The Current state of Commercial Real Estate: Armageddon or Overblown? Setting things straight with Matt Lasky of Equity Velocity Funds

We’re back! Hitting first up with the question of where the current state of Commercial Real Estate is at since COVID. Is the market coming back? Were the hits too hard with everyone out of the office? We’re looking at all the aftermath with Matt Lasky (@MattLasky) of Equity Velocity Funds, where the pain points are, who kept afloat and how the market has changed since the vacancy or ‘phantom occupancy’ of Commercial buildings. In this episode we talk with Matt about the commercial real estate bubble bursting, inflation & debt cliff, leverage factors, new lending standards, the difference between debt and equity & the challenges of bringing on new supply in real estate.

Were there any success stories in all of this mess? Find out as we dive in with Matt as he gives us a closer look at just what’s going on in the current state of Commercial real estate. SEND IT!



Check out the complete Transcript from this week’s podcast below:

The Current State of Commercial Real Estate: Armageddon or Overblown? Setting things straight with Matt Lasky of Equity Velocity Funds


Jeff Malec  00:07

Welcome to The Derivative by RCM Alternatives, where we dive into what makes alternative investments go analyze the strategies of unique hedge fund managers and chat with interesting guests from across the investment world. Hello there. Summer is here June 1 at five degrees here in Chicago love it. Almost as nice as Vegas, which I just got back from. After attending the EQ D Conference. They’re listening to big institutional options traders and hedge fund managers and exchanges and all the rest. Talk the talk Jason Buck was there as well. And we’re doing a little Home and Away pod breakdown first here on the Red River then on mutiny investing podcast of all the panels, all the speakers, what was said by all those volunteers pros, who said something interesting, who didn’t. So subscribe today. So you get that in your feed as soon as it drops next Thursday. on to this week’s show. As I mentioned, beautiful day here in Chicago, people are out and about all’s good in the city. But if you watch any news, you’d probably say, Well, hold on, you got some violence, you got a bunch of empty office space, people moving out in droves to low tax rate states. Which makes you question what will commercial real estate look like here in Chicago and deed? What will it look like across the country with empty resale stores, empty office space, and more? Will all that start blowing up real estate developers regional banks, pensions, insurance companies and more. We’re getting into all that and more with Matt Lasky the managing partner equity velocity funds and having him make the Armageddon case first, and then switch him over to the bullish case and whether he believes you know, don’t believe everything you read, it’s all going to be okay. We’ll see which side you land on. Send it. This episode is brought to you by our CMC outsourced trading desk. Did you know our Sam does declaring an execution for several ETFs and mutual funds utilizing futures options and more. That’s right, check it out at our sam And now back to the show. We’re here with Matt Lasky. Out of the Columbus area we were just talking about the baseball team we lost to licking Valley dirtbags. Which I guess licking Valley is not too far away from you


Matt Lasky  02:24

know, got used to this city. A lot of growth going on out there now.


Jeff Malec  02:28

Really, it’s I thought it was a fictitious place. It’s a real place.


Matt Lasky  02:32

It’s real. Haven’t been out there a ton. But can imagine there’ll be more trips out there with the Intel chip plant. That’s big news in Columbus and some of the reshoring of chip manufacturing.


Jeff Malec  02:45

That’s how big is that gonna be? Like?



A billion dollars? Yeah.



Jeff Malec  02:51

I don’t even know what a chip plant looks like. It’s a big, it’s a big footprint. Who knows? I know that


Matt Lasky  02:56

they’re, they’re rationing concrete already for for all of Columbus. So it’s pretty substantial.


Jeff Malec  03:03

Really? All right. Well, we’ve had you on the pod before but with another guest who was talking like mortgage backed securities and stuff wasn’t a perfect fit. So wanted to get you back on with all the talk of commercial real estate. Is it a bust? Is it a overblown what’s going on? So give everyone a little background, what you do and why you know, the care space and then we’ll dive in.


Matt Lasky  03:29

Sure. So managing partner and equity of velocity funds, we’re 35 year old commercial real estate investment firm our two core competencies over the majority of our history have been retail and healthcare. At inception, that was big retail. So think grocery anchored centers, Walmart anchored centers and small healthcare and now that’s flipped on its head. So think larger suburban medical office buildings, surgery centers, and some seniors housing, and then smaller infill retail. So things you can’t necessarily do online on the retail front and then been a developer our whole history. So getting more and more involved in larger scale mixed use projects. So think apartments, office retail, and kind of a live workplace type, wholly integrated setting.


Jeff Malec  04:20

And then two things. They just jogged my memory like yeah, pre COVID You guys were Amazon proofing, right? I think was the word you used or what was the word?


Matt Lasky  04:29

Yeah, they call it the Amazon test, which was our, our real estate vernacular for you know, hopefully things you can’t do online.


Jeff Malec  04:36

Right? And then that spectacularly got shut down by COVID or what happened in that scenario. So what does that look like gyms and things like that? Yeah.


Matt Lasky  04:47

Fitness restaurant. Some that, you know, we do have a lot of medical stuff in our retail so as kind of healthcare shifts from a patient type mentality to accussed Everyone’s Tality you’ll get dental, PT, urgent cares, primary cares, other types of uses and retail. But But we’d say service oriented retail broadly. And then like health and wellness would be your type of kind of tenant for seeking.


Jeff Malec  05:14

But in that post COVID was at a tough time of like, basically everyone stopped going to gyms and restaurants or did PPP save the day or what did that look like?



Matt Lasky  05:23

Yeah, so I think we’ll get into this more, but it was, we have, we have largely invested in growth markets. Thematically, it’s so happens that, you know, without making a political statement, a lot of those growth markets happen to be red states and red states happen not to shut down. So I think we were better lucky than smart. But we had very few impairments of kind of government mandated business closures. So some of the tenants struggled, we have to work through some things, but we across our entire portfolio of call it roughly $500 million. In 2020, we ended the year, mid to high 90s percent rent collected, and so it was a little lumpier, we had to work with some tenants. But that’s a pretty normal year for any landlord, you know, you’re not usually at 100% collections have a little bit of AR, so call it PPP, call it luck, because a lot of our times were able to stay open and get creative, and then we’re able to work with them and defer some rent to catch up later. But we ended up in good shape.


Jeff Malec  06:26

And then you hinted at something there, maybe I read into it. So what’s the explain to me the difference between pure care and developer, and then you guys are sort of bridging the gap there. Yeah, so we,


Matt Lasky  06:39

we invest kind of across what people would call different risk spectrum. So development is, you know, taking a piece of land and building a building, we do development a little differently in that we want to be at least 50%, or more pre leased and that have negative debt coverage or like a negative debt carry. And then a lot of our businesses an acquisition business where we’re buying buildings that have where we think we have strong risk adjusted return, sometimes that means we can push rents or increase occupancy and add a lot of value or other times we think that it’s a solid asset and a little bit mispriced. And there’s great kind of in place cash flow in a growing market.


