We have another set of Tepid Takes. Let’s dive deep into the world of commercial office space real estate.
With the rise of remote work after COVID-19, the office landscape has fundamentally shifted – leaving many investors wondering – what’s next? We examine the phenomenon of “ghost vacancy” and explore how office tenants’ leases will impact the utilization of commercial office space.
We also dissect the recent news from life insurers who are cutting back on office loans and minimizing office lending as future risks loom. With so much unused office space in the market, is it time for a move towards multifamily repurposing?
Join us for an in-depth analysis of this complex and ever-changing landscape.
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Hello and welcome. Are you ready? Are you ready?
Okay, well, okay. You get yourself ready, listeners. Buckle up, strap in, put your heart rate monitor on if you’re on the on the elliptical, and let’s get to it. Today we’re gonna be doing some tepid takes. This is my favorite segment.
Is it? Yeah.
You know why?
If it requires no prep work from.
Us and it shows, I think it really shows in the listener experience.
They know it.
They’re like, you guys come into this very unprepared for the first time, listeners who are like, what the hell is a tepid take? It’s like a hot take, but a little bit less hot.
Yeah, it’s a little cooler. What do we say?
Like a lukewarm, lukewarm take?
I’m the guy that goes to the coffee shop and orders a coffee and then asks them to put an ice cube in it. Is that weird?
No. No. Well, actually, I’ve asked for that. I stopped. I just do it myself now.
Because people just go behind the counter and get an ice cube.
No, I usually just throw a little water in there because I’m kind of I just don’t want to burn the shit out of my mouth. Am I weird?
No, I don’t think it’s weird, but I do not understand how you people are drinking boiling coffee.
Seriously, I don’t get it. I don’t get it either, because it’s.
The most temperature sensitive area of my second, maybe most temperature sensitive area of my body, and it’s like, I don’t understand how people can drink scalding hot liquids. Some people love it.
I don’t know.
That’s weird. If you’re a drinker of scalding hot liquids, leave us a review. And in that review, tell us what happened, what hurt you?
And is it just, like, scar tissue? Do you just not have just have.
A callous roof of the mouth?
Imagine so much freshly hot pizza.
It’s just all so Jamie and I are very, very different in this way. She wakes up and makes morning coffee. She makes it hot, and then she’ll drink it, and then she’ll give me mine, and she’ll put ice cubes in it. So bring it down. She calls it Anthony Warm, which is, like, pretty much might as well just be room temperature 48 coffee. Yeah. It’s just really funny. I’m like, I don’t understand how you drink hot anything. It hurts me.
Yeah, I agree.
Okay, so nothing to do with real estate, but that’s what the tepid take. This is a good, I don’t know, appetizer for what’s to come.
Which is just to say it’s going.
To be a dubious it’s going to be rough. It’s going to be a rough definitely.
Yeah. The apportiff comes at the end. So here’s your appetizer. Do you ever hear any people say that? Your appetizer?
People say that?
I mean, I’ve heard you say it, like, twice now. Well, you say a lot of shit on this podcast that I’m pretty sure nobody else says ever.
Just try to keep people on the toes. I want to start new slangs and, like, new catchphrases.
I want to go on anything not good, people can take it off.
People haven’t really caught on to any of them yet, but you just keep throwing stuff at the wall, you see what sticks. Yeah, man. Okay, just to give you guys a little bit of I don’t know what’s context? No, not context, but, like, get them excited. A little teaser. Yeah, that’s a great word, teaser. We’re going to talk about blackstone. We’re going to talk about WeWork. We’re going to talk about life insurance. We’re going to talk about Wells Fargo and Colliers. This is going to be an interesting episode, got to tell you that now.
Life insurance. Yeah. I think we got them amped. They’re excited.
You want to dive in or what do you think?
Okay, I got some advice. You got some bad advice, I guess.
Okay, let’s take a hard detour in our comfort zone.
Have you heard of a guy named Guatemade?
I don’t think so.
Can you spell that? G-A-U-T-A-M-B-A-I-D. Fund manager of stellar wealth. Stellar wealth partners. India Fund.
