April 11, 2024 • 45 mins
Learn to leverage debt strategically with Devin Jolley, debt markets expert and President of Davidson Companies. Jolley shares his experience navigating financial upheavals from the Great Financial Crisis to COVID-19. Discover how past crises reshaped risk management, shifting from deal-making to caution. Understand the recovery of financial institutions post-pandemic, the resurgence of community banks, and regulatory shifts. Get expert insights on securing favorable loans in today’s debt landscape.
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Episode Transcript
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Rachel Oh (00:04):
Welcome to Peaks and Portfolios presented by PEG
Companies, your go-to podcastfor all things commercial real
estate investment.
I'm Rachel oh, and togetherwe're diving into current events
, trends, issues andopportunities impacting the CRE
investment space, fromdissecting the latest market
moves to sharing insights ontoday's commercial real estate
(00:26):
landscape.
It's time to maximizeportfolios here in the peaks of
the Mountain West and beyond.
Okay, welcome everybody againfrom the peaks of the Mountain
West high up here on the WasatchFront.
We are excited to talk allthings real estate, the economy
(00:47):
and anything else that may comeabout.
Thank you for joining us todayfor this week's episode of Peaks
and Portfolios presented by PegCompanies In commercial real
estate, equity and capitalmarkets gets a lot of attention,
which, in my role at Peg, iswhat I'm most focused on.
However, the larger part of thecapital stack is the debt
secured and, like during anycycle, the debt story has its
(01:11):
twists and turns and we'redefinitely seeing that as
headlines loom about thetrillions of dollars of debt
maturing.
To better understand commercialreal estate finance in today's
market, I can't think of anyonebetter than my good and dear
friend and now esteemed guestDevin Jolly, president of the
Davidson Family Office, a familywith roots in the firearm
industryemed guest Devin Jolly,president of the Davidson Family
Office, a family with roots inthe firearm industry.
Welcome, Devin.
Devin Jolley (01:29):
Thank you, Rachel.
Appreciate the introduction.
Rachel Oh (01:32):
Thank you so much for joining us today.
Just curious what have you beenkind of focused on lately in
your role at Davidson?
Devin Jolley (01:39):
As a family office , we're focused on finding
commercial real estate deals,primarily in the debt and equity
space.
We would do private loans.
We're seeing a lot ofopportunity in that space and
we're also willing to come inwith equity investments for the
right transaction, provideguarantees where it makes sense.
(01:59):
They have a number of firearmbusinesses, they have a cell
phone business, they have aTesla charging station business,
and then on the family officeside, we are looking to deploy
capital into differentcommercial real estate assets.
So, whether that's debt orequity investments, we're
looking at both, seeing a numberof different opportunities in
(02:21):
both those spaces.
It's a really good time to kindof be in this space.
These troubling times bringopportunities and these are some
of the best times to invest,you know if you're in the right
spot.
So still heavily involved inthe capital markets in a lot of
ways.
Rachel Oh (02:35):
I'm going to come knocking on your door for money.
By the way, you know this right.
Devin Jolley (02:38):
That's right.
Hey, we would love to investwith Peg Awesome.
We've seen a lot of good.
Hey, we would love to investwith Peg Awesome.
We've seen a lot of good dealsand I love what Peg's doing, so
we would absolutely welcome that.
Rachel Oh (02:51):
Awesome, I'm going to hold you to that.
Thank you, devin.
Okay, so to give everyone alittle bit of background on
Devin, let me kind of toot yourhorn a bit.
You've been now at this closeto 16 years right of experience
in the commercial real estatefinance industry.
Obviously, you're now headingup a company.
You spent most of your careerin banking where you financed
(03:11):
construction, bridge, permanentand line of credit facilities at
KeyBank, symmetra, lifeInsurance Company, agon and a
boutique mortgage banking firmcalled Glacier a boutique
mortgage banking firm calledGlacier.
You have a unique understandingof debt through your various
roles, including seeing debtfrom the broker perspective side
, the lender perspective and,most recently, from the borrower
(03:33):
side.
So I wanted to ask you a littlebit about debt from your
experience.
If you wouldn't mind, can youtake me back to when you first
started in this industry andwhat it was like?
I mean, this is what you saidabout 16 years.
So what was debt like back then?
And just tell me what theeconomy and what was.
(03:54):
You know, what was commerciallending like back then?
Devin Jolley (03:56):
Yeah, and I'll even back up a little further
than that.
You know my first entry intothe commercial or into the real
estate was in college.
So actually Garth Davison, whoI work for now.
I worked for him back incollege.
So we were doing residentialloans back in early 2000s, 2003,
(04:17):
4, 5.
And I thought that's what Iwanted to do for my career.
I wanted to do residentialloans and I remember I had a
buddy that was doing residentialloans and I was working at a
cell phone but there was kind ofa big craze to get into that
space and you know I was youngand it looked really exciting
(04:50):
and got myself into theresidential real estate side and
there was a couple of reallygood years and it was very
exciting to be in college.
Rachel Oh (04:59):
This was the early 2000s, yeah.
Devin Jolley (05:00):
Okay, yeah.
And then I was introduced tocommercial real estate from an
uncle who was in the space onthe finance space and he said
why are you doing residential?
You should be doing commercial.
And kind of lined up aninternship in Cedar Rapids, iowa
.
So I moved out there.
Rachel Oh (05:16):
Cedar Rapids.
What's in Cedar Rapids, Iowa?
Devin Jolley (05:19):
Yeah, agon Life Insurance Company.
Okay.
So a big life insurance companywas out there and got a role to
work for Agon, and that waskind of my first entry into
commercial real estate financeand then, kind of the rest is
history.
I, you know from there, went onto a boutique mortgage banking
shop where we were brokeringloans to different life
(05:41):
insurance companies.
Then the great financial crisishappened.
Rachel Oh (05:45):
Okay, so let's talk about that.
What was lending like duringthe GFC?
Devin Jolley (05:52):
You know that was interesting, right?
I mean prior to that time-.
And you were young, right.
You were early in your career.
Rachel Oh (05:59):
Were you just like oh my gosh, what did I just do
Exactly?
Devin Jolley (06:03):
I am in the commercial real estate finance
industry and going through theGFC crisis, it was a unique time
to be in that space.
Right Banks were failing, lifeinsurance companies were failing
AIG, lehman Brothers but at thesame time, I think it was
probably the best time to havean introduction into commercial
(06:26):
real estate why?
Because tell me why.
Yeah, I mean, you saw theproblems right, you saw what
could go wrong, and it made youthink about risk differently and
how we should underwrite, howwe should, you know, consider
risk in commercial real estate.
And you know, some of thoselessons have not.
You know, I haven't forgottensome of those lessons.
(06:46):
It was a scary time, you know.
I think that's the interesting.
You know part of where we're attoday because it's been 16
years.
Yeah.
Right, I look at some of thesenewer guys that are coming out
of college.
Yeah, and where were theyduring the last financial?
They were in elementary schoolor junior high or high school.
Rachel Oh (07:05):
They have lived the high life right, yeah and they
probably just didn't see, andalso like zero interest rates,
right?
I mean, they don't even knowwhat they don't know.
Devin Jolley (07:15):
Yeah, in a lot of ways, and so I think in prior to
this time, we had a recessionon average every seven to eight
years, and here we've had a longexpansion cycle 16 years and I
think it's good right.
I think we're in some ways.
There needs to be a little bitof reset and we can get into
that later on the podcast andwhere some of maybe the pain
points are Devin.
Rachel Oh (07:36):
did you just say we're old?
Devin Jolley (07:38):
I don't feel like that at all.
Rachel Oh (07:40):
I just feel like You're like 16 years and we're
talking about the young kids.
Devin Jolley (07:43):
They don't know anything but you know I look at
Cameron Gunter over there at PEGand you know some of the other
executives that have beenthrough multiple cycles, and you
know I only have one.
I have one experience under mybelt and I guess more recently
COVID, if you want to count thatas a small blip.
But no, I think I thinklearning during those times.
(08:05):
Well, first of all, there's alot to learn during those times
and it gives you a muchdifferent perspective, which I
think is needed.
Yeah, no for sure.
Rachel Oh (08:15):
Okay, so let's go back to the GFC.
You're young in your career.
Now the world has literallycollapsed.
It's the greatest financialcrisis the world has really seen
since, probably even surpassesthe great depression.
So you know, what did you guysdo?
Did you?
Were you making any loans?
Were you just underwriting andjust passing on everything?
(08:35):
And what were deposits lookinglike?
I mean, they're probably gone,right, they're just they're what
?
What happened?
I mean, the dow was at what?
Seven thousand some insane.
I don't even remember what itwas.
Devin Jolley (08:45):
I just remember driving into work every day and
it was like the Dow dropped1,200 points, the Dow dropped
800, and it was like day afterday after day, and I didn't even
know what that meant.
Rachel Oh (08:56):
So you had a job.
Devin Jolley (08:57):
So I had a job and you know, at some point you
know, I kind of realized thatyou know a job's a luxury.
I wasn't paid very much at allbut a job was a luxury and I was
gaining a ton of experience.
That's good perspective.
And you know I had a lot ofbuddies that went back to
college.
You know they went back to gettheir master's degree and I felt
I was learning so much in myrole from going through that
(09:19):
that that was part of mymaster's degree in some extent.
You know I was learning.
But you got a master's degree Idid.
Later I went back and got amaster's degree in finance and
yeah, it was interesting.
You know, I worked for a smallboutique mortgage banking
company and their business wasto place life insurance company
(09:40):
debt with their borrowers andthat was primarily their
business.
They really weren't doing awhole lot of bank debt or
anything else.
It was life insurance companiesand, as we saw from the great
financial crisis, you know,there's ripple effects.
This did not just affect thebanks, but this affected the
life insurance companies as well.
Aig failed right, and everyone,everyone was entangled in this
(10:02):
right.
Rachel Oh (10:02):
Wall.
Devin Jolley (10:03):
Street is very entangled amongst each other and
it affected everyone, so ourbusiness quickly dried up.
At Glacier, life insurancecompanies weren't really lending
.
Everyone was trying to figureout what type of exposure they
had on their balance sheet, somy job was to put together a
list of any bank anyone with apulse that was lending.
Rachel Oh (10:27):
Who was lending?
Devin Jolley (10:29):
You know, it was random banks.
Rachel Oh (10:32):
So they had healthy deposits in place.
Devin Jolley (10:35):
You know, for whatever reason, there were some
banks that weren't hurt nearlyas bad as others.
Rachel Oh (10:42):
Was it regional?
By any chance, it was morecommunity banks.
Devin Jolley (10:44):
To be honest, it was kind of hit or miss.
Hurt nearly as bad as others,right, was it regional, by any
chance, or was it it was morecommunity banks?
To be honest, it was kind ofhit or miss, and so I would make
hundreds and hundreds of callsand figure out who was on first
and who was lending who was not.
What were they lending on what?
asset types and I put together abig list for the company and
that's what we used to placeloans for our clients and you
(11:06):
know, it kind of shifted fromlife company debt placement to
banks or really anyone that waslending at that point.
So there was a low period andfor some time yeah.
And then you know it kind ofpicked back up.
