoa, to my surprise I don't need it, things are better than I expected."
Bruce Stachenfeld (15:33):
So I suspect, I don't suspect, I know it's going to get more heated in terms of the battles between borrowers and lenders. But one thing's for sure, nobody wants to go desperately begging for money. Well, let me say it this way. Nobody wants to go begging desperately for expensive money to recapitalize their project. They, their lender and whoever else it is, are trying every, which way the world to not be paying for 15% money in a market where interest rates are close to zero.
Adam Hooper (16:04):
And that's a lot of, again, that "rescue capital" that we've seen. Structurally, I think most are looking at it as preferred equity or mezz or something like that for some of these recapitalization opportunities. And that's going to come with at a pretty high price tag. So I think most, as long as the banks are willing and obviously, that depends on the nature of what kind of lender that is, a balance sheet lender is going to look at that differently than a debt fund and CMBS again, totally different animal. I guess, have you seen any early indications of how those different kinds of debt capital are responding to this, or is it all fairly consistent in that forbearance or giving some kind of a workout right now or extension I guess, on any maturity events that are going on right now? How are those different lenders responding I guess, is the question?
Bruce Stachenfeld (16:54):
There isn't an across the board statement where you've got the CMBS players, the banks, non-bank lenders, if you will. Look, every deal is different in every situation but they're actually human beings on both sides. Generally, what's been going on is the lenders most of the time are thinking, "Well, what really happened here? Is my borrower kind of a deadbeat or incompetent or obnoxious or just bad or is my borrower the exact opposite, really a good person and did everything right and just got nailed by the crisis? Is my borrower trying to take advantage of me by just asking for stuff because everybody is or does my borrower genuinely ready to help?"
Bruce Stachenfeld (17:38):
Most lenders are kind of divvying it up that way. If the borrower is, I don't want to say bad, the lenders are saying, "Well, why should I cut you any slack? You're the equity, you get all the upside and you should take the downside. I'm a lender, I get paid back either way. This is your problem. I'll give you a couple of cookies but not much more than that." On the other hand, this is a good borrower, we want repeat business. It's a great relationship, we all got hurt here. I'm a lender, I really want to help. I'll try to figure out something that doesn't hurt me that will help you.
Bruce Stachenfeld (18:07):
I would say most lenders are trying to do that because most lenders have a reputation in the market, they want to get into future business. They don't want to look like the evil lender that just crushed everybody in their path when things went wrong and on the other hand, they don't want to be schmucks that just get taken advantage of either. So it's kind of like what you would expect. The CMBS markets may be a bit of an exception of that, because there isn't quite the reputational desire there. I mean obviously, nobody wants to be bad, but this is stuff that's securitized and the humanistic element is to a large degree kind of minimized there.
Bruce Stachenfeld (18:42):
So that becomes a little bit kind of more a statistical game where you've got this special servicer that is looking probably to get some fees out of doing the work of the extension. You've got the bondholders not to get taken advantage of. You've got the borrowers realizing, "Look, this isn't a situation where I'm going to get repeat business from a CMBS trust or something." So it's a little bit I'd say more hardball-ish, if that's the word, in CMBS markets than in the relationship-driven lending markets.
Bruce Stachenfeld (19:15):
The last thing I'll say is this, I'll give a clog for our clients that are lenders every single one, and I really mean it. Every single one is saying, "Bruce, we don't want to be a vulture. We don't want to take advantage of people. We don't want to do that kind of thing. We don't want to get taken advantage of ourselves. And yes, we'd love to find opportunities, but the last thing we want to do is screw people when they're weak. We want to create upside for both of us."
Adam Hooper (19:40):
And I think that's again, a very different mental and just a mindset shift from what we've seen in prior more economic-driven cycles in crises before. So I think it's good to hear that there is desire to hopefully find solutions that work for all the parties involved. And I think again, that'll maybe insulate some of that distress that people were anticipating a couple months back.
Adam Hooper (20:05):
One of your latest articles you wrote was the Big V Recovery, and I think you're taking a pretty aggressive position on the shape of that recovery. So maybe just talk a little bit about your views on why we're going to have more of a V-shaped recovery and then we can maybe look at some of the latest economic impacts and maybe forecast a little bit with some of the stimulus that's running or maybe set to expire within unemployment benefits and what some of those impacts might be on that recovery.
Bruce Stachenfeld (20:35):
So one of the things I did; actually, I did this last year, I purchased a crystal ball.