Jeff Malec  07:17

So the most scary go down to the developer is that the developments on the far end of the risk and the risky is,


Matt Lasky  07:24

yeah, so from a risk adjusted return standpoint, you know, if you’re going to be a developer, you want the highest level of returns relative to if you’re buying a long term, single tenant net leased asset, it’s usually the opposite end of that continuum where people, for better for worse treat that long term lease and credit more like a bond, unless like real estate, and then development is kind of the most risk, you’re going to take. In a good jurisdiction, it’s going to be a two to three year timeline, from inception of a project to delivery of a building, and in more complicated markets, that could be five or more years.


Jeff Malec  08:00

And then help me understand I was when I’m like sitting here doing spreadsheets and bemoaning my life of picking, analysis and all this stuff on futures programs and data and I’m like, Oh, it should go into real estate and I’m driving around sun’s out, tops down in the car, like so commercial real estate. Are you mostly sitting at the office doing work? Are you out and about meeting people walk in buildings walk in sites?


Matt Lasky  08:25

Yeah, it’s a little bit of a little bit of both. I think like, there’s a lot of people have had success with maybe limited institutional financial acumen in commercial real estate, I think some of that is interest rate driven, and also kind of flows driven as real estate is now a major food group and much more of an, you know, main asset class more institutionalized, as opposed to 20 years ago. So I think you need to understand the spreadsheets, maybe now more than ever, but at the end of the day, it’s a, it’s a tangible asset, like in our acquisition process, we’re always going to see the building, we’re going to talk to all the tenants during our due diligence period. You know, one of the interesting things about real estate, relative to the regulated futures world is the ability to trade on insider information and not go to jail for it, right. If we find out that an area is about to improve, or there’s about to be a big project or an interchange, put in or something that dramatically positively or negatively impacts an area, you’re allowed to act on that information in real estate, whereas you know, that’d be material. Yeah, non disclosed public information maybe in a in a regulated securities world.


Jeff Malec  09:37

I think there’s technically not insider information in futures markets as well right. Like all those oil majors are trading around their own data and their own positions in there. But anyway, let’s not get anyone in trouble so sure, early in the path so I’m going to let you choose your own adventure here. I want to take two sides Here’s the story of one right? It’s died down a little bit. But back March, April, Silicon Valley Bank, all that stuff was there’s going to be a huge commercial real estate fueled bubble bursting, that’s going to cause the next great depression, right, there was that kind of level of craziness of we’re in for big trouble, commercial, real estate’s driving the ship. The other side, we’ve seen a little bit more recently, it’s like, Hey, this is overblown, the like yourself, these are professionals. They know how to manage their risks, they know how to manage their interest rate risk. It’s not as big of a deal as everyone’s making out to be. So let’s spend half the pod talking. It’s not that big of a deal and half the pod saying it’s Armageddon. So which which path do you want to take, first, let you choose your own adventure?


Matt Lasky  10:47

Let’s start with Armageddon, because I guess I lean a little bit more bullish. And this will be the harder harder case for me so so we’re starting on the hard side. So in short, I’d say the majority of pain is call it the interest rate, you know, the historic interest rate increase that everybody knows about. And so there’s a lot of younger, less tenured sponsors, and some well capitalized sponsors, right, that originated that deals, call it around COVID, maybe a year or two before and then up until the last year or two with floating rate debt, limited caps and short term maturities. So what that means is, you know, you’re looking at a Sofer that went from so far, or I guess it was library, technically, then right, but a floating rate, that index that was essentially zero, or barely around in there to whatever it is today in the fives. And, you know, that dramatically changes your valuation on an exit and your cost to carry the project. So, you know, we have a world whereby you had slowing apartment rent growth across the country, I’d say in most markets, it’s still positive, but the rate of increases is slowing. So you can have this, this perfect maturity storm where people didn’t implement their business plans, which means growing net operating income, that could be because they missed on the revenue growth. They spent too much in costs, right? Because there’s an inflation story here. So if you’re rehabbing a building, and you underwrote anything, the last few years from a materials or construction standpoint, those costs probably ran away from you. And then you also have, you know, the two biggest other expenses and an asset are insurance and taxes. And you’ve got a lot of municipalities with limited budgets, increasing tax millage rates, so like the, you know, higher tax per dollar plus higher insurance costs, that you have this storm that can erode cash flow and create this looming debt cliff to where you have to have a cash in refi. So when your debt comes due, if you don’t have money to bring to the table to pay off some of the lender or can’t raise rescue capital through like, some sort of creative financing and prefer to prep equity preferred equity or mez, that you’re going to have a gap between where your asset would be valued today, and the debt cliff.


Jeff Malec  13:11

And so I heard you saying they’re like, it’s, they’re getting lower rates of return, because the rates are going up. But the Armageddon scenario is like, not just you’re just making less money, you’re forced liquidated sale, which is kind of what you’re saying, like, there’s this clip of like, okay, and tell us how most of those are structured? They’re like balloon payments, or how does that work of? Right? Is it both the month after month payments, so they’re floating rate. So now, every month, I have to pay more, and then at some point, I have to pay this money back and maybe don’t have the revenues because the rents are down?


Matt Lasky  13:43

Yeah, so a lot of the sophisticated capital, and both on the debt and equity side would have had probably some sort of rate cap or swap rate in place today. But a lot of the aggressive kind of value add or opportunistic sponsors, or developers might have had like a three year now plus to one year extensions that are subject to certain tests. So essentially, in today’s world, they’re probably not meeting a lot of those tests. I think that that a three year balloon. So that’s kind of why that COVID time period is where I’ve mentioned the start. So common, common terms in real estate that three years, five years, 10 years, plus maybe extensions for balloon payments coming due. So the first of those, you know, COVID, which by the way was peak valuation. So not only do you have revenue and debt issues, but you also probably paid more than you ever have historically for real estate across the majority of asset classes and 2020 2021. So as the profit on your asset or net operating income goes down for some of the reasons earlier mentioned, and so real estate’s valued on cap rates, which is the net operating income divided by the purchase price, if you pay all cash. So maybe the best way to think about that as it’s like the inverse of A P E ratio. And so as cap rates are not one to one correlated to interest rates, but they are affected by interest rates as interest rates kind of blew out cap rates ticked upwards, which means the multiple in which someone would value your property went down. And that creates the scenario where income may or may not be stagnant, could be down, valuation multiples are down, and you have to pay off your debt in this three or five year window. And there’s a shortfall. And that’s the, that’s what’s going to hit and cause the kind of issues a lot of people are fine from an in place cash flow standpoint, fundamentals across the board. And most asset classes are still really good, other than maybe some central suburban office that we could talk about.


Jeff Malec  15:52

And then tie into regional banks there. So the regional banks have most of this exposure of when you say shortfall, that means the bank’s not getting its money back. Right? Because so does the CRA is like hey, we, if we go out of business, whatever, they’re not coming, personal guarantees, they’re not coming, like who’s on the hook for a big bad care deal gone bad.


