June 6, 2025 • 30 mins
With the 10-year Treasury hovering near 5% and Trump’s $3T tax plan rattling the bond market, capital costs are surging — and CRE is feeling the heat.
On this episode, Peachtree Group CEO Greg Friedman dove into how the rising 10-year Treasury is impacting deals, the challenge of supporting exit caps in a rapidly shifting environment, how extend and pretend is hurting deals and why he’s still doing development deals even though he expects CRE to underperform for a while.
Register on Bisnow.com to join next Friday's conversation live, or check back here for the conversation after it airs.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Mark Bonner (00:15):
Okay. Welcome, welcome to everyone out there on
this beautiful day in commercialreal estate, and welcome to
episode one of First Draft Live.It's Friday, June 6. We're
thrilled to have so many of youtuning in from across The US,
Canada, The United Kingdom,Ireland, and beyond. We know
it's getting late over there, sothank you for making us a part
of your Friday night.
(00:35):
Over 400 people have registeredto join us for today's show, and
we're grateful you're here. Justso you know, we're also
streaming live on LinkedIn,Instagram, and Facebook. I'm
your host, Mark Bonner,BizNell's editor in chief, and
I'm coming to you live from NewYork City. On today's program,
we're going to get intorepricing risk in a hire for
(00:57):
longer world, distress,dislocation, and creative
capital, and finally, the newmacro map for CRE in 2025.
Joining us today to help breakit all down, Peachtree Group co
founder and CEO, Greg Friedman.
He oversees $10,000,000,000 inreal estate investments, and he
has deep expertise in credit andequity, particularly in
(01:20):
commercial real estate. Greg,welcome to the program. I know
you're dialing in from youroffices in Austin. We really
appreciate you being here.
Greg Friedman (01:28):
Yeah. Mark, thank you for having me, and it's it's
an honor to be the first one todo this. So so thank you.
Mark Bonner (01:35):
Thank you, my friend. So look, let's get into
the math. The ten year has beenhovering all week at around four
and a half percent. The bondmarkets have been volatile.
Jerome Powell is saying that heneeds more time on inflation.
I'm looking at Jamie Dimon thelast day or two talking about
the bond markets. I'm gonna readit to you here. Quote, it hurts
the people raising money. Thatincludes small businesses. That
(01:58):
includes loans to smallbusinesses.
It includes high yield debt. Itincludes leverage lending. It
includes real estate loans.That's why you should worry
about volatility in the bondmarket. Greg, how are you
adjusting your own returnexpectations?
And just for our audience andour benefit, what's the real
(02:18):
cost of capital for CRE sponsorsat this moment?
Greg Friedman (02:22):
Yeah. It's I mean, that's a great question. I
mean, I think there's noquestion there's a lot of risk
in the marketplace today. Ithink Jamie Dimon's correct. I
think there's anunderappreciation of risk.
Obviously, even in the lasttwenty four hours, we've had
Elon Musk and Trump going at it,so that creates another layer of
risk. But it's so it's aninteresting environment. This is
(02:43):
very unprecedented what we'regoing through right now. And,
you know, we've gone throughthis period of time where, you
know, it's been, you know, wewent through this decade pre
2022 where, you know, interestrates were next to zero, and now
we're in this much higher forlonger interest rate
environment. And there's a lotof headwinds ahead.
There's also a lot of, becauseof these headwinds, there's a
(03:03):
lot of opportunities. But ifyou're making investments like
right now, it's a verychallenging market because
you're dealing potentially withan environment that could, you
know, stagflate out. So you maybe dealing with stagflation. So
as we're pricing, as we'retrying to make investments, you
know, if it's on the creditside, because we invest through
debt as well as equity, I mean,we're obviously trying to
(03:24):
achieve on the equity side, youknow, returns that are typically
around 20% or higher. And thisis, in my opinion, an
environment where you need toget paid for taking on risk.
So you need to be verythoughtful about, you know,
making any investment becauseit's a very challenging
environment just because thedirection of what's happening,
(03:44):
you know, between the tax bill,between tariffs, you know,
what's going to be the impactultimately with inflation
because those are twoinflationary type events. It's
very concerning. And the jobreport, I think, today came back
positive, but it still feelslike the economy itself is very
fragile. So I think it's aperiod of time where you got to
(04:08):
be very strategic and thoughtfulif you're investing capital and
be very careful.
Mark Bonner (04:13):
Yeah. I mean, you mentioned the drought report. It
came in relatively positive.That's not good news if a hawk
looking at the interest ratesituation with Jerome Powell. It
probably means that they staypat, maybe even until December,
at least that's what GoldmanSachs said this morning.
I mean, when you come when itcomes to valuing assets, right,
and we know the last halfdecade, pandemic included,
(04:36):
obviously, the politicalenvironment that we're in today,
uncertainty. Right? I mean, thatis the word du jour. How do you
even value assets at thismoment? I mean, how have you had
to evolve that part of yourbusiness?
Greg Friedman (04:49):
Sure. So you look at historically when you're
valuing assets, you know, welook at the risk free rate, the
ten year treasury rate to yourpoint. You know, it's average
pre 2022. So when you look from2010 to 2022, the ten year was,
you know, on average about 2.2%.Today, to your point, it's
closer to four and a halfpercent.
So it's almost double. And sohistorically, commercial real
(05:10):
estate, you would add a riskpremium spread depending on the
the property type. And onaverage, I think it's about 270
basis points or 275 basis pointsabove the ten year is what the
average cap rate is for all ofcommercial real estate. Now that
includes, you know, officebuildings, multifamily, you
know, retail, hotels, and soforth. So, you know, that's an
(05:32):
average risk premium spread.
And so if you believe the tenyear is going to stay elevated
at 4.5% or stay around 4.5% orpotentially even go higher,
there's some arguments to saythat could even go above 5%. But
if you feel like that's, youknow, that's the range, then
you're probably using asubstantially higher cap rate
than what you're using, youknow, obviously, pre 2022. And
(05:54):
it's interesting just because weconstantly were financing groups
that are out there acquiring anddeveloping assets and we're
buying out there trying to buyassets. And a lot of people are
based on the value the waythey're valuing these assets,
they're almost valuing it,expecting the ten year to almost
revert closer to where it waspre 2022. And we just don't
think that's gonna be the case.
(06:15):
And that's why just to becandid, why we haven't been very
active on the equity side overthe last couple of years because
since first quarter twentytwenty two, we've been super
active in doing a lot of directlending. We bought a bunch of
loans from financialinstitutions as well that are
looking to deleverage yourexposure to CRE is because the
values don't make a lot of senseto us on the equity side because
(06:37):
we feel like, you know, caprates, you know, when you look
at the true intrinsic values ofthese assets and if you apply
the right cap rate for what themarket is today, it's, you know,
most assets are probably worth alot less than where, you know,
these assets are clearing themarket if they're selling. I
mean, there's been a lot ofbusted processes, but also
transaction volume is still downdramatically from where we were
(06:59):
at the peak levels, going backto pre-twenty twenty two or even
pre COVID. Part of the reasonit's been muted is for the
reasons we just talked about.
