Economic Panel w/ Neal Bawa (Best Ever Conference) – Part 1 | Aspen Funds
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Economic Panel w/ Neal Bawa (Best Ever Conference) – Part 1

Bob Fraser spoke at a virtual event for passive investors hosted by the Best Ever Conference as part of the economic panel with Neal Bawa. Neal is a data-driven economist and has claimed the title “Mad Scientist of Multifamily.” This panel was moderated by Ben Lapidus, co-founder of the Best Ever Conference and CFO of Spartan Investment Group.

Listen in to this week’s episode to hear part 1 of Bob and Neal discuss where the economy is headed, how interest rates impact real estate, where cap rates are going and what to expect as we enter 2023.

Best Ever Conference is the conference where serious commercial real estate investors gather to learn, network, and invest. It will be hosted at the Hyatt Regency in Salt Lake City from March 8-10, 2023.

Register by November 30 to get the best rate by using our exclusive 15% coupon! Coupon valid until November 30 – $INVEST$ Register –

Neal Bawa is a technologist who is universally known in real estate circles as the Mad Scientist of Multifamily. Besides being one of the most in-demand speakers in commercial real estate, Neal is a data guru, a process freak, and an outsourcing expert. Neal treats his $1 billion-dollar multifamily portfolio as an ongoing experiment in efficiency and optimization. The Mad Scientist lives by two mantras. His first mantra is that “We can only manage what we can measure”. His second mantra is that “Data beats gut feel by a million miles“. These mantras and a dozen other disruptive beliefs drive profit for his 800+ investors.

Connect with Neal on Linkedin –

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Economic Panel w/ Neal Bawa (Best Ever Conference) – Part 1

Ben Fraser: Hello, Future Billionaires! Welcome back to another episode of Invest Like a Billionaire podcast. We’ve got something really fun for you today. So Bob was actually a presenter at a recent virtual conference hosted by Best Ever Conference. It was for primarily passive investors and he was on an economic panel.

With Neal Bawa and Ben Lapidus, and if you’re not familiar with Neil Bawa he is a really excellent economist and he is known as the mad scientist of multifamily. He’s been around in the space for a long time and is really known and the speaking circuit for his economic presentations.

And so him and Bob were talking about all things economics and really looking at what’s going on in the market with interest rates, with cap. Going into 2023. It was a really fascinating conversation. It was moderated by Ben Lapidus, who is the CFO at Spartan who is one of the co-founders of the Best Ever conference.

And so it was really fun. I think you’re really gonna enjoy this. This conversation between Neil and Bob and Ben and this is actually gonna be a two parter because the conversation was so long. It makes sense to split it into two parts. So I hope you enjoy the first part today.

And our friends over at Best Ever, they’re actually giving us a little sweetener for our listeners. So if you are interested in going to the Best Ever Conference we will be there as Aspen. There is a link in the show notes for a 15% off coupon. This does expire November 30th. So if you’re interested in going, it’s gonna be in Salt Lake City, Utah this year.

It’s gonna be a really great event. We’ve been to it the past several years. It’s always one of our favorite events to go to. So if you’re interested in going, you can find the link in the show notes, and I hope you enjoy this conversation between Neal, Bob and Ben.

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Ben Lapidus: I wanna start with inflation, not a recession, not wealth distribution.

I just wanna focus on inflation in its in isolation and not what it means for for a recession. Can increasing interest rates. Really bring us down in inflation over the next 12 months. Neal I kind of heard from you that the answer is yes, maybe not to the 2% that the Fed would like to see, but maybe to the three to 4%, which is by cutting it more than half of where we’re at today.

Bob I got some differing opinions from you a little bit and what I’d really like to focus on are the supply side elements that impact inflation. We can control demand. The Fed can control demand by making it more difficult for the average consumer to buy things. But if CPI is mostly being pushed by food and energy, and the food is being dried up because of droughts around the world, supply logistics, because you can’t get boats through the Mississippi River or the Cheng Z River or what have you, and 40% of Europe’s energy was cut off through sanctions because of a Russian Ukraine war causing a global shock to energy prices.

