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SHOW NOTES FOR EPISODE 459: OPPORTUNITIES AND PREDICTIONS FOR MARKET RECOVERY
The coronavirus pandemic has not only created a “new normal,” it has created a new economy and, therefore, a new real estate market. In today’s podcast, attorney, registered investment advisor, real estate investor and CEO of Cap Stack Partners David Blatt shares insights into this new economy, what a recovery will look like and what new opportunities have emerged for real estate investors.
What You Will Learn
- What the 5 hottest real estate asset opportunities are for the new Covid economy
- A unique job search strategy that can launch you into becoming your own company CEO
- What makes distressed properties such good investments
- How you can leverage small multifamily properties into major syndications
- Why the current economic crisis is different from the Great Recession
- What is the main factor you cannot calculate when analyzing a potential rental property
- How David Blatt knew that the Great Recession was coming and how he capitalized upon that opportunity
- Why interest rates do not correlate with market growth
- What are the top U.S. growth regions for the new Covid economy
About Our Guest
David Blatt
David Blatt is the CEO of CapStack Partners, an advisor focused on helping real estate clients find debt solutions, including project financing, loan sales & syndications, and loan workouts and restructuring. A licensed attorney, real estate broker and advisor, David took a humble start as a receptionist at a real estate firm and parlayed it into a career in real estate investments and the creation of his successful company in 2012. David is the host of the real estate investment podcast, “Make the Deal: Real Estate Investing with David Blatt.” A frequent public speaker on entrepreneurship, innovation, and capital & investment trends in real estate and has spoken at top real estate conferences. He is a Registered Investment Advisor, is licensed to practice law in New York, New Jersey, and California, and is a real estate broker in New York and Florida.
More About David
- Has been in real estate for the last 20 years
- Always has been entrepreneurial
- When he came out of graduate school he knew he wanted to create his own investment platform
- He didn’t want to work for some big brand institution
- He has always gravitated to real estate
- He liked the idea of buying an asset that is appreciating in value over time and generating cash flow at the same time
Becoming an Over-Qualified Receptionist
- He decided he would find a job in real estate to get started
- He was already a licensed attorney and an investment advisor
- But he knew no one in the real estate industry and he needed contacts and experience
- He found a small real estate investment shop that he liked
- They were doing a lot of environmental distressed acquisitions and redevelopment
- They were also looking to hire a receptionist
- He went in to apply for the receptionist job
- In the interview, he told the principal of the firm that it was “his lucky day.” He told him:
- You don’t have to pay me more than the job requires
- But, in exchange, I want three things:
- I want the experience in the industry and to learn what you do
- I want to build my network of both real estate professional contacts and investor contacts
- I want the opportunity to earn equity in the deals that we do together where possible
- Then, he told them, “Once I’ve learned enough, I’m going to leave you.”
- He worked there for two years
Starting His Own Business
- He left the small real estate firm to launch his own real estate investment platform
- He started to find deals and raise money from investors
- He was able to scale pretty quickly
- The business morphed into a full-fledged distress debt fund
- He learned the distressed debt business from his previous employer
- He would buy defaulted loans or REOs from the bank
- He liked the idea of being able to take a distressed asset, create value and turn it around
- This was a few years before the Great Recession
- When the recession hit, everyone was in awe of the fact that he knew what was coming
- He had built up enough of an infrastructure and track record by the time that the recession hit that he had institutional capital dedicated to what he was doing
- He was able to focus a lot on buying a lot of distressed opportunities
- He had a fantastic run until the market started to recover. Then, the opportunities dried up
First Deals
- Right before he left the small real estate company, he bought a small 9-unit apartment building in New York City
- Valued at $1 million something
- He was able to raise equity, get a loan and close the deal
- Then he heard about an off-market 20-building deal for $15 million
- The previous buyer fell out of the deal
- No brokers were involved
- He bought directly from the seller
- He was also able to re-connect with some of the banks he had made contact with at his previous firm
- In normal transactions, you have the seller who wants the highest price and the buyer wants the lowest price
- With banks, they just want to get the property off their books, which favors the buyer who wants the lowest price
- He grew from a 9-unit apartment into managing a few hundred million dollars in assets at its peak
- They did more multifamily deals but he covered many other asset classes as well
Lessons From the Great Recession
- David thought the recession would last a lot longer than it did
- If the market had processed everything that had happened to it, on its own, without government intervention, it would have taken a really long time for the recovery to materialize
- It was a fascinating time for David because it taught him a lot
- You can analyze a deal on its merits from the perspective of value and what your motivations are to put your money into a deal, but the one thing you can’t predict or underwrite or project is regulation
- Being attentive to where the government is thinking about things is very important when you’re making investments
- For example, a lot of buildings in New York have a regulations around them
- For the longest time, there were ways you could deregulate units
- It has been a pretty steady business to buy things at top dollar on in-place value with a business plan and expectation that you can get the value up by deregulating units
- And now, as of a year or so ago, that’s no longer on the table
- There have been a whole lot of investors who have come into these deals, based on that business plan
- They made a “regulatory bet” that it was going to remain as they expected it to and then, just like that, it turned against them that had nothing to do with “did you like the deal” or “are their drivers here supporting growth (rent, population, income, etc.)” – no, none of that matters when you are dealing with government regulation
- It’s a bad bet – things can turn on a dime!