Mark Bonner (07:10):
Right. I mean, mentioned intrinsic value.
Right? I mean, let's talk aboutthe public versus private
disconnect for a second. Right?
REITs repurchased nearly1,000,000,000 in shares in Q1
this year. That's a signal thatthey see a disconnect between
market price and intrinsicvalue, to your point. Are you
seeing a similar mismatch in theprivate market? And how is that
(07:31):
shaping your buy sell holdstrategy?
Greg Friedman (07:33):
Yeah. I mean, it seems like the public market's
been probably more punished thanthe the private markets on
trades right now. So from whatwe've seen, and we don't invest
typically in the public marketsfor, you know, like public REITs
or anything like that. But forwhat we've seen, it feels more
like, you know, the privatemarket is overpaying for assets.
(07:54):
So definitely, in general, Iwould say the private market is
viewing, you know, has a moreoptimistic view for the outlook
across most commercial realestate assets.
I would, that would be myargument right now as you relate
those two markets together.
Mark Bonner (08:12):
Right. The other thing that we're seeing out of
our newsroom is that, and theheadlines are a little
frightening, right? Developmentcoast to coast is on ice, right?
We were talking about tariffsyesterday, you and I, and, you
know, tariff driven costincreases, persistent capital
delays, it's freezing thedevelopment pipeline all over
the place across multiple assetclasses. I mean, Greg, how is
(08:35):
that showing up in yourpipeline?
Greg Friedman (08:37):
Yeah. I mean, it's making the because here's
the thing, the tariffs is stillwho knows what's going to happen
with the tariffs because, Imean, to be candid, the new
administration is trying toimplement these tariffs. It
hasn't been put in full effect.It's too early to sort of tell.
Now, the reality is tariffs aregoing to drive up the costs and
(08:59):
it's going to make it morechallenging.
And if you're starting adevelopment project today, well,
it means you're not breakingground tomorrow because it takes
time to get the contractor andget the final architectural
plans and get out the pricingcoming in. So if you're looking
to start a new constructionproject today, potentially,
you're probably at least a goodsix to twelve months out, if not
(09:22):
two to three years out. And nowyou're trying to underwrite what
is the impact of these tariffs.And it makes it very challenging
if you want to go developproperties, which is a great
thing if you're an owner ofassets already today. So if you
own a bunch of commercial realestate assets, you're feeling
even better about the future.
Although, we've got theheadwinds we've talked about
(09:43):
because there's gonna be a lackof new supply. But it's very
challenging for us to go out anddevelop new properties because
it's hard to understand what isgoing to be the impact of these
tariffs over the next severalyears because you're probably if
the tariffs truly are in place,that's probably going to cause
the cost to grow outside ofprobably even inflationary
(10:04):
pressures, right? So, typically,you would expect to be in a more
normalized constructionenvironment. It's easier to sort
of gauge your risk. And nowwe're back almost in this
environment, sort of like whatwe went through during COVID,
where pricing was increasingextremely quickly.
On the positive side, this isnot a, you know, construction is
a mix between labor expense, youknow, material expense. So it's,
(10:26):
you know, it is material that,you know, the potentially, you
know, the material expense isgoing be higher, but it's less
concerning than what we sawduring COVID, where you saw
labor expense was just driving alot of that increase along with
all the supply chain disruptionthat was impacting the material
costs. So you were just gettinghit from both levels. So it's
very hard to do it. But withthat said, we are I mean, from
(10:50):
our standpoint and from myperspective, I'm still bullish
on doing development if you canmake it it makes sense.
Because right now, it's verymuted, all new supply across all
the property types. So when wewake up three to five years from
now, and if you're able todeliver new product that's
opening two to three years fromnow, you're going to be in an
environment where there hasn'tbeen a lot of new product
(11:11):
delivered, new wins in realestate in general. We own a
bunch of hotel properties,premium branded hotel properties
under the Marriott Hilton Flags.What we've found and we're
continuing to develop several ofthose properties as we speak
right now. We have probablyseven or eight of them under
construction.
And and we're continuing tobuild with the idea that, you
know, there's gonna be a premiumfor this newer product once it
(11:34):
opens because the guests tend toyou know, per you know, they
favor staying at newer hotels.Investors like owning newer
assets, and they tend to performbetter from a standpoint of
being able to drive better netoperating income. And you tend
to have a better exit when yougo to sell them. So development
is still viable, but is, to yourpoint, there's a huge headwind
(11:57):
if you're doing it through theequity side. The credit side,
probably 30% of our book rightnow is on the new loans that
we're originating is slantedtowards new construction.
So we're still active in thatspace, but you have to be very
thoughtful about how youunderwrite the risk of the
tariffs.
Mark Bonner (12:14):
Right. And the thing that makes this moment so
volatile is that you have tomake these decisions now, right?
We're looking at price of steel,we're looking at price of
lumber, we're looking at priceof floor tiles. Tariffs are one
thing on day one. They're acompletely different thing on
day two.
Do you buy on a Monday? Do youwait till Tuesday? Maybe they'll
be lower. And we've alreadyreported out over the last
(12:34):
couple of weeks that a lot ofcontractors, a lot of heads of
constructions are getting caughtin this spin cycle of, gosh, I
wish I could have waited today.Can I cancel that order?
And yeah, so it's a short termdecision that you make today for
a long term payoff, right? Butyou still have to make it pencil
for the day, right, Greg? Imean, that's chaotic.
Greg Friedman (12:56):
That is total chaotic. It's the environment
we're dealing with since I mean,and I hate to pick on the new
administration because I'm very,very optimistic, very bullish on
some of the things that they'regoing to hopefully accomplish
over the next several years. ButI mean, the new administration
(13:16):
has taken over at the beginningof this year, it's just
continued to be chaos. And Ithink we're going to continue to
deal, you know, we're going todeal with these issues as you're
laying out that it's just it's avery chaotic environment. And
that's why if you're able to bevery strategic and thoughtful in
these kind of environments, it'sthese types of moments where,
(13:37):
you know, it's it to your point,it's very hard to go develop,
but there's other opportunitiesthat will be created because of
it.
Now, development, this is forthe concerns you laid out. More
and more people are probablygoing to be pencils down on
developing new. And if have aproject that actually makes
sense, and I'm speaking verymacro, very high level, so I'm
(13:58):
not saying go out and just buildin every market. But if you have
a project that makes sense,you're probably going to do
extremely well on the other sideof all this chaos. But it's
being able to see through thismoment of chaos is how we've
historically made a lot of moneyas a firm is being able to move
forward and be decisive in thesemoments.
But it's not without risk, andit's not you've got to have the
(14:20):
stomach for taking on that risk.
Mark Bonner (14:23):
I mean, so obviously, you're into financing
a development into the nextcycle, right? But have you heard
of other people at your levelwalking away from projects or
buying them stalled?
Greg Friedman (14:35):
Yeah. I mean, I haven't seen necessarily
projects stall out. I've I'veseen a lot of lenders that have
started to back down from newdevelopment projects that, you
know, different lenders that wecompete with. I've seen, you
know, some developers that haveprojects in their pipeline that
they're you know, they haven'tbroken ground on, but they're
like, you know, maybe maybe weneed to take on another partner
and they're approaching us ormaybe they just want to, you
(14:58):
know, sell the project becausethey're concerned about being
able to achieve the returns. Iwould say it's not really as
much tariff driven.