Can the Fed really stand up? Energy facilities, can they just produce airable land through their policies? That’s a question that I’d like to start with. I don’t know who would like to go first, but can we really bring inflation down as a result of interest rates coming up in

Bob Fraser: forever?

Yeah I’ll just jump in. The only way the Fed can do that is by killing demand and by, by generating recession. And it’s like a surgeon, or a doctor who their only tool is an amputation solve. That’s it. And that’s all the Fed is. They, unfortunately it’s lame. We need policy answers.

We need, they need to work on, we need our government to produce, create capital programs, investment programs and energy and start, begin beginning permitting and other things to, to spur supply. So can the, an absent that, which the Fed can’t control.

The only thing they have is this giant amputation saw called recession. And they can’t, they can spoil demand enough to soften energy, prices and inflation, but it’s a tough road to hope.

Neal Bawa: Very difficult. I think we look at the early 1980s because the Fed had a severe issue with oil related inflation, right?

So right now we’ve got an energy inflation issue and it’s a worldwide issue. It’s not actually the US is the luckiest country in the world at this point, Just for the record. So we are a, both an oil and natural gas producer in Together, if you take them together. We’re the largest producer in the world.

We’re not the largest exporter in the world. But we are largest producer in the world. And if you actually look at oil and gas prices today, we’re pretty much the lowest in the world, with the exception of Saudi Arabia. So when you look at this, when you look at. It’s helpful to look at what the Fed was dealing with in 1990, in 19, late seventies, and also in, in 81.

And basically they used the interest rates as a brute force weapon. It is a hammer. It’s not a scalpel, it’s a hammer. And they basically hammered, they bring down every single kind of demand by slowing the economy, and that also helps with oil. I sure you could say, oil has nothing to do with us at this point of time.

Foods, is out of our control. But if you slow everything down in the economy, you slow down the amount of oil that is needed to run that economy because oil is the is what runs our economy. Energy is the economy. And so this brute force weapon does work, will work. And I think what’s happening, Is that other parts of the world are beginning to follow suit.

They really don’t have much of a choice. The Bank of England, even though England is in a historic recession, just cut interest or increase interest rates the ECB is following, Everyone else is following as well. This works, but it really doesn’t affect inflation. It affects the economy in the and pushes it down.

And it’s working. I’m looking at numbers right now. It’s working.

Ben Lapidus: So it, it affects demand side inflation, I think is what you’re saying. And if the force of it pushing demand down across the entire spectrum balances out more so than the supply side shocks that we’re feeling internationally, we can get there.

I think that’s the argument you’re making, Neal. So how susceptible is that plan to additional. Let’s say higher likely black swan events in, in the geopolitical environment. If Taiwan is no longer able to, give us more microchips if Ecuador is not able to farm lithium for the Tesla batteries or what have you, because China becomes a little bit more aggressive with the Taiwan situation and some other hotspot areas in the world that, that produce resources that Americans consume.

How susceptible is this kind of hammer or this amputation that’s pushing demand side of inflation in, in, in working holistically to bring inflation down to where it’s supposed to

Bob Fraser: That’s just it. It’s not enough. It’s not enough. And that was exactly what Goldman Sachs was saying, right?

They’re saying even in a negative growth impulse, it’s simply not enough to reduce demand enough. Because we’ve had seven years of basically inventory put draws, and there’s simply not enough capacity right now. Even it’s continuing to decline and it takes a massive investment, trillions and trillions of investment and many years to reverse that.

So they’re gonna be pushing this this thing uphill, and it’s not gonna go very well.

Neal Bawa: I don’t fully agree with that belief, and I’ll tell you why. So that belief assumes that everyone is able to pay as prices go up. So I expect that we will see both oil and natural gas shocks in December, possibly January and February, even though I have to say the Eurozone’s done better than I thought at hoarding natural gas.

But I still see, short term shocks. The honest answer though is America’s only 18% of the world economy, and we may be able to afford oil if it’s, it spikes up to 160, 170 a barrel. But I can tell you this the world doesn’t it doesn’t have the money to pay for that level of supply shock.