Stellar wealth partners. India Fund.
Why so many words? They’re like, we could not find a URL. We’ve been there. We used to be in invictuscapitalventures.com those good days.
But anyways, I guess it’s like a podcast or something. We study billionaires. I feel like you’ve mentioned yeah, I love that podcast.
Yeah, I haven’t listened to it a long time, though.
The guy I think catches that clay, I think is his name, who’s doing it, was basically going through this guy’s book, talking about the joys of the title of the book is Joys of Compounding by Guatem Bade, probably butchering his name. So I apologize, Mr. Bade, but it really made me want to go get the book. Really? Yeah. Because that sounds really interesting.
That’s the type of book where it’s like, cool, that’s going to be about money.
Yeah, pretty much. But anyways, he had some cool stuff in here, and I think I pulled out too. But the one that I kind of liked the best was, most people would recommend that you have a widely diversified portfolio in order to reduce your risk. Sounds familiar, right?
I’ve heard this. Yeah.
But Guatem points out that by being widely diversified, it’s actually just transferring your risk. You’re exchanging company specific risks, which might be quite low depending on the company, and you are exchanging that for market, systematic risk. Risk hasn’t been reduced. It’s simply been transferred from one form to another. I was like, oh, I like that. That’s a good way to kind of look at it. And then some other points that Clay, the podcast host, was making was the world’s wealthiest people have become wealthy through concentration and Charlie Munger is famous for saying that he considers a widely diversified portfolio one of four stocks.
Widely. I like that. Yeah, it’s interesting. The diversification advice that you hear so frequently is definitely not the strategy for building wealth and getting wealthy. And there’s really a difference. I think there’s two types of people, right? There’s people that don’t care to ever be wealthy. They just kind of want to be safe and they want to do their thing, which is why I have some money. That’s okay. And then there’s people who are like, I want to build wealth. I want to get to that financial freedom, or whatever that number looks like for you. Diversification will not get you to that second one. Diversification maybe has a role in that first one, but it will not get you to that second one. I think that’s where a lot of people go wrong thinking that they’re going to build wealth by being diversified.
Yeah, and I thought it was nice they point out that it wasn’t reducing risk even. It was just transferring it to a slightly different form. And then the other one I pulled out, I’m just going to rattle off real quick because it’s kind of related. In order to generate significant wealth investing, you should seek the highest rate of return possible. Right. Most people think, oh, if I want to make tons of money, I got to make the biggest possible returns. But what Guantan said is that we should not aim for the highest possible returns in the shortest period of time, but rather we should seek above average returns over a long period of time with lowest possible risk. And that part ties into what we were just saying there, because above average is not possible if you’re diversified, you are guaranteed average. So you don’t want to get these big home runs per se, but you want to just slightly outperform consistently for long periods of time. I thought real estate is a good example of that. S and P averages 810 11% a year or something like that. Looking at something like real estate where you’re making like 20, right. It’s not a home run, but do that for 2030 years and it’s substantial.
Yeah. It goes back to one of the things we talk a lot about, which is protected downside. The upside takes care of itself. And so instead of going and chasing yield and instead of chasing those great returns, you should always be looking first at the risk, the downside. And is that capped and is that protected? And then, okay, what is the risk adjusted return in the grand scheme of things so that you can keep your money working for you as long as possible? That’s really the game. That’s where Warren Buffett majority of his wealth has really come in the last 20 years. And that dude’s 90 now. So do the math on where he was in his life when he started making big, big money.
It’s all a result of pretty good.
Returns in the grand scheme of things. He doesn’t have the best return profile of anybody ever. No, he’s been doing it longer.
No, exactly. I think he’s just got just enough alpha for a long enough period of time that it’s worked wonders. But he’s not making 1000% return on his investments. It’s just beating the average for decades. It works.
And I like this metaphor. Even in the context of day to day life and thinking about your business or thinking about your skill set, you don’t need to go out there and get the home run skill set or do a massive amount of work in a short period of time to try and change your life circumstances or anything. Just like consistently applying compounding interest over time and sticking with it has really profound large effects. Joy of compounding.