Rachel Oh (11:21):
When did it pick back up roughly?
Devin Jolley (11:23):
You know, I don't remember exactly.
I think it was probably a goodyear year, year and a half maybe
, or more.
Rachel Oh (11:30):
So like about 2010-ish Mm-hmm 2000,.
Okay.
Devin Jolley (11:32):
Yeah, I think these banks needed to understand
what type of exposure theyreally had, what this meant.
You know, anytime you gothrough a crisis, you know cap
rates are maybe slow to reactyeah, Right, or slow.
Anytime you go through a crisis, you know cap rates are maybe
slow to react yeah, Right, orslow to rise Right.
And you see you start seeingthe stress sales and then you
know there's transactions andslowly you see kind of that rise
(11:56):
in cap rates and kind of thereset, and so it just takes time
.
Yeah.
Rachel Oh (12:00):
Yeah, I mean we know, like in hindsight, that that
would have been the time to buyeverything, Right?
Just?
Devin Jolley (12:06):
right.
Rachel Oh (12:07):
Everything from the public markets, you know, to
just private everything.
So how did the banks then seeit?
I mean, which banks came outstrong as a result?
Devin Jolley (12:17):
And during the great, great financial crisis,
you know, I think it was morecommunity banks that kind of
came back and they were probablyfirst to come back.
Yeah, for sure.
Rachel Oh (12:27):
Which we're kind of seeing.
Well, we can get to that in alittle bit as we fast forward.
But OK, so you're, you're, youknow you've got the GFC a little
bit behind you You're.
When did you go back to getyour graduate degree?
Devin Jolley (12:41):
Yeah, I spent a couple more years out in Seattle
.
I worked for Symetra LifeInsurance Company.
They were a Berkshire Hathawaycompany and they were they were.
Rachel Oh (12:48):
Warren Buffett, great Warren Buffett, yep.
A lot of money behind them andthe Oracle of oh Omaha.
Sorry, I don't know why.
I thought Omaha, iowa, ok,different law, but OK, ok.
Devin Jolley (13:00):
So you're in.
Rachel Oh (13:01):
Seattle, which is my hometown, by the way.
Devin Jolley (13:03):
Yeah, love it.
Seattle's great.
And yeah, I went to Symetra.
They were a newer lifeinsurance company.
They were not hurt by the greatfinancial crisis, didn't have a
whole lot of loan exposure.
So my thought was, hey, let'sgo work for the most active
lender in the market.
And that's why I went toSymetra and literally saw
(13:24):
hundreds and hundreds of dealsand that was just rapid growth
and development on my side tosee volume when everyone else
was kind of which makes sense,because I've seen you grind like
no tomorrow with all the dealsyou have.
Rachel Oh (13:38):
So that makes so much more sense why you are the way
you are.
Okay, so you're at an activegroup that's just doing deal
flow.
And then lead me up to sort ofthe next.
I mean again, in our lifetimewe see different market cycles.
What was the period like postthe GFC?
(13:58):
And then what was your next big?
You know?
Devin Jolley (14:03):
You know I didn't have a whole lot of commercial
real estate experience prior tothe GFC.
It was very short-lived.
But I have a lot of colleagues,former bankers, that would kind
of tell me the good old days,the stories of prior to the
Great Recession and kind of whatbanking was like.
Yeah, and you know it's verydifferent.
Rachel Oh (14:24):
What was it like?
Was it just cushy and easy?
Devin Jolley (14:26):
It was, there were big bonuses, big payouts and
you know real estate always wentup and there wasn't a whole lot
of risk assessment.
In some ways, I think and Ithink that's the biggest change
you know what happened was.
You know there was committeesformed Basel committee.
You know there was committeesformed Basel Committee and they
are now hyper-focused on lookingat the financial you know,
(14:49):
solvency of the banking sector,right.
We saw what can happen globalmeltdown when some of these
banks fell.
And you know also, you know,remember the great financial
crisis.
You had some major major banksmerge with each other and these
banks formed super banks.
Sure, and so today we have fourginormous banks.
(15:10):
Is that a word?
I think so.
Both (15:12):
Yeah, anyhow, let's say it .
Yeah, let's just pretend it's aword.
Devin Jolley (15:16):
So you have four huge banks in the country,
multi-trillion dollar banks, andthen you have kind of a middle
tier I've calledillion dollarbanks, and then you have kind of
a middle tier of, call it, 20banks and then the rest of the
banks and, by the way, there's4,800 banks in the country.
Give or take.
The rest, you know, are much,much smaller.
To give you a little bit moreperspective, you know the
(15:38):
largest bank, jpmorgan Chase bythe time you get to the 50th
largest bank in the country.
That bank is less than 1% of thesize of JPMorgan Chase.
So you have these super banks.
And you know these committeeswere formed to make sure that
the banking sector was nevergoing to see bank failures again
or limit them, and there was alot of oversight committees.
(16:02):
And now, instead of lendersjust doing a loan and putting
that loan to bed until maturity,now they have to risk rate and
re-underwrite their deal on aquarterly basis and be much more
diligent on monitoring theprogress or monitoring the
(16:22):
business plan of these loans andif they're performing or not.
And so you know banking becamevery regulated.
Rachel Oh (16:28):
It sounds like it created a bunch of new jobs.
Honestly, new job titles, and Imean a lot more risk management
, right, a lot more riskmanagement, whereas before it
was just kind of like Exactlyright, fell into the sunset
Interesting, okay.
Devin Jolley (16:39):
It's the part of banking that I think everyone
hated right, and it was funmaking loans and doing deals.
It's not so fun monitoring anddoing all the administrative
reporting that's now involvedwith banking.
Rachel Oh (16:52):
Yeah, so I know that there were more regulations that
were put in place post-GFC andit sounds like, based on what
you just shared, the banksadjusted and there's far more
oversight committees anddifferent risk management roles
and et cetera.
So let's fast forward a littlebit.
So pandemic, I mean that hitsin 2020.
And, by the way, I shouldmention Devin used to work with
(17:16):
us here at PEG For a number ofyears.
He was our director of capitalmarkets over debt.
That's how I got to know him,very impressive individual.
So just so for some backgroundfor our listeners, I remember I
think you started at PEG duringthe pandemic, am I right?
Like the week of, or something?
Devin Jolley (17:32):
Yes.
Rachel Oh (17:32):
Because I didn't know you.
We were back in the oldbuilding and I was sitting on
the fifth floor and I justremember this Devin Jolly like
running around with a bunch ofpapers, just scurrying from
Craig's office to the I don'tremember where you'd go back and
forth, and you were likerunning around like a chicken
with a head cut off.
And we're, of course, trying tofigure out how do we raise
equity when no one was meetingwith us, but describe what you
(17:53):
were.
I mean, I know a little bitabout what you're doing, but
describe what you were doing,because I think you literally
had just joined the company andthen all I saw was just you
scurrying back and forth it wasa wild time.
Devin Jolley (18:01):
Yeah, I put in my notice at my old employer and
during that two-week periodwhere I put it in, uh, covid
became a thing.
Remember rudy gobert came outon espn and said I have covid
and that's like it.
Like broke the news and all ofa sudden, like covid was like a
real thing.
It wasn't just something inFrance and it was like here in
the US.
Rachel Oh (18:19):
Now it's like oh my gosh, that was March.
Devin Jolley (18:21):
right yeah, the Ebola virus is here, you know
we're all going to die.
And so, yeah, you're right.
I came into new higherorientation day, first day at
PEG, and the Dow had dropped andI'm thinking, oh boy, here we
go again.
This is the second time.
You know, I started a newcareer, you know, and the great
financial crisis happened, youknow.
(18:43):
Now, I start a new role, a newcareer.
Rachel Oh (18:46):
Because you oversell all of debt for PEG.
Devin Jolley (18:49):
Yes.
Rachel Oh (18:49):
And we're, you know we're at $2 billion AUM right
now, so you've helped us securea lot of that debt.
So okay, so brand new role and,once more, another financial
crisis.
Devin Jolley (18:59):
Yeah, watch out when I changed jobs oh wait, I
just did.
Maybe you should look out.
Right, I get my timingsimpeccable.
So maybe that's foreshadowingsomething.
I don't know.
Rachel Oh (19:09):
It better be for the good this time, right.
Devin Jolley (19:12):
So yeah, I mean my new role.
I think a lot of developers,when the going's good, it's time
to make money right, and PEGwas no different.
We were.
Things were going.
I mean, you were here, rach,you were raising equity and we
had a lot of great projects inthe hopper and you know, I
thought I was going to come overhere and do a lot of debt
(19:33):
placement In the first year.
It was PPP loans.
You know, we had a portfoliowith probably 30 hotels that's
right, and and you know, duringcovid there was a.
There was a couple months there,like you know it was.
It was scary, you know.
No one was staying in hotels.
Rachel Oh (19:48):
Our occupancy dropped to almost zero, you know I
don't know some places in someplaces, not all, there were some
that like yeah, resort markets,right, yeah, and there was that
like one or two month periodwhere like no one knew Nothing.
Devin Jolley (20:01):
Yeah, it was.
It was kind of crazy, I thinkit kind of ramped up from there
very quickly.
But yeah, it was.
It was trying to figure outwhat we had on our books.
All these assets were foreignto me.
Yeah, you know what were ourreserves.
Yeah, negotiating, you know,modifications on our loans.
Yeah, yeah.
Then you know modifications onour loans, yeah.
And then you know submittingPPP applications.
Yeah.
(20:22):
And in some case we had to dothat six or seven times because
these portals for some of thebanks broke down.
Rachel Oh (20:28):
I remember it was kind of a disaster.
I remember hearing you sayingoh my gosh, I have to do this
again and again, and again, andagain.
Devin Jolley (20:35):
It was a wild ride for the first couple of months.
Rachel Oh (20:37):
Okay, so that was most of 2020, right?
Mm-hmm.
And keep in mind, logan and Iwere in the other room and we
were just dialing for—I mean, wewere making calls but nobody
was traveling.
The greatest thing about mytime during that time is that I
could get like five to tenmeetings a day because nobody
(20:57):
was traveling.
So it was super easy.
We were all on—back.
Then you know Zoom.
Now we use Teams, but that wasa thing Like we didn't used to
do calls and now everyone's onZoom and I could literally do
five to 10 meetings a daybecause everybody was at home
working and nobody was traveling.
So we actually, leading into2021, had our largest
(21:19):
fundraising year ever in historythus far.
Devin Jolley (21:22):
In 2020?
.
Rachel Oh (21:24):
On 2021.
2020, we raised a bunch ofcapital in the fourth quarter.
Nothing in the first three.
And then 2021, we had ourlargest fundraising year to date
.
Devin Jolley (21:35):
Yeah, and you were financing those loans, by the
way.
Yeah, we had a couple of hugeyears.
Yeah, it was really date.
Yeah, we had a couple of reallygood loans and you were
financing those loans.
By the way.
Yeah, we had a couple of hugeyears.
Yeah, it was really fun.
Rachel Oh (21:42):
Yeah, and then yay for 2023.
No, I'm just kidding.
Okay, so 2020, a lot of PPPstuff.
The world is changing On thelending side.
Did you do any?
