May 23, 2024 • 31 mins
In this episode, newly appointed PEG Companies Co-CEO Garett Bjorkman explores modern financial landscapes shaping new investment opportunities. We discuss how private credit firms address banks' liquidity gaps in transitional real estate assets. Garett shares insights from his journey from Shanghai to Utah. Topics include conservative lending in multifamily real estate, potential in select service and extended-stay hotels, and balancing affordable luxury projects with investor returns.
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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
(00:25):
landscape.
It's time to maximizeportfolios here in the peaks of
the Mountain West and beyond.
Okay, welcome everybody fromthe peaks of the Mountain West
high up here on the WasatchFront.
We are excited again to talkreal estate, the economy and
(00:46):
anything else that may comeabout.
Thank you for joining us todayfor this week's episode of Peaks
and Portfolios.
You know, over the weeks we havecovered various topics,
including the Fed funds rateoffice to multifamily conversion
, securing debt in thisenvironment, securing debt in
this environment.
I wanted to shift gears alittle bit and kind of talk
(01:06):
about private credit, which isactually experiencing an
extraordinary moment due tocyclical and secular trends in
the real estate lendingenvironment, and to help us
better understand what'shappening in the real estate
credit markets.
We are pleased to have ouresteemed guest and my new boss,
Garett Bjorkman, co-chiefexecutive officer for PEG
(01:28):
Companies.
Welcome, Garett.
Thank you, Rachel.
So what are we now in Day 12?
Garett Bjorkman (01:33):
I think it's day 12.
Rachel Oh (01:34):
Yeah, yeah, so what do you think?
What do you think aboutaltitude here?
Anything, the altitude's great.
Garett Bjorkman (01:39):
I think it makes me move a little bit more
fluid, a little quicker.
It's good.
It's good we're moving fast.
Rachel Oh (01:46):
Yeah, how about you missing Scottsdale?
Garett Bjorkman (01:48):
You know I'm missing my kids a little bit,
since they're not here yet.
But other than that lovingbeing, in the mountains right
now.
Rachel Oh (01:56):
Well, let's get them here.
Well, they're coming soon.
They're coming soon.
Utah is very kid-friendly.
I don't know if you've noticed.
Garett Bjorkman (02:00):
I've noticed there's a lot of them and you
know they're coming, they'recoming.
Rachel Oh (02:05):
We aren't the fastest growing state in the union, for
no reason.
Garett Bjorkman (02:08):
I know Number one state I saw.
Rachel Oh (02:10):
Yes, In the last census count I don't know if
everyone knows, but 2010 to 2020, we were the fastest growing
state in the entire union.
Yeah, yeah so it's a good place.
Yeah for today's podcast.
I did dig into your bio a bitmore, which I'm going to go into
, but it does turn out that youstudied in Shanghai, so ni hao
ma.
Garett Bjorkman (02:27):
Yeah, ni hao, ni hao, yes, yes.
In 2008, I studied in Shanghai.
Okay, and how fluent are you inMandarin Conversationally?
You know I'm okay, butdefinitely not fluent.
I'm working on it.
My kids are in Mandarinimmersion oh, excellent.
(02:48):
So we're trying to get themthere and I'm trying to get
there with them.
Rachel Oh (02:51):
Okay, well, I feel I'm not in my free time.
Garett Bjorkman (02:53):
That's what I'm going to be focused on.
Rachel Oh (02:54):
I feel like there's some offshore activities in the
future.
Garett Bjorkman (02:58):
Yeah, we hope so, once those capital
constraints ease up.
Rachel Oh (03:01):
Well, good, let's talk about that a little more.
So, just so the audience isbetter acquainted with you, I'm
going to share a little bitabout your background.
Garett has had significantexperience in the financial and
real estate industry, start offhis career at JCR Capital
Investment and ThoroughfareCapital with roles in research
and capital markets.
(03:21):
In 2015, Garett became amanaging director at the CIM
Group which is where you camefrom, a real estate and
infrastructure investment firm,where he managed CIM's credit
platform, which grew to $10billion, and also oversaw a
build-to-core equity deploymentstrategy to over about $2.5
billion, if I have that right,and since May 1st of this year,
(03:43):
Garett is now the co-chiefexecutive officer of PEG
Companies.
We are a 20 plus year verticallyintegrated real estate
investment firm with over 2.7billion AUM and, as I mentioned
before, he is my new boss, sothank you, boss, for joining us
today.