I think tariffs is probablyprobably the icing on the cake
for a lot of these projectsbecause the other Although a lot
of I'm very bullish aboutdevelopment as we talked about
them, because I'm sort oftalking on the other side of the
equation. I mean, let's talkabout exit caps. A lot of people
(15:19):
are betting on this exit capthat's going to be at 5 and a
quarter, five and a halfpercent. Well, if you're
underwriting a development deal,to your point, you're sort of
seeing through this challengethat we're dealing with right
now, this chaos of the tariffsand so forth. But as we wake up
three years from now, are weback to an interest rate
environment we saw pre 2022?
(15:40):
Probably not. And and so ifwe're not going back to an
environment where the ten yearis at 2.2% on average, how are
you supporting underwritingthese exit caps that, you know,
that are around 5% or five and ahalf percent even? Because it's
a very likely outcome we'regoing to be with a ten year
that's around 4.5%, which wassort of the low mark. Go back
pre GFC, that was the low mark,and we're back in a pre GFC
(16:04):
environment. So being at a 4.5%tenure is relatively cheap.
But then when you start to lookat historical cap rates at that
period of time, there wasn't alot of these assets that people
were underwriting, selling at 5%or even lower exit caps that
were trading at those levelsback then. So I think that's
probably a bigger headwind todevelopment is making these
(16:24):
projects actually make sense andis hired for longer. And it sort
of goes to because earliertoday, we had our investment
committee and we were we went ona tangent about just
affordability issues likehousing and how we're at a
pivotal moment right now becausemost people are being priced out
(16:44):
of homes because they can'tafford to buy them. They can't
afford to, you know, the cost ofwith the debt service associated
with it and their income levels,you know, relative to, you know,
so the purchase price relativeto their income levels is like
at the highest mark since, youknow, pre you have to go back,
you know, pre great financialcrisis. So we're at a very
(17:05):
challenging period of time whenyou look at it from all those
perspectives.
Mark Bonner (17:09):
Right. And look, and meanwhile, there's been a
spike in bridge to bridgerefinancing and mezz heavy
stacks. Right? Is that acreative capital strategy or is
that just extend and pretend twopoint zero?
Greg Friedman (17:21):
Yeah, I think it's sort of extended, but it's
sort of a combination. Like, Ido think there's some value if
you have a project where youjust open up and you just need
time, you know, because you knowyou're gonna ramp up and you can
ramp up and you can cover thisadditional cost. Because when
you're going from a bridge loanto a bridge loan or you're going
from, you know, you're adding alayer of a mezz piece or a pref
(17:43):
piece, that's most cases, that'sprobably increasing your basis
because there's so much negativeleverage. You know, your debt
cost is probably higher. Youknow, when you look at, you
know, blended across thosestructures, it's probably higher
than the cash flows coming offthe property.
So you're going to have tosupport that through either
injecting additional capitalinto the asset to pay those
payments, or you're gonna haveto accrue interest. You're gonna
(18:06):
have to do something that'sgonna end up increasing your
basis. And so if you've got anasset that has you you're gonna
have meaningful run up of cashflows over the next eighteen
months, sure, it can make a lotof sense. But a lot of the deals
I'm seeing right now, it's moreof a, you know, extend and
pretend, and it's a hope and aprayer that, you know, interest
rates are going to come down. Ifthat's what you're betting on, I
(18:28):
think that's something, youknow, going back to the point we
talked about before, I thinkit's very misguided and you're
going to end up probablyunderachieving returns and
you're putting your existingcapital probably at risk of
potential losses, if not a totalloss.
Mark Bonner (18:42):
So it sounds like you don't think that's
sustainable, that it'sessentially a bridge to nowhere.
Greg Friedman (18:47):
I think it's, you know, across the board. I
wouldn't say it's necessarily itdoesn't work for all assets. I
would say the majority of assetsout there doing a bridge to
bridge, adding pref or mezz toit, I don't think it's
necessarily the smartestsolution just because it's going
to increase your basis. It's notto say it can't work. I do think
it can work at some level.
It's just not It's probably notgoing to work at the scale that
(19:09):
most people would hope. Because,I mean, what's interesting, and
I think people sort of forgetthis because I think a lot of
people are trying to do thisextent and pretend because they
go back to, hey, back during thegreat financial crisis, because
I talk to banks all the time,and this is why they're doing it
because we buy a lot of loansfrom these banks. And they're
like, hey, let's just keep onextending the loan out because
what we learned from the GFC iseventually everything came back.
(19:31):
The difference was is when theywere extending loans back during
the GFC, borrowing cost was nextto zero. Right?
Today, borrowing cost isexpensive. Right? So you're
paying you know, back then,you're borrowing at, you know,
4% or whatever the case is,maybe 5%. Today, you're
borrowing at rates. You know, ifyou're doing bridge to bridge, I
mean, you're borrowing at eightto 12% type rates.
(19:53):
And that's that's very punitiveto properties where most of
these assets are trading, youknow, in that, you know, call it
six to 9% cap rate range. Youknow, you're very quickly you
have negative leverage or allyour cash flows are just getting
wiped out to cover debt serviceto give you a hope and a prayer
for another day. And and that'swhy I think it's it's a very
challenging proposition, but Ido think it can work in the
(20:15):
right situations. But you gottahave an asset where you can
really accelerate growth of cashflows a lot quicker. Have to be
able to outpace inflation.
Mark Bonner (20:26):
If you're just joining us, we're still talking
to Peachtree Group Co Founderand CEO, Greg Friedman. Thank
you to all of our viewers comingin from LinkedIn, Instagram, and
Facebook. Let's move on. Youknow, we have to address the
elephant in the room, Greg.Trump versus Elon Musk, the
psychodrama that's currently onTruth Social and Twitter or X.
(20:48):
I mean, we talked about blackswans. We've talked about the
uncertainty of theadministration with tariffs and
other other economic policy.Geopolitics comes into play. You
know, things like Russia,Ukraine, or or everything that's
happening in The Middle East.Like, those things come to play
with these decisions.
Right? You know, when you lookat those geopolitical factors
(21:09):
and, obviously, when you whenyou look at this argument that's
happening between Trump and therichest man in the world, I
mean, how do you even begin tobake those things into your
pricing models?
Greg Friedman (21:21):
It makes it extremely challenging because,
you know, I mean, this isprobably one of the worst case
scenarios right now that youhave, you know, Musk and Trump,
you know, two powerfulindividuals in their own right,
you know, two successfulindividuals going at it, and
they both can impact themarkets. This is almost a
miniature potential black swanevent. Right? Like, who knows
(21:44):
how this plays out because bothof them, unfortunately, are, you
know, probably not taking orthey're using the media to sort
of and social media, especiallyto sort of, you know, take the
jabs at each other. And I don'tthink that's healthy for The US
economy.