So let’s say that there’s a shock and I’ll go with oil first and then we’ll talk about China. You’ll see prices spike up for 3, 4, 5, 6, 7, 8 weeks. And during that time, yes, inflation will go right back up. But then after that it’ll crush demand. It won’t just drop demand, it crushes demand.

So one of the key things that I keep reading about from lots of different economists is oil at 1 40, 1 50 or natural gas equivalent basically puts the entire world economy of India recession, because there’s people who simply stop consuming oil, right? We can’t imagine that in our head as Americans, we’re so spoiled.

We’re like, I’ll buy, a car that’s, an electric car. I’ll do something. But we’re not basically going to change our lifestyles because oil goes up by $2 a gallon. Other parts of the world, you actually see people simply not consuming other things and those things include oil.

So in the short term, I think Bob’s correct. What Goldman’s saying is basically we can have these supply shocks and they can, they’ve been building up over seven years of under investment. I get that. But when I’m looking at the next six to 12 months, if the price of oil is already pretty high, so it’s in between 90 and a hundred dollars a barrel, once it starts going into the one 20 s, 1 30, 1 40, it just demolishes demands in other part of the world.

And that part of the world is what pays for this, not the United States. Because we get cheaper oil than the rest of the us the rest of the world. Now, China though, if China chooses to attack Taiwan I think that is a, keep in mind that Russia’s attack on Ukraine is going to look like nothing because Russia’s attack on Ukraine affects us.

Obviously from an oil perspective and food perspective, even though most of Ukraine’s food goes to Africa and Europe, it still affects in US in terms of inflation. It’s an in indirect effect. Attacking Taiwan is attacking the United States. I think from a geopolitical perspective, there is no way that we could withstand that.

I think that China would be extraordinarily foolish to attack Taiwan. I think that all of this stuff that they’re talking about is just Chinese internal politics. Please understand, the Russians can simply drive tracks into the Ukraine. There’s roads between Russia and the Ukraine. There is the straight of Taiwan that’s a hundred miles wide.

And if the Chinese are stupid enough to actually drive ships across it, there’s submarines, dozens of them that the Taiwanese have that will simply sink the Chinese fleet. An attack on Taiwan is extraordinarily difficult. You can’t find today a geopolitical that will say that China was, will succeed at that.

But assuming it happens, I think that’s a far bigger event than Ukraine. And anything and everything that we say about inflation at this point, anything and everything that we say about interest rates at this point is completely off the table cuz no one even knows what will happen at that point.

Ben Lapidus: Okay. So here’s the question. I, Bob, I think this is more for you. Let’s say that inflation does not tampered down. I think we’re hearing maybe two different slightly overlapping, but not quite the same opinions here. Hey, we can get the fed down or the interest rates down to the three to 4% range.

Not ideal, but palatable. We can live in that world and we have another opinion that’s, Yeah, we can probably get it down a little bit, but not quite to three to 4%. So Bob, if you’re in, in, in Powell’s head, what is the flipping point that says, you know what, It’s not working. Inflation’s still above 5%.

This isn’t working. We’re just gonna back off. Cuz it’s causing more harm than

Bob Fraser: good. Yeah, that’s not gonna happen. They’re gonna, they want to keep inflation down. I It’s creating a massive amount of political kind of upheaval today and it’s gonna create more they’re not gonna back off if inflation stays high.

And I think I, I think Neal’s a little optimistic about where rates will, the speed at which rates will come down. I don’t think they’re gonna be able to do it because I do think inflation is gonna stay stubbornly high and and the Fed has to pay attention.

Ben Lapidus: All right, so then let’s talk about another hot topic.

Let’s move away from inflation and how it affects how interest rates affect cap rates. I think one of the most surprising things for everyone in our space is how little movement there has been in cap rates, despite interest rates doubling, being in a negative leverage environment, being in a, essentially a negative spread environment.

If you were to take the broad strokes nationwide averages in any asset class at this point, maybe not multifamily, but almost any other asset class you would have to pay to be a sponsor in today’s environment. On average, just using market conditions, right? As opposed to, be paid for the work that you do.