So, as I started off, we areseeing private credit is
(04:04):
experiencing increasedopportunities due to the
changing trends in the realestate lending environment.
The great financial crisis andrecent bank failures have led to
greater regulation and limitedtraditional capital availability
and rising interest rates.
The cap stack has changed, sothis is where you came from, so
(04:24):
I was wondering to see you knowif you could tell us a little
bit about what is happening inthe real estate credit markets
and how is that impacting theopportunities we are seeing
today?
Garett Bjorkman (04:33):
Yeah, yeah, no, it's a great question.
So let's just take a step backand, I think, big picture going
back to the GFC to understandwhat was happening, that caused
a lot of issues to happen withlending and why regulators moved
in in a big way and reallycreated the market for private
(04:55):
credit.
So if you just think about howbanks work right, banks take
deposits- and deposits havedaily liquidity right and then
banks go and take that thosedeposits and make loans and
invest in assets that areilliquid or less liquid, and
(05:20):
there is a fundamental mismatchbetween the liquidity of the
assets and liabilities on abank's balance sheet Right.
And so I think that's alwaysbeen a fundamental problem that
many people have seen in thebanking industry in general, and
it's one of the things that hasreally created the regional
(05:40):
banking crisis.
You know, last year regionalbanking crisis last year, and it
was that same issue of peoplewanting their deposits out at
the same time when banks hadinvested in securities that were
longer dated and didn't havethat same maturity.
And so that aspect, I think,combined with the fact that
banks historically wereinvesting in real estate assets
(06:03):
that had some kind oftransitional element to it
whether it was a value-add playto increase occupancy, increase
rents or some sort ofconstruction component that just
wasn't what banks did and theyweren't good at managing that
risk Right.
And so Dodd-Frank and Basel IIIwere really the regulations
coming out of the GFC thatcreated the void for private
(06:25):
credit to start coming into thespace, and it was really focused
on changing the capitalrequirements for banks to make
the capital charges so punitive,to the extent that banks were
lending on these kind oftransitional assets at higher
(06:46):
leverage levels.
And so, you know, privatecapital came in to fill that
void.
So, whereas banks would nowkind of lend up, to call it 50%
loan to value, whereashistorically they were lending
75, 80%, you know, pre-GFC.
Now banks are lending kind of50% and then private capital's
coming in and filling that voidfrom 50 to 75.
(07:10):
So it was a space that hasbecome, you know, now it's an
institutional asset class right.
It's in pretty much everyinstitutional portfolio
allocation there's a, you know,for private credit and I think
more frequently real estatecredit in institutional
portfolio allocations and youknow there's been mortgage REITs
(07:32):
that have been formed.
There's private funds that havebeen formed really to fill that
void.
And they've become a reallymajor player in the real estate
market and so kind of theiractive participation and their
ability to provide liquidity tothe market is a key factor in
transaction volume occurring forowners being able to refinance
(07:56):
loans to acquire properties.
The standards at which privatecapital is able to lend is
critical for the market to exist.
Rachel Oh (08:04):
Right, you know we talk about this and I've
mentioned this in a fewdifferent episodes is this
looming debt situation that'scoming about?
Right, they say it'sunprecedented.
I mean, I've heard billions,I've heard trillions, and I
understand there's groups thatare accustomed to paying I don't
know three, four percent, andnow, with a refi event coming,
(08:25):
you know you're upwards of what?
7%, 8% plus.
And so is that then setting thestage for even a bigger
opportunity for these, forprivate credit, like how is
private credit seeing you knowkind of landscape?
Because it does seem like it'son everyone's minds right now.
Garett Bjorkman (08:41):
Yeah.
So I think, look, the banks aregetting continued pressure by
the regulators, after theregional banking crisis, to
shore up their balance sheet andreduce their exposure to
commercial real estate, inparticular, in office.
So let's just talk aboutliquidity in the market.
I think there's a few factorsthat you need to consider.
There's liquidity pressures onowners of real estate because
(09:08):
most of the transitional lendingthat was done was done in the
floating rate context.
So, you know, think back to2020, you know, we're just
coming out of COVID interestrates are at zero.
Rachel Oh (09:20):
2020 had the highest volume of commercial real estate
activity in US historycommercial real estate activity
in US history, which is crazy tome, because the whole world was
like at home with masks can'tgo out, and yet we're just
lending like crazy.
There's so much right.
Garett Bjorkman (09:34):
Money supply was high.
It was all the stimulus.