Matt Lasky  16:13

So nuanced. I’d say in a lot of cases, depending on going in leverage ratios, these regional banks who don’t want to be in the business owning real estate still might be close to money good on a lot of the stuff that was aggressively levered, but they’re now in a lot of cases, because of kind of government stress tests, ability to lend cash elsewhere, deposit ratios, they’re out of the market from a capital standpoint. So there’s this kind of handfuls of billions of dollars of originations, like significant bank, I forget what the stat was, but they were one of the three to five largest lenders in New York City, right? They’re gone, they’re back capital’s out of the market. Right. So that blows a hole in a borrower’s ability to, you know, buy their asset. Yeah. And there’s not exactly a bunch of groups, you know, with what I would call reasonable capital, based on everyone’s kind of last five years. And you can argue whether that’s reasonable or not, but there’s not a lot of capital lining up to take their place, right, you got some aggressive debt funds, but that money today is priced higher than probably they told their equity, it would be. So cost of capital is way up, and values are down. And that’s driven by kind of supply and demand imbalance from banks. They’re just choosing and maybe using the term banks loosely, but call it yeah, all aspects of the real estate lending ecosystem are just being a lot choosier on their deals. And in I mean, we’ve heard stories of banks that a year ago, were open for business, you don’t have to have any deposits. And now they’re saying, Oh, the only way we’ll do this loan is if you have deposits that are like 30% of the loan. And that’s just kind of unprecedented. But that goes back to some of the ratios. We talked about the banks trying to stay on the right side of, you know, stress tests and kind of what they have to do from a regulatory standpoint.


Jeff Malec  18:09

And so nobody’s blowing up, nobody’s losing those billions.


Matt Lasky  18:13

Yeah, so that there will be some equity. Yeah, it’ll be the equity on kind of under capitalized sponsors, mainly, that I think takes the biggest hit. So if a sponsor doesn’t have the staying power, the ability to get through it, or there could be a lot of dead money to where, you know, you may not lose your equity, but it takes the sponsor seven years, and you put out whole, yeah, it’s just that it’s like a zombie fund. So from an opportunity cost standpoint, you’re probably negative on any sort of, like, real rate, but from dollars impaired, it’s probably there’ll be more dead maybe then, truly impaired. With the exception of I think there’s going to be some big, gloomy outlooks for some of the tier one city office towers. So think New York, Chicago, San Fran, you know, have some very serious structural issues from population decline standpoint of work from home standpoint, and then evaluation and basis standpoint in the asset


Jeff Malec  19:13

crime here in Chicago, but yeah, well, there’s crime in a lot of those cities. That goes down to the valuation standpoint. But yeah, yeah. And the


Matt Lasky  19:23

lack of tenant demand to backfill the space where people bought, you know, office was one of the trophy darling assets for a lot of institutional investors and, you know, real occupancies in all those cities are way way down.


Jeff Malec  19:37

Yeah. Have you seen that chart with the cell phone usage data? Yeah, that was impressive read for. You didn’t see it listener like they were right, because some of this tenant tenancy data can be a little wishy washy. I guess I’m like, is that real? Is that not real? But this was actual cell phone. How many signals are hitting the towers in the downtown areas of all these Major cities and it was down 20 to 70%. Since pre COVID? Yeah. So it’s like no matter what the tenant data says, like, there’s just not as many people coming downtown.


Matt Lasky  20:11

exactly in the same way, you know, a lot of the pain will be when the shoe drops in that coming due, you mentioned kind of wonky lease data, you know, some of the bigger credit tenants might have done five or 10 year leases, and they might still show us occupied, but nobody’s been in the building in years. And so it’s like, how do you you know, how do you classify that? And that’s


Jeff Malec  20:33

when so this official debates bad looking already bad looking at in terms of occupancy in New York or San Fran or Chicago? Like you’re saying that’s even overstated? Because some of these big tenants are showing as occupied when there’s nobody actually in there?


Matt Lasky  20:47

Yeah, it depends on the source, the more sophisticated like analysts or people in the now are trying to account for that, like, call it phantom vacancy. So it’s at least but not occupied. And others are just showing the face rate levels. But like, you know, we’ve talked to people and a lot of those markets that say, it’s a lot more kind of damning than just occupancy would show based on people who are have leases, but probably won’t renew based on kind of remote work policies and a shift in their business.


Jeff Malec  21:19

And now put your macro head on, which I don’t know if you have one, but But you macro head on, like what does that do for society as a whole? Right? If we have these, right, everything’s built, especially in these big cities of like, come into the city work down here, go back to the suburbs, or even like, okay, high price condos near the city. And, like, it seems like a lot of stuff could break in, which was the initial panic after COVID, right, of like, sell all this, everything’s breaking, but then it was like, No, it’s fine.


Matt Lasky  21:46

Yeah, so there’s a saying, I think that I’ll forever be true, or people are going to learn in real estate, that basis is forever and yields temporary. And so a lot of people get sucked into, hey, the going into yield on this is whatever. And that’s some usually form of relatively good, right. And that can change. And so I think that, you know, there’s assuming the cities don’t structurally decline, which would be a whole different macro call, but like, let’s just assume San Fran, Chicago and New York, you know, remain mega cities in the world. And maybe that happens, maybe it doesn’t. It takes a low basis to reset to do anything with those buildings, whether it’s repurposed or office comes back, and you can lease it at cheaper rates, but, but it takes some serious pain for the current owners to revalue the stuff back to a level to get kind of other investors willing, yeah, willing to reposition the assets. To make it attractive. There has to be, you know, a big narrowing of that bid ask kind of spread right now.


Jeff Malec  22:48

And like Detroit, I would assume is like a prime example of it. Right? It was dirt cheap. They were giving away houses and downtown real estate and whatnot. So that’s we’re saying like that level of pain perhaps is needed in some of these places to get get things rolling again. Yeah, and


Matt Lasky  23:06

maybe the floor is higher, just based on how big those cities were. But right for a while, people don’t realize that Detroit was bigger than Chicago for a lot of this country’s history, right until that pig that you mentioned. And it took a lot of pain.


Jeff Malec  23:21

We had a babysitter when my kids were younger. And she’s like, Oh, I’m moving back to Detroit. I’m like, oh, no, I don’t want to lose. And she’s like, well, I bought a house with your babysitting money. Like what? I turned to my wife how much we’re paying this lady. She’s like, it wasn’t that much. Just the house is that cheap. So the equity holders, and are we seeing that in the publicly traded commercial? REITs? Right, basically, yeah, he’s getting hammered.


Matt Lasky  23:51

Yeah, right. And they say that the public markets lead, and sometimes maybe they overcorrect. But if you look at all the public office market, REITs, they’ve been slaughtered. Right. And so it and a lot of those guys have exposures into those markets I just mentioned, because there’s a concentration of what used to be call it core office markets. And then those stocks have all been, you know, obliterated. No,


Jeff Malec  24:16

thank you one, like the San Francisco footprint with all the high paying tech companies and whatnot. But yeah. And then that’s not even getting in. We’re just talking commercial office space, but all the commercial REITs have gotten slaughtered Right. Like malls, malls started way before COVID. But yep, are there any surviving in this man?


Matt Lasky  24:38

That’s not my expertise. I know some of held up better than others. Like some of the industrial guys or storage guys haven’t been hit like the office skies or malls as an example. Which I think is the markets way of telling you, you know, kind of what they think is going to happen, which is a structural shift and how we often And then, you know, like apartments and storage have been Darlene asset classes. And a lot of that is the ability to reset rents, you know, monthly instead of long term and annually, a little bit less cap and CAPEX intensive businesses, and you know, broader probably geographic concentration of your assets relative to like some of the core office or mall people.