Yeah. Get that book.
I don’t know if I love the title of that one, but I know exactly what that book is going to be about, so I do approve.
The joys. There’s more than joys, plurals. Yeah, many joys.
All right, let’s get into this.
All right, number one, blackstone considers partnering with regional banks. This one says investment Giant Blackstone Inc. Which just reported a relatively lackluster quarter due to commercial property market turbulence, is considering partnership with regional banks which have had their own issues lately as depositors have sought other places to put their money. Question are you a depositor that has sought other places to put their money recently? Dan.
No. Other than switching from a high yield savings account to Treasuries. But it was not a result of regional bank shenanigans.
Yeah, I did the same thing. It wasn’t due to shenanigans or anything like that, but we are part of those depositors who have sought other places to put our money, which is interesting.
It’s not what everybody else for the reasons yeah. I think what a lot of people are referring to when they’re talking about that behavior is going from your local regional bank to Schwab to JPMorgan, to the big too big to fail banks. That’s what a lot of people were seeing for maybe like a week or two after the SVB thing. But this is interesting. I’m curious what they mean by partnering. Partnering?
Like, are they going to be going to regional banks to finance their real estate moving forward? I don’t know. I know that they’re moving really hard into single family, I’m sure. This is interesting to me because the size of loans that they do, they would have to partner. They have to string a whole lot of regional banks together probably to cover the loans that they’re doing.
Yeah. The only thing I could think of is that the regional banks are going to obviously have less regulatory oversight. So maybe that’s attractive, but I don’t know how that works. If you’re I don’t know? Yeah.
I don’t know. Because Blackstone is interesting. They don’t do anything out of the goodness of their heart. They’re about as capitalistic a company as you can get. They’re very smart. So you would think this would just they’re not doing this to bail out the regional banks, which is like I don’t know. I don’t understand it, honestly. And I’m curious. Do you know anything about this relatively lackluster quarter that Blackstone’s reported? I don’t believe that lackluster, no.
I wasn’t paying any attention to any of their earnings or anything like that, but I would assume that they have a lot of exposure to office.
Office. And looking through these tepid takes, office is going to be a recurring theme here, and so we might as well.
Just move straight to the blackstone did walk away from this. Might have been on one of the last Tupet takes we did, but didn’t they just walk away from a large loan that they were supposed to pay?
Oh, no, that was a different group out of San Francisco. I know you want to talk about that office space.
No, but Blackstone just they might have.
Also done something, but I don’t think we talked about it.
When I Google it, I feel like they just defaulted or something recently.
Yeah, I don’t know. I don’t really keep a finger on Blackstone and what’s happening there in the world of real estate, they’re just so big that it’s Wall Street, not Main Street. Whereas when I think about us, we’re very much Main Street investors in the sense that we have our finger on the pulse of the local economy, our market and operating, but not necessarily as like when you start getting to these billion dollar funds, it’s just a different level than what we play with. So this doesn’t really affect us. WeWork has six months to avoid being kicked off the New York Stock Exchange. Their stock is under a dollar. Dan, is that a buy? I feel like that’s a buy. Tell me it’s a buy. I’m ready to buy.
Push the buy button.
What’s that what that puts their market cap at? Because they peaked at, like, 40 or 50 billion, I think.
Yeah, that’s a good question. Do you think they can turn it around? Think they got a chance here? No, I think you think they’re they’re just going I mean, I don’t I.
Don’T think they’re going bank or they’re just not going to yeah, they’re going to be a pen exchange. I’m not surprised.
Yeah, it’s really interesting. This whole work from home movement had so much momentum behind it for a little bit of time. 2020, 2021. I think people really liked the concept, and then for some reason, in 2022, there was, like, this loggerheads between some companies being like, you need to come back to work, and employees being like, I don’t want to come back to work. I want to stay remote. And now largely work from home is like shifting back to in the office in a lot of ways as the cultural paradigm is like, I don’t want to work from home all the time.