I don't think it's healthy forthe world. And it's something
that it could impact, you know,it could impact values because
(22:04):
it has an impact to what happenswith this tax bill one way or
the other. It's going to have animpact to, the direction of The
US. And still, The US is theleading economy of the world. So
I think this is a really badsituation for all of us.
I think ultimately, forcommercial real estate, although
it's not like this isn't adirect fight in regards to
(22:27):
commercial real estate, but itdoes have an impact. And one
thing, because you talked aboutLinkedIn, I post very frequently
on LinkedIn just my opinions ofthe market. And I've been saying
this for several months. I thinkthere's an under appreciation
for the risk of a true blackswan event occurring. And
unfortunately, I think the newadministration has lost a little
bit of focus coming into whatthey were really all about.
(22:48):
From my perspective, it was moreabout less regulation, having
better tax policies and thingslike that. And they've gotten so
focused on tariffs. And now thisis just another distraction
where they're not able to reallyaccomplish our game plan. It's
an unfortunate event. And Ithink going back to my point on
(23:10):
the LinkedIn message, I kept Imean, I've said multiple times
that I think there's going to beI mean, unfortunately, there's a
high risk that there's going tobe a black swan event or
something that's going to shakeup the market because it felt
like we're due for one.
And this potentially could leadinto one or it could create, you
know, create chaos elsewhere,which isn't needed at this
point, Todd.
Mark Bonner (23:29):
So, Greg, I mean, is a ridiculous question, but, I
mean, are you literally thinkingof Taco when you're thinking
about what you're willing tounderwrite?
Greg Friedman (23:38):
Not necessarily thinking about TACO, but it's
something we've talked aboutmultiple times in our, at least
in our investment committee whenwe're looking at deals and
things like that, but it's notfront and center. When we make
investments, although we'regoing through a very chaotic
period of time right now, we'renot as worried about the next
three to six months because alot of these issues are going to
(24:00):
get solved. You look at theadministration when they were in
term last time, they had a lotof chaos around them. They had a
lot of volatility. Andeventually, we got through it.
And we're really looking overthe next three to five years.
And over the next three to fiveyears, I'm still bullish on the
outlook of The US economy, theresiliency of The US economy. So
(24:20):
although it's concerning, andthis is going to be in my
opinion, this is going to putmore pressure on underlying
values of assets. It mayactually cause values to drop
further. It may cause riskpremium spreads technically to
grow.
It may cause the cost of capitalis going to probably grow
because there's more risk in theeconomy. Not to mention, I was
(24:43):
over in Europe earlier thisweek. Was in London with a bunch
of meetings, meeting withdifferent groups that invest in
commercial real estate orlooking to allocate capital into
commercial real estate. Andthere were sounding feedback. A
lot of them were very hesitantto allocate into The US.
Most of them already hadallocations in The US, but they
were looking potentially to dialback their allocations to The US
(25:04):
because of a lot of the concernswith the growing debt and just
with The US economy and thedirection of the new
administration. So that wasalready another challenge as
well that puts on because ifthere's less dollars coming in
The US, because a lot of thisinternational money or capital
coming in from Europe and othercountries tend to pay premium
(25:26):
values for commercial realestate assets. That capital is
not coming in. That's going tohave a negative impact to the
underlying values of assets. So,this is just another headwind in
my opinion.
Mark Bonner (25:37):
We got a few more minutes here, but let's just try
to get to one or two morepoints, Greg. And again, thank
you so much for your time. Look,spreads, they're still wide.
Liquidity is still thin. Whattype of deals are getting done
right now?
Greg Friedman (25:49):
Yeah. So I think for the most part, I would argue
that deals that have really goodfrom a standpoint of when you
say deals are getting done froma standpoint of deals that are
getting financed in the creditspace, I would tell you deals
that have good in place cashflows or they have a very solid
business plan on how they'regoing to go if it's a
transitional asset on howthey're going go execute and
(26:09):
create cash flows at the assetlevel. Those tend to be the ones
that are more fanciful. I thinkfrom property type, there's no
question. Most properties areprobably well positioned from a
supply demand perspective on ago forward basis, although
multifamily is obviously had arecord amount of supply built.
But resoundingly, I thinkmultifamily is very well
(26:30):
positioned as a property type. Ithink hotels face a lot of near
term challenges just with theeconomy. If it all sudden we did
end up in a recession, thattends not to bode well for
hotels. But on the flip side, Imean, growth has been anemic
since 2020. And so hotels, theirrecovery time should be super
(26:52):
quick if we did end up in arecession.
And I think long term hotels arevery well positioned due to the
supply demand imbalances. So Ithink it's somewhat of an
interesting time. And I wouldtell you one asset class or one
property type that we'reprobably getting more excited
about is the office sector, youknow, because there's been a
bifurcation going on acrossoffice where I feel like the
(27:15):
media always talks negativeabout commercial real estate,
but it's really geared towardsoffice. And office has obviously
dealt with a lot of seculardistress, but you're starting to
see that true bifurcation. Andwe're starting to see a lot of
opportunities on the debt sideand even on the equity side
where these assets are tradingat much higher cap rates and you
have a decent term left on thetenants that are in the
(27:36):
building.
So, it's almost becoming supercompelling to invest, at least
as a lender, we're starting tobe, you know, interested in
lending in that space as well.
Mark Bonner (27:47):
So let's go a little macro for a second and we
can close on this, Greg. The newnormal, the new playbook. Rates
probably are not going back topre pandemic levels. They aren't
really gonna go down much morefrom here, probably. Maybe a few
basis points.
We'll see. This is probably thenew normal. I mean, Greg, in
your opinion, what does thatmean for cap rates, IRR targets,
(28:12):
long term strategy? Yeah. Areyou thinking about this?
Greg Friedman (28:15):
Sure. This is to your point, this is the new
game. I think we've gone from aa we talked about the other day,
we went from a forty year periodwhere you bought an asset, you
sold it three to five yearslater, and you sold it at an
environment where the interestrate, the debt cost was lower,
cap rates were lower. And nowwe're in this environment where
interest rates are going toprobably be higher, obviously
(28:37):
higher for longer. Cap rates areprobably going to expand out
slowly, unlike what we saw,obviously, going back over the
last forty years.
So I think we've gone from adecade where commercial real
estate assets overperformed, youknow, just based on that
financial engineering aspect toit. And now we're gonna, you
know, unfortunately, probablyunderperform on the equity side.
(28:58):
Now with that said, I think itbecomes an environment where you
can't financially engineer anddrive your returns. You now have
to actually be good on theownership side. You got to be
good on the asset managementside to drive value.
So, you still can make greatreturns in commercial real
estate. I think it's a veryviable asset class to invest
into, and it will continue to beone of the better asset classes
(29:19):
to invest into. But you got toinvest with sponsors that know
how to drive value at the assetlevel because that's going be a
lot more critical than what wesaw, especially from 2010 to
2022, where a lot of people madea lot of money in commercial
real estate by just being goodat buying an asset, not by
actually operating that asset.
Mark Bonner (29:38):
K. I'm getting the hook from my producer. That's
all the time we have today.Greg, I appreciate you so much.
Thank you for being here.