Adam Hooper (20:41):
What'd you find?
Bruce Stachenfeld (20:41):
I'm not telling, but it cost me a ton of money and it's been right almost exactly 50% of the time. Joking aside, as we said at the beginning of the call, I don't like the word thought leadership because I don't want to be thought of as a pompous ass. Maybe I am, but I already thought of that way. But I really just try to think myself. I try not to let other people; the media, et cetera, do my thinking for me. And I just do my best to say, "What do I think is likely to happen?" And I just don't worry about it and it's like, well, look, markets are fueled by two emotions; fear and greed whether we like it or not.
Bruce Stachenfeld (21:20):
Sometimes we just really want to invest and things come along and we're like, "Wow, that looks great opportunity." We want to put our money in. Other times we're just scared to do anything. Warren Buffett who I do respect says, "I like to be greedy when others are fearful, and fearful when others are greedy." And he's obviously done okay doing that.
Bruce Stachenfeld (21:37):
Anyway, I started looking what was going on and I said to myself, "Well, look, the media has a goal. It has to sell newspapers, eyeballs, or whatever they're selling, they have to do that." I'm not really excoriating the media. I am not blaming them, I'm saying they have to do that. If they can't get people to read their articles, they get fired and they go out of business, they have to. So the news that says, "The COVID is pretty bad thing and I think the economy is going to kind of go down and then it'll probably go up after it's over," it's boring. I mean, who would want to read that article? But an article that says, "Record drop in this… Biggest fall since Great Depression. Panic in the street," anything that sounds awful has to go on the front page.
Bruce Stachenfeld (22:23):
And then if you think about it, the more awful it is, it has to keep going on there because nobody has the slightest interest in reading it unless it's more and more awful. So fear, just keeps rising and rising and rising. And then what happens? Well, after a while people get bored with that. How many articles is anyone going to read that start with, record drop. I mean, after a while, you just don't want to read that anymore.
Adam Hooper (22:44):
You're fatigued, yeah.
Bruce Stachenfeld (22:46):
So then what happens? I started thinking ahead. Well, at some point, the media people are going to say, "This is getting boring. Maybe we should shock people and say, bottom hit or recovery plan or something good and people will probably read that." And you know what, of course they are, because they were served two months of down, down, down, everything's horrible. All of a sudden something's good, it's like, "Whoa, let's read that article." So what do they do? Media starts moving the other direction and say, "Well, things could go up."
Bruce Stachenfeld (23:12):
Now, if you start with the media sort of making the news or trying to make the news, you also add into that the insane speed with which information flows today. I mean, if somebody drops a pot on a stove in China, we hear about it in New York in 11 seconds. So if you think about it, whatever's happening; the fear, it's immediate and pervasive. And the stock market fell what, 9,000 points in like 12 days or something? I mean, that's insane and I was like, "Well, what if it fell 9,000 points in 12 days this probably could go up 9,000 points in 12 days, why not?" All that has to happen is, people have to ring the bell, the bottom is here and then it'll go back up, which is in fact what at least has been happening in the public markets.
Bruce Stachenfeld (23:54):
I also add in that, the difference this time and the last time is insane amount of cash lying around. It's strange that, I don't want to sound however I sound but I love the United States, I think it's a wonderful place and I think people in this country. The thing that made this country so great when we got here whenever it was, hundreds of years ago, we had the wilderness to scrape a living out, we didn't have it all handed to us. So this is a country of entrepreneurs, of people when they get smacked they come up with another way to do business. I wrote an article called the Second Mouse. Can I tell that story?
Adam Hooper (24:29):
Bruce Stachenfeld (24:29):
All right then. If you've seen the movie, I'll get back to what I'm talking about here in a minute. If you've seen the movie Catch Me If You Can, Leonardo DiCaprio's father, I forget his name, Frank Abagnale in the movie, he's giving a speech. I'll try to imitate him, but don't laugh at me too much. He says, "Two mice, fell into a bucket of cream. The first mouse quickly subdued and he drowned in the cream. The second mouse, he kicked and he struggled and he kicked and he kicked and he struggled so hard that he turned that cream into butter and he crawled out. Ladies and gentlemen, I'm that second mouse." That was his speech. Everyone was cheering.
Bruce Stachenfeld (25:10):
This country is filled with second mice, that's what it is. When something goes wrong, obviously sometimes we get disheartened and I do too and we all do, but the people in this country I think they try to figure out some other way around it. We see all the restaurants that moved from dining service to take-out service and stuff like that. [inaudible 00:25:27] obvious. But we just see so many people coming up with workarounds, these people are wonderful. And so you have all that.