I think that market also just got really saturated and WeWork was really I mean, they were doing the Silicon Valley tech approach to real estate, which is like, we’re not going to worry about making money, we just want to grow.
But get to scale first.
But when you have all those fucking long term leases well, that’s the thing, you can’t do that.
Yeah, you can’t scale to growth there where it’s like, okay, you have this really long term expensive lease, but really the unit economics don’t work to get enough people into that space to ever justify this.
It only works if SoftBank keeps cutting you billion dollar checks every couple of quarters. That’s the only way that works.
And they don’t want it to keep doing that.
I guess not. I don’t know. Things kind of went downhill. Yeah, it’s interesting. And something else that’s really interesting these days is just on the work from home thing, but it’s called Ghost Vacancy. No, I think it’s pretty unique to the office space, but it’s like because most office tenants are in long commercial leases, 1015 years or something like that, and so not all those leases are going to be rolling over like right now when this kind of collapse of office utilization is happening. But you can tell the utilization is dropping because there’s this manufacturer of key cards for corporate headquarters and they can see, okay, how many people actually coming in and going. And there is severe underutilization of office space that still has leases in place, but it’s basically a very good forecast of who’s not going to renew when their leases.
So that’s kind of a looming thing that’s going to be unfolding over the next several years, at least very slowly.
Well, that ties into this next tepid take, which is that life insurers are shying away from office loans. As rents fall, values dwindle, and this is just as growing life insurance companies, which hold around 15% of the $4.5 trillion in US. Debt backed by commercial real estate, they plan to minimize office lending in 2023, according to the Wall Street Journal. And there’s nothing surprising about that. To me. Life insurance companies are very risk off, very much not looking to get boiled alive. And I don’t think there’s any way that you can look at office space at the moment and feel super excited about what the future holds there. Because even like with the work from home, people coming back to office, that doesn’t solve the underlying issue for a lot of cities, which is that there is a lot of office sitting unutilized. We talked to people, you talked to somebody just the other day that’s looking at doing office renovations. We talked about that one in St. Paul that they’re kicking off the project there. And there’s some potential there to take these office spaces and turn them into multifamily.
But some of them. Some of them but it’s so rare that you can find a building that actually works for that because there’s so much space in these office towers that’s in the middle of the building, and there’s no windows, no light. So who wants to live in a box in the middle of a building with no windows?
They’re just not designed for habitation. Yeah, different uses.
Some buildings that work, but the vast majority, they won’t work for that unless you do something really unique on the inside. But there’s not many things that you can do that people don’t want light for. So maybe like a bunch of dark rooms for developing photos. I don’t know.
What do you think about office in general these days? Somebody comes along and they give you a sweetheart deal, and you buy it pretty much at as low a basis as you can possibly imagine. Do you still even go into it?
Me personally? No, because I don’t know anything about it. I know how to lease it.
Yeah, that’s the thing with multifamily that’s been so nice. Is it’s easy to lease a multifamily building? We’ve all rented an apartment. You get it if you’ve ever looked at a lease for an office space.
It’s pain. I hate looking at those.
I get anxiety just looking at it.
It’s like, written in Chinese.
Yeah. And it’s a very different relationship than with a renter of an apartment building.
I think, for people that know that space, there’s definitely going to be some opportunities coming. But that’s not me.
It’s not my zone of competence, and.
It’S not a zone that I want to be competent in. I don’t think I want to be good at reading office lease leases.
Seems boring, right?
It doesn’t sound like something I want to do, but who knows? Okay, so Wells Fargo beefs up their reserves by $643,000,000 to deal with bad CRE debt.
Commercial real estate, just so you know. CRE beefing up reserves, also increasing the.
Reserves to cover credit card and auto loans.
I don’t know what to make of it. Makes sense.
Everyone’s got a lot of debt, which is really interesting because you hear conflicting data on this. You’re going to read articles and hear news stories about how people’s cash balances in their banks are at historic highs, but then you also see that there’s record levels of credit card debt. And so what is really interesting there is that the fact that some people have a lot of cash and a lot of people don’t, and it’s like lower end of the income spectrum. Not flush with cash, lots of credit card debt. But people who have been wealthy, traditionally, they’re doing really good with cash. So these guys have no credit card debt. So it’s kind of the rich get richer.