So let’s talk about cap rates. Why haven’t they come why haven’t they expanded yet to the extent that they. I’ll jump

Bob Fraser: in there and give my opinion, and I know Neal has more on this, but to go to Neal’s point on his or his presentation, the economy is on fire and it has been, there’s a ton of liquidity out, out there and that liquidity is still in play.

And so that’s primarily driving. There’s just a lot of capital and we had, if there was a bubble, it was a syndicator bubble. , I don’t know how, where these syndicators came from buying these multifamily assets. It’s Throw a couple guys together, go talk to friends and family, go buy multi-family.

And so I think that’s driven at some, but I think there’s another element and if I’m right and inflation is gonna, going gonna march forward the unicorn investment. The one place you must be is commercial real estate because you get high leverage and you get access to inflating NOIs.

So it’s, you get the double whammy of inflation. So I think it has a growth component, just there, we back in era we, PEs went out the window, right? Priced earnings ratio went out the window and people started talking about priced earnings to growth ratio.

If you have high growth, you get a premium. So I would argue that investors with a longer term view, who are looking to place tenure and 20 year capital are saying, I don’t care. I want to get into this. And because of the chart I showed that showed, Hey, in at 8% inflation in 10 years, your price is double.

And so I think that long term investors are also stepping up. So I think it’s the growth premium and longer term investors.

Neal Bawa: I have to say, I, I completely agree and completely disagree. So the part that I agree upon is the fact that there is astonishing amounts of capitals on the sideline and it seems that there’s more capital now flooding into the us It seems to be coming from the Eurozone.

So I’m seeing that capital come in and saying, Yeah, a significant portion of that will go in real estate cuz they’re worried about the stock market being, where it is. So I’m seeing that, that impact. So I agree and I also agree that even if inflation comes down, I don’t expect it to come down to 2%, right?

I expect it to come down to three or 4%. And the Fed basically at some point will make their piece with that. So we get this inflationary long term benefit where values go up based. But my answer to you on why cap rates have not decompressed is actually much simpler. The answer is, it’s too early.

Cap rates are about to decompress. In q4, you will see cap rates finally decompress. In q1, you will see an astonishing decompression. The reason for that is data. Let’s say Colliers is gathering data or costars gathering data. The problem is there’s so many states that basically don’t disclose the sales price, that it takes a long time for CoStar or everyone else to actually figure out what prices properties are selling for because they’re not disclosing those, right?

And more of the transactions are now happening in non-disclosure states like Texas. So that’s where the money is, right? And they’re not disclosing. So it takes a while to figure it out. So here’s my. Cap rates have already decompressed. If you talk with the people that are on the front lines, the brokers, right?

The brokers that are selling 10 assets of a quarter, every single one of them will tell you cap rates have decompressed, but it’s not showing up in the data. It’s not in the CoStar data, it’s not in the already matrix data. The reason for that is it takes time. Also, keep in mind how ridiculously quick this has happened, right?

The fed started raising rates in March, but that was just a quarter point. Who cares, right? But then the seven five hammers, three successive, 0.75 hammers have just happened in the last four months. How much property can you actually sell in the last four months? Almost everything that is in the cap rate data that we are looking at today was in was in contract before the three big 0.75 hammers.

I would argue that the cap rate data that you are able to see today does not contain any impact from the three big hammers. That data could only start to be visible in q4, and then it’ll be highly visible in q1. So you’re gonna see decompression happen in q4 and then you’re gonna see massive decompression happen in q1.

As people figure out what properties are selling for, there’s already cap decompression happening. That’s

Bob Fraser: absolutely right. And what people may not be aware of. And as being active in the market as we are right now, cap rates are below interest rates, and that just can’t, So means leverage doesn’t even make sense anymore.

And if you don’t, if you can’t leverage, you’re not buying anything. So that’s, it’s it’s nuts and we are gonna see things happen. I, we’re personally looking out, I’ve, we saw this in this bubble that we’ve seen in the last couple years. It’s completely bridge debt driven.

And I think we’re gonna see what I call a bridge blow up. And I think when interest rates reset, when they, they typically bought with three year caps kind of thing. When those caps are lifted, which is coming up in the next 18 months, say 12 to 18 months, you, your office obviously gonna see refinance risk where these guys can’t refinance and then they don’t cash flow at the new rates.