For all our viewers, we'll beback with another episode of
First Draft Live next week, sodon't miss out. You can sign up
now at Bisnell.comfront/events.And by the way, you can catch
all the replays and highlightson our site and socials. Maybe
(30:00):
you prefer to listen. We're onSpotify too.
We hope to see you all here atthe same time, same place next
Friday. This is First DraftLive. Have a great weekend,
y'all.
Okay. Welcome, welcome to everyone out there on
this beautiful day in commercialreal estate, and welcome to
episode one of First Draft Live.It's Friday, June 6. We're
thrilled to have so many of youtuning in from across The US,
Canada, The United Kingdom,Ireland, and beyond. We know
it's getting late over there, sothank you for making us a part
of your Friday night.
(00:35):
Over 400 people have registeredto join us for today's show, and
we're grateful you're here. Justso you know, we're also
streaming live on LinkedIn,Instagram, and Facebook. I'm
your host, Mark Bonner,BizNell's editor in chief, and
I'm coming to you live from NewYork City. On today's program,
we're going to get intorepricing risk in a hire for
(00:57):
longer world, distress,dislocation, and creative
capital, and finally, the newmacro map for CRE in 2025.
Joining us today to help breakit all down, Peachtree Group co
founder and CEO, Greg Friedman.
He oversees $10,000,000,000 inreal estate investments, and he
has deep expertise in credit andequity, particularly in
(01:20):
commercial real estate. Greg,welcome to the program. I know
you're dialing in from youroffices in Austin. We really
appreciate you being here.
Greg Friedman (01:28):
Yeah. Mark, thank you for having me, and it's it's
an honor to be the first one todo this. So so thank you.
Mark Bonner (01:35):
Thank you, my friend. So look, let's get into
the math. The ten year has beenhovering all week at around four
and a half percent. The bondmarkets have been volatile.
Jerome Powell is saying that heneeds more time on inflation.
I'm looking at Jamie Dimon thelast day or two talking about
the bond markets. I'm gonna readit to you here. Quote, it hurts
the people raising money. Thatincludes small businesses. That
(01:58):
includes loans to smallbusinesses.
It includes high yield debt. Itincludes leverage lending. It
includes real estate loans.That's why you should worry
about volatility in the bondmarket. Greg, how are you
adjusting your own returnexpectations?
And just for our audience andour benefit, what's the real
(02:18):
cost of capital for CRE sponsorsat this moment?
Greg Friedman (02:22):
Yeah. It's I mean, that's a great question. I
mean, I think there's noquestion there's a lot of risk
in the marketplace today. Ithink Jamie Dimon's correct. I
think there's anunderappreciation of risk.
Obviously, even in the lasttwenty four hours, we've had
Elon Musk and Trump going at it,so that creates another layer of
risk. But it's so it's aninteresting environment. This is
(02:43):
very unprecedented what we'regoing through right now. And,
you know, we've gone throughthis period of time where, you
know, it's been, you know, wewent through this decade pre
2022 where, you know, interestrates were next to zero, and now
we're in this much higher forlonger interest rate
environment. And there's a lotof headwinds ahead.
There's also a lot of, becauseof these headwinds, there's a
(03:03):
lot of opportunities. But ifyou're making investments like
right now, it's a verychallenging market because
you're dealing potentially withan environment that could, you
know, stagflate out. So you maybe dealing with stagflation. So
as we're pricing, as we'retrying to make investments, you
know, if it's on the creditside, because we invest through
debt as well as equity, I mean,we're obviously trying to
(03:24):
achieve on the equity side, youknow, returns that are typically
around 20% or higher. And thisis, in my opinion, an
environment where you need toget paid for taking on risk.
So you need to be verythoughtful about, you know,
making any investment becauseit's a very challenging
environment just because thedirection of what's happening,
(03:44):
you know, between the tax bill,between tariffs, you know,
what's going to be the impactultimately with inflation
because those are twoinflationary type events. It's
very concerning. And the jobreport, I think, today came back
positive, but it still feelslike the economy itself is very
fragile. So I think it's aperiod of time where you got to
(04:08):
be very strategic and thoughtfulif you're investing capital and
be very careful.
Mark Bonner (04:13):
Yeah. I mean, you mentioned the drought report. It
came in relatively positive.That's not good news if a hawk
looking at the interest ratesituation with Jerome Powell. It
probably means that they staypat, maybe even until December,
at least that's what GoldmanSachs said this morning.
I mean, when you come when itcomes to valuing assets, right,
and we know the last halfdecade, pandemic included,
(04:36):
obviously, the politicalenvironment that we're in today,
uncertainty. Right? I mean, thatis the word du jour. How do you
even value assets at thismoment? I mean, how have you had
to evolve that part of yourbusiness?
Greg Friedman (04:49):
Sure. So you look at historically when you're
valuing assets, you know, welook at the risk free rate, the
ten year treasury rate to yourpoint. You know, it's average
pre 2022. So when you look from2010 to 2022, the ten year was,
you know, on average about 2.2%.Today, to your point, it's
closer to four and a halfpercent.
So it's almost double. And sohistorically, commercial real
(05:10):
estate, you would add a riskpremium spread depending on the
the property type. And onaverage, I think it's about 270
basis points or 275 basis pointsabove the ten year is what the
average cap rate is for all ofcommercial real estate. Now that
includes, you know, officebuildings, multifamily, you
know, retail, hotels, and soforth. So, you know, that's an
(05:32):
average risk premium spread.
And so if you believe the tenyear is going to stay elevated
at 4.5% or stay around 4.5% orpotentially even go higher,
there's some arguments to saythat could even go above 5%. But
if you feel like that's, youknow, that's the range, then
you're probably using asubstantially higher cap rate
than what you're using, youknow, obviously, pre 2022. And
(05:54):
it's interesting just because weconstantly were financing groups
that are out there acquiring anddeveloping assets and we're
buying out there trying to buyassets. And a lot of people are
based on the value the waythey're valuing these assets,
they're almost valuing it,expecting the ten year to almost
revert closer to where it waspre 2022. And we just don't
think that's gonna be the case.
(06:15):
And that's why just to becandid, why we haven't been very
active on the equity side overthe last couple of years because
since first quarter twentytwenty two, we've been super
active in doing a lot of directlending. We bought a bunch of
loans from financialinstitutions as well that are
looking to deleverage yourexposure to CRE is because the
values don't make a lot of senseto us on the equity side because
(06:37):
we feel like, you know, caprates, you know, when you look
at the true intrinsic values ofthese assets and if you apply
the right cap rate for what themarket is today, it's, you know,
most assets are probably worth alot less than where, you know,
these assets are clearing themarket if they're selling. I
mean, there's been a lot ofbusted processes, but also
transaction volume is still downdramatically from where we were
(06:59):
at the peak levels, going backto pre-twenty twenty two or even
pre COVID. Part of the reasonit's been muted is for the
reasons we just talked about.
Mark Bonner (07:10):
Right. I mean, mentioned intrinsic value.
Right? I mean, let's talk aboutthe public versus private
disconnect for a second. Right?
REITs repurchased nearly1,000,000,000 in shares in Q1
this year. That's a signal thatthey see a disconnect between
market price and intrinsicvalue, to your point. Are you
seeing a similar mismatch in theprivate market? And how is that
(07:31):
shaping your buy sell holdstrategy?