Bruce Stachenfeld (25:34):
You also have most businesses didn't really fire all those people, they furloughed them because they said, "Look, we're out of business for 90 days, when we're back you'll come back." You also have all these new jobs created by the Amazons of the world, the healthcare workers that now have to take care of people with COVID or AIDS living in people's homes. There's so many things that have already happened. I could go on and on and on, but I thought that there's at least a pretty darn good chance that when we hit the bottom and things start to come up, it's going to be really fast so I created the phrase, big V. I hope I'm right.
Bruce Stachenfeld (26:09):
I did say in my article, if I'm wrong I will not be one of those prognosticators who makes a prediction is wrong and then just tiptoes away. I'll admit it. I'll eat my words and say, "I did my best. I gave you my reasons, my thinking, my analysis." And if I'm wrong, I'll stand up like a big boy and I'll say, "I was wrong." Anyway, I'm hoping I'm right and I think everyone hopes I'm right, and let's see what happens.
Adam Hooper (26:30):
Yeah. And again, we'll have links in the show notes to subscribe to your newsletters. Again, it's very thoughtful stuff. I think maybe digging into that a bit, we talked about distressed real estate debt. I think the next thing you talked about was Opportunity Zones, you guys have been very active in that space historically. What have you seen lately in the Opportunity Zone space? Have you seen an uptick, a downtick, where do those look right now?
Bruce Stachenfeld (26:58):
So this is one of the place where I guess, I was way off base. So Opportunity Zones, it was something that our firm really broke out to a major lead on. Tax lawyers become the Wizard of Oz, we call her. My partner, Terri Adler is one of the top real estate lawyers in New York City, has become the guru of structuring and putting together these real estate deals in Opportunity Zones. And then I, in terms of the things that I do, connecting capital to transactions, I've done a ton in that regard. And we started an Opportunity Zone hub where we reached out to the 60,000 people we had and said, "Look, if you have an Opportunity Zone transaction let us know, or if you have money to invest let us know." And there was a lot of connectivity that came out of that.
Bruce Stachenfeld (27:42):
So then COVID hit, there were a whole bunch of Opportunity Zone deals going on. And at least my thought was, "Wow, this is going to really put a disaster on that." And I think, I'm not totally sure, but I think I'm totally, totally wrong. And hindsight, so obviously 2020. But if you think about it, well, what happened in the last 100 and something days? Well, people sold an awful lot of stock and other assets, they sold like crazy and then of course, a lot of them bought back in.
Bruce Stachenfeld (28:12):
Now when they sold, they created something called a capital gain. In order to invest in an Opportunity Zone the first thing your entry ticket, as our Wizard of Oz says, your entry ticket is a capital gain. So I don't know it was a trillion, two trillion, five trillion of capital gains suddenly appeared in the last 90 days. So where's that money going? Well, it's not all going to go into Opportunity Zones. But if you think about where are you going to invest your capital, as I've already pointed out rescue capital doesn't look too good. Even the most safest assets like multifamily is getting whacked around, but gee, an Opportunity Zone is something where people are building things, it's not expected to produce any cashflow for a year or two or even three years and then it's something you hold for 10 years.
Bruce Stachenfeld (28:55):
So now you start thinking about it, "Well, look, I got this big capital gain and I got to pay this enormous tax. And I could pay the tax, or I could put the money into an Opportunity Zone and you know what? I don't have to really bump out what's happening in the economy for a while because it doesn't matter because they're building things, they're not expecting anyone to pay any rent. And then you know what, nobody thinks COVID's going to last for 10 years, God forbid. 10 years from now, who knows what'll happen. This might be a great deal, and I won't pay any tax on the appreciation. Ooh, Opportunity Zones look fantastic." So on information and belief, it is getting easier to my surprise to raise money for Opportunity Zones and there's been a lot more interest. So to be clear, I'm not 100% sure of this, but I'm pretty sure.
Adam Hooper (29:38):
And it's something again, I think there was obviously a huge amount of interest early days in Opportunity Zones. I don't know that we'd ever saw really the match between available capital gains and projects as we anticipated early on, but I agree, I think with people looking for a longer-term picture, Opportunity Zones are becoming… Certainly, I think realizing the benefits that they have, I think most developers today would agree that there's probably more certainty around delivering product and the end of 2021 or early 2022 than there is right now which, certainly leans in the favor of those kinds of projects. Moving on industrial, I don't think we've seen any downward pressure in industrial, still tons of capital chasing. It's still pretty good fundamentals. What's your thoughts on that space?