- They made a “regulatory bet” that it was going to remain as they expected it to and then, just like that, it turned against them that had nothing to do with “did you like the deal” or “are their drivers here supporting growth (rent, population, income, etc.)” – no, none of that matters when you are dealing with government regulation
- For the longest time, there were ways you could deregulate units
- For example, a lot of buildings in New York have a regulations around them
- Being attentive to where the government is thinking about things is very important when you’re making investments
- You can analyze a deal on its merits from the perspective of value and what your motivations are to put your money into a deal, but the one thing you can’t predict or underwrite or project is regulation
Looking at the Covid Economy
- He works nationally
- His investments, over the last couple of years, have been focused primarily on the Southeast and Southwest because of macro-growth drivers that he likes
- The one thing that he likes is that the government jumped in to support the capital markets
- Everyone is really focused on the interest rates
- What’s my financing going to cost when I make investments?
- But if you look historically at the impact of interest rates on real estate values and the pace of the market growth, it doesn’t necessarily correlate
- What really correlates more closely is capital availability – how much capital is in the market
- Right now, we’ve got capital
- We’ve got debt capital
- We’ve got equity capital
- And people like real estate
- Right now, we’ve got capital
- What’s my financing going to cost when I make investments?
- What we saw in the Great Recession, that was problematic, was that it highlighted how real estate is this big, slow, fixed asset that, when you want to get out of it, you really can’t, as quickly and easily as you thought. Values are going to move far faster than you can liquidate, if that’s what you are looking to do
- This time around, it’s actually working to investors’ advantage because the steady buy ‘n hold right now is just a good place to be and the asset really forces that discipline
- This is another reason why David likes real estate broadly speaking
- This time around, it’s actually working to investors’ advantage because the steady buy ‘n hold right now is just a good place to be and the asset really forces that discipline
- In terms of opportunities, it’s uneven
- You look at retail and you can see it’s getting obliterated, even though that story has been going on for quite some time
- Malls have been struggling for a while before their recent problems due to ecommerce
- Hotels have been seriously impacted
- However, if you are patient, there may be some great opportunities
- There is a pent-up sense of people wanting to travel
- At some point, when things normalize – whatever that looks like – hotels will benefit
- Many people will feel better when a big name corporation, for example, is behind cleaning protocols
- By year-end and the beginning of next year, if you are an opportunist investor, you will be presented with some interesting opportunities
- Bank forbearances will be resolved and/or companies folded and we’ll better know the survivors
- Finally, you can’t ignore the attention the suburbs are getting as a result of people needing more space for home offices and WFH (work from home) situations. There will be fantastic opportunities in:
- Home ownership
- Single family rental rental assets
- Suburban offices
- Multifamily is more resilient
- There hasn’t been a drop-off in demand for multifamily investment assets
- More attractive are the non-CBD downtown assets
- Garden style are of more appeal
- It will attract more investor attention
- He recently saw a trade in Tennessee that was being marketed as in the Nashville MSA even though it wasn’t really in Nashville
- The buyer paid generously for the asset
- There were 25 bids for this property
- Class B value-add multifamily property
- This exemplifies the demand that’s currently out there
- There was no hiccup in financing for the asset class
- Eviction moratoriums still hurt investors
- Think of the regulatory implications
- The carrying costs never got a time-out
- If you are going into deals in today’s market, make sure you have appropriate reserves and that you strongly consider where you want to invest your money
The State of Lending
- David speaks to all kinds of lenders from small local banks to Fannie and Freddie lenders
- Everyone is open for business
- The only thing is, they are being supper picky about the deals that they are financing
- This has noting to do with the merits of the deals that get presented for financing but more about WHO is presenting the deal
- It’s more challenging for the person who may not have a track record to get financing on a deal that completely pencils as much as someone else who may have done it before
- What he has noticed is that the levels of financing have dropped
- In the beginning, they dropped because lenders had no visibility into the future because they were in “uncharted territories”
- But, today, at this stage, it has more to be with lenders being more opportunistic – “If I can charge you the same but give you less of it, that’s a much better deal for me.”