Greg Friedman (07:33):
Yeah. I mean, it seems like the public market's
been probably more punished thanthe the private markets on
trades right now. So from whatwe've seen, and we don't invest
typically in the public marketsfor, you know, like public REITs
or anything like that. But forwhat we've seen, it feels more
like, you know, the privatemarket is overpaying for assets.
(07:54):
So definitely, in general, Iwould say the private market is
viewing, you know, has a moreoptimistic view for the outlook
across most commercial realestate assets.
I would, that would be myargument right now as you relate
those two markets together.
Mark Bonner (08:12):
Right. The other thing that we're seeing out of
our newsroom is that, and theheadlines are a little
frightening, right? Developmentcoast to coast is on ice, right?
We were talking about tariffsyesterday, you and I, and, you
know, tariff driven costincreases, persistent capital
delays, it's freezing thedevelopment pipeline all over
the place across multiple assetclasses. I mean, Greg, how is
(08:35):
that showing up in yourpipeline?
Greg Friedman (08:37):
Yeah. I mean, it's making the because here's
the thing, the tariffs is stillwho knows what's going to happen
with the tariffs because, Imean, to be candid, the new
administration is trying toimplement these tariffs. It
hasn't been put in full effect.It's too early to sort of tell.
Now, the reality is tariffs aregoing to drive up the costs and
(08:59):
it's going to make it morechallenging.
And if you're starting adevelopment project today, well,
it means you're not breakingground tomorrow because it takes
time to get the contractor andget the final architectural
plans and get out the pricingcoming in. So if you're looking
to start a new constructionproject today, potentially,
you're probably at least a goodsix to twelve months out, if not
(09:22):
two to three years out. And nowyou're trying to underwrite what
is the impact of these tariffs.And it makes it very challenging
if you want to go developproperties, which is a great
thing if you're an owner ofassets already today. So if you
own a bunch of commercial realestate assets, you're feeling
even better about the future.
Although, we've got theheadwinds we've talked about
(09:43):
because there's gonna be a lackof new supply. But it's very
challenging for us to go out anddevelop new properties because
it's hard to understand what isgoing to be the impact of these
tariffs over the next severalyears because you're probably if
the tariffs truly are in place,that's probably going to cause
the cost to grow outside ofprobably even inflationary
(10:04):
pressures, right? So, typically,you would expect to be in a more
normalized constructionenvironment. It's easier to sort
of gauge your risk. And nowwe're back almost in this
environment, sort of like whatwe went through during COVID,
where pricing was increasingextremely quickly.
On the positive side, this isnot a, you know, construction is
a mix between labor expense, youknow, material expense. So it's,
(10:26):
you know, it is material that,you know, the potentially, you
know, the material expense isgoing be higher, but it's less
concerning than what we sawduring COVID, where you saw
labor expense was just driving alot of that increase along with
all the supply chain disruptionthat was impacting the material
costs. So you were just gettinghit from both levels. So it's
very hard to do it. But withthat said, we are I mean, from
(10:50):
our standpoint and from myperspective, I'm still bullish
on doing development if you canmake it it makes sense.
Because right now, it's verymuted, all new supply across all
the property types. So when wewake up three to five years from
now, and if you're able todeliver new product that's
opening two to three years fromnow, you're going to be in an
environment where there hasn'tbeen a lot of new product
(11:11):
delivered, new wins in realestate in general. We own a
bunch of hotel properties,premium branded hotel properties
under the Marriott Hilton Flags.What we've found and we're
continuing to develop several ofthose properties as we speak
right now. We have probablyseven or eight of them under
construction.
And and we're continuing tobuild with the idea that, you
know, there's gonna be a premiumfor this newer product once it
(11:34):
opens because the guests tend toyou know, per you know, they
favor staying at newer hotels.Investors like owning newer
assets, and they tend to performbetter from a standpoint of
being able to drive better netoperating income. And you tend
to have a better exit when yougo to sell them. So development
is still viable, but is, to yourpoint, there's a huge headwind
(11:57):
if you're doing it through theequity side. The credit side,
probably 30% of our book rightnow is on the new loans that
we're originating is slantedtowards new construction.
So we're still active in thatspace, but you have to be very
thoughtful about how youunderwrite the risk of the
tariffs.
Mark Bonner (12:14):
Right. And the thing that makes this moment so
volatile is that you have tomake these decisions now, right?
We're looking at price of steel,we're looking at price of
lumber, we're looking at priceof floor tiles. Tariffs are one
thing on day one. They're acompletely different thing on
day two.
Do you buy on a Monday? Do youwait till Tuesday? Maybe they'll
be lower. And we've alreadyreported out over the last
(12:34):
couple of weeks that a lot ofcontractors, a lot of heads of
constructions are getting caughtin this spin cycle of, gosh, I
wish I could have waited today.Can I cancel that order?
And yeah, so it's a short termdecision that you make today for
a long term payoff, right? Butyou still have to make it pencil
for the day, right, Greg? Imean, that's chaotic.
Greg Friedman (12:56):
That is total chaotic. It's the environment
we're dealing with since I mean,and I hate to pick on the new
administration because I'm very,very optimistic, very bullish on
some of the things that they'regoing to hopefully accomplish
over the next several years. ButI mean, the new administration
(13:16):
has taken over at the beginningof this year, it's just
continued to be chaos. And Ithink we're going to continue to
deal, you know, we're going todeal with these issues as you're
laying out that it's just it's avery chaotic environment. And
that's why if you're able to bevery strategic and thoughtful in
these kind of environments, it'sthese types of moments where,
(13:37):
you know, it's it to your point,it's very hard to go develop,
but there's other opportunitiesthat will be created because of
it.
Now, development, this is forthe concerns you laid out. More
and more people are probablygoing to be pencils down on
developing new. And if have aproject that actually makes
sense, and I'm speaking verymacro, very high level, so I'm
(13:58):
not saying go out and just buildin every market. But if you have
a project that makes sense,you're probably going to do
extremely well on the other sideof all this chaos. But it's
being able to see through thismoment of chaos is how we've
historically made a lot of moneyas a firm is being able to move
forward and be decisive in thesemoments.
But it's not without risk, andit's not you've got to have the
(14:20):
stomach for taking on that risk.
Mark Bonner (14:23):
I mean, so obviously, you're into financing
a development into the nextcycle, right? But have you heard
of other people at your levelwalking away from projects or
buying them stalled?
Greg Friedman (14:35):
Yeah. I mean, I haven't seen necessarily
projects stall out. I've I'veseen a lot of lenders that have
started to back down from newdevelopment projects that, you
know, different lenders that wecompete with. I've seen, you
know, some developers that haveprojects in their pipeline that
they're you know, they haven'tbroken ground on, but they're
like, you know, maybe maybe weneed to take on another partner
and they're approaching us ormaybe they just want to, you
(14:58):
know, sell the project becausethey're concerned about being
able to achieve the returns. Iwould say it's not really as
much tariff driven.