Bruce Stachenfeld (30:27):
Well, we can be really short on this one. [inaudible 00:30:28] in industrial are like pigs in you know what. You told me I'm not supposed to use improper language, so I won't say that word. But they are very, very happy creatures. Industrial is just killing it, and it was killing it before and it's even better now. It's a wonderful spot to be in as far as just about everybody is saying.
Adam Hooper (30:49):
So multifamily has been thus far, holding up a lot better than we would've anticipated two, three months ago. What percentage of that or I guess, what portion of that performance that we've seen hold up in multifamily? Do you think is due to just these I guess, bigger macro supply-demand fundamentals versus maybe some of this stimulus or unemployment benefits that have been out there? And where do you see that going maybe through the rest of this year, Q3, Q4?
Bruce Stachenfeld (31:24):
It's interesting, just as a little interjection. It's kind of almost the gods are being a little unfair to the real estate industry. The parties that said, "I don't need to make a killing. I just want a nice safe asset. I'm going to buy multifamily. And I won't get the greatest returns, but it certainly don't really have much risk because people pay the rent." Those are the people that got hurt the most because a lot of places stopped paying the rent. And the people who were gambling on development everything was kind of doing fine because they don't have any tenants yet, it's not really fair. But anyway, I'm just sort of joking around a little bit.
Bruce Stachenfeld (31:56):
So in terms of what's happening, most of the time most parties are actually surprised at what percentage of tenants are paying the rent, I think they thought it was worse than it was. Anecdotal stories of clients getting 90%, 95%, even 98% of their rent paid and obviously other places not, it obviously does depend on the human beings in the buildings. In some places it's terrible, people have lost their jobs, et cetera, and they can't afford to pay the rent. And then of course, you have the government printing untold sums of money with the stimulus checks and that to some extent is boiling up parties that are otherwise not in a great financial state making it so they can pay the rent.
Bruce Stachenfeld (32:38):
What will happen on this? This is my guess, and I'm going to fast forward to the end of our interview and then come back to it. But I think at the end of the day, the whole COVID thing is a bit of a red herring. Whatever was happening before, will probably be impaired for a while and then go back to the way it was. So if you had a multifamily that was healthy six months ago, it'll probably be healthy six months from now. What will happen in the next six months, that I wouldn't even try to predict. I mean, it's the only way to give more [inaudible 00:33:12] unless their jobs' going to come back faster and who knows.
Bruce Stachenfeld (33:14):
My overall prediction is it will be a lot better than most people believe, but who really knows in the very short run. But when you really think about it, if the underlying fundamentals of that deal or that market were healthy beforehand, the odds are pretty high they'll be healthy after this is an interruption.
Bruce Stachenfeld (33:34):
In terms of multifamily, my big picture is saying is this, I think that the owner of multifamily has more to fear from politics than they do from COVID. And the reason is that, I think COVID will end at some point, I pray it's soon, but at some point it's going to end. But there are certainly a political environment where there's a lot of pressure on the owners of property that house human beings to treat them fairly or whatever it happens to be. I'm not weighing in on that issue, but I'm saying if you're an investor you have to take that into account and I think that's probably more of an investment concern than is the actual impact of COVID.
Adam Hooper (34:16):
And you mentioned there, I think the underlying theme is this longer-term perspective on this asset class in general versus looking everything on a month to month basis in this more acute dip that we're in right now over a long enough period will look probably more like a blip in terms of the economic side of this than release it within some of these asset classes. How do you compare that with the public markets? Obviously, public market's very volatile. A lot of different REIT sectors got absolutely crushed, I don't think we've seen that pricing necessarily reflect in the private markets. Do you see what happened in the public markets in those asset classes reflective of where you anticipate private markets will go? How is that going to be different this time, with the public markets as an indicator of what's going on in private market pricing?
Bruce Stachenfeld (35:09):
There's a lot of questions in one there. And I guess what I would say is, the public markets respond more instantaneously as we all know, than the private markets do. And a lot of people have made an incredible amount of money, and a lot of people have lost an incredible amount of money on the arbitrage between them. I think what we saw 60ish, maybe 90ish days ago, the public markets got utterly crushed, the pricing jolt I think 50%, 60% on some of the REITs. And astute investors, including a lot of our clients said, "Whoa, this is incredible. There's no way that the price of these assets is down 60%, it's nutso."