Jeff Malec  25:25

I’m one of these idiots with all this extra furniture that’s sitting in a storage unit. And I did that I’m like, hold on, we could just literally leave that out on the street, let someone take it. And then two and a half years time have like the money we’d save by not paying for storage, just buy new stuff. So like that’s going on across America, like what do you what are you paying for?


Matt Lasky  25:47

That’s part of the American dream, I think is renting a storage locker?


Jeff Malec  25:50

Yeah. But for what, and then talk to me a little bit about the leverage factors that typically get used. And some of you said some guys are way over levered. Some are, like, what’s the what would you say is normal leverage and versus some of the more aggressive sponsors? How far out on the leverage scout and they go?


Matt Lasky  26:08

Sure. So on, you know, on the public side, those groups might have like, 10 to 35% leverage on their portfolio, get the best rates, but right, you’re just you have less leverage. And then on the private side, that’s where things get wild. I mean, an aggressive private side guy is 75 to 80% leverage, right. And without the balance sheet, or ability to issue money in the capital markets, and the private equity shops, like the big private equity guys that everyone would know, the Blackstone’s KKR is, they’re probably more in the 60 to 70% loan to value area. But some of the newer sponsors, you know, would have these aggressive business plans to where they’re going to grow the net operating income and start at like 75 or 80% leverage. And that’s before, you know, some of the more isosteric guys that might get into like mez that to really actually up that even further, that’s just like playing college senior loan and equity.


Jeff Malec  27:11

And take me through what does that look like I’m building a Walmart or a Target or those I don’t know if those are corporately built, but like for the sake of argument, say we’re building a target. What are the what’s that cost to build? Say? It’s 100 million. They’re putting up 20 million? Borrow? Yeah. Borrowing the ad?


Matt Lasky  27:30

Yep. Yeah. So that, you know, target is going to be less than that. But let’s just say it’s a big target anchored center with some other tenants to becomes $100 million development. You know, some of the most aggressive guys are probably going, you know, 20 million in equity, 80 million in debt, or maybe 30 million or 70 million in debt. But if you kind of miss your lease up projections, right, that can that can get out of hand quick. I would say lenders were a lot more disciplined in this cycle. So some of those hope notes and lack of debt service coverage that you would see in Oh, seven are alway didn’t exist today. So people weren’t like funding dreams as much in this past cycle.


Jeff Malec  28:14

Yeah. What’s the hope note? I like that one. Yeah, I


Matt Lasky  28:17

mean, there were there were deals where people would just like, look at your year two or year three on paper pro forma, that service coverage and Geico. Yeah, well alone off that, even if very limited amounts were in place. And so when the cycle shift, and that didn’t happen, you know, people just got annihilated. And that that largely wasn’t happening without like, substantial personal guarantees, or some sort of other collateral. This go around, I would say the lending standards remained kinda pretty healthy. From everyone.


Jeff Malec  28:51

That was hanging over from Oh, nine. Yeah, we’re not falling for that again. Yeah. You mentioned so far, I had a quick we were at the EQ D Conference in Vegas equity derivatives conference and was marveling with someone like, did you think that would happen that fast? From LIBOR to sofr? Right. That seemed like there was no pain period. Everyone’s just like, woke up on a Tuesday. It’s like, we’re using so for now. And total aside, but like, Did you experience any lag in that? Or it’s just like, Okay, does matter to me call it whatever you want, basically?


Matt Lasky  29:27

Yeah, I mean, everyone got out ahead of it. I would say the most interesting part, and I’d have to go back and look at the actual years, but it may be three or four years ago, were originating loans based on LIBOR, and with some, like, relatively sophisticated counterparties and I’m like, Hey, don’t we need some language for Sofer and like, I don’t worry about it like, well, the whole world already agreed that like, yeah, that was not new. Yeah, they’re just like I will deal with it when we get there. Which made us a little uncomfortable, but we did. It was painless. They basically kinda just like, not in the way you would execute a swap, but swap the rating. So it was the same thing, and, you know, slightly different pricing and, and we just worked through it, but all our counterparties were, I’d say, a couple months out ahead of it. And then, you know, we just switch the index one day in the paperwork, you know, to match. But it was amazing that it was public knowledge and well agreed upon and nobody wanted to deal with it until it was like that Tuesday, you mentioned that seems like Hey, okay, we got the memo. It’s time to actually care about Sofer. Right, where do


Jeff Malec  30:33

I pull that up with some Bloomberg ticker? And talk to me like right before? COVID? Right after COVID? Actually, even I was getting pitched on a lot of these like, hey, put into money with me, we’re gonna build an Airbnb down and Reynolds like Georgia, $3 million house, we rent it out for 35 grand a week. Like a few of these things. I’m like, Well, what if the people who can pay 35 grand a week disappear? So like, I know, that’s not necessarily your specialty? That’s kind of what do you call it? That’s not commercial. It’s not residential. It’s somewhere in between? Yeah, so


Matt Lasky  31:05

their vernacular is probably short term rental. But that means different things to different people. There’s a couple of guys out there doing really big properties at scale. And they’re sophisticated, but they know that they’re in the hospitality business. And they would probably identify a lot more with a boutique hospitality owner and like trying to provide Ritz Carlton level experiences at homes than like, you know, the group of guys who went and bought a lake house and said they’re gonna rent it out.


Jeff Malec  31:33

Yeah. Which I’m like, what? Yeah, rates go up. I was I had the negative head on in that scenario, thank goodness. Because I can’t imagine those guys have done well. Now. Their rates, the same scenario, they’re probably some floating rate, interest rate only or something that now is much higher cost of caring.


Matt Lasky  31:51

Yeah, the the smaller guys there, were probably able to get more conventional, like long term thing closer to home have some bad 30 year. But the, you know, the whole breakeven on occupancy is the question there. And then there’s, you know, much more extreme regulatory risk in that asset class than a lot of others, right. There’s some towns that are trying to ban them completely, and retro actively to so not saying hey, like in a lot of the commercial assets, if somebody changes zoning, like they asked that’s grandfathered in. Yeah, exactly, like a major change, but not on the short term rental side.


Jeff Malec  32:31

Yeah, and I’ve stayed in some Colorado and elsewhere that are you can tell we’re built specifically for that purpose. So like, if that happened, and they have to resell it to someone to live in, like, they’re like, this isn’t livable, right? It’s good for 10 guys on a ski trip or whatever. But it’s not, you wouldn’t want to raise a family in here. So I don’t know, when was that Armageddon? Enough? I don’t know. Mr. Smith. What do you mean, give me one more thing of like, how really terribly bad it could be. Yeah, so


Matt Lasky  33:00

I think the asset classes, so the kind of three darlings of the last cycle were self storage, multifamily, industrial, most of the industrial deals that people were really attracted to have triple net leases, which means you pass through common area maintenance, taxes and insurance to your tenant. And if those go up, that might eventually become a problem. But it’s an overall affordability problem from your tenant. And you know, the market amongst assets will be different, but kind of the same, right? Like insurance, and taxes throughout Houston are going to be relatively similar, whatever pick your city, but on storage and multifamily, you don’t get to pass through your taxes, right, you pass them or insurance, you pass them through VRN. And it just if taxes and insurance go up and rent doesn’t that decreases your margin. And so there’s, you know, there’s a lot of investment in areas prone to natural disasters, be it California, Florida, other parts of the Sun Belt, Texas where insurance costs have skyrocketed, taxes have continued to go up and you’re racing against rent and maybe your debt at that point too. And so, as I looked like allocate personal side, like interested in the tailwinds of storage and multifamily, because I think we’re becoming a, like a nation of renter’s and that we like to store stuff too. But one of the things I couldn’t get over as in some of my favorite markets, is the insurance and tax risk and insurance premiums are up in a lot of Florida markets like a couple 100% Over the last few years. And that’s because when it costs more to rebuild stuff, and to the frequency of natural disasters has gone up, and then taxes are going up with that and those are two big line items that really affect your margin. I just couldn’t get comfortable with kind of mitigate Even insurance or tax risk?