I mean, it’s that case shaped recovery kind of thing where a certain segment of the population is doing quite well, and then there’s this other large segment which is not doing well, and they’re subsidizing their lack of income with credit cards.
And this is the big issue that Radalio pointed out in his changing world order, is where the US. Is right now in terms of its like, whether it’s at its peak or past its peak as an empire. One of the underlying factors that leads to an empire kind of imploding or becoming less of a superpower is the growing chasm, the growing social and economic chasm between the citizens. And so, on the one hand, you have people who are just getting wealthier and wealthier. Then you have people who are getting poor and poorer, and that middle kind of just gets strung out between those two. And when that starts to happen, then you start to look down the barrel of a potential civil unrest, all sorts of shenanigans, because people will only accept being so poor for so long before they’re like, well, screw this. I’m playing a different game here’s. My guns. Give me your money.
But when Dahlio looks at that throughout history, it’s different because you saw that happen in isolated parts of the world, right? It happened, let’s just say, in Rome, when they were the world power, and then it shifted. But this is the first time we’ve had basically everybody kind of doing the same thing at the same time. So China’s got the same thing, russia’s got the same thing. Everybody’s got the same thing going on at once. And China’s got actually a more severe problem with their population growth and their demographic set up there.
Yeah, I think India just overtook them right, as, like, the most populous.
Well, I mean, they just had that one child thing for so long. From a demographic perspective, they’re set up really poorly for the next generation here. So that doesn’t help in that regard. So I guess what I’m trying to say is, yeah, that’s happening here in the US. But it’s like everyone’s got their version of that shitty kind of situation happening at the same time. And so for Dahlia to say, oh, changing of the world order is going to happen. It’s going to be China next, or whatever, it’s like, no, they’ve got the same thing going on, slightly different version, but there’s no better alternative.
Yeah, I think that’s true. I’d be curious to see other major global superpowers, the wealth disparity and what that looks like in those countries worse than us. Yeah, I’d be interested to see some data on it. But the interesting thing the guys on the all in podcast were talking about a while ago is just the devaluation of the American dollar and what that leads to if it becomes no longer the reserve currency. And looking at what are the alternatives is that China is that bitcoin. And one of the points I think is Chamath makes is that the problem is that those are still currencies that are pegged to the dollar. It’s not like you leave the dollar and you go to yuan, because now if the dollar drops, the yuan drops. It is an interesting, like, what is the alternative here? It’s like, not clear.
That’s what I’m saying. Everyone’s doing the same shit. There’s no better option, so I don’t know how that plays out. Maybe Dahlio has the answers somewhere, but.
I’m all about that doge. Cohen all right, so what do we got here? Our last tepid take.
This is it.
Listeners are like, oh, thank God. I would change channels, but I only downloaded one podcast before getting on this plane. I’m stuck with you guys.
I’m sorry about that.
Guest okay, this says, Wave of distressed CRE sales coming. Colliers, that is a terrible title. So Colliers is saying that there’s a wave of distressed commercial real estate on the horizon. It’s not here yet, they said, but it’s coming. That’s not even a tepid take. Everybody’s been saying this.
That is one of the more obvious headlines I’ve seen.
Thanks for the heads up.
Colliers they’re taking the real safe bet. They’re like, let’s say something without saying something.
Distressed assets are coming. They’re not here yet, but they’re coming.
I think warmer temperatures are coming. I’m going to go out on a limb and say it’s like mid April. I think it’s going to get warmer next month.
I love the last sentence of this. It says, not so long ago, refinancing was relatively easy and certainly cheap.
Who wrote this?
Reed, was this you? Okay, this is pulled through the article.
It’s like you don’t say report.
It’s almost like not so long ago it was winter and it was cold.
I’ve learned nothing from this.