Bruce Stachenfeld (35:50):
The price may have fall 5%, 10%, 15%, 20%, even 25%, but even with a huge drop like that these REIT stocks are a joke, they're so cheap. So what happened is, pretty instantaneously people started buying stock at these public REITs and the market shot up until, I don't know, I got to look at each REIT specifically, is the value of the stock higher or lower than the intrinsic value of the underlying real estate? I mean, who knows? I mean, it's almost impossible to figure out.
Bruce Stachenfeld (36:18):
Delving deeper into your question, I think what's really going on is this effect, pretty sure of it. All of our clients as I mentioned, have dry powder, they all want to invest, but the markets are largely frozen; deals are still not happening. They're happening more and more every day. And I actually anticipate within a day or a week or a couple of weeks, there's going to be a lot of deal activity. But our clients have this concern which is, how can I price something right now? I don't know. I mean, is there going to be a second wave of COVID that's going to usher in the next depression and everything's going to fall 80% in value and the world will end? Or is Bruce right, it's a big V and in 60 days it'll be like, "Oh, I wish I bought. I missed my chance."
Bruce Stachenfeld (37:02):
So when you have that layer of potential uncertainty over you, you probably say, "Well, how can I possibly price what I'm buying right now?" And that stops the buyer from paying top dollar and it also stops the seller from selling anything other than top dollar, so transactions don't really happen. My latest Real Estate Philosopher article that came out just yesterday, was when I proposed this idea called the COVID earn-out which is, people should price the asset at the higher end. In other words, the seller's price is 100, the buyer's prices 80. Price the asset at 100 but the buyer only pays 80 and takes the other 20, puts it in escrow or somehow puts it off to the side.
Bruce Stachenfeld (37:47):
And they agree that if the economy falls off a cliff or it goes down or COVID, or whatever, they look at macro matters. If the economy goes bad, then the buyer keeps the other 20 and never pays it. On the other hand, the economy goes good then the buyer does pay it and the seller gets his full price. And I call it the COVID earn-out, because I like to name things. I don't know anyone's actually done this yet, but anyway that was my latest idea. I don't know if it's a good one or not that leads into I guess, the answer to your question.
Adam Hooper (38:18):
Yeah. And I think that's obviously one of the things we're paying very close attention to is, when will this liquidity and transaction activity come back into the markets? Because as you said that a buyer just doesn't know how to price that uncertainty and a seller certainly doesn't want to accept that uncertainty if cashflow is remaining healthy at the asset. Our gut feel is probably sometime later Q3 or early Q4 is when we'll start to see some of that price adjustment or price discovery happen in the private markets, it sounds like you feel that might even be quicker than that. We're seeing some those price discovery happen.
Bruce Stachenfeld (38:55):
I think it's much, much quicker than that. Well, Q3 is only 10 days away.
Adam Hooper (38:59):
Yeah, a couple of days away.
Bruce Stachenfeld (39:00):
But I do think it's very, very soon. Not to talk about my article so much, but that's why you put me on here. But one of the things I think happens is, there's a lot of pressure. Once one person starts to buy, it pressures others. Let me explain what I mean. If you're in business, let's say you have a fund that you're running or an institution, any kind of player. And you start thinking about, what happens if you perform the same as everybody or better than everybody or worse than everybody? You start thinking about it and just pretend you are a normal, run-of-the-mill woman or man, nothing special. And you see other people investing and you don't want to.
Bruce Stachenfeld (39:40):
Now you think about it. Well, if you outperform, people are like, "Wow, good job, Toby. That's great. You're amazing." If you average perform, well, All right. It's fine. If you underperform, you lose your job or your company goes out of business or you lose your investors or something. So if you think about it, rational people in that situation are pressured enormously not to try to outperform because the only thing is sure, if you try to outperform then you're doing different things than others and then there's only two possible outcomes; underperformance or outperformance because you're not following the herd.
Bruce Stachenfeld (40:21):
And you're taking a chance and you have to make a value judgment, it was Howard Marks who actually gave me this thought a year ago in his book. You have to make a value judgment that it's more exciting to you for the chance to outperform than the risk of under performance is. I know I'm getting pretty mathematical here. But if you really think what I'm saying, at the end of the day there's an enormous amount of pressure to follow the herd even though you don't want to admit you're following the herd. But if all your competition is buying, you really at risk if you're not buying. So my sense is, when they ring the bell and I think the bell's ringing right now, I think you're going to see an awful lot of activity very, very quickly in the markets. That's just my prediction.