Jeff Malec  35:01

Do you see Texas and Florida, like commercial property taxes going up to offset all the influx of people coming in that are paying no income tax? Yeah,


Matt Lasky  35:13

definitely. Texas is famous for large tax reassessments. And it’s it’s interesting, their taxes are technically a non disclosure state. So when you sell a property, you don’t have to disclose the sales price, which is very unique relative to most parts of the country. But you know, there’s no added as sensitive as where you get well, sometimes randomly or, you know, they are, it’s not a secret that like the assessor’s now are, have subscribed to all the like commercial databases and trying to pay appraisers and stuff for comps, basically anything they can do, to try to see what things were sold for. They’re trying to to get their tax revenue, which is reasonable and fair. But it’s a whole different risk of, there’s a lot of negotiated language around what you can and cannot disclose upon sale in Texas, specifically, Florida’s maybe a little bit better. But Texas is very good at trying to figure out what your property’s worth and necessity to it. And property tax appeals are big business in both those states. Yeah, hey,


Jeff Malec  36:16

that’s the business in Chicago. So what does that look like? So those two areas cautionary, that’s just more competition, or it’s higher price for the end, like eventually, it’ll get passed through and higher rents, but then you’re saying it’ll be basically lower buy in, like, people won’t buy that single family, they won’t rent from there, because it’s higher than this older one or whatever. Like, you just gonna prefer a lower price comp, I guess. Yeah.


Matt Lasky  36:41

Yeah. Or that really sophisticated. And well, heeled sponsors are very realistic, and where they think taxes and insurance will shake out. And other people may get caught off guard and say, oh, you know, the last guy’s insurance was this per square foot and not realize that they’re gonna have a higher value, a higher replacement cost, and maybe not as much scale. And that could be two or three times what the previous guy was paying, and increasing rapidly.


Jeff Malec  37:10

Right? So they’re eventually bust through that whole equation. And so you don’t have any good stories from your xyz pensions gonna go bust because they’re all up in care or whatnot. Like, that’s what all the red, like, all these private credit funds are gonna go, the regional banks are gonna go, the big banks are gonna go have care.


Matt Lasky  37:31

So yeah, if you wanted to find pain, I would see, you know, who had the biggest exposure to Office and Office in New York, San Fran Chicago, and that could be anywhere from pensions to banks. I mean, there’s a couple of banks that would have had that. And they’ll have pain. But that’s where I see like, the major impairments because you have this kind of perfect storm of high asset prices and deteriorating fundamentals. And you’ll hear in like the bull case, I’d say fundamentals are really strong in the majority of asset classes, but office so you’ve got this debt wall, high valuations and right. Coming out of the last cycle. I mean, some of the kind of error maybe one of the most famous sales right was Blackstone buying Sam cells equity office portfolio at a huge valuation, Blackstone simultaneously sold off a bunch of the prime assets to REITs that ended up giving it back coterminous, to like, lower their bases coterminous with closing on Sam stuff, but that was like the Darlene asset class. Right. So it wasn’t long ago that core office buildings and major markets, you know, that was just last cycle really where that was like, one of the asset classes. And now it’s, you know, probably going to be the face of the largest amount of impairments in the cycle.


Jeff Malec  38:54

Or to Me thinks that multifamily and storage, right, like those are now the new darlings and it’s just gonna keep cycling of like the new darlings will become the dogs eventually. Before we leave Armageddon to bull bolt down, down at the hedge fund conference, met back in February in Miami met with a lot of private credit groups. And it was kind of this toggle, like, what if rates go up? What if you and they were kind of like No, we’d like it when the the they can’t pay anymore. And we take possession of property. Usually we make more money on that. Because we can sell it which I’ve had red flags going off of like, that doesn’t sound good. That doesn’t sound like your normal model. But like, what’s the reality of that there’s a mess. Like if all these people have these properties that they need to either manage, live through for however many years or sell, like what does that look like? That puts pressure on everything right?


Matt Lasky  39:51

Yeah, and I’d say to your comment on the debt groups, there are a few debt funds and kind of a slang as loan tone and they There’s a handful of groups that, you know, their motto was loan to own. And they really do want to do that. And there’s others that will tell you they don’t. And I’d say, the way they act, they truly don’t want to be opera operators of real estate. But if you look at some of these guys and forget what podcast he was on, but I believe was the CEO of a core capital, which is one of the leading debt funds, you know, he was looking at debt IRR ours at like 60 to 70% leverage higher than he thinks the equity would be unsophisticated sponsors. So like a lot of, I would say, big money or bigger allocators we’ve talked to over the last couple years, we’re like, hey, we think the debt space is a lot more attractive than the equity space, because we think we’re gonna get the same return and have a 30 or 40% cushion in values before there’s any sort of impairment


Jeff Malec  40:50

and the ability to own it at the very worst, correct,


Matt Lasky  40:54

correct moment. And if you can reposition it, then that’s like, you know, that’s big upside.


Jeff Malec  41:01

All right, I wanted you to slam the private credit, guys, but they’re all right.


Matt Lasky  41:04

Now the credit, you know, it’s kind of like the the public markets, you know, the, the bond guys, which is the credit guys and real estate are usually a little bit more, kind of less optimistic, and more cautious, and maybe a little savvier than some of the equity guys.


Jeff Malec  41:20

Yeah. Yeah. That just seemed weird to me of like, well, what’s your job lending or owning or running? Like? Well, and depends on the scenario, we’re flexible? All right, any any other fire and brimstone? No, no. All right. So you mentioned that you’re more bullish than most. So let’s get into the bullish side.


Matt Lasky  41:43

Yeah, so I think, contrast this with Oh, seven or oh, wait, you had tighter lending standards, and most assets can support themselves and less, less over building. So real estate, and you know, rip, Sam Zell very famous for being a supply and demand guy, right, like, real simple economics. And where a lot of people have historically really blown up in commercial real estate are bringing projects out of the ground or investing heavily when the supply is growing rapidly, and then the cycle turns and the demand doesn’t catch up with the supply coming online. And because of this inflation environment, the last couple years, it’s been very, very hard for developers to make new supply deals pencil, so starts on almost every asset class, our, you know, within balance relative to where they were last cycle, or close to non existent. And a lot of asset owners who bought stuff and didn’t develop it are at a basis such that if you wanted to go build the product today and earn a similar return, you’d probably have to spend 30, or 40, or have to command rents that are 30, or 40%, higher than the guy who bought the assets. And that’s a function of today’s interest rates and today’s construction pricing. And so that’s going to keep


Jeff Malec  43:11

going even if you own the land, you’re like that really incented to do anything with it.