I think tariffs is probablyprobably the icing on the cake
for a lot of these projectsbecause the other Although a lot
of I'm very bullish aboutdevelopment as we talked about
them, because I'm sort oftalking on the other side of the
equation. I mean, let's talkabout exit caps. A lot of people
(15:19):
are betting on this exit capthat's going to be at 5 and a
quarter, five and a halfpercent. Well, if you're
underwriting a development deal,to your point, you're sort of
seeing through this challengethat we're dealing with right
now, this chaos of the tariffsand so forth. But as we wake up
three years from now, are weback to an interest rate
environment we saw pre 2022?
(15:40):
Probably not. And and so ifwe're not going back to an
environment where the ten yearis at 2.2% on average, how are
you supporting underwritingthese exit caps that, you know,
that are around 5% or five and ahalf percent even? Because it's
a very likely outcome we'regoing to be with a ten year
that's around 4.5%, which wassort of the low mark. Go back
pre GFC, that was the low mark,and we're back in a pre GFC
(16:04):
environment. So being at a 4.5%tenure is relatively cheap.
But then when you start to lookat historical cap rates at that
period of time, there wasn't alot of these assets that people
were underwriting, selling at 5%or even lower exit caps that
were trading at those levelsback then. So I think that's
probably a bigger headwind todevelopment is making these
(16:24):
projects actually make sense andis hired for longer. And it sort
of goes to because earliertoday, we had our investment
committee and we were we went ona tangent about just
affordability issues likehousing and how we're at a
pivotal moment right now becausemost people are being priced out
(16:44):
of homes because they can'tafford to buy them. They can't
afford to, you know, the cost ofwith the debt service associated
with it and their income levels,you know, relative to, you know,
so the purchase price relativeto their income levels is like
at the highest mark since, youknow, pre you have to go back,
you know, pre great financialcrisis. So we're at a very
(17:05):
challenging period of time whenyou look at it from all those
perspectives.
Mark Bonner (17:09):
Right. And look, and meanwhile, there's been a
spike in bridge to bridgerefinancing and mezz heavy
stacks. Right? Is that acreative capital strategy or is
that just extend and pretend twopoint zero?
Greg Friedman (17:21):
Yeah, I think it's sort of extended, but it's
sort of a combination. Like, Ido think there's some value if
you have a project where youjust open up and you just need
time, you know, because you knowyou're gonna ramp up and you can
ramp up and you can cover thisadditional cost. Because when
you're going from a bridge loanto a bridge loan or you're going
from, you know, you're adding alayer of a mezz piece or a pref
(17:43):
piece, that's most cases, that'sprobably increasing your basis
because there's so much negativeleverage. You know, your debt
cost is probably higher. Youknow, when you look at, you
know, blended across thosestructures, it's probably higher
than the cash flows coming offthe property.
So you're going to have tosupport that through either
injecting additional capitalinto the asset to pay those
payments, or you're gonna haveto accrue interest. You're gonna
(18:06):
have to do something that'sgonna end up increasing your
basis. And so if you've got anasset that has you you're gonna
have meaningful run up of cashflows over the next eighteen
months, sure, it can make a lotof sense. But a lot of the deals
I'm seeing right now, it's moreof a, you know, extend and
pretend, and it's a hope and aprayer that, you know, interest
rates are going to come down. Ifthat's what you're betting on, I
(18:28):
think that's something, youknow, going back to the point we
talked about before, I thinkit's very misguided and you're
going to end up probablyunderachieving returns and
you're putting your existingcapital probably at risk of
potential losses, if not a totalloss.
Mark Bonner (18:42):
So it sounds like you don't think that's
sustainable, that it'sessentially a bridge to nowhere.
Greg Friedman (18:47):
I think it's, you know, across the board. I
wouldn't say it's necessarily itdoesn't work for all assets. I
would say the majority of assetsout there doing a bridge to
bridge, adding pref or mezz toit, I don't think it's
necessarily the smartestsolution just because it's going
to increase your basis. It's notto say it can't work. I do think
it can work at some level.
It's just not It's probably notgoing to work at the scale that
(19:09):
most people would hope. Because,I mean, what's interesting, and
I think people sort of forgetthis because I think a lot of
people are trying to do thisextent and pretend because they
go back to, hey, back during thegreat financial crisis, because
I talk to banks all the time,and this is why they're doing it
because we buy a lot of loansfrom these banks. And they're
like, hey, let's just keep onextending the loan out because
what we learned from the GFC iseventually everything came back.
(19:31):
The difference was is when theywere extending loans back during
the GFC, borrowing cost was nextto zero. Right?
Today, borrowing cost isexpensive. Right? So you're
paying you know, back then,you're borrowing at, you know,
4% or whatever the case is,maybe 5%. Today, you're
borrowing at rates. You know, ifyou're doing bridge to bridge, I
mean, you're borrowing at eightto 12% type rates.
(19:53):
And that's that's very punitiveto properties where most of
these assets are trading, youknow, in that, you know, call it
six to 9% cap rate range. Youknow, you're very quickly you
have negative leverage or allyour cash flows are just getting
wiped out to cover debt serviceto give you a hope and a prayer
for another day. And and that'swhy I think it's it's a very
challenging proposition, but Ido think it can work in the
(20:15):
right situations. But you gottahave an asset where you can
really accelerate growth of cashflows a lot quicker. Have to be
able to outpace inflation.
Mark Bonner (20:26):
If you're just joining us, we're still talking
to Peachtree Group Co Founderand CEO, Greg Friedman. Thank
you to all of our viewers comingin from LinkedIn, Instagram, and
Facebook. Let's move on. Youknow, we have to address the
elephant in the room, Greg.Trump versus Elon Musk, the
psychodrama that's currently onTruth Social and Twitter or X.
(20:48):
I mean, we talked about blackswans. We've talked about the
uncertainty of theadministration with tariffs and
other other economic policy.Geopolitics comes into play. You
know, things like Russia,Ukraine, or or everything that's
happening in The Middle East.Like, those things come to play
with these decisions.
Right? You know, when you lookat those geopolitical factors
(21:09):
and, obviously, when you whenyou look at this argument that's
happening between Trump and therichest man in the world, I
mean, how do you even begin tobake those things into your
pricing models?
Greg Friedman (21:21):
It makes it extremely challenging because,
you know, I mean, this isprobably one of the worst case
scenarios right now that youhave, you know, Musk and Trump,
you know, two powerfulindividuals in their own right,
you know, two successfulindividuals going at it, and
they both can impact themarkets. This is almost a
miniature potential black swanevent. Right? Like, who knows
(21:44):
how this plays out because bothof them, unfortunately, are, you
know, probably not taking orthey're using the media to sort
of and social media, especiallyto sort of, you know, take the
jabs at each other. And I don'tthink that's healthy for The US
economy.
I don't think it's healthy forthe world. And it's something
that it could impact, you know,it could impact values because
(22:04):
it has an impact to what happenswith this tax bill one way or
the other. It's going to have animpact to, the direction of The
US. And still, The US is theleading economy of the world. So
I think this is a really badsituation for all of us.