And if you can’t cash, guess what? You can’t refi. If you can’t refi, you have to fire sale. And if cap rates have risen at all, it’s actually a negative equity event and you lose money. So I, I think depending on how, if it’s slightly severe, if it’s just slightly high cap rates and or interest rates, you’re gonna say massive flood of the, the syndicator bubble is gonna, they’re going to all do a collective face plant and honestly, great time to buy.

Great time to buy.

Ben Lapidus: So that’s great commentary and it kind of transitions into by how much, right? So like I’ve already seen 10 to 15%, driving acquisitions for Spartan. I’ve seen 10 to 15% price adjustments already. That’s not the same as a hundred percent rate increase, right? Not only have we gone from zero to three to four benchmarks for sofa, but we’re seeing spreads increase from 200 to 400%.

I saw somebody post on LinkedIn expect something as high as 800% spreads on sofa, which would be a 12% interest rate. I guess that would be probably more for the high risk bridge stuff. So if rates are where they are today, you can assume six and a half to eight and a half depending on what you’re doing and how you’re doing it.

That’s, that is more than double what we were experiencing, especially multi-family nine months ago. So by how much will cap rates expand do we think knowing that they’ve only expanded in my experience so far, 10 to 15% halfway into q4.

Neal Bawa: I love that 10 to 15% number. I think that’s what I’m seeing in the marketplace.

I’ll give you my rule of thumb and I actually want Bob’s kind of feel on this. So there’s this myth that, if ca if interest rates go up by 1%, cap rates will go up by 1%. There’s actually no data to ever support that. What I usually use as a rule of thumb, and this may, this time it may be different, is if you see a hundred basis point or 1% increase in the Fed funds rate, I’m not talking about mortgage rates.

So the Fed funds. Cap rates will decompress by at least 0.25 to 0.33. So what that means is if fed the Fed funds rate’s basically gone by 300 basis points at this point, that’s 0.75, increase in the cap rate minimum. It could be higher than that. So when the fed goes all the way to where they’re threatening to go, which is, basically 4.75 cap and keep in mind that they didn’t quite start at zero.

And the, that, that cap rate deep compression doesn’t start for the first a hundred basis points simply because that’s too low. And so once the Fed got to a Fed funds rate of one, you started seeing that cap decompression starts to occur. So they get to five, that’s 400 basis points, which is basically a one cap difference.

So if they, but they won’t stay at five, my argument is they cannot stay at five. They will not stay at five. I feel know, Bob is thinking a little bit differently because he thinks inflation’s very sticky. So I, But if they stay at five, let’s assume for a moment they stay at five. Cap rates have to change by one cap.

That’s my math quarter point cap rate to a hundred basis

Ben Lapidus: points. And before Bob, before you jump in, what is the theory behind that correlation from, how you’ve assessed this in the past, because that still gives you a three point negative spread. And commercial real estate typically has had about a three point spread between cap rates and interest rates.

Three points. Yep. So how is it, is that kind of what it is like that works up until you’ve eliminated your spread down to zero and then maybe it doesn’t work so much? Is that the thought process or how do you come up with a quarter point to one point relationship or a third of a point to one point relationship?

Neal’s, Sorry. That was a follow up question for you. For me.

Neal Bawa: Yeah. The answer is by doing Excel math, right? I’ve been simply doing Excel math of what the market will take. So for every increase in interest rate, there’s people that are now basically willing to come into the marketplace because they are looking at the long term asset.

One of the key things is if you just look at that one to one relationship, you’re saying, Yeah, there’s still, a negative correlation. I get that. But people are making bets on holding an asset for five to 10. They’re also making a bet that during some of those years, this correlation is not going to be as terrible as it is today.

And so they, when they make that correlation they make assumptions that the interest rate correlation will improve in their favor over substantial amount of time. They’re also going to make a correlation that if if interest rates are this high, then inflation must be high. If inflation is high, rent’s highly correlated to that.