Matt Lasky  43:16

Yeah, because of where interest rates when construction, right. And so the way, the way a lot of people look at real estate development, is what they would call an unlevered yield on cost. So that’s your net operating income divided by your total costs, and with higher interest rates by said unlevered. But eventually you put that on it, but your costs are up in the inflation side. And then if you do have that your cost to carry, it’s much higher, and so it’s the risk premium, you’re gonna come in to do a project. So those two created this very unique storm, to where it’s really, really hard to justify new development across the whole country. And that’s before you get into like, unrealistic seller expectations on land values, and a whole host of other things. It’s just, it’s hard to build. And by the way, with lending, freezing opera, people having deposit issues and whatnot, you know, if you’re going to get a loan, a construction loan is harder to get than an acquisition loan, because you got to Europe, nothing, a year or two of nothing while you build that, and it’s just more risk. So the loans that are getting done, are, you know, the the guys getting kind of the most traction are usually acquisition guy, or people focused on buying pre existing income streams as opposed to development. It doesn’t mean new development kind of won’t happen. But there’s a pretty solid storm of events that have made it insanely hard to bring on new supply and so in certain kinds of industries or segments like housing, like we need more and more housing each year, so call it like multifamily or build the rent homes. Storage, you know seems to be going up Um, in terms of the amount of crap, Americans just accumulate and need to store, industrial, you know, even retail is so severely under built, if you look at the starts throughout the last 10 years of retail, as opposed to like, call it 2000 Through 2009, it’s just dramatically under build, not that we needed it, we were probably over retail. And then healthcare demand is a little bit less elastic, right? Because you don’t necessarily choose to see a lot of doctors and whether unless it’s cosmetic, and so as we age as a population, we need more and more call it healthcare services. So you have this kind of supply demand imbalance, and then there’s a real cost that we had a story of, you know, call it a tenant who was thinking about leaving one of our buildings, and then I think, got a very harsh reality check when they went and priced out what it would cost to, you know, find a new space or build a new building in the market. And I would guess, based on where their rent is, it was probably 80 to 100% increase, and we’re in like a Class B or A minus building. But if they’re gonna go recreate it today, their costs would be double or close to it.


Jeff Malec  46:15

Which so let’s unpack there. So part of me is like, No, you just made the bearish case with all those bad sounding things, but you’re just saying that’s all constricting supply to the standpoint where rents have to go up, everything has to go up. And from an investor’s standpoint, that’s better from Yeah, from a tenant standpoint, doesn’t sound so good, make good then it sounds like more inflation and causes more recession that causes less demand. So it’s kind of like a, you have to strike that good balance. There


Matt Lasky  46:46

it is. And then the other interesting side of said, debt is by far, kind of the biggest capital challenge, but the amount of like, rescue capital or opportunistic money that’s on the sidelines is near record highs. So there’s like, I don’t know where that floor is, but it’s kind of going to be like, I don’t know if you see freefall because there’s so much dry powder out there that as soon as things hit somebody’s you know, underwritten returns, and it’s going to just be how aggressive they want to be versus how conservative in their underwriting, you know, they’re going to start buying up assets. And we saw it. I mean, we saw it during COVID. And that was obviously a much different time and a little bit last macro and kind of unpredictable, episodic event, but a bunch of people raised opportunistic funds, and then, you know, still have them because the floor got hit so hard that people just kept buying stuff. And there was really no kind of Fallout or blowback from the pandemic. And a lot of that.


Jeff Malec  47:45

Those are like, we’re saying private equity funds, or private, just opportunistic real estate funds. Yeah, those are big players there. Yeah.


Matt Lasky  47:54

I mean, like, some of the big boys, you know, we’re talking billions of dry powder. So levered, you know, call it two or three times, you start to get a lot of buying power there. But I mean, well into the billions, like 10s of billions, maybe hundreds of billions of opportunistic capital out there. Right now. The the one thing we didn’t touch on in the bear case that is probably prudent is because of where rates have gone, people now have a yield alternative. Right? So we’re talking about these capital flows. For a while there, right? Real estate was three or 400 basis points above whatever Treasury you want, even on high quality real estate. Now, that’s not the case. Right? Those are closer to par. And there’s no, you know, illiquidity discount, or premium depending on how you’re trying to view or spin that right. And so people can buy treasuries and get relatively similar returns, at least on the current income side, right. So if you got like a tactical pension, or endowment, big allocator. You know, I, I feel like moving forward right now they’re gonna have trouble saying, Hey, we think this is going to be a great vintage year for real estate, like let’s go into real estate instead of just parking our cash and some something backed by the US government. Right, and some T bills,


Jeff Malec  49:13

and what does that look like for like, say multifamily, right, like unlevered? You’re saying, in the two, three years ago, they were looking at two or 3%? Over and over the 10? year when?


Matt Lasky  49:26

Yeah, so like a cap rate, so call it the yield, based on an all cash purchase. For the highest quality stuff, you’d probably see like three and a half or four caps, if you could, you know, have some rank growth and you’re talking really big assets and really private markets. Today, there’s probably some cap rate softening but you know, I’m a multifamily tourists not an expert but you’re still probably around four and a half or five caps for like that highest quality stuff. But now that’s par with short term paper here, right? Yeah. And so Uh, you know, three or four years ago when it was, you know, counted on your hands level of basis points, right, and you had a story of rent growth, then it was like, Oh, this is really attractive. And now, the allocation level that changes,


Jeff Malec  50:14

right? A lot of risk to. So back to the bouquets, all this way less supply. Too much cost to come in and just dampen that slide to say, like, cool, we get it. Here’s more and more and more and more. So you’re saying is too much cost to build out all out. But at some point there, they will come in, that’s where you’re saying the dry powder. Yeah, and what what does that point look like? That’s, you think based on rates, that’s where you’re going with it? Yeah, or, you know,


Matt Lasky  50:51

rates or mild stress and not distress in the way that we knew it in like a way but distress of like, oh, this is finally, you know, getting to my more opportunistic kind of return profile, like, I’m just gonna hit the bid and buy something in place, because the development challenges and kind of unknowns with costs. And so the biggest difference, I think, from what we’re seeing relative to the last cycle is just the fundamentals of the real estate, which is mainly supply and demand dynamics relative to like, occupancy costs and rent trends.


Jeff Malec  51:27

The Alright, what else you got on the bulkhead? So what does that look like? In terms of you still think it’s these leaders, the storage, multifamily, industrial?