- If you have a deal that makes sense and that is in the right asset class, you should have no trouble getting financing
- Multifamily is certainly a very desirable asset class right now
- Industrial is also great
- Single family rentals also
- Self storage
- These are all no-brainer financings
David’s Current Deal Focus
- He’s seen an uptick in distress opportunities
- For example, buyers who were at the table, pre lock-down, and the deals didn’t go through
- Now these deals are available
- He working on a few deals that are REOs from the bank
- Suburban office assets
- These are great, if they are in the right markets, for long-term holds
- There are opportunities for growth there
- Suburban office assets
- He’s also looking at distressed notes backed by single family rentals
- Distress opportunities are not so much where the market is as they are around the circumstances of a given deal
- He sees single family rentals as a strong asset class right now
- There aren’t enough homes for sale
- And the ones that are available aren’t affordable
- Key Markets
- Growth markets in the Southeast
- The Carolinas
- South Florida
- Markets in the Southwest
- Growth markets in the Southeast
- There is truly a distinction between speculating and investing
- If you are approaching real estate as an investment, you have to have a long-term horizon
- If you have a long-term horizon, then you have to take the bets your taking based on the macro view for things like the asset class or the location
- If you’re speculating, it’s a near-term profit making opportunity
- i.e. Fix ‘n flip markets
- He doesn’t like that execution because it’s such a fixed asset and it’s super hard to get in and out of a deal even when the market’s doing really well
- If you really want to speculate, do REITs in the public market because that’s the most liquid market in which it can get done
- Your investment thesis should be one of investment appreciation and cash flows
- If you are approaching real estate as an investment, you have to have a long-term horizon
Advice for Old Dawgs Looking at Real Estate Investing to Help Them in Their Retirement Years
- Single family is a good space to be
- You want to make sure you can preserve your capital and at the same time create a cash flow so your money is working for you
- There’s two ways to do that in real estate:
- Investing and getting it on a basis
- Your purchase price can produce a good cash-on-cash return that clears whatever hurdle you need it to with the idea that you are locking your money in with some long-term fixed-rate financing so you know your asset is going to be worth what it’s going to be worth
- The alternative
- With that investor profile that has that threshold
- Provide financing directly
- Bridge financing is a great way to satisfy that because it checks a lot of boxes
- You’re putting the money out
- You’re getting a really attractive yield
- Bridge financing is a great way to satisfy that because it checks a lot of boxes
- From a private lending standpoint
- He likes to look deals as “What’s my last dollar in?” In other words, if someone is buying a property at 100% of whatever the purchase price is and He’s lending at that at 60-70 LTV. His last dollar in is 60-70 of what the buyer’s last dollar in is
- The reason he wants to look at it from that standpoint is. if something goes wrong with the borrower and their business plan and he ends up owning the real estate, he looks at whether he’s comfortable, at his price (the amount he lent) on that real estate to own the deal
- If he has to now go in and collect the rent directly, is he really OK with doing that at 60-70% LTV
- That’s the analysis he applies
- You want to to work well where you’re collecting your return and then you can roundtrip that investment
- The reason he wants to look at it from that standpoint is. if something goes wrong with the borrower and their business plan and he ends up owning the real estate, he looks at whether he’s comfortable, at his price (the amount he lent) on that real estate to own the deal
- He really likes those deals from a capital preservation and cash flow distribution standpoint
- Regarding asset classes that do that, he feels it’s thinking opportunistically
- You make your money on the buy
- You really have to think of where your buy price is so you don’t have to pay attention to the markets and where value may go
- The second you buy, you’ve effectively locked-in your profits
- And now you can focus in on your cash flows and enhance those so your money is truly working for you and the real estate is doing what it is intended to do as an asset class
- He likes to look deals as “What’s my last dollar in?” In other words, if someone is buying a property at 100% of whatever the purchase price is and He’s lending at that at 60-70 LTV. His last dollar in is 60-70 of what the buyer’s last dollar in is
- Investing and getting it on a basis
Current Opportunities
- If you can buy…
- Multifamily
- Single Family
- Office
- Industrial
- And you can get into a deal that is more “value add”
- It goes back to basis and value creation
- If you are an active investor, can roll-up your sleeves and can create that value, that’s great!