Adam Hooper (41:06):
And now, do you see that being split amongst different asset classes benefiting from that activity earlier? Again, is it going to follow the distress or is retail and hospitality going to be snuffed up first or is that going to go to the more stable, well-performing assets right now? Where do you think that activity is going to go first?
Bruce Stachenfeld (41:26):
Well, remember all these parties that raise all these rescue capital are looking for deals, they're all looking for deals. They don't want the boring simple stuff, that 3%, 4%, 5%, 6%, they don't want that, they're being paid… They're telling investors, "I will outperform that kind of stuff by getting you 8%, 9%, 10%, 12%, 15%, even 20% returns." So will money flow towards the safer assets? Absolutely. The feeding frenzy, if you will, is to find the bargains. So where are you going to find bargains? Well, most obvious bargain right this minute is hotels. [inaudible 00:42:01] say feeding frenzy for hotels, I don't know if I know any client that is looking at hotels.
Bruce Stachenfeld (42:07):
Now the problem there, at least in my assessment, is it's not that much different to what I was saying about with distress debt. Well, if you think about it, hotels you say, "Look, this is a good hotel. It was well-run. It was making money. It had 74% occupancy pre-COVID and now it's empty." And the lender's pissed and this has happened, that's happened. But you can price it, you can say, "Well, you know what? I'm going to price in three years to recovery." And you're going to hope it's like one year. But you say, "Look, worst case it's going to take three years, we're going to have to feed this hotel, because it's out of business or close to it or running at a loss and then, you know what, I think it will be fine."
Bruce Stachenfeld (42:44):
So you do the math and you say the hotel used to be worth $50 million and then you figure, "Well, how long I'll have to take to feed it and whatnot." And you subtract and you say, "You know what, it's worth $42 million to me today." Okay, great. Well guess what, everyone else is doing the same thing, so I don't know that you're necessarily going to be able to outperform. When you said 42, some other person might say 43 and other ones says 44 and now you're looking at 45 and you say, "That's just too expensive."
Bruce Stachenfeld (43:13):
So my sense is probably with hotels at least, the vast piles of cash will push everything to fair market value which is some combination of pre-COVID minus the economic time lag of feeding it until it performs. Would I be looking at hotels? Yes. I definitely would be looking for bargains, but I don't think I'd be getting my bargains by just playing with the cash flows and the numbers.
Bruce Stachenfeld (43:42):
The way I'd be getting my bargains is looking for good hotels or bad ones, that could be fixed by good performance, good metrics, differentiation, excitement, whatever magic which I don't know myself, whatever magic it takes to make a successful hotel. I think that's still here and that goes back to my theme that COVID is a red herring because what's really going on or should be going on, you should be figuring out if you're buying a hotel. Can you figure out how to make that hotel outperform what it was? If you can and then you're doing this math, then it works and you have the upside. But the upside is created by your creativity and talents, not by just playing with the numbers.
Adam Hooper (44:21):
Yes. And now what about office, we haven't talked about office yet? I think again, there's some competing forces there. You've got this remote experiment that we're all going through right now, work from home whether that's here to stay and then you've got just this trend of smaller and smaller square foot per employee, I think that'll probably reverse. Where do you see those forces combining for what the office space looks like coming out of this?
Bruce Stachenfeld (44:45):
So this is where my crystal ball is really absolutely certain to be right 50% likely. This is what I would say. Bill Gates says a wonderful quote, which I'm not going to quote exactly right probably. But basically, Mr. Gates says something like, "People constantly overestimate what will happen in one year and underestimate what will happen in 10 years." And I really think that my best guess as to what will happen to office is something like that. In the relatively shortish run, my best guess is not much is going to change. Yes, some people will work at home and some companies will want more space and some of this and some of that and all these other things, and everybody's spending every day predicting whatever they want to predict; like everyone will leave New York, people will leave New York, they'll go here, they'll go there, I don't know. But I think the best prediction for office in a year, is probably not much different from what it was pre-COVID.
Bruce Stachenfeld (45:42):
Having said that, I think if you look at trends over the next 10 years you may not come out the same way. There's an awful lot of things like tectonic shifts in office space that had been going on and once again, the COVID blip I don't think change those things. Is there more desire to work at home on a long-term basis? I'm not really sure. There's co-working, there's all these different things happening. And I would say if I were a hotel… not a hotel, I'm sorry. If I were an office investor, I would be thinking about those kinds of issues more than what COVID will do and I would be planning how I invested in office based on these longer-term trends rather than the short-term COVID trend.