Interest rates are at zero andpeople were buying, not
necessarily going in.
Actually, at the time they weregoing into office thinking
there would be a quick rebound.
But all of that transitionaldebt was basically floating rate
(09:56):
debt and a lot of that that wasissued by the private markets
was structured with three-yearinitial maturities with two
one-year extension options andthat's how that, all the time,
that's how you structure theloans and that's just industry
practice.
So all of those loans that weretaken out in 2020 are now coming
due 2023, 24, 25.
(10:17):
And it's also happening at thesame time when long-term rates,
in terms of, if you look at thetreasury, which has been just
bumping around four and a halfpercent, is up in a significant
way from where it was.
You know, if you look kind ofat how do people value real
estate and how do you thinkabout cap rates, and you think
about long term rates.
You know people have alwayslooked for some premium to the
(10:41):
risk free rate to be buying realestate, and people have looked
to the 10 year treasury as arisk free rate, Whereas you know
real estate and people havelooked to the 10-year treasury
as a risk-free rate, whereas youknow you go back to 2020, again
, look at apartments.
Right, the fundamentals ofapartments.
There's an undersupply ofhousing.
We were seeing strong rentgrowth.
The fundamentals really madesense for multifamily
development and so people werewilling to lend high on
(11:05):
multifamily.
People were willing to pay highamounts and low cap rates
because of those strongfundamentals.
What they weren't expecting wasthat long-term interest rates
were going to make the shiftthat they have in that, all of a
sudden, now you can buy 10-yeartreasuries for 4.5% and now
people are going to want somepremium to that 10-year when
(11:27):
they're valuing the underlyingasset.
So let's just say, on average,people maybe want 130, 150 basis
point premium to the 10-year inorder to say, hey, the
incremental risk through owningthis asset is worth it.
That means 25%, 30% discountfrom peak values on multifamily,
despite the fundamentals stillremaining relatively strong.
(11:50):
So when you, you know that'skind of the overall market
dynamic and then go back andthink about you know all of the
lenders, the private lenders whowere lending in those years,
who were the issuers of thoseloans, and you know these loans
(12:11):
are now maturing and you knowthey are having very difficult
conversations with the owners ofthese assets who are their
borrowers in terms of you know,what does it take to give me
more time?
And lenders are asking is myloan impaired?
Rachel Oh (12:29):
right.
Garett Bjorkman (12:29):
Is the value of the asset gone lower than my
loan amount.
And I think we're in a reallyinteresting time because, if you
look at, especially in themultifamily space, which is a
space where people never reallyanticipated this would happen,
because cap rates were so lowand we've seen values now
decline because of this capitalmarkets shift and long-term
(12:50):
rates, you know there's manylenders now who really are
impaired in the debt fund spacebecause they were actively
lending at 75 to 80 percent.
Rachel Oh (13:02):
Which is crazy to me, because I mean just you know,
just fundamentally, and I'm sureyou'll carry on the tradition.
We've never hit that, I don'tthink.
Garett Bjorkman (13:10):
We've always been very conservative.
Rachel Oh (13:12):
I mean, I think we're at—we've always been at like
50-60.
Well, actually I wasn't sure.
There's probably a period wherewe were maybe at 75, but in
general in the last five yearsit's been 60%.
Garett Bjorkman (13:23):
Yeah, I mean going through our book.
Since I've been here, I thinkI've been really pleased with
the conservative and disciplinedway in which we've leveraged.
We've leveraged with strongbanking relationships where I
think we've designed therelationships strategically such
that no one project is worthblowing up the entire
(13:45):
relationship.
And we're working together toget through issues.
But you're absolutely right, Ithink banks are willing to work
with us because of the fact thatwe have so low leverage and
nobody feels like they reallyare impaired, and so we've had a
lot of cooperation with ourbanks people willing to give us
time.
I think on the debt fund sideit's different in the sense that
(14:07):
you know a lot of these debtfunds.
The way that they utilizeleverage was with a real lack of
discipline.
And you know, as the market gotreally competitive, in order to
drive their cost of funds down,in order to originate loans you
know the public mortgage REITs,the private debt funds they
would easily take on four timesleverage, you know four times
(14:33):
being their debt to equity ratio.
Or you know, effectively 80% ofthe senior loan they would go
out and get financed in thesestructures from banks.
And it's kind of funny I meanunfortunate but funny.