Matt Lasky  51:40

Um, you know, we’re guess we’re a little biased? We do you know, we think healthcare in a service oriented retail, we’ve been able to maintain tenancy and grow rents strong. I think there’ll be


Jeff Malec  51:56

and explain to me what service oriented retail looks like. Yeah, so


Matt Lasky  52:01

restaurants, pet stores, nail salons, health and wellness, things you can’t do online, mainly. And also things you can’t do online that we also think have a future. So like, if it’s a Hallmark card store, we’re less interested than if it’s like a restaurant and a gym. Yeah, that area was probably the least built like that service oriented retail was probably the least spill area. And some of that’s maybe because we’re a little over belt after call it Oh, 809. But that’s like the least built area. Kind of going forward. I think. If the storage, industrial kind of multifamily guys see pain or start to get in trouble. It was a valuation issue on the front end. And that’s because they got too aggressive the last few years on their purchase basis relative to where they could grow rents. But I think moving forward, there probably won’t be that. There’ll be pockets of kind of maybe slight losses, but I think everyone is kind of long American Housing, whether that’s home starts builder and communities or multifamily. I mean, you have kind of this background story over the last 10 years, we weigh under built single family homes relative to any time in the history of this country to so like, people need a place to live. I think that’s a lot of the attractiveness multifamily is just this gut or intuition level thing of like, Americans need a place and shelter. And you know, if not a single family home than apartments.


Jeff Malec  53:39

And what’s your thoughts like the out going I guess she’s gone mayor here in Chicago was floating, turning LaSalle street or financial district into low income housing. But we’ll ignore the low income versus poor part and just say like, Okay, if you have all this office space problem, and you have these dearth of supply, on housing, why not convert all those office spaces into housing?


Matt Lasky  54:06

Yeah, so it’s, the short is it’s super costly and hard to do. And the floorplates don’t always match up. But that’s where that basis kind of changes everything. And who knows if, you know, if somebody gets aggressive, like at a government level, and call it like San Fran or Chicago, and you know, a lot of development is somehow, you know, funded or subsidized. Yeah, by local governments in a whole handful of ways. If somebody comes up with a program to make that tensile a lot better for developers, then everyone probably wins. And by the way, like developers are going to say, well, they are profit motivated, they are going to probably deliver it at a more effective cost per square foot and the government would based on dealing private enterprise and non government based so you know, I think everyone could win in that world. And I think there’s a lot of people trying to figure out how A like how do we program a ties? To the extent we can try to convert some of these office towers to residential units, whether that’s high end, low end, mixed condos, apartments? I think, you know, there’s a lot of people out there trying to figure out the design aspect and conversion of that,


Jeff Malec  55:17

then that’s weird, because like, where are they working? I guess they’re just working from home. So it’s like, we’re not going into an office. But now we live in an office where I work from home. Here’s my break. See, right now it’s two success stories. They’re like one my good friend she lived in that AIG building down Wall Street area was converted, like super nice condos, bowling alleys, gyms, like the whole nine yards and there but yeah, must have cost a fortune to convert that. And then here at in Chicago, the old post office where the road goes under the building, right, we sat there for I don’t know what it was 1520 years. And now the CBO is in there. And some other tenants. So yeah, there are few and far between success stories on the conversions. But both for sure that post office was backstopped by the city, I’m sure. I don’t know exactly, but so talk to me a little bit of like, what I was gonna say part of the bull case to me is like, if I’m looking at a hedge fund or something, I’m like, okay, their drawdown could be 20%, or 40%, or 80%. Like, what does that look like? And I know, it’s totally deal dependent on whatnot. But if you have a fun if you’ve put a bunch of these deals together, what does that look like on the what, what is the actual downside?


Matt Lasky  56:36

Yeah, I think so. I’d have to look and double check to make sure this is true. But if it’s not 100%, accurate, it’s directionally correct. But I’ve seen a couple of times that no one has ever, like lost money broadbased in commercial real estate over the course of 10 years, and it didn’t mean that they made great returns, and that some vintages are better than others, I think it’s better as just the parable or an example of like staying power is what matters, having you know, enough cash in a partnership or in a fund for a rainy day to make sure that you don’t have a debt maturity mismatch. If you do that, and you buy it well to okay, then you’re going to be some semblance of Alright, over the long term, you know, barring maybe some very isolated examples, and, you know, horrible city selection are horrible asset class selection.


Jeff Malec  57:27

But surely, there’s been tons of individual players or individual companies spectacularly blown out, where you’re just saying that property, maybe that person or group blew out on that property, but the property itself over 10 years was just fine.


Matt Lasky  57:41

Yep. And that’s where, right you get some of the stigmas or stories around, like, you know, everybody at the country club or whatever talks about their best deal and doesn’t talk about the ones they lost money on relative to like, some of the professionals are like, Hey, I allocated at the spawn, and I’m really excited about my 11% return. And, you know, the other guy’s like, I want three times my money in three years, but they don’t understand that like idiosyncratic risk of like, you know, that sponsors other deal could have been a goose egg, or whatever. So that’s where some of it gets into the like, diversification, and kind of thematic investing across more than just call it commercial real estate, right? Like, even, like, if you take office, which we were picking on earlier, like, office in Miami, or Dallas, or Nashville is probably going to fare a lot differently than like office in New York, Chicago, LA, San Fran, right. And, and so there’s like nuance and the portfolio construction and how you kind of spread risk of against your investments relative to like, you know, the people who are tweeting, you know, everyone’s here on Twitter, and it’s all great deals, and we’ve had our fair share of those. But you know, at Ryohei, that’s, it’s all part of a fund, like, yeah, we’re going to have that happen. But there’s also going to be some things that don’t go according to plan. And we want to, you know, we want to bet on ourselves over 10 or 20 assets in a portfolio rather than, Hey, pick your winner.


Jeff Malec  59:11

And so there along those lines, you think you’d want to diversify across as many sectors as possible, but you have a little more concentration risk, would you say like, right, because I could see like, Yeah, cool. I want to do several different projects. So I’m not going to blow out with any one goes wrong. And you think if you took that to as far conclusion be like, I want to be in every piece of real estate, every geography everywhere, right? But only probably Blackstone can do that. Or BlackRock. So how do you think about that, like, Okay, I want to diversify. But hey, I don’t have enough money to completely diversify. So at some point, you have to choose which path to take, right?


Matt Lasky  59:48

Yeah. And so I write the caveat like not financial advice, and also like financial advisor saw my asset allocation. I’d say you’re nuts, right, because we’re betting on ourselves and heavily invested in every deal we do. and right, I think some of that speaks for itself. But I’ve been invested with other sponsors, and have always taken the approach of like, I don’t mind the extra fees at the fund level, because I kind of want like, for lack of a better term, maybe like, the medic asset class and or geography data more so than like Philo, and I’m not smart enough to pick like, the hottest multifamily deal. But I think I can back a Jackie and pick mshs and trends that we can do better over time from collet. If you’re looking at like the normal distribution or the curve of potential outcomes, I would rather try to chop off the left tail, right and have a positive expected return. And I think that gets better with diversification over kind of multiple deals. But I don’t know, I don’t think everything is created equal. But I don’t know if that’s the best advice for everyone. Because that’s like, right, all we do every day is like eat, breathe and sleep real estate and talk to other people in the industry. So, you know, for people that are practitioners, we might have a unique take on that. But there’s also right with where valuations are like if you want that broad based exposure, then buy some sort of REIT index, right. It’s cheap, it’s liquid. It’s not over levered. You know, that’s an easier way to get that kind of broad base closer to BlackRock, Blackstone exposure them. Call it in private.