I mean, I don't feel like therewas much because you were
focused on PPP.
It wasn't really until 2021,probably.
No, that's not true.
We had that portfolioacquisition we did At the end of
(22:03):
2020.
Devin Jolley (22:04):
Yeah, late, late 2020.
You know, I think anytimethere's kind of a crisis, the
banks kind of put it on pause,right.
I mean, you got to understandfor them.
You know they got to risk theirentire portfolio on a quarterly
basis.
And so.
I liken that to you know, ifyou're a lender, why catch a
falling knife?
If you think that values aredeclining, you may not jump in
(22:25):
and you're going to be veryhesitant.
And we saw a lot of that withbanks.
They didn't want to jump inearly 20.
You know, I remember I wascalling, you know, some banks.
We had a hotel, if you remember, our Buffalo Hotel, rachel, and
it was in Buffalo, new York,and I'm calling banks in June of
20.
And they're like why are youcalling me?
It's like an apocalypse outside.
Rachel Oh (22:47):
And in Buffalo it probably was, it was.
Devin Jolley (22:49):
Yeah, I think the mark has recovered.
Banks started to tiptoe back inAround when you know, probably
fourth quarter of 20.
And we got a couple of dealsdone in fourth quarter of 20,
then 21 kind of loosened upagain and 22 was a great year
for Peg 23,.
(23:11):
You know we saw the rise ofinterest rates, 23 was tough for
me.
I don't know about you, but itwas tough for me yeah, we
started to really see the riseof interest rates.
We saw Silicon Valley Bank andSignature Bank fail.
Rachel Oh (23:25):
First Republic Well, I guess they got acquired right,
so they didn't fail.
Quote unquote.
Devin Jolley (23:30):
Yeah, I think that's the second and third
largest bank failures in UShistory.
Right, that was a big deal, butwe had learned our lessons,
right?
Rachel Oh (23:38):
Hadn't we learned our lessons from the GFC?
There was—I mean, the carnagewas not as bad as it could have
been because of the— Right.
It was a different risk, though, right.
Devin Jolley (23:46):
Like the Great Recession, it was don't do bad
loans.
Because lesson learned if youdo, you're going to fail.
You know this was different.
Yeah, they.
There weren't bad loans.
Yeah, right, and in some waysyou could argue that these banks
were maybe too conservative.
Yeah Right, Certainly didn'tmanage their money well, you
know, and they didn't hedgeagainst the inflation risk out
(24:09):
there.
But I don't think a lot ofpeople thought that rates would
rise as fast as they did, andactually I have a chart here
that talks about.
You know, this is the fastestrise in rates we've ever seen,
or at least in some time period,right?
So you know now is you know?
The narrative is you can failas a bank if you do bad loans or
(24:29):
if you're too conservative, youcan fail too.
And if you put it in lowyielding you know, bonds and
investments that aren't hedgedagainst inflation you can fail
too.
So it's different this time.
To your point, the banks havebeen, you know, stringent in
their underwriting.
Rachel Oh (24:47):
They've been conservative.
Devin Jolley (24:48):
It's not the same as it was last time.
Rachel Oh (24:51):
So let's talk about that.
What are banks looking for now,now that we're okay, so
pandemic is we're in apost-pandemic period, right to
your point, interest rates arehigher than they have been in
recent memory, which, by the way, my parents, who are in their
80s, always like to tell me youguys don't know high interest
rates, you complain, but we were, we were, you know, we were, we
(25:12):
lived during double digit, uhinterest rates.
So tell me a little bit kind ofabout that.
Then, how has that affectedunderwriting and what are the
banks looking for now?
That's different than maybebefore.
Devin Jolley (25:24):
Yeah, I mean just going back to last year.
I think there was a rippleeffect with some of these banks.
The question was well, whattype of exposure do we have to
some of these same investmentsthat Silicon Valley and First
Republic and Signature Bank had?
Rachel Oh (25:39):
So like asset class wise yeah.
Devin Jolley (25:42):
And how are they hedging against inflation?
You know, are they going tohave the same?
Do they have the same type ofrisk?
Rachel Oh (25:48):
And so, and let's see , at its peak it was inflation
was like at what?
19%.
Devin Jolley (25:52):
Something like that.
You know, I don't remember thenumber, but yeah, I think it was
roughly about 19% which iscrazy is crazy I mean, we're
trying to get down to two.
Rachel Oh (25:59):
We're at about 3.4 ish or something, but okay, yeah
, so hedging against inflation.
Devin Jolley (26:06):
Okay.
So I think you know there's alot of banks that need to
understand how, you know what,what was their game plan for
that?
How high are rates really goingto go?
And unfortunately, kept seeingrate hikes right up until you
know the latter half of right Upuntil you know the latter half
of last year.
And I remember thinking, youknow, in the fall of last year
we were doing a couple of loansand I'm like man, I don't know
(26:26):
how much, how much more we cantake, like nothing's penciling
anymore.
Rachel Oh (26:31):
Back in the day.
What was it?
It was LIBOR plus.
What LIBOR plus?
You know?
Devin Jolley (26:44):
maybe $230, know maybe two 230, and now we're at
what you know um now we switchto sofa, or are we now we switch
to sofa and sofa, is that?
You know 530 basis points?
Yeah, up from you know 10 basispoints at one point dang in
march, um, of I think, 22, Ibelieve it was yeah.
And so we've seen, you know, a500 basis point increase.
You know, and yeah, there was aperiod I was just like man this
(27:07):
.
I don't know how much more wecan take of this.
The interest rate's rising and,you know, nothing's really
penciling.
How do you get a developmentdeal to work?
Rachel Oh (27:16):
I mean they had to have adjusted what was
acceptable or what was deemedlendable.
At this point I mean right, thewhole world is is no one's
immune from this interest rateenvironment.
So I mean, for the banks tomake any loans, they had to make
some adjustments right on howthey looked at underwriting.
Yeah.
Devin Jolley (27:36):
I think they did.
I think historically, the waybanks have looked at
underwriting is, you know, maybeyour note rate right.
You've got a SOFR plus 230 noterate.
That's your actual, what you'reactually making your payment on
.
And a lot of banks looked atyou know, when they make a loan
they have what's called anunderwriting rate and the
(27:56):
underwriting rate lookssomething like this.
They'll say hey well, what isthe perm rate today?
If this loan was stabilizedtoday, what would be the rate?
Yeah.
Then they look and say, allright, well, this loan that we
have is not going to bestabilized for two years, and so
, therefore, I'm going to taketoday's permanent loan rate.
And apply it and apply a premiumor some cushion on that to
(28:17):
account for interest rate riseand apply it and apply a premium
or you know some cushion onthat to account for interest
rate rise.
And that's how they underwrote.
And historically you knowbalance sheet construction
bridge debt was cheaper or lessexpensive than permanent loan
debt.
You maybe got a constructionloan for under 3% and your perm
(28:39):
debt might have been 3.5% to 4%.
Rachel Oh (28:42):
Now, what are we at?
Devin Jolley (28:43):
And now it's the exact inverse.
Right, your short-termconstruction bridge debt with
banks is more expensive thanpermanent loan debt.
So it's really kind of thrown aloop in how banks underwrite,
you know, do they underwritewith perm rates plus a cushion?
Do they underwrite with thecurrent note rate?
And it's not as clear today.
(29:04):
It's kind of all across theboard, I think.
You know, still lenders aresizing to the takeout but you
know, I see a lot of lendersjust sizing to the actual note
rate today.
And you know, today, when SOFRis 500 and you're 300 over
you're, you know, you're eightand a half nine percent
sometimes.
Right, it can get very, veryexpensive and tough to make
(29:24):
deals pencil.
Rachel Oh (29:25):
Yeah.
So what deals, then, aregetting you know what's getting
approved, what?
What are banks lending on Like?
Is it asset class base, is itlocation, is it relationship?
I mean because if you look.
So just for additional, I mean,we keep hearing about trillions
of dollars of debt maturing.
(29:46):
I think the most of it is inmultifamily and I'd love to hear
your thoughts on that.
But obviously another bigcomponent is office.
You've got, I think, a spike inhospitality for this next year,
but then it kind of you know,kind of trickles down.
I mean.
But you know, in in the lastrecent report I've seen is like
2.2 trillion coming due betweennow and 2027.
(30:06):
So with that that's, I mean,and again it's all across every
asset class, nothing's immune.
So how is that affecting wherepeople put their, you know, put
their monies and what are?
How are banks looking at it?
Devin Jolley (30:22):
Yeah, I think there's a flight to quality.
Right now, banks are payingclose attention to location
right and access and all thefundamentals of real estate, but
they're also focused onsponsorship right.
What is the sponsorshipexperience and track record?
Have they gone through adownturn?
Rachel Oh (30:42):
right have they managed through this, so
experience matters.
Devin Jolley (30:44):
It matters a ton, right.
Then you know, I think thethird is you know the guarantee,
and you know I look at lendingand there's kind of a
three-legged stool.
It's property, it's your, youknow property, all the, you know
access, visibility, all thefundamental real estate
components.
And then there's borrower, youknow the sponsorship, and then
(31:06):
there's guarantor, which is kindof the secondary exit strategy
for a lender.
If something goes wrong, whocan they look to for financial
strength?
And so there's kind of athree-legged stool.
And you know, before I think youknow you might have got away
with having two of those threestools.
Today you really need or legson the stool, excuse me, you
(31:27):
know, and today I think youreally need three, right.
And so weaker sponsors,sponsors with less experience,
sponsors with less liquidity.
You know my advice to themwould be team up with someone
that does have the experience ordoes have the liquidity.
And you know that's where I'mcoming in.
(31:50):
Right now, companies is helpingsponsors maybe look a little
bit better on paper to theirlender, helping with the
liquidity, helping provide aguarantee, or so you'll
guarantee some of our loansmoving forward.
Potentially yeah, if the priceis right.
Rachel Oh (32:07):
Again, you've said it on air and.
I'm going to hold you to it.
Devin Jolley (32:11):
I don't think PEG needs us.
They got deep pocket moneybehind them.
Rachel Oh (32:17):
It took us time.
It took us time.
So, there was definitely a timewhen we partnered with groups,
but yeah, no, okay, sounderwriting it sounds like the
fundamentals are still there,right?
Yeah, and flight to quality isobviously important.
Devin Jolley (32:33):
Yeah, you're not seeing lenders.
You know trend rents right.
We've seen a huge spike in rentgrowth.
You know you look at ADRs todayon hospitality.
Look at rents on multifamilytoday.
Rachel Oh (32:45):
Yeah, they're leveled right now.
I mean they're not going down,but they've leveled off a bit.
Devin Jolley (32:49):
Yeah, I think there's some hesitancy to
lenders to underwrite furthergrowth rates.
You know they don't want tounderwrite on the come.
They really want to underwritekind of what's out there today.
It's hard to predict whattomorrow is going to bring and
being too aggressive with growthrates is something they're very
(33:09):
sensitive right now.
Rachel Oh (33:10):
I know that on the equity side everyone's looking
at untrended yield rates sothey're no longer accepting and
you know we used to do a 2% to3% modest growth.
Right Now it's and numbers haveeased up a bit.