- But you may have investors that are more passive and they just want to know that they are going to get their quarterly distributions. with growth and know there’s preservation there, make sure you are working with someone who is experienced and can execute on that value add strategy
- Good opportunities can be had in:
- Suburban office
- Medical office
- Essential type uses
- Also
- Single family rental
- Build-for-Rent space
- Good growth place to be because:
- You’ll have long-term demand by people migrating and wanting to live and work in their homes
- Lenders are more and more moving into that space to provide great lending options
- This will create more demand and more value for real estate down the road
- If you know that you can borrow money simply and easily from numerous sources, then I’ve already solved how I’m going to pay for this thing when I buy it from you
- This will, in turn, create more buyers having that same resource and, therein, there is the demand that translates into higher value
- If you know that you can borrow money simply and easily from numerous sources, then I’ve already solved how I’m going to pay for this thing when I buy it from you
- This will create more demand and more value for real estate down the road
Current Business
- His company is going back into the distress space
- He definitely sees opportunities as the forbearances burn off
- He’s actively pursuing those types of deals
- He’s looking at special situations where buyers have fallen out of bed on pre-Covid deals where they can jump in and take advantage of opportunities
- He’s also thinking long-term hold portfolio strategies
- He’s also building up the lending side of his business – rescue capital
- Where he used to have institutional lending relationships in his last fund, since then, all the deals he has done have been backed by private capital
- It just aligns much better with his view of real estate because the institutions are typically structured into funds of their own that usually have some kind of end-date
- If you buy a piece of real estate that you really like for the long-term, these funds force you to sell when you don’t want to and that happens all the time
- He likes to be a buyer in those situations but he hates being forced to sell when it’s not necessary
- The motivations of private investors in this space has a generational wealth creator and if you can identify assets like that and not have to sell-out because of some structure that does not necessarily factor into the real estate analysis, that’s a great place to be
- That’s how he’s been capitalizing deals he’s been pursuing
- If you buy a piece of real estate that you really like for the long-term, these funds force you to sell when you don’t want to and that happens all the time
Rap-It-Up
- Favorite real estate book: Am I Being Too Subtle? by Sam Zell
- Favorite business book: The Most Important Thing by Howard Marks
- Most valuable web site for success (other than your own): LinkedIn
- Favorite app: Overdrive
- Favorite quote: “The market can stay irrational longer than you can stay solvent.” – John Maynard Keynes
- If you had to start all over, knowing what you know, and you only had $1,000, what would you do to launch your real estate investing business? I would use that money to reach as many investors as I can to build-up an exponential war chest to be able to buy assets. Marketing dollars to reach those investors.
How to Reach David
- Website: CapStackPartners.com
- LinkedIn: https://www.linkedin.com/in/davidblatt-capstackceo/
DISCLAIMER: Many of the above strategies take knowledge and have a higher degree of risk. You need to do your research and/or work with someone who is experienced to reduce your risk.
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