Jeff Malec  1:01:31

Yeah. And how do we convince people like you to diversify themselves personally into things like managed futures that do great when rates spike, right? Like, it always surprises me? I’m like, Nah, I’m fine. And you talk a lot of family offices with tons of this exposure? And they’re like, no, like, they don’t get it. They see a track record of I don’t like this period where it was down. I’m like, so how do you think about that of like, okay, I get it sort of diversifying. But you play managed futures to arrest a little bit, right? Yeah. Yeah, I’d


Matt Lasky  1:02:02

say, I’m bad to ask because I have a lot of managed futures and trend following me as a smart one. Yeah. Well, I don’t know. You know, time will tell. But the, I’ve been a math guy, right. So it’s like, let the data guide you. And I think MEB Faber, somebody’s done a really good job of blindly showing return streams and portfolio construction, and what would you pick? And the actual answer blindly, is always, you know, three or four acts that manage future CTA exposure than one actually has. But I was that kid in college, right. And I was in college during part of the GFC. And I’m like, What do you mean, like, you know, this 8% annualized return with a periodic 50 or 60% drawdown is the way to go? Right, there’s got to be a better way, even if you’re just improving the drawdown profile, not the overall return profile. And that’s before anything like strategic rebalancing or allocations, right, but I invest for like, growth and then income and like real estate and private that is on my income side. And then on the growth side is like manage future CTA trend volatility, but it’s all some sort of trend, direct, so


Jeff Malec  1:03:09

you’re not even considering how it tends to do well, when real estate does poorly. Are you? I am


Matt Lasky  1:03:15

I think that you know, a lot of people lose that environment, right of like, the tail hedge funds might have call it like negative carry on an annualized basis. But if you want in any sort of allocation to the Hey, those do really well, when everything else is burning, and you can buy everything else in your portfolio cheaper, it changes the math, I just, I think a lot of people get lost with that kind of second or third level of thinking. You know, I think everyone needs a little tail risk to but got I think trend is a more noble explainable cause


Jeff Malec  1:03:48

and trend has better using do air quotes, better exposure to interest rates, right. So should do much better when there’s a either a big shift in the curve or a big absolute increase in rates. But yeah, it always surprises me of like, Hey, here’s this thing that does really what what hurts your business, Mr. Developer real? Oh, if rates went up huge, I would really hurt my business. Okay. Here’s something that does well, when rates go, like, Nah, I didn’t like that. And oh, nine when it lost 8%. And looks like it’s too lumpy, and all this stuff, like, but the lumps are exactly when you want the loans. Anyway, I digress. But I’m glad to hear you’re a convert on this. I wanted to ask you, do you see a willingness of these health care groups to like go into lower and lower class building? Like it seems to me in the old days, like no way I would have gone to one of these urgent cares in where some of them are at now. Seems like they’re just in a strip mall and in a weird place like 10 years ago, I don’t think you would have gotten to a doctor in one of those places, but maybe I just have selective memory or is that something that’s happening?


Matt Lasky  1:04:56

Yeah, I think access kind of can lenience to the consumer for them is becoming more and more of a hot button. And a lot of places most available, and closest to kind of their customers are going to be these retail centers, because they’re in the trap high traffic areas close to the population. So you’re going to continue to see this prevalence of healthcare users taking retail, or being closer to the population. And, you know, there was a kind of the mentioned 10 years ago, right. But that was the perfect storm of major recession, lots of vacancy and retail, and hey, this use that’s like, Hey, we’re still growing during this downtime, we’re kind of counter cyclical, right, like healthcare users are almost the Managed futures version of real estate users, because demand has continued to go up as we age as a population. So I think you’re gonna continue to see that trend. And it’s just, it’s hard to build now. So like, converting a space or some sort of reuse of retail, converting it to medical right now, in a lot of cases is going to be more affordable than building something new.


Jeff Malec  1:06:07

Even though that, is that on the expensive side of converting for medical purposes, or depends on what sort of machinery whether they have X ray? No, that’s,


Matt Lasky  1:06:16

yeah, I mean, at most, you know, most retail places, all you need are the outer walls, and you’re basically starting from scratch on the interior. And, you know, the mechanicals and stuff there help, but it’s an expensive endeavor, it’s probably, you know, from kind of the walls and mechanicals every bit of $150 or more a square foot, and improvements.


Jeff Malec  1:06:44

Alright, let’s finish up give me the this time next year, this time, five years from now, were we talking about Siri, do we care? Is it just back into the background and my world? But in your world in the foreground? But right? Is it just back to its normal long term averages? Um,


Matt Lasky  1:07:03

I’d say yes, I think we’re going to talk a lot about the people who are really good operators, it’s no longer like the last three years, you know, to use trading terms, you could have been kind of a levered beta player and done well. And now you’re not going to just buy high and sell higher, you’re going to have to really be an operator. So I think there’s going to be this bifurcation of like, the operator class, who really got in the trenches and drove investment performance through their operations. And then there’s going to be these other guys who, you know, or gals who hopped into the asset class, and maybe bit off more than they could chew. And the, you know, I think scale is going to continue to win, because the guys who are well enough capitalized, to hang on to assets or work through some of these things, or even get banks attention, right, if somebody signed in on a loan is worth 500 million, versus somebody who’s worth 3 million, they’re gonna probably get more attention or get further in kind of growing through this, whatever that means. And so I think scale is going to continue to matter. And that’s going to kind of be a self reinforcing feedback on better performance through operations, better scale, and that’s going to kind of continue to go around and around. But I also think people will be surprised in that. And we’re not working on this are smart enough, but I think there’ll be some big winners in office in like, growing markets or the South as kind of some of the baby gets thrown out with the bathwater, and there might be some broader base portfolios or systemic issues or, you know, as capital kind of puts office on the dirty list. I think there’ll be some big losers and some of the big cities but also some guys who you know look like heroes in caught the bottom you know, that might be both the mall buyers of like a waiter out nine or something like the big contrarians down and you know, some of the Florida Texas Sunbelt markets that are office guys, and, you know, are able to kind of strategically pick their spots and do really well.


Jeff Malec  1:09:03

I love it. We’ll be here and I’m like, Oh, that would that guy at the party. He bought a bunch of office space back in 2324. Like killing it, and I don’t know if I make that bet. Yeah, well,


Matt Lasky  1:09:17

I’m not doing it.


Jeff Malec  1:09:17

Yeah. No, I love it. But it’s like, that’s the ones that work out ones. They’re like, I wouldn’t do that. But he’s the guy do. Awesome, Matt. Well, thanks for coming on. It’s been fun. When you back in Chicago, I see you posted Twitter sometimes your Chicago pics. Give us a call. Yeah, we


Matt Lasky  1:09:35

will. We Summertime is great. And maple and ash holds near and dear spot to my heart. So yeah, it’s


Jeff Malec  1:09:43

been a while. So yeah, we’ll hit that. All right. All right. Thanks so much. We’ll talk to you soon.


Matt Lasky  1:09:49

Great. Appreciate it.


Jeff Malec  1:09:55

Okay, that’s it for the show. Thanks to Matt. And Sophie’s not right about downtown Chicago. Thanks to Jeff burger for producing and RCM for supporting. And as mentioned Tune in next week where Jason buck and I do our second annual EQ de Vegas conference breakdown, PEACE.


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