I think what investors arelooking for has eased up a bit.
Last year was tough.
This year I definitely see aneasing up.
Are you seeing the same trendon the commercial lending side?
Devin Jolley (33:35):
Yeah, a little bit .
You know it's still challengingout there.
Banks are still very cautious.
You know, if I could describethe market today, you know, a
being you know banks are ingrowth mode, you know and full
bore.
B being maybe cautiouslyoptimistic, c being being
(33:56):
cautious and D being out of themarket, I would say we're
somewhere between cautiouslyoptimistic and cautious.
Cautious in that we've seenrents go up quite a bit and
we've seen a lot of oversupplyin certain markets.
Sure, we know there's sometrouble, particularly maybe in
(34:16):
the office sector.
Oh, huge.
Rachel Oh (34:19):
There's got to be a huge yeah.
Devin Jolley (34:21):
And maybe some other asset types.
I think it's somewhat isolatedto certain geographies and
certain asset types.
Rachel Oh (34:29):
I feel like urban downtown areas are different.
Now, right, we certainly seethat in our portfolio, so I
imagine that's across thecountry.
But yeah, okay.
Devin Jolley (34:39):
So you know, for those reasons and the fact that
you know there's new regulationscoming out with the banks to
potentially have more liquidityon their balance sheet, you know
to, you know, maybe offset somepotential losses, and some of
those regulations are coming outright now by the Basel
(35:00):
Committee.
Rachel Oh (35:01):
So you know, more and more Basel.
Yeah, I know of Art Basel, butsorry, basel, this is not the
art.
Obviously.
This is what is Basel it's anoversight committee for banks.
Devin Jolley (35:13):
They set some regulations for banks to follow
just to make sure that they canwithstand financial shockwaves
in the economy.
So there's stress tests andthings like that that are
ongoing with banks and they'rethe oversight committee.
So we're constantly looking atthe solvency of know what they
(35:35):
need to be looking out for.
Rachel Oh (35:36):
Okay, so underwriting the fundamentals remain the
same, obviously, as a flight toquality.
What's the pecking order forlenders Like?
Are there certain asset classesthat they prefer and you have
less you know consternation overgetting you know debt?
For Tell me a little bit aboutthat from your perspective.
Devin Jolley (35:55):
Yeah, I think you'll be kind of a no shocker.
I had this conversationliterally yesterday with the
bank.
You know, I think top is, youknow, permanent debt, obviously.
You know banks historicallyhave not done a lot of permanent
debt on their balance sheetthat has gone to life insurance
companies or CMBS or agencies.
They're starting to put morepermanent debt on their balance
(36:17):
sheet.
They know they need to makeloans and so where's the safest
place to make a loan?
Probably a stabilized asset.
So you're seeing more bankswilling to do permanent debt on
their balance sheet, followed bybridge debt.
Then, you know, construction'schallenging right.
I think some markets there's alot more appetite than others
but, it's again geographymatters.
Rachel Oh (36:39):
Yeah, location, location, location.
Yeah Right, you never heardthat before.
Devin Jolley (36:45):
But yeah, I mean asset type wise, no shocker
industrial multifamily kind oftop of the pecking order Retail
the lender I talked to yesterday, you know grocery-anchored
retail specifically, you knowthey're, and even some other
retail they're still bullish onretail is doing quite well
Hotels, self-storage with, youknow, the bottom of the stack
(37:10):
certainly being office.
I think there's a lot of painstill to be had in some classes
of office, particularly maybethe Class B and C Class Bs and
Cs.
Rachel Oh (37:19):
Yeah, I feel like Class A, highly amenitized in
the right location, are probablythe only ones that would get
any kind of— yeah, I mean we sawthat at PEG right we had a
brand-new Class A officebuilding recently.
Devin Jolley (37:33):
sign three new leases oh yeah Right, that's
awesome new class A officebuilding recently signed three
new leases.
Oh yeah, right, so you know wehad, you know we had a great
office building, highlyamenitized, and we just didn't
see what.
What you're seeing in maybe theclass B, c office space, and so
I think even even office isisolated to certain.
You know class B or C or A,right?
(37:55):
So the details matter.
Rachel Oh (37:57):
No, absolutely Okay.
So we are well into our 2024now.
Just curious what you know fromyour vantage point, your
perspective.
Where do you see theopportunities in commercial real
estate?
I mean, I feel like I see themon my side of the capital stack,
but just curious where you seethings.
Devin Jolley (38:16):
Yeah, I think there's a lot of the capital
stack.
But just curious where you seethings.
Yeah, I think there's a lot ofopportunity on the debt side too
.
You're seeing more of that.
Debt funds pop up.
Yeah, it seems like every daythere's another 20 debt funds
that are coming out of nowhere alot of capital ready to deploy
in the debt space.
So I think that's a veryintriguing spot for some people,
something that we're looking aton our side too, at Davidson.
(38:37):
But you know, I think that youknow the news and the media
about commercial real estatekind of paints everything with a
broad stroke.
But I don't think everything'sin trouble.
You know, and just to give youa quick example, you know, from
call it 2021, we saw permanentinterest rates on multifamily at
(38:57):
3%.
Right.
Rachel Oh (38:59):
You know they're around those were the days Right
.
Devin Jolley (39:02):
And in today it's like six, you know, maybe six
and a quarter.
So you've seen three, 320, 300basis point rise in interest
rates since that time, whenyou've seen in office though
that might be 400 to 500 basispoints, and so that's
challenging.
You know, in multifamily you'veseen rise in rents.
(39:25):
Right, vacancies haven't beenhit that hard in a lot of areas
and it's been pretty resilient.
On office.
Adrs have gone through the roof.
Right, expenses have been cutin the office they're operating
more lean.
Rachel Oh (39:39):
Office or hotel, I'm sorry.
Hotels, yeah, so hotels.
So ADRs in hotels, oh yeah,have you tried to book a?
I keep saying this, have you?
Devin Jolley (39:50):
tried to book a hotel lately anywhere.
Yes, it's insane, it is crazy,yes, and so I think hospitality
has come back in a lot of waysand that's been able to offset
some of the higher cost ofcapital.
Maybe it's 400 basis point rise, but then you get to office.
Have we seen rents rise?
Have we seen vacancies?
You know, drop and you have a500 basis point increase in the
(40:13):
cost of capital.
That's a problem.
And so I think it's going to bevery isolated.
Rachel Oh (40:20):
And then this hybrid working model is here to stay,
obviously.
Devin Jolley (40:23):
Yes.
Rachel Oh (40:24):
I mean PEG is unusual in that majority of people come
in, I think, every day.
Well, not majority, but a largegroup.
I do if I can, if I'm nottraveling, but I know tech
companies.
Devin Jolley (40:35):
Would you want to come in every day if you were in
a class B C space?
Rachel Oh (40:39):
Oh, good point.
We used to.
I feel like, yeah, good point,Probably not as much.
I love our.
I mean our space is beautifuland we've got that gym and we've
got all the restaurants allaround.
That's a very good.
I didn't even think about itthat way.
It's a miniatized right.
I mean, all you know, we gotrestaurants within walking.
Devin Jolley (40:56):
We got what?
Is it?
25 restaurants.
Rachel Oh (40:58):
No, like 75 or something 75.
Don't you know our circular?
It's like 75.
Devin Jolley (41:02):
It's an amazing.
I didn't even know there's thatmany restaurants here in Provo,
but we're all walking distanceright, Like I think we have more
walking restaurants to ouroffice building than any other
office building in Utah County.
Right, and yeah, those thingsmatter a lot when it comes to
leasing.
Rachel Oh (41:18):
That makes a lot of sense, right.
Devin Jolley (41:20):
So yeah, I mean it's been nice when we moved
into this building.
It was you could feel theenergy at PEG right, like it
brought some new energy to ourcompany moving to a Class A
space, and if you have nicespace, I think people want to be
here and I do think we're allmore productive if we're in the
(41:41):
office.
I think that experiment didn'twork for a lot of folks and it's
a very good point.
So yeah, even the class A.
Here's an interesting statistic.
I read something the other day.
It said 60% of the officevacancy is concentrated in 10%
of the buildings 60% ofoccupancy.
Office vacancy is concentratedin 10% of the buildings.
Rachel Oh (42:03):
Dang.
Devin Jolley (42:04):
What are those 10% ?
You know, I think it's certainlocations geography.
And again Class B C you know,unaminitized buildings.
They're taking a hit.
They're taking a hit, they'retaking a beating, yeah, and you
(42:24):
know, going back to kind of thepoint of this whole podcast on
kind of where we are seeing, Ithink you know I think borrowers
got the pass during COVID.
Everyone kind of got a blanketmodification and at this point
if deals aren't working, at thispoint you can't really blame
COVID.
And so lenders are kind ofstepping back and now they're
starting to have some toughconversations with borrowers and
(42:46):
so I think we're on the cusp ofseeing some trouble in certain
asset types and it's going to bevery interesting to see the
office.
It's well documented right.
It's all over the news thatthere's going to be some pain in
that sector and I think it'sgoing to take some time to bleed
some of this, to bleed outright.
It always does.
(43:07):
It's not going to be.
It's not going to be quick.
And you know, I think we'regoing to see interest rates
lower.
But I really doubt the Fed isjust going to lower interest
rates quickly.
They just caused the second andthird largest bank failures in
the country last year by therise of interest.
I shouldn't say they caused it,but that was a result, that was
(43:29):
a result, and I think they aregoing to be very hesitant to
willy-nilly lower rates.
Yeah.
And you know, some of the excessneeds to bleed out of the
system.
Yeah, and maybe a small minorcorrection, or whatever this
correction brings, is maybe agood thing.
Yeah.
In some ways In opportunity forthose that you know are ready
(43:51):
to capitalize on the opportunity, which is exciting for you and
I and, being in the companiesthat we're at, that you know
have staying power.
Yeah.
Have liquidity, have financialbacking.
Yeah, there's a lot ofopportunity.
Rachel Oh (44:05):
Yeah, and you know, a conservative approach.
I think that's the big thing,right, like just trying to go,
not trying to swing for thefences always, but keeping
stability, as you mentioned.
Devin Jolley (44:14):
Okay.
Rachel Oh (44:15):
Well, devin, I super appreciate it.
It's so good chatting with youagain.
I miss having you around theoffice, but I am excited.
I'm hoping you get me a firearmfor a good deal, maybe A .22.
That's all I can handle, butokay.
Thank you so much, devin, forjoining us this week.
Devin Jolley (44:33):
Thank you for having me.
It's been great.
Good to see you again, Rachel.
It's good to be back here inthe PEG headquarters and to see
everybody again.
Rachel Oh (44:40):
I know we miss you.
We miss you around here, so youneed to come back more often.
So maybe we can do an episodein the future about firearms or
something I don't know enoughabout that.
Devin Jolley (44:54):
I'm a real estate guy through and through, that's
where I'm a real estate guy,true and through.
Okay, and that's where I'mspending my time today.
I mean, it's certainly themoneymaker for Davidson, but the
family office side is where I'mspending my time.
Rachel Oh (45:05):
Okay, excellent.
Well then we'll talk about thenext big deal we do together.
How's that?