So rents are going to be high, so I’m gonna make money on that. So if you actually model out a property over five or 10 years, you’ll notice that you never end up in a situation where a hundred basis point increase in interest rates, increases cap rates by a hundred basis point. Because if you do that, model that out over another a hundred basis point, another basis, a hundred basis point.

You’re either going to end up in a situation where no one in the world will ever buy multifamily, or everyone in the world will buy multifamily based on your assumption. So neither one of those is possible. So I think that there has to be some correlation. So I basically model this out to the point where it’s yeah, quarter point decompression appears to occur every time a hundred points basis points go up in interest rates.

Ben Lapidus: That was my intuition on what you were gonna say, but I just wanted to hear you say it. So thanks, Neal. Bob, do you have a difference of opinion on or the same opinion on where cap rates are going to go over the next six to nine months?

Bob Fraser: I would probably agree with Neal but I would say there’s gonna be a difference in the classes.

So I do believe this current market climate favors core and core plus class A, if you will. And it says to get Brian Spear’s question on the chat as well. I think it’s very favorable. So from a couple perspectives, so we’re seeing the Class Cs have the greatest kind of cap rate movement, right?

Right now, and this is because we’re on the value add component. Inflation has killed it, right? All of a sudden your budgets are blown out the window. Your rehab budgets are blown out as, as well as the lower end of the market is greater impacted by inflation. So the wealthier the higher income folks have less inflationary impact.

So they’re they’re less gonna be, are hurt by rent increases. So I do believe that class A and core Plus Core plus are gonna be out, have outsized kind of kind of safety factors in this market.

Neal Bawa: 1, 1, 1 slight tweak to that, right? Firstly, I a hundred percent.

Class A is gonna be hurt. The most class A is gonna be the most protected. A hundred percent agree on that. I’m worried about core assets. The reason I’m worried about core assets is I’m not seeing employees come back to their jobs. I’m seeing still we’re at 46, 40 7% swipe rate. Those key swipes that people swipe when they go into offices.

That’s an extremely low rate where pandemic’s gone. And I’m worried about the number of people that want to pay extremely high rents in core assets. So I’m. A little more bullish on assets that are a little bit further away from the core but still looking at Class A assets. I think this is inversely correlated for anyone to be buying Class C at this point.

Wait for a while. You’re about to get lots of great deals on Class C. So just be patient. Just be patient.

Bob Fraser: And my comments were for multi-family, I’m staying utterly away from office. It’s, there’s, we don’t know what’s gonna happen with office, but the pain has not yet begun because of the long term.

The leases are, so leases not expired and it’s gonna be a lot of pain in the in the office area.

Neal Bawa: But my argument is if offices don’t bring all of the jobs back, then the multifamily assets in that area are going to see, not going to see rent increases, they’re probably not gonna see red drops.

Obviously this is core, right? But they may not see the rent increases that they’re historically used to see.

Ben Lapidus: And so just for the folks who are listening, when we’re talking about Class A, class B, class C, are we talking about markets or asset quality right now? Secondary, tertiary markets. We’re talking about asset quality of of a building.

I’m talking about

Neal Bawa: asset quality. I’m qu yeah, asset quality, a little bit about markets, but I think predominantly asset quality.

Ben Lapidus: Awesome. Okay. So let’s start taking some of the questions from the chat box here. And again, folks, if you are listening, you have a question. I’m looking at the chat, but it would be highly effective if you you slap that question into the q and a box.

There are two different components on the bottom of your zoom screen. One is a q and a, one is a chat. The q and a has two little message bubbles. If you’d like to ask a question slap it into that q and a box. So one of the questions that we have, I also from Brian, is, which real estate sectors will get hurt or benefit from the interest rate increases the most, let’s say.

Let’s maybe say what’s our top three real estate sectors that will be positively impacted and what are our top three real estate sectors that will be negatively impact?

Bob Fraser: My number one is industrial for all the reasons that I gave in my presentation. I think my number two would be multi-family again, because we’re just, it’s just underbuilt.

And my number three is probably storage. Which seems to just be resilient no matter what. And everything else I’m actually staying away from. Okay.

Neal Bawa: Same exact ranking for all three. Same

Ben Lapidus: exact ranking. Okay. So I know you’re both gonna say Office is the worst. What about second?