I think ultimately, forcommercial real estate, although
it's not like this isn't adirect fight in regards to
(22:27):
commercial real estate, but itdoes have an impact. And one
thing, because you talked aboutLinkedIn, I post very frequently
on LinkedIn just my opinions ofthe market. And I've been saying
this for several months. I thinkthere's an under appreciation
for the risk of a true blackswan event occurring. And
unfortunately, I think the newadministration has lost a little
bit of focus coming into whatthey were really all about.
(22:48):
From my perspective, it was moreabout less regulation, having
better tax policies and thingslike that. And they've gotten so
focused on tariffs. And now thisis just another distraction
where they're not able to reallyaccomplish our game plan. It's
an unfortunate event. And Ithink going back to my point on
(23:10):
the LinkedIn message, I kept Imean, I've said multiple times
that I think there's going to beI mean, unfortunately, there's a
high risk that there's going tobe a black swan event or
something that's going to shakeup the market because it felt
like we're due for one.
And this potentially could leadinto one or it could create, you
know, create chaos elsewhere,which isn't needed at this
point, Todd.
Mark Bonner (23:29):
So, Greg, I mean, is a ridiculous question, but, I
mean, are you literally thinkingof Taco when you're thinking
about what you're willing tounderwrite?
Greg Friedman (23:38):
Not necessarily thinking about TACO, but it's
something we've talked aboutmultiple times in our, at least
in our investment committee whenwe're looking at deals and
things like that, but it's notfront and center. When we make
investments, although we'regoing through a very chaotic
period of time right now, we'renot as worried about the next
three to six months because alot of these issues are going to
(24:00):
get solved. You look at theadministration when they were in
term last time, they had a lotof chaos around them. They had a
lot of volatility. Andeventually, we got through it.
And we're really looking overthe next three to five years.
And over the next three to fiveyears, I'm still bullish on the
outlook of The US economy, theresiliency of The US economy. So
(24:20):
although it's concerning, andthis is going to be in my
opinion, this is going to putmore pressure on underlying
values of assets. It mayactually cause values to drop
further. It may cause riskpremium spreads technically to
grow.
It may cause the cost of capitalis going to probably grow
because there's more risk in theeconomy. Not to mention, I was
(24:43):
over in Europe earlier thisweek. Was in London with a bunch
of meetings, meeting withdifferent groups that invest in
commercial real estate orlooking to allocate capital into
commercial real estate. Andthere were sounding feedback. A
lot of them were very hesitantto allocate into The US.
Most of them already hadallocations in The US, but they
were looking potentially to dialback their allocations to The US
(25:04):
because of a lot of the concernswith the growing debt and just
with The US economy and thedirection of the new
administration. So that wasalready another challenge as
well that puts on because ifthere's less dollars coming in
The US, because a lot of thisinternational money or capital
coming in from Europe and othercountries tend to pay premium
(25:26):
values for commercial realestate assets. That capital is
not coming in. That's going tohave a negative impact to the
underlying values of assets. So,this is just another headwind in
my opinion.
Mark Bonner (25:37):
We got a few more minutes here, but let's just try
to get to one or two morepoints, Greg. And again, thank
you so much for your time. Look,spreads, they're still wide.
Liquidity is still thin. Whattype of deals are getting done
right now?
Greg Friedman (25:49):
Yeah. So I think for the most part, I would argue
that deals that have really goodfrom a standpoint of when you
say deals are getting done froma standpoint of deals that are
getting financed in the creditspace, I would tell you deals
that have good in place cashflows or they have a very solid
business plan on how they'regoing to go if it's a
transitional asset on howthey're going go execute and
(26:09):
create cash flows at the assetlevel. Those tend to be the ones
that are more fanciful. I thinkfrom property type, there's no
question. Most properties areprobably well positioned from a
supply demand perspective on ago forward basis, although
multifamily is obviously had arecord amount of supply built.
But resoundingly, I thinkmultifamily is very well
(26:30):
positioned as a property type. Ithink hotels face a lot of near
term challenges just with theeconomy. If it all sudden we did
end up in a recession, thattends not to bode well for
hotels. But on the flip side, Imean, growth has been anemic
since 2020. And so hotels, theirrecovery time should be super
(26:52):
quick if we did end up in arecession.
And I think long term hotels arevery well positioned due to the
supply demand imbalances. So Ithink it's somewhat of an
interesting time. And I wouldtell you one asset class or one
property type that we'reprobably getting more excited
about is the office sector, youknow, because there's been a
bifurcation going on acrossoffice where I feel like the
(27:15):
media always talks negativeabout commercial real estate,
but it's really geared towardsoffice. And office has obviously
dealt with a lot of seculardistress, but you're starting to
see that true bifurcation. Andwe're starting to see a lot of
opportunities on the debt sideand even on the equity side
where these assets are tradingat much higher cap rates and you
have a decent term left on thetenants that are in the
(27:36):
building.
So, it's almost becoming supercompelling to invest, at least
as a lender, we're starting tobe, you know, interested in
lending in that space as well.
Mark Bonner (27:47):
So let's go a little macro for a second and we
can close on this, Greg. The newnormal, the new playbook. Rates
probably are not going back topre pandemic levels. They aren't
really gonna go down much morefrom here, probably. Maybe a few
basis points.
We'll see. This is probably thenew normal. I mean, Greg, in
your opinion, what does thatmean for cap rates, IRR targets,
(28:12):
long term strategy? Yeah. Areyou thinking about this?
Greg Friedman (28:15):
Sure. This is to your point, this is the new
game. I think we've gone from aa we talked about the other day,
we went from a forty year periodwhere you bought an asset, you
sold it three to five yearslater, and you sold it at an
environment where the interestrate, the debt cost was lower,
cap rates were lower. And nowwe're in this environment where
interest rates are going toprobably be higher, obviously
(28:37):
higher for longer. Cap rates areprobably going to expand out
slowly, unlike what we saw,obviously, going back over the
last forty years.
So I think we've gone from adecade where commercial real
estate assets overperformed, youknow, just based on that
financial engineering aspect toit. And now we're gonna, you
know, unfortunately, probablyunderperform on the equity side.
(28:58):
Now with that said, I think itbecomes an environment where you
can't financially engineer anddrive your returns. You now have
to actually be good on theownership side. You got to be
good on the asset managementside to drive value.
So, you still can make greatreturns in commercial real
estate. I think it's a veryviable asset class to invest
into, and it will continue to beone of the better asset classes
(29:19):
to invest into. But you got toinvest with sponsors that know
how to drive value at the assetlevel because that's going be a
lot more critical than what wesaw, especially from 2010 to
2022, where a lot of people madea lot of money in commercial
real estate by just being goodat buying an asset, not by
actually operating that asset.
Mark Bonner (29:38):
K. I'm getting the hook from my producer. That's
all the time we have today.Greg, I appreciate you so much.
Thank you for being here.
For all our viewers, we'll beback with another episode of
First Draft Live next week, sodon't miss out. You can sign up
now at Bisnell.comfront/events.And by the way, you can catch
all the replays and highlightson our site and socials. Maybe
(30:00):
you prefer to listen. We're onSpotify too.
We hope to see you all here atthe same time, same place next
Friday. This is First DraftLive. Have a great weekend,
y'all.
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