Let's do it, okay, awesome,okay.
Thank you to all who havejoined us today.
From the peaks of the MountainWest, I am Rachel Oh, your host
for Peaks and Portfoliospresented by PEG Companies as we
dig into all things real estate.
Until next time, see everybody.
Welcome to Peaks and Portfolios presented by PEG
Companies, your go-to podcastfor all things commercial real
estate investment.
I'm Rachel oh, and togetherwe're diving into current events
, trends, issues andopportunities impacting the CRE
investment space, fromdissecting the latest market
moves to sharing insights ontoday's commercial real estate
(00:26):
landscape.
It's time to maximizeportfolios here in the peaks of
the Mountain West and beyond.
Okay, welcome everybody againfrom the peaks of the Mountain
West high up here on the WasatchFront.
We are excited to talk allthings real estate, the economy
(00:47):
and anything else that may comeabout.
Thank you for joining us todayfor this week's episode of Peaks
and Portfolios presented by PegCompanies In commercial real
estate, equity and capitalmarkets gets a lot of attention,
which, in my role at Peg, iswhat I'm most focused on.
However, the larger part of thecapital stack is the debt
secured and, like during anycycle, the debt story has its
(01:11):
twists and turns and we'redefinitely seeing that as
headlines loom about thetrillions of dollars of debt
maturing.
To better understand commercialreal estate finance in today's
market, I can't think of anyonebetter than my good and dear
friend and now esteemed guestDevin Jolly, president of the
Davidson Family Office, a familywith roots in the firearm
industryemed guest Devin Jolly,president of the Davidson Family
Office, a family with roots inthe firearm industry.
Welcome, Devin.
Devin Jolley (01:29):
Thank you, Rachel.
Appreciate the introduction.
Rachel Oh (01:32):
Thank you so much for joining us today.
Just curious what have you beenkind of focused on lately in
your role at Davidson?
Devin Jolley (01:39):
As a family office , we're focused on finding
commercial real estate deals,primarily in the debt and equity
space.
We would do private loans.
We're seeing a lot ofopportunity in that space and
we're also willing to come inwith equity investments for the
right transaction, provideguarantees where it makes sense.
(01:59):
They have a number of firearmbusinesses, they have a cell
phone business, they have aTesla charging station business,
and then on the family officeside, we are looking to deploy
capital into differentcommercial real estate assets.
So, whether that's debt orequity investments, we're
looking at both, seeing a numberof different opportunities in
(02:21):
both those spaces.
It's a really good time to kindof be in this space.
These troubling times bringopportunities and these are some
of the best times to invest,you know if you're in the right
spot.
So still heavily involved inthe capital markets in a lot of
ways.
Rachel Oh (02:35):
I'm going to come knocking on your door for money.
By the way, you know this right.
Devin Jolley (02:38):
That's right.
Hey, we would love to investwith Peg Awesome.
We've seen a lot of good.
Hey, we would love to investwith Peg Awesome.
We've seen a lot of good dealsand I love what Peg's doing, so
we would absolutely welcome that.
Rachel Oh (02:51):
Awesome, I'm going to hold you to that.
Thank you, devin.
Okay, so to give everyone alittle bit of background on
Devin, let me kind of toot yourhorn a bit.
You've been now at this closeto 16 years right of experience
in the commercial real estatefinance industry.
Obviously, you're now headingup a company.
You spent most of your careerin banking where you financed
(03:11):
construction, bridge, permanentand line of credit facilities at
KeyBank, symmetra, lifeInsurance Company, agon and a
boutique mortgage banking firmcalled Glacier a boutique
mortgage banking firm calledGlacier.
You have a unique understandingof debt through your various
roles, including seeing debtfrom the broker perspective side
, the lender perspective and,most recently, from the borrower
(03:33):
side.
So I wanted to ask you a littlebit about debt from your
experience.
If you wouldn't mind, can youtake me back to when you first
started in this industry andwhat it was like?
I mean, this is what you saidabout 16 years.
So what was debt like back then?
And just tell me what theeconomy and what was.
(03:54):
You know, what was commerciallending like back then?
Devin Jolley (03:56):
Yeah, and I'll even back up a little further
than that.
You know my first entry intothe commercial or into the real
estate was in college.
So actually Garth Davison, whoI work for now.
I worked for him back incollege.
So we were doing residentialloans back in early 2000s, 2003,
(04:17):
4, 5.
And I thought that's what Iwanted to do for my career.
I wanted to do residentialloans and I remember I had a
buddy that was doing residentialloans and I was working at a
cell phone but there was kind ofa big craze to get into that
space and you know I was youngand it looked really exciting
(04:50):
and got myself into theresidential real estate side and
there was a couple of reallygood years and it was very
exciting to be in college.
Rachel Oh (04:59):
This was the early 2000s, yeah.
Devin Jolley (05:00):
Okay, yeah.
And then I was introduced tocommercial real estate from an
uncle who was in the space onthe finance space and he said
why are you doing residential?
You should be doing commercial.
And kind of lined up aninternship in Cedar Rapids, iowa
.
So I moved out there.
Rachel Oh (05:16):
Cedar Rapids.
What's in Cedar Rapids, Iowa?
Devin Jolley (05:19):
Yeah, agon Life Insurance Company.
Okay.
So a big life insurance companywas out there and got a role to
work for Agon, and that waskind of my first entry into
commercial real estate financeand then, kind of the rest is
history.
I, you know from there, went onto a boutique mortgage banking
shop where we were brokeringloans to different life
(05:41):
insurance companies.
Then the great financial crisishappened.
Rachel Oh (05:45):
Okay, so let's talk about that.
What was lending like duringthe GFC?
Devin Jolley (05:52):
You know that was interesting, right?
I mean prior to that time-.
And you were young, right.
You were early in your career.
Rachel Oh (05:59):
Were you just like oh my gosh, what did I just do
Exactly?
Devin Jolley (06:03):
I am in the commercial real estate finance
industry and going through theGFC crisis, it was a unique time
to be in that space.
Right Banks were failing, lifeinsurance companies were failing
AIG, lehman Brothers but at thesame time, I think it was
probably the best time to havean introduction into commercial
(06:26):
real estate why?
Because tell me why.
Yeah, I mean, you saw theproblems right, you saw what
could go wrong, and it made youthink about risk differently and
how we should underwrite, howwe should, you know, consider
risk in commercial real estate.
And you know, some of thoselessons have not.
You know, I haven't forgottensome of those lessons.
(06:46):
It was a scary time, you know.
I think that's the interesting.
You know part of where we're attoday because it's been 16
years.
Yeah.
Right, I look at some of thesenewer guys that are coming out
of college.
Yeah, and where were theyduring the last financial?
They were in elementary schoolor junior high or high school.
Rachel Oh (07:05):
They have lived the high life right, yeah and they
probably just didn't see, andalso like zero interest rates,
right?
I mean, they don't even knowwhat they don't know.
Devin Jolley (07:15):
Yeah, in a lot of ways, and so I think in prior to
this time, we had a recessionon average every seven to eight
years, and here we've had a longexpansion cycle 16 years and I
think it's good right.
I think we're in some ways.
There needs to be a little bitof reset and we can get into
that later on the podcast andwhere some of maybe the pain
points are Devin.
Rachel Oh (07:36):
did you just say we're old?
Devin Jolley (07:38):
I don't feel like that at all.
Rachel Oh (07:40):
I just feel like You're like 16 years and we're
talking about the young kids.
Devin Jolley (07:43):
They don't know anything but you know I look at
Cameron Gunter over there at PEGand you know some of the other
executives that have beenthrough multiple cycles, and you
know I only have one.
I have one experience under mybelt and I guess more recently
COVID, if you want to count thatas a small blip.
But no, I think I thinklearning during those times.
(08:05):
Well, first of all, there's alot to learn during those times
and it gives you a muchdifferent perspective, which I
think is needed.
Yeah, no for sure.
Rachel Oh (08:15):
Okay, so let's go back to the GFC.
You're young in your career.
Now the world has literallycollapsed.
It's the greatest financialcrisis the world has really seen
since, probably even surpassesthe great depression.
So you know, what did you guysdo?
Did you?
Were you making any loans?
Were you just underwriting andjust passing on everything?
(08:35):
And what were deposits lookinglike?
I mean, they're probably gone,right, they're just they're what
?
What happened?
I mean, the dow was at what?
Seven thousand some insane.
I don't even remember what itwas.
Devin Jolley (08:45):
I just remember driving into work every day and
it was like the Dow dropped1,200 points, the Dow dropped
800, and it was like day afterday after day, and I didn't even
know what that meant.
Rachel Oh (08:56):
So you had a job.
Devin Jolley (08:57):
So I had a job and you know, at some point you
know, I kind of realized thatyou know a job's a luxury.
I wasn't paid very much at allbut a job was a luxury and I was
gaining a ton of experience.
That's good perspective.
And you know I had a lot ofbuddies that went back to
college.
You know they went back to gettheir master's degree and I felt
I was learning so much in myrole from going through that
(09:19):
that that was part of mymaster's degree in some extent.
You know I was learning.
But you got a master's degree Idid.
Later I went back and got amaster's degree in finance and
yeah, it was interesting.
You know, I worked for a smallboutique mortgage banking
company and their business wasto place life insurance company
(09:40):
debt with their borrowers andthat was primarily their
business.
They really weren't doing awhole lot of bank debt or
anything else.
It was life insurance companiesand, as we saw from the great
financial crisis, you know,there's ripple effects.
This did not just affect thebanks, but this affected the
life insurance companies as well.
Aig failed right, and everyone,everyone was entangled in this
(10:02):
right.
Rachel Oh (10:02):
Wall.
Devin Jolley (10:03):
Street is very entangled amongst each other and
it affected everyone, so ourbusiness quickly dried up.
At Glacier, life insurancecompanies weren't really lending
.
Everyone was trying to figureout what type of exposure they
had on their balance sheet, somy job was to put together a
list of any bank anyone with apulse that was lending.
Rachel Oh (10:27):
Who was lending?
Devin Jolley (10:29):
You know, it was random banks.
Rachel Oh (10:32):
So they had healthy deposits in place.
Devin Jolley (10:35):
You know, for whatever reason, there were some
banks that weren't hurt nearlyas bad as others.
Rachel Oh (10:42):
Was it regional?
By any chance, it was morecommunity banks.
Devin Jolley (10:44):
To be honest, it was kind of hit or miss.
Hurt nearly as bad as others,right, was it regional, by any
chance, or was it it was morecommunity banks?
To be honest, it was kind ofhit or miss, and so I would make
hundreds and hundreds of callsand figure out who was on first
and who was lending who was not.
What were they lending on what?
asset types and I put together abig list for the company and
that's what we used to placeloans for our clients and you
(11:06):
know, it kind of shifted fromlife company debt placement to
banks or really anyone that waslending at that point.
So there was a low period andfor some time yeah.
And then you know it kind ofpicked back up.
Rachel Oh (11:21):
When did it pick back up roughly?
Devin Jolley (11:23):
You know, I don't remember exactly.
I think it was probably a goodyear year, year and a half maybe
, or more.
Rachel Oh (11:30):
So like about 2010-ish Mm-hmm 2000,.