Yeah. So what I will say is that, yeah, I think that there are some distressed assets on the horizon, especially as we’ve been talking recently in episodes about operators who are doing a lot of capital calls. They got caught with their pants down with rising interest rates, and there’s a lot of issues associated with that that we’re seeing right now. And I think that’s only going to get worse over the next year. So I think there will be some assets, I think there will be some good buying opportunities. Just right now. Don’t really see it yet, mainly because a lot of sellers are still starting.
To starting to we’re seeing the peak.
But what’s interesting about this, we’ve seen some deals this week that we’re like. Those are some interesting numbers.
But there’s also a side of it where it’s like, well, how much lower can it go? Maybe that’s a good number, but if I waited, could it be even better?
No, you don’t know.
It’s hard to say.
I don’t think so. I think some of the desperation is going to be offset by rates dropping. So, yeah, people are going to be in some precarious spots over the next several months here as their debt matures. They can’t refi or whatever, but if we’re 100 basis points lower for interest rates, then people would be willing to pay a little bit more. So I don’t think it’s going to be this, like, crash. I think it’s going to be this just sort of slow trickle of people getting kicked in the face who are not able to refi or whatever.
It’s not going to be a do you think then? So what you’re saying is that the numbers that we’re seeing, the deals that have come across our table in the last week or two, are as low as the valuations are going to get?
No, not necessarily. I’m just saying, like, I think it’s going to be about like this for the next couple of years, maybe a little lower, but I don’t think it’s going to be like a crash because I think as we see these loans come due and these guys in a situation now, I’m talking about multifamily here. Office another story that’s going to be a shit show for the next several years, I’m sure. But as far as multifamily goes, for those guys who botch the debt and they just can’t refi at 6%, fast forward six to eight months. If we’re at 5%, then they don’t have to go as low to move it, you know what I mean?
It’d be interesting to see. It’d be interesting. I don’t know. Don’t know where to go.
I know we don’t have anything maturing before 2027. I was actually just looking at this earlier this morning, so I was like I just wanted to chart, like, all our loans and the balances coming to maturity and they start at 27 for us.
Do we still have the one that ends in 2057?
I still got a column.
We have loans that we were looking recently.
I don’t think it was 57, I think it was 50.
It was like 30 years out. It was a long ways out. And we’re like, that has to be a typo.
I almost don’t want to look into it in case it is a typo and it’s like an official Typo bank error record with the state and the title comes out. But, yeah, I think we’re in a pretty good spot there as far as that goes. I know there’s a lot of people with stuff maturing this year and next year, and if it’s maturing, like, over the next six months, that blows.
Yeah. You’re in a lot of trouble, people. So those are some tepid takes. You are. Okay.
There’s a lot of distressed assets, a lot of office.
It’s all the same.
Just a lot of doom and gloom. I would like some spicier takes next time about people doing shady things.
Yeah, try. To pull these from National Enquirer next time.
That’s where the good stuff is. I got a book here if you don’t want to do it.
Yeah, what’s up?
It’s a book I’ve never read, and I’ve only heard somebody paraphrase a little bit of which is the choice of Compounding by Quatum babe. I’m butchering the name, but seems like it’s probably good.
Just, like, serve that one up to yourself.
Check it out.
I dig it.
So you actually have a book RECO?
No, I don’t. So that’s good. I’ve never heard of that one. I don’t either. It’s new to me. Go check it out. The Joys of Compounding by some guy that we cannot say his name.
Fund manager of Stellar Wealth Partners, India. Fun. I feel like we could make an.
Accurate you should be able to remember that people just go Google. All right, so go check out that book. Here’s an interesting one. If you guys have Tepid Takes or things that you would like us to react to, then send it into marketing at I’m sorry, let me try this again. Marketing@invictusmultifamily.com. That’s reed’s email. Just shoot it over to actually, yeah, that’s Reed. Shoot it over. And we will try to respond to it in the next edition of Tepid Takes.
And do we put I’m sorry, I was spaced out. Do we put some parameters over what kind of content we just asked? No, real.
I’ll respond to anything.
You’re going to get some weird send.
Read whatever weird stuff you’re saying out there on the Internet. All right, guys, that’s going to do it for us. We appreciate and love you.