Neal Bawa: For me it’s Airbnb, stay away from Airbnb.

Those assets are insanely priced for today’s marketplace. You’re about to see. It was, they were so ridiculously marginal when, people bought them. In the last two or three years, people have been buying these properties for, 2 million, $2,000 a square foot. I think Airbnb is going to collapse.

And not Airbnb. The company, I think they’re doing fine, but the people that were basically doing short-term rentals, when you look at today’s interest rates and what they were paying for short-term rentals in the last 18 months. It makes zero sense. So anything in the short term rental market, I think you are going to see incredible fire sales and they will start quicker than fire sales that you might see in, classy assets because of what Bob was mentioning.

Sdr I think you’ll see friendly of of bargains in the marketplace in Q one Q2 next year.

Bob Fraser: Yeah. And I would extend that to all hospitality. I think we saw a post covid boom and we really don’t know what the normalized world it looks like post covid. We really do not. What is hospitality, appetites, and consumption look like?

We have no clue. So I’m a hundred percent staying away from all hospitality and I include STR in that. Yep.

Ben Lapidus: Let’s just let’s just throw retail out there for fun because retail has been that one that, is it gonna do okay? Is it gonna bounce back? So I know that none of the three of us really invest that highly into retail, but what are you guys seeing out there in the retail space?

Bob Fraser: I do. I do. And Iactually love, I actually love, I should have put that on my list so somehow, I’m older than you guys and the hard drive doesn’t always spin up as fast as, I got you.

Ben Lapidus: I’m here for the good questions. .

Bob Fraser: Now we love neighborhood retail, so the cap rates we’re buying, so neighborhood retails a little teeny, teeny strip malls, okay.

With the dog groomer, the bar, the nail salon, that stuff soared through Covid and the cap rates are running in the 9% range. Ex explain that to me. And so we’re backing up the truck and buying as much as we can of that stuff, it’s very difficult to scale, but but we love it, the non anchored, non grocery anchored.

So grocery is being eCommerce and it’s we think it’s at risk, and so we don’t like the big retail. We like the little teeny retail.

Ben Lapidus: Local boutique services. How much elbow grease does that require? Cause that’s not really so much going to your institutional leasing companies as a partner which

Bob Fraser: creates the inefficiency, right?

Yeah. That’s, It’s not, the big REITs are not buying the stuff, which was why you’re getting a nine cap. And I’ll tell you what our value add strategy is the heavy lift value strategy. It’s raising leases, raising rents when the leases expire. ,

Neal Bawa: . Yeah. Yeah. It’s a good deal. I’m gonna basically send a spy to hack Bob’s computer and figure out where he’s getting nine cap, strip malls, because boy, I would buy as many as I possibly could, knowing what I know about interest rates and inflation.

You send a check, you send, you check this for me. But I that’s the next thing I was gonna say. I’ve been investing in other people’s strip mall type projects. And they’re all, they’ve all done really well at this point in time. Now they can’t sell them at this point because of Nine Cap.

But they, the cash flow is pretty strong. Because of what happened in the last 18 months. So that they’re all like, You know what, I’m cash flowing at 18%. Why they, why the heck would I sell? I’ll just wait for cap rates to adjust whenever they do. But for somebody to buy today at Nine Cap, you cannot beat that.

I don’t think anybody, anything in multifamily would ever beat an eight and a half or nine cap purchase in strip mal, retail. It’s amazing.

Bob Fraser: I’m happy I am. It’s nuts. And this is my thesis of the insanity of the markets, right? Warren Buffet said if markets were efficient, I would be broke.

And markets are manic and stupid and not completely inefficient. And you just have to find the most hated assets and buy ’em. Guess. Guess what? I just bought an oil field. You know what my cap rate is in an oil field? 25. Oh,

Neal Bawa: 25. Yeah. Yeah.

Bob Fraser: And value add, by the way. So value add play, it’s, today’s cap rate is 25, Yeah.

And that’s sandbag that’s conservative numbers. Wow. Wow. Why? Why is that? Because it’s hated asset class. It’s out favor, that’s when you want to buy.


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