Okay.
Devin Jolley (11:32):
Yeah, I think these banks needed to understand
what type of exposure theyreally had, what this meant.
You know, anytime you gothrough a crisis, you know cap
rates are maybe slow to reactyeah, Right, or slow.
Anytime you go through a crisis, you know cap rates are maybe
slow to react yeah, Right, orslow to rise Right.
And you see you start seeingthe stress sales and then you
know there's transactions andslowly you see kind of that rise
(11:56):
in cap rates and kind of thereset, and so it just takes time
.
Yeah.
Rachel Oh (12:00):
Yeah, I mean we know, like in hindsight, that that
would have been the time to buyeverything, Right?
Just?
Devin Jolley (12:06):
right.
Rachel Oh (12:07):
Everything from the public markets, you know, to
just private everything.
So how did the banks then seeit?
I mean, which banks came outstrong as a result?
Devin Jolley (12:17):
And during the great, great financial crisis,
you know, I think it was morecommunity banks that kind of
came back and they were probablyfirst to come back.
Yeah, for sure.
Rachel Oh (12:27):
Which we're kind of seeing.
Well, we can get to that in alittle bit as we fast forward.
But OK, so you're, you're, youknow you've got the GFC a little
bit behind you You're.
When did you go back to getyour graduate degree?
Devin Jolley (12:41):
Yeah, I spent a couple more years out in Seattle
.
I worked for Symetra LifeInsurance Company.
They were a Berkshire Hathawaycompany and they were they were.
Rachel Oh (12:48):
Warren Buffett, great Warren Buffett, yep.
A lot of money behind them andthe Oracle of oh Omaha.
Sorry, I don't know why.
I thought Omaha, iowa, ok,different law, but OK, ok.
Devin Jolley (13:00):
So you're in.
Rachel Oh (13:01):
Seattle, which is my hometown, by the way.
Devin Jolley (13:03):
Yeah, love it.
Seattle's great.
And yeah, I went to Symetra.
They were a newer lifeinsurance company.
They were not hurt by the greatfinancial crisis, didn't have a
whole lot of loan exposure.
So my thought was, hey, let'sgo work for the most active
lender in the market.
And that's why I went toSymetra and literally saw
(13:24):
hundreds and hundreds of dealsand that was just rapid growth
and development on my side tosee volume when everyone else
was kind of which makes sense,because I've seen you grind like
no tomorrow with all the dealsyou have.
Rachel Oh (13:38):
So that makes so much more sense why you are the way
you are.
Okay, so you're at an activegroup that's just doing deal
flow.
And then lead me up to sort ofthe next.
I mean again, in our lifetimewe see different market cycles.
What was the period like postthe GFC?
(13:58):
And then what was your next big?
You know?
Devin Jolley (14:03):
You know I didn't have a whole lot of commercial
real estate experience prior tothe GFC.
It was very short-lived.
But I have a lot of colleagues,former bankers, that would kind
of tell me the good old days,the stories of prior to the
Great Recession and kind of whatbanking was like.
Yeah, and you know it's verydifferent.
Rachel Oh (14:24):
What was it like?
Was it just cushy and easy?
Devin Jolley (14:26):
It was, there were big bonuses, big payouts and
you know real estate always wentup and there wasn't a whole lot
of risk assessment.
In some ways, I think and Ithink that's the biggest change
you know what happened was.
You know there was committeesformed Basel committee.
You know there was committeesformed Basel Committee and they
are now hyper-focused on lookingat the financial you know,
(14:49):
solvency of the banking sector,right.
We saw what can happen globalmeltdown when some of these
banks fell.
And you know also, you know,remember the great financial
crisis.
You had some major major banksmerge with each other and these
banks formed super banks.
Sure, and so today we have fourginormous banks.
(15:10):
Is that a word?
I think so.
Both (15:12):
Yeah, anyhow, let's say it .
Yeah, let's just pretend it's aword.
Devin Jolley (15:16):
So you have four huge banks in the country,
multi-trillion dollar banks, andthen you have kind of a middle
tier I've calledillion dollarbanks, and then you have kind of
a middle tier of, call it, 20banks and then the rest of the
banks and, by the way, there's4,800 banks in the country.
Give or take.
The rest, you know, are much,much smaller.
To give you a little bit moreperspective, you know the
(15:38):
largest bank, jpmorgan Chase bythe time you get to the 50th
largest bank in the country.
That bank is less than 1% of thesize of JPMorgan Chase.
So you have these super banks.
And you know these committeeswere formed to make sure that
the banking sector was nevergoing to see bank failures again
or limit them, and there was alot of oversight committees.
(16:02):
And now, instead of lendersjust doing a loan and putting
that loan to bed until maturity,now they have to risk rate and
re-underwrite their deal on aquarterly basis and be much more
diligent on monitoring theprogress or monitoring the
(16:22):
business plan of these loans andif they're performing or not.
And so you know banking becamevery regulated.
Rachel Oh (16:28):
It sounds like it created a bunch of new jobs.
Honestly, new job titles, and Imean a lot more risk management
, right, a lot more riskmanagement, whereas before it
was just kind of like Exactlyright, fell into the sunset
Interesting, okay.
Devin Jolley (16:39):
It's the part of banking that I think everyone
hated right, and it was funmaking loans and doing deals.
It's not so fun monitoring anddoing all the administrative
reporting that's now involvedwith banking.
Rachel Oh (16:52):
Yeah, so I know that there were more regulations that
were put in place post-GFC andit sounds like, based on what
you just shared, the banksadjusted and there's far more
oversight committees anddifferent risk management roles
and et cetera.
So let's fast forward a littlebit.
So pandemic, I mean that hitsin 2020.
And, by the way, I shouldmention Devin used to work with
(17:16):
us here at PEG For a number ofyears.
He was our director of capitalmarkets over debt.
That's how I got to know him,very impressive individual.
So just so for some backgroundfor our listeners, I remember I
think you started at PEG duringthe pandemic, am I right?
Like the week of, or something?
Devin Jolley (17:32):
Yes.
Rachel Oh (17:32):
Because I didn't know you.
We were back in the oldbuilding and I was sitting on
the fifth floor and I justremember this Devin Jolly like
running around with a bunch ofpapers, just scurrying from
Craig's office to the I don'tremember where you'd go back and
forth, and you were likerunning around like a chicken
with a head cut off.
And we're, of course, trying tofigure out how do we raise
equity when no one was meetingwith us, but describe what you
(17:53):
were.
I mean, I know a little bitabout what you're doing, but
describe what you were doing,because I think you literally
had just joined the company andthen all I saw was just you
scurrying back and forth it wasa wild time.
Devin Jolley (18:01):
Yeah, I put in my notice at my old employer and
during that two-week periodwhere I put it in, uh, covid
became a thing.
Remember rudy gobert came outon espn and said I have covid
and that's like it.
Like broke the news and all ofa sudden, like covid was like a
real thing.
It wasn't just something inFrance and it was like here in
the US.
Rachel Oh (18:19):
Now it's like oh my gosh, that was March.
Devin Jolley (18:21):
right yeah, the Ebola virus is here, you know
we're all going to die.
And so, yeah, you're right.
I came into new higherorientation day, first day at
PEG, and the Dow had dropped andI'm thinking, oh boy, here we
go again.
This is the second time.
You know, I started a newcareer, you know, and the great
financial crisis happened, youknow.
(18:43):
Now, I start a new role, a newcareer.
Rachel Oh (18:46):
Because you oversell all of debt for PEG.
Devin Jolley (18:49):
Yes.
Rachel Oh (18:49):
And we're, you know we're at $2 billion AUM right
now, so you've helped us securea lot of that debt.
So okay, so brand new role and,once more, another financial
crisis.
Devin Jolley (18:59):
Yeah, watch out when I changed jobs oh wait, I
just did.
Maybe you should look out.
Right, I get my timingsimpeccable.
So maybe that's foreshadowingsomething.
I don't know.
Rachel Oh (19:09):
It better be for the good this time, right.
Devin Jolley (19:12):
So yeah, I mean my new role.
I think a lot of developers,when the going's good, it's time
to make money right, and PEGwas no different.
We were.
Things were going.
I mean, you were here, rach,you were raising equity and we
had a lot of great projects inthe hopper and you know, I
thought I was going to come overhere and do a lot of debt
(19:33):
placement In the first year.
It was PPP loans.
You know, we had a portfoliowith probably 30 hotels that's
right, and and you know, duringcovid there was a.
There was a couple months there,like you know it was.
It was scary, you know.
No one was staying in hotels.
Rachel Oh (19:48):
Our occupancy dropped to almost zero, you know I
don't know some places in someplaces, not all, there were some
that like yeah, resort markets,right, yeah, and there was that
like one or two month periodwhere like no one knew Nothing.
Devin Jolley (20:01):
Yeah, it was.
It was kind of crazy, I thinkit kind of ramped up from there
very quickly.
But yeah, it was.
It was trying to figure outwhat we had on our books.
All these assets were foreignto me.
Yeah, you know what were ourreserves.
Yeah, negotiating, you know,modifications on our loans.
Yeah, yeah.
Then you know modifications onour loans, yeah.
And then you know submittingPPP applications.
Yeah.
(20:22):
And in some case we had to dothat six or seven times because
these portals for some of thebanks broke down.
Rachel Oh (20:28):
I remember it was kind of a disaster.
I remember hearing you sayingoh my gosh, I have to do this
again and again, and again, andagain.
Devin Jolley (20:35):
It was a wild ride for the first couple of months.
Rachel Oh (20:37):
Okay, so that was most of 2020, right?
Mm-hmm.
And keep in mind, logan and Iwere in the other room and we
were just dialing for—I mean, wewere making calls but nobody
was traveling.
The greatest thing about mytime during that time is that I
could get like five to tenmeetings a day because nobody
(20:57):
was traveling.
So it was super easy.
We were all on—back.
Then you know Zoom.
Now we use Teams, but that wasa thing Like we didn't used to
do calls and now everyone's onZoom and I could literally do
five to 10 meetings a daybecause everybody was at home
working and nobody was traveling.
So we actually, leading into2021, had our largest
(21:19):
fundraising year ever in historythus far.
Devin Jolley (21:22):
In 2020?
.
Rachel Oh (21:24):
On 2021.
2020, we raised a bunch ofcapital in the fourth quarter.
Nothing in the first three.
And then 2021, we had ourlargest fundraising year to date
.
Devin Jolley (21:35):
Yeah, and you were financing those loans, by the
way.
Yeah, we had a couple of hugeyears.
Yeah, it was really date.
Yeah, we had a couple of reallygood loans and you were
financing those loans.
By the way.
Yeah, we had a couple of hugeyears.
Yeah, it was really fun.
Rachel Oh (21:42):
Yeah, and then yay for 2023.
No, I'm just kidding.
Okay, so 2020, a lot of PPPstuff.
The world is changing On thelending side.
Did you do any?
I mean, I don't feel like therewas much because you were
focused on PPP.
It wasn't really until 2021,probably.
No, that's not true.
We had that portfolioacquisition we did At the end of
(22:03):
2020.
Devin Jolley (22:04):
Yeah, late, late 2020.