Adam Hooper (46:29):
And I think again, that kind of underscores the current situation. Real estate has always historically been looked at as a much longer-term asset class, it's a longer-term horizon and its illiquidity can help smooth out some of these more acute bumps in market cycles. So it seems like that's a fairly consistent theme through your perspective is; over the long-term, this current crisis that we're in probably doesn't fundamentally change too many of those longer-term trends that we're already seeing this is more of a short-term blip and then that trend will likely continue as it was pre-COVID with a lot of these different factors.
Bruce Stachenfeld (47:12):
Adam Hooper (47:13):
Anywhere that that doesn't hold up? Anywhere that you'll see some lasting longer-term impacts from this? I mean, again we haven't talked too much about retail, do you see that as an accelerant of some of those trends that were already happening in retail or? Where will COVID have a longer lasting impact I guess, than more of a short-term blip do you think?
Bruce Stachenfeld (47:33):
What a great leading question. So thank you. I'm so happy you asked me that Adam Hooper. So retail is the place where I've personally seen the most bargains. When I say bargains, ability to outperform is what I mean. So retail, I thought a lot and read a lot about retail the last three or four or five years. And the way I look at retail is there's… people call retail an asset class and that is a mistake. Retail in my view, is two kinds of assets in it and obviously, there could be hundreds of different ways of chopping it up but I look at it like this. If your business model is you take other people's products, you stick them on a shelf, you mark them up 30% or 40% and then you wait for people to come in and buy it, I think that model has been dead since Amazon was born whatever, it was 20 years ago, we just didn't realize it. It's dead. It just doesn't work anymore, because the middleman is being wiped out of the process.
Bruce Stachenfeld (48:33):
Sure, in Martha's Vineyard, a Chotskies Shop can get away with it, absolutely. But in terms of any major player, it's game over. So you have a lot of these parties, I'm not going to embarrass of them by mentioning them, they were kind of dead man walking-type businesses before COVID. And it's kind of in a way, I don't want to say good because it has a value judgment in there. But what I think will happen is, COVID has hastened the demise of businesses that really should have demised a long time ago and what that means is a number of things.
Bruce Stachenfeld (49:09):
First of all, the people that work at those businesses it's tragic, they're going to be harmed in the short run and hopefully they'll be okay in the intermediate run. The people who are running these businesses I think is probably going to be a good thing, because they would never have had the ability to shut down a live business. Now it's been shut down for them and they're forced to really create something new that could be the phoenix that comes from the ashes. So I kind of think for the businesses that were gradually dying, I mean, we probably know what they were, this hastens it and my guess is most of those businesses will not come back. And if you're an investor at retail, you would want to avoid that because it isn't going to go good.
Bruce Stachenfeld (49:50):
But then you look at the other half of retail, and these are businesses that were doing phenomenally well before COVID. I mean, look at the Apple store to pick an obvious example. But if you go to the mall, there's some stores where people are just running into the stores like crazy and buying all sorts of stuff. Maybe there's a special brand that the store has or special way of doing business that's interesting, I call this a power niche. Those retailers were doing good before, they're going to do good after. In fact, they're going to do better because a lot of their competition is gone.
Bruce Stachenfeld (50:19):
So if you think about it, if you're looking at retail as one asset class the odds are you're walking away from it. But if you're bifurcating your thinking into two asset classes, sort of what I would call power niche retail and demising retail or something and you're analyzing it that way, you may find that since so many people are not looking at any retail, you may find ways to outperform by buying the power niche retail and avoiding the demising retail. And I understand that's tricky, it's not like you just snap your fingers and do it, you'd probably have to do some real diligence on the shopping center or the mall or whatever to really understand the attended mix in it. But my sense is that that is probably the best place for a creative type investor or purchaser or lender to outperform.
Adam Hooper (51:08):
And then one last one before we wrap it up here. We saw increasing in popularity is co-living pre-COVID, where do you see that going? Is that something that will change? Will it continue? Do we have short enough memories that will persist once we get through this? What are your thoughts on co-living?