You know, I think anytimethere's kind of a crisis, the
banks kind of put it on pause,right.
I mean, you got to understandfor them.
You know they got to risk theirentire portfolio on a quarterly
basis.
And so.
I liken that to you know, ifyou're a lender, why catch a
falling knife?
If you think that values aredeclining, you may not jump in
(22:25):
and you're going to be veryhesitant.
And we saw a lot of that withbanks.
They didn't want to jump inearly 20.
You know, I remember I wascalling, you know, some banks.
We had a hotel, if you remember, our Buffalo Hotel, rachel, and
it was in Buffalo, new York,and I'm calling banks in June of
20.
And they're like why are youcalling me?
It's like an apocalypse outside.
Rachel Oh (22:47):
And in Buffalo it probably was, it was.
Devin Jolley (22:49):
Yeah, I think the mark has recovered.
Banks started to tiptoe back inAround when you know, probably
fourth quarter of 20.
And we got a couple of dealsdone in fourth quarter of 20,
then 21 kind of loosened upagain and 22 was a great year
for Peg 23,.
(23:11):
You know we saw the rise ofinterest rates, 23 was tough for
me.
I don't know about you, but itwas tough for me yeah, we
started to really see the riseof interest rates.
We saw Silicon Valley Bank andSignature Bank fail.
Rachel Oh (23:25):
First Republic Well, I guess they got acquired right,
so they didn't fail.
Quote unquote.
Devin Jolley (23:30):
Yeah, I think that's the second and third
largest bank failures in UShistory.
Right, that was a big deal, butwe had learned our lessons,
right?
Rachel Oh (23:38):
Hadn't we learned our lessons from the GFC?
There was—I mean, the carnagewas not as bad as it could have
been because of the— Right.
It was a different risk, though, right.
Devin Jolley (23:46):
Like the Great Recession, it was don't do bad
loans.
Because lesson learned if youdo, you're going to fail.
You know this was different.
Yeah, they.
There weren't bad loans.
Yeah, right, and in some waysyou could argue that these banks
were maybe too conservative.
Yeah Right, Certainly didn'tmanage their money well, you
know, and they didn't hedgeagainst the inflation risk out
(24:09):
there.
But I don't think a lot ofpeople thought that rates would
rise as fast as they did, andactually I have a chart here
that talks about.
You know, this is the fastestrise in rates we've ever seen,
or at least in some time period,right?
So you know now is you know?
The narrative is you can failas a bank if you do bad loans or
(24:29):
if you're too conservative, youcan fail too.
And if you put it in lowyielding you know, bonds and
investments that aren't hedgedagainst inflation you can fail
too.
So it's different this time.
To your point, the banks havebeen, you know, stringent in
their underwriting.
Rachel Oh (24:47):
They've been conservative.
Devin Jolley (24:48):
It's not the same as it was last time.
Rachel Oh (24:51):
So let's talk about that.
What are banks looking for now,now that we're okay, so
pandemic is we're in apost-pandemic period, right to
your point, interest rates arehigher than they have been in
recent memory, which, by the way, my parents, who are in their
80s, always like to tell me youguys don't know high interest
rates, you complain, but we were, we were, you know, we were, we
(25:12):
lived during double digit, uhinterest rates.
So tell me a little bit kind ofabout that.
Then, how has that affectedunderwriting and what are the
banks looking for now?
That's different than maybebefore.
Devin Jolley (25:24):
Yeah, I mean just going back to last year.
I think there was a rippleeffect with some of these banks.
The question was well, whattype of exposure do we have to
some of these same investmentsthat Silicon Valley and First
Republic and Signature Bank had?
Rachel Oh (25:39):
So like asset class wise yeah.
Devin Jolley (25:42):
And how are they hedging against inflation?
You know, are they going tohave the same?
Do they have the same type ofrisk?
Rachel Oh (25:48):
And so, and let's see , at its peak it was inflation
was like at what?
19%.
Devin Jolley (25:52):
Something like that.
You know, I don't remember thenumber, but yeah, I think it was
roughly about 19% which iscrazy is crazy I mean, we're
trying to get down to two.
Rachel Oh (25:59):
We're at about 3.4 ish or something, but okay, yeah
, so hedging against inflation.
Devin Jolley (26:06):
Okay.
So I think you know there's alot of banks that need to
understand how, you know what,what was their game plan for
that?
How high are rates really goingto go?
And unfortunately, kept seeingrate hikes right up until you
know the latter half of right Upuntil you know the latter half
of last year.
And I remember thinking, youknow, in the fall of last year
we were doing a couple of loansand I'm like man, I don't know
(26:26):
how much, how much more we cantake, like nothing's penciling
anymore.
Rachel Oh (26:31):
Back in the day.
What was it?
It was LIBOR plus.
What LIBOR plus?
You know?
Devin Jolley (26:44):
maybe $230, know maybe two 230, and now we're at
what you know um now we switchto sofa, or are we now we switch
to sofa and sofa, is that?
You know 530 basis points?
Yeah, up from you know 10 basispoints at one point dang in
march, um, of I think, 22, Ibelieve it was yeah.
And so we've seen, you know, a500 basis point increase.
You know, and yeah, there was aperiod I was just like man this
(27:07):
.
I don't know how much more wecan take of this.
The interest rate's rising and,you know, nothing's really
penciling.
How do you get a developmentdeal to work?
Rachel Oh (27:16):
I mean they had to have adjusted what was
acceptable or what was deemedlendable.
At this point I mean right, thewhole world is is no one's
immune from this interest rateenvironment.
So I mean, for the banks tomake any loans, they had to make
some adjustments right on howthey looked at underwriting.
Yeah.
Devin Jolley (27:36):
I think they did.
I think historically, the waybanks have looked at
underwriting is, you know, maybeyour note rate right.
You've got a SOFR plus 230 noterate.
That's your actual, what you'reactually making your payment on
.
And a lot of banks looked atyou know, when they make a loan
they have what's called anunderwriting rate and the
(27:56):
underwriting rate lookssomething like this.
They'll say hey well, what isthe perm rate today?
If this loan was stabilizedtoday, what would be the rate?
Yeah.
Then they look and say, allright, well, this loan that we
have is not going to bestabilized for two years, and so
, therefore, I'm going to taketoday's permanent loan rate.
And apply it and apply a premiumor some cushion on that to
(28:17):
account for interest rate riseand apply it and apply a premium
or you know some cushion onthat to account for interest
rate rise.
And that's how they underwrote.
And historically you knowbalance sheet construction
bridge debt was cheaper or lessexpensive than permanent loan
debt.
You maybe got a constructionloan for under 3% and your perm
(28:39):
debt might have been 3.5% to 4%.
Rachel Oh (28:42):
Now, what are we at?
Devin Jolley (28:43):
And now it's the exact inverse.
Right, your short-termconstruction bridge debt with
banks is more expensive thanpermanent loan debt.
So it's really kind of thrown aloop in how banks underwrite,
you know, do they underwritewith perm rates plus a cushion?
Do they underwrite with thecurrent note rate?
And it's not as clear today.
(29:04):
It's kind of all across theboard, I think.
You know, still lenders aresizing to the takeout but you
know, I see a lot of lendersjust sizing to the actual note
rate today.
And you know, today, when SOFRis 500 and you're 300 over
you're, you know, you're eightand a half nine percent
sometimes.
Right, it can get very, veryexpensive and tough to make
(29:24):
deals pencil.
Rachel Oh (29:25):
Yeah.
So what deals, then, aregetting you know what's getting
approved, what?
What are banks lending on Like?
Is it asset class base, is itlocation, is it relationship?
I mean because if you look.
So just for additional, I mean,we keep hearing about trillions
of dollars of debt maturing.
(29:46):
I think the most of it is inmultifamily and I'd love to hear
your thoughts on that.
But obviously another bigcomponent is office.
You've got, I think, a spike inhospitality for this next year,
but then it kind of you know,kind of trickles down.
I mean.
But you know, in in the lastrecent report I've seen is like
2.2 trillion coming due betweennow and 2027.
(30:06):
So with that that's, I mean,and again it's all across every
asset class, nothing's immune.
So how is that affecting wherepeople put their, you know, put
their monies and what are?
How are banks looking at it?
Devin Jolley (30:22):
Yeah, I think there's a flight to quality.
Right now, banks are payingclose attention to location
right and access and all thefundamentals of real estate, but
they're also focused onsponsorship right.
What is the sponsorshipexperience and track record?
Have they gone through adownturn?
Rachel Oh (30:42):
right have they managed through this, so
experience matters.
Devin Jolley (30:44):
It matters a ton, right.
Then you know, I think thethird is you know the guarantee,
and you know I look at lendingand there's kind of a
three-legged stool.
It's property, it's your, youknow property, all the, you know
access, visibility, all thefundamental real estate
components.
And then there's borrower, youknow the sponsorship, and then
(31:06):
there's guarantor, which is kindof the secondary exit strategy
for a lender.
If something goes wrong, whocan they look to for financial
strength?
And so there's kind of athree-legged stool.
And you know, before I think youknow you might have got away
with having two of those threestools.
Today you really need or legson the stool, excuse me, you
(31:27):
know, and today I think youreally need three, right.
And so weaker sponsors,sponsors with less experience,
sponsors with less liquidity.
You know my advice to themwould be team up with someone
that does have the experience ordoes have the liquidity.
And you know that's where I'mcoming in.
(31:50):
Right now, companies is helpingsponsors maybe look a little
bit better on paper to theirlender, helping with the
liquidity, helping provide aguarantee, or so you'll
guarantee some of our loansmoving forward.
Potentially yeah, if the priceis right.
Rachel Oh (32:07):
Again, you've said it on air and.
I'm going to hold you to it.
Devin Jolley (32:11):
I don't think PEG needs us.
They got deep pocket moneybehind them.
Rachel Oh (32:17):
It took us time.
It took us time.
So, there was definitely a timewhen we partnered with groups,
but yeah, no, okay, sounderwriting it sounds like the
fundamentals are still there,right?
Yeah, and flight to quality isobviously important.
Devin Jolley (32:33):
Yeah, you're not seeing lenders.
You know trend rents right.
We've seen a huge spike in rentgrowth.
You know you look at ADRs todayon hospitality.
Look at rents on multifamilytoday.
Rachel Oh (32:45):
Yeah, they're leveled right now.
I mean they're not going down,but they've leveled off a bit.
Devin Jolley (32:49):
Yeah, I think there's some hesitancy to
lenders to underwrite furthergrowth rates.
You know they don't want tounderwrite on the come.
They really want to underwritekind of what's out there today.
It's hard to predict whattomorrow is going to bring and
being too aggressive with growthrates is something they're very
(33:09):
sensitive right now.
Rachel Oh (33:10):
I know that on the equity side everyone's looking
at untrended yield rates sothey're no longer accepting and
you know we used to do a 2% to3% modest growth.
Right Now it's and numbers haveeased up a bit.
I think what investors arelooking for has eased up a bit.
Last year was tough.
This year I definitely see aneasing up.
Are you seeing the same trendon the commercial lending side?
Devin Jolley (33:35):
Yeah, a little bit .
You know it's still challengingout there.
Banks are still very cautious.
You know, if I could describethe market today, you know, a
being you know banks are ingrowth mode, you know and full
bore.
B being maybe cautiouslyoptimistic, c being being
(33:56):
cautious and D being out of themarket, I would say we're
somewhere between cautiouslyoptimistic and cautious.
Cautious in that we've seenrents go up quite a bit and
we've seen a lot of oversupplyin certain markets.
Sure, we know there's sometrouble, particularly maybe in
(34:16):
the office sector.
Oh, huge.
Rachel Oh (34:19):
There's got to be a huge yeah.
Devin Jolley (34:21):
And maybe some other asset types.
I think it's somewhat isolatedto certain geographies and
certain asset types.
Rachel Oh (34:29):
I feel like urban downtown areas are different.
Now, right, we certainly seethat in our portfolio, so I
imagine that's across thecountry.
But yeah, okay.
Devin Jolley (34:39):
So you know, for those reasons and the fact that
you know there's new regulationscoming out with the banks to
potentially have more liquidityon their balance sheet, you know
to, you know, maybe offset somepotential losses, and some of
those regulations are coming outright now by the Basel
(35:00):
Committee.
Rachel Oh (35:01):
So you know, more and more Basel.
Yeah, I know of Art Basel, butsorry, basel, this is not the
art.
Obviously.
This is what is Basel it's anoversight committee for banks.
Devin Jolley (35:13):
They set some regulations for banks to follow
just to make sure that they canwithstand financial shockwaves
in the economy.
So there's stress tests andthings like that that are
ongoing with banks and they'rethe oversight committee.
So we're constantly looking atthe solvency of know what they
(35:35):
need to be looking out for.
Rachel Oh (35:36):
Okay, so underwriting the fundamentals remain the
same, obviously, as a flight toquality.
What's the pecking order forlenders Like?
Are there certain asset classesthat they prefer and you have
less you know consternation overgetting you know debt?
For Tell me a little bit aboutthat from your perspective.
Devin Jolley (35:55):
Yeah, I think you'll be kind of a no shocker.
I had this conversationliterally yesterday with the
bank.
You know, I think top is, youknow, permanent debt, obviously.
You know banks historicallyhave not done a lot of permanent
debt on their balance sheetthat has gone to life insurance
companies or CMBS or agencies.
They're starting to put morepermanent debt on their balance
(36:17):
sheet.
They know they need to makeloans and so where's the safest
place to make a loan?
Probably a stabilized asset.
So you're seeing more bankswilling to do permanent debt on
their balance sheet, followed bybridge debt.
Then, you know, construction'schallenging right.
I think some markets there's alot more appetite than others
but, it's again geographymatters.
Rachel Oh (36:39):
Yeah, location, location, location.
Yeah Right, you never heardthat before.
Devin Jolley (36:45):
But yeah, I mean asset type wise, no shocker
industrial multifamily kind oftop of the pecking order Retail
the lender I talked to yesterday, you know grocery-anchored
retail specifically, you knowthey're, and even some other
retail they're still bullish onretail is doing quite well
Hotels, self-storage with, youknow, the bottom of the stack
(37:10):
certainly being office.
I think there's a lot of painstill to be had in some classes
of office, particularly maybethe Class B and C Class Bs and
Cs.
Rachel Oh (37:19):
Yeah, I feel like Class A, highly amenitized in
the right location, are probablythe only ones that would get
any kind of— yeah, I mean we sawthat at PEG right we had a
brand-new Class A officebuilding recently.
Devin Jolley (37:33):
sign three new leases oh yeah Right, that's
awesome new class A officebuilding recently signed three
new leases.
Oh yeah, right, so you know wehad, you know we had a great
office building, highlyamenitized, and we just didn't
see what.
What you're seeing in maybe theclass B, c office space, and so
I think even even office isisolated to certain.
You know class B or C or A,right?
(37:55):
So the details matter.
Rachel Oh (37:57):
No, absolutely Okay.
So we are well into our 2024now.
Just curious what you know fromyour vantage point, your
perspective.
Where do you see theopportunities in commercial real
estate?
I mean, I feel like I see themon my side of the capital stack,
but just curious where you seethings.
Devin Jolley (38:16):
Yeah, I think there's a lot of the capital
stack.
But just curious where you seethings.
Yeah, I think there's a lot ofopportunity on the debt side too
.
You're seeing more of that.
Debt funds pop up.
Yeah, it seems like every daythere's another 20 debt funds
that are coming out of nowhere alot of capital ready to deploy
in the debt space.
So I think that's a veryintriguing spot for some people,
something that we're looking aton our side too, at Davidson.
(38:37):
But you know, I think that youknow the news and the media
about commercial real estatekind of paints everything with a
broad stroke.
But I don't think everything'sin trouble.
You know, and just to give youa quick example, you know, from
call it 2021, we saw permanentinterest rates on multifamily at
(38:57):
3%.
Right.
Rachel Oh (38:59):
You know they're around those were the days Right
.
Devin Jolley (39:02):
And in today it's like six, you know, maybe six
and a quarter.
So you've seen three, 320, 300basis point rise in interest
rates since that time, whenyou've seen in office though
that might be 400 to 500 basispoints, and so that's
challenging.
You know, in multifamily you'veseen rise in rents.
(39:25):
Right, vacancies haven't beenhit that hard in a lot of areas
and it's been pretty resilient.
On office.
Adrs have gone through the roof.
Right, expenses have been cutin the office they're operating
more lean.
Rachel Oh (39:39):
Office or hotel, I'm sorry.
Hotels, yeah, so hotels.
So ADRs in hotels, oh yeah,have you tried to book a?
I keep saying this, have you?
Devin Jolley (39:50):
tried to book a hotel lately anywhere.
Yes, it's insane, it is crazy,yes, and so I think hospitality
has come back in a lot of waysand that's been able to offset
some of the higher cost ofcapital.
Maybe it's 400 basis point rise, but then you get to office.
Have we seen rents rise?
Have we seen vacancies?
You know, drop and you have a500 basis point increase in the
(40:13):
cost of capital.
That's a problem.
And so I think it's going to bevery isolated.
Rachel Oh (40:20):
And then this hybrid working model is here to stay,
obviously.
Devin Jolley (40:23):
Yes.
Rachel Oh (40:24):
I mean PEG is unusual in that majority of people come
in, I think, every day.
Well, not majority, but a largegroup.
I do if I can, if I'm nottraveling, but I know tech
companies.
Devin Jolley (40:35):
Would you want to come in every day if you were in
a class B C space?
Rachel Oh (40:39):
Oh, good point.
We used to.
I feel like, yeah, good point,Probably not as much.
I love our.
I mean our space is beautifuland we've got that gym and we've
got all the restaurants allaround.
That's a very good.
I didn't even think about itthat way.
It's a miniatized right.
I mean, all you know, we gotrestaurants within walking.
Devin Jolley (40:56):
We got what?
Is it?
25 restaurants.
Rachel Oh (40:58):
No, like 75 or something 75.
Don't you know our circular?
It's like 75.
Devin Jolley (41:02):
It's an amazing.
I didn't even know there's thatmany restaurants here in Provo,
but we're all walking distanceright, Like I think we have more
walking restaurants to ouroffice building than any other
office building in Utah County.
Right, and yeah, those thingsmatter a lot when it comes to
leasing.
Rachel Oh (41:18):
That makes a lot of sense, right.
Devin Jolley (41:20):
So yeah, I mean it's been nice when we moved
into this building.
It was you could feel theenergy at PEG right, like it
brought some new energy to ourcompany moving to a Class A
space, and if you have nicespace, I think people want to be
here and I do think we're allmore productive if we're in the
(41:41):
office.
I think that experiment didn'twork for a lot of folks and it's
a very good point.
So yeah, even the class A.
Here's an interesting statistic.
I read something the other day.
It said 60% of the officevacancy is concentrated in 10%
of the buildings 60% ofoccupancy.
Office vacancy is concentratedin 10% of the buildings.
Rachel Oh (42:03):
Dang.
Devin Jolley (42:04):
What are those 10% ?
You know, I think it's certainlocations geography.
And again Class B C you know,unaminitized buildings.
They're taking a hit.
They're taking a hit, they'retaking a beating, yeah, and you
(42:24):
know, going back to kind of thepoint of this whole podcast on
kind of where we are seeing, Ithink you know I think borrowers
got the pass during COVID.
Everyone kind of got a blanketmodification and at this point
if deals aren't working, at thispoint you can't really blame
COVID.
And so lenders are kind ofstepping back and now they're
starting to have some toughconversations with borrowers and
(42:46):
so I think we're on the cusp ofseeing some trouble in certain
asset types and it's going to bevery interesting to see the
office.
It's well documented right.
It's all over the news thatthere's going to be some pain in
that sector and I think it'sgoing to take some time to bleed
some of this, to bleed outright.
It always does.
(43:07):
It's not going to be.
It's not going to be quick.
And you know, I think we'regoing to see interest rates
lower.
But I really doubt the Fed isjust going to lower interest
rates quickly.
They just caused the second andthird largest bank failures in
the country last year by therise of interest.
I shouldn't say they caused it,but that was a result, that was
(43:29):
a result, and I think they aregoing to be very hesitant to
willy-nilly lower rates.
Yeah.
And you know, some of the excessneeds to bleed out of the
system.
Yeah, and maybe a small minorcorrection, or whatever this
correction brings, is maybe agood thing.
Yeah.
In some ways In opportunity forthose that you know are ready
(43:51):
to capitalize on the opportunity, which is exciting for you and
I and, being in the companiesthat we're at, that you know
have staying power.
Yeah.
Have liquidity, have financialbacking.
Yeah, there's a lot ofopportunity.
Rachel Oh (44:05):
Yeah, and you know, a conservative approach.
I think that's the big thing,right, like just trying to go,
not trying to swing for thefences always, but keeping
stability, as you mentioned.
Devin Jolley (44:14):
Okay.
Rachel Oh (44:15):
Well, devin, I super appreciate it.
It's so good chatting with youagain.
I miss having you around theoffice, but I am excited.
I'm hoping you get me a firearmfor a good deal, maybe A .22.
That's all I can handle, butokay.
Thank you so much, devin, forjoining us this week.
Devin Jolley (44:33):
Thank you for having me.
It's been great.
Good to see you again, Rachel.
It's good to be back here inthe PEG headquarters and to see
everybody again.
Rachel Oh (44:40):
I know we miss you.
We miss you around here, so youneed to come back more often.
So maybe we can do an episodein the future about firearms or
something I don't know enoughabout that.
Devin Jolley (44:54):
I'm a real estate guy through and through, that's
where I'm a real estate guy,true and through.
Okay, and that's where I'mspending my time today.
I mean, it's certainly themoneymaker for Davidson, but the
family office side is where I'mspending my time.
Rachel Oh (45:05):
Okay, excellent.
Well then we'll talk about thenext big deal we do together.
How's that?
Let's do it, okay, awesome,okay.
Thank you to all who havejoined us today.
From the peaks of the MountainWest, I am Rachel Oh, your host
for Peaks and Portfoliospresented by PEG Companies as we
dig into all things real estate.
Until next time, see everybody.
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