Bruce Stachenfeld (51:32):
Co-living in my view is not a new business, it's a new way of doing business. We saw this in co-working. To sound like a bit of a humbug, I predicted exactly this in co-working and I said it's not a new business, it's a new way of doing business. So what does that mean? Just like the internet wasn't a new business we thought it was 20 years ago. I mean, almost nobody has made any money on the internet business however everybody's made money using the internet, it's the same thing with co-living. What's going to happen in co-living; first of all, it's going to be fine. After the crisis, people have to live somewhere, I don't know why that co-living is any different from living in an apartment building with an elevator where people are [inaudible 00:52:07].
Bruce Stachenfeld (52:07):
So my guess is, co-living before and after COVID will be the same. But the real issue for co-living is this, fast forward somewhere between three and five years from now, every single owner just about of every building is going to have a co-living floor. So people who go into the co-living business, I think we're going to have some real troubles, because at first maybe it's a cool thing and then everyone's doing it and everyone's doing it and then everyone's doing it and then we'll how do you outperform? Well, I don't know.
Bruce Stachenfeld (52:39):
So I think if you think of it that way, it's going to be perfectly cool to have co-living but I don't see it as a special business. I know we don't really have time to delve into my power niche, but if I were going into the co-living business I would be doing it in a way… Sorry about that, with the phone here. I would be trying to do that in a way where I had a niche-based way of doing the co-living. So not just selling plain old co-living, I'm selling co-living perhaps to a certain type of population, a certain type of industry or something and created some kinetic energy out of that.
Adam Hooper (53:15):
Something a little more specialized. Again, akin to what you were saying in retail, the generalist approach, maybe not the best coming out of this but something more specialized, more differentiated is where those successes will be.
Bruce Stachenfeld (53:25):
Adam Hooper (53:29):
Well, this is all super fascinating stuff, Bruce. We'll let you get going here. Is there anything that we didn't address today that you want to touch on before we wrap up?
Bruce Stachenfeld (53:39):
Yeah, only one thing. And I know I've said it a couple of times before, but I really do think the biggest thing is this. One of my intellectual breakthroughs I think is that, in the real estate world finding deals is a dead end. You don't find deals anymore, you create them. And if you're thinking your job is to just find transactions, if you think about it, everyone else is seeing the exact same thing you're seeing. The broker could send it out to 100 people 10 years ago now it's 10,000 people, everyone's seeing the same things. So finding deals is a dead end, you have to create transactions. Somewhere in every transaction, somebody created value. It could have been the developer. It could have been a creative capital provider, I don't know, but somebody's creating value.
Bruce Stachenfeld (54:25):
One way or another, that's what you have to do to outperform in real estate on a long-term basis. That was true pre-COVID, it probably seemed to have stopped for a month or two during COVID. But as soon as this COVID thing recedes into the distance which I don't think it's that far off, it'll be back to the same thing again. And so my message I guess, to the real estate world is obviously you have a brain, you have creativity, you have some way to create value, figure out what that is, focus on that and don't be distracted by the short-term bubbles and bursts and horribleness and wonderfulness of the markets. Anyway, that's my final statement here.
Adam Hooper (55:08):
There we have it. Well, thank you again, so much for coming on today. How can listeners learn more about what you're up to and more importantly get signed up for their version or their subscription to The Real Estate Philosopher?
Bruce Stachenfeld (55:22):
You have all the questions I'm probably I'm the least prepared to answer this, because I have a team that does this. But look, there's a thing called The Real Estate Philosopher, I'm guessing that you can just shoot your listeners or participants the link to it. I will say this selling it, I try to keep it interesting and provocative and thought-provoking and all that stuff. I think we're about to start doing Twitter and things like that. I know I'm on LinkedIn and that sort of thing, but I'm a little bit of a babe in the woods on social media. But certainly, The Real Estate Philosopher's my pride and joy and I love doing it.
Adam Hooper (56:00):
Well, I can definitely vouch for it is thought-provoking, it's a very well-written piece. So again, I've appreciated that and we'll have links in the show notes for all this for the listeners to navigate that way. So again, Bruce, thank you so much for your time today, glad you could come on the show. And hopefully, our listeners will have learned a few things from today.
Bruce Stachenfeld (56:22):
Thank you for having me. I really sincerely say it was an honor to be here and this is a very, very well done by you Adam. So thank you.
Adam Hooper (56:30):
Perfect. And I got to give Tyler all the credit for that.
Bruce Stachenfeld (56:32):
Adam Hooper (56:34):
Listeners, that's all we have for today. So as always, if you have any comments or suggestions, please send us a note to email@example.com. And with that, we'll catch you on the next one.
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