But it goes back to the sameissue, which is the fundamental
issue in the banking system is alot of these debt funds have
(14:56):
borrowed short and lent longright, so they've borrowed, you
know, four times leverage oncredit facilities that have
durations that don't match theunderlying loans.
So you know, if you look at thepublic mortgage REITs, they're
trading at prices that arereally way down right.
(15:17):
And I think it's not justbecause of, hey, we think that
value is impaired.
I think that there's aperception and a reality that,
as these loans have issues,these entities, these funds,
they're going to get pressurefrom the banks to be paying down
debt.
And where is that liquiditygoing to come from?
(15:37):
And so you know, there's realliquidity issues, which I think
is what is causing a lot ofpeople to say, hey, there's
going to be a lot of near-termopportunity to see one.
These debt funds are going tobe putting pressure on their
borrowers to be kind of forcedsellers to sell assets to
generate liquidity so they canpay back their loans, which is
(15:59):
something that's very differentfrom the GFC.
Right In the GFC, you had theFed which was going to say, hey,
you know, just wait.
And we're going to kind of lookthe other way.
Rachel Oh (16:11):
That's not the case here.
Garett Bjorkman (16:12):
Right.
So I think there's differentplayers that are going to be the
catalyst for forced sales asthese loans do mature, in
particular from the privatelenders who are making higher
advance rate loans and arehaving to deal with their own
liquidity issues.
And you know, I think that isgoing to lead to distress.
You know, distress sales from acapital markets perspective.
Rachel Oh (16:36):
I keep hearing that and I'm just curious is it
really happening, right?
Garett Bjorkman (16:40):
Yeah, so it's happening.
I would say we're seeing it.
It's happening very quietlyright, and I would say over the
past two and a half years you'veseen the headlines of people
handing back the keys on officeassets right Office absolutely.
Large office assets right, andthere's been no fighting.
(17:02):
It's just been take back thekeys no negotiations right.
Everybody's kind of said takethe keys, we're not.
No negotiations right.
Everybody's kind of said takethe keys.
And now the banks are justsitting on it.
I think where we're at now andwe're just again early is in the
multi-sector is all of thisstuff that was.
I think people had hope thatlong-term rates were going to
(17:25):
come down, hope that long-termrates were going to come down,
that maybe we would get somerelief sooner in terms of
interest rates, and people lastyear I think, were willing to
put in some money to getextensions, and banks and debt
funds were willing to work withthose borrowers to give them a
little bit more time.
But there does seem to be moreconsensus in the market that
(17:49):
interest rates are going to stayhigher for longer and it seems
like every time the Fed speaks,you know they feel more and more
comfortable with keeping ratesat the levels that they are.
And so you know, to the extentthat things stay constant and
you just kind of apply thesimple math that we talked about
before about having 120 to 130basis point spread over the 10
(18:10):
year and we have a 30% declinefrom peak valuations and
multifamily.
You know, once that realitysets in, you know and lenders
are saying, hey, we're impairedyou know, they have to take some
action right.
So we are seeing it.
I think we're relatively early,but it is happening.
(18:31):
But we're seeing people go outand raise preferred equity.
We're seeing people have to goout and raise mezzanine loans
right.
We're seeing people have to getcreative in order to meet
extensions.
But these debt funds arelooking for cash and people are
capital constrained.
Rachel Oh (18:49):
Yeah, so that all sounds like opportunity, as you
mentioned all that.
Garett Bjorkman (18:54):
Yeah, I mean, look, I think that's absolutely
where we're focused right now.
Right, I mean we're not superfocused on the debt side of
things here at PEG, at least yet.
But I think that debt iscertainly going to be the
catalyst for a lot ofopportunity in the near term and
I think it's going to give usthe ability to be acquiring
(19:16):
assets below what we believe tobe long-term intrinsic value.
And you know, look, it's toughto build right now.
There are markets wherebuilding absolutely still makes
sense.
We're seeing it, obviously,given the fundamentals in the
residential sector, there'sstill opportunities.
We're seeing it in build forrent.
Rachel Oh (19:39):
There is no build for rent, so you have to have a
build for rent.
Garett Bjorkman (19:41):
Yeah, I mean the build for rent is still
where we're seeing strong equitycoming in and you know this
select service, limitedhospitality strategy that we
have.
You know we're still able tobuild to levels that make a lot
of sense.
But the acquisitionopportunities of distress assets
I shouldn't say distress assetsbecause they're really
performing assets with stronglong-term fundamentals that just
(20:04):
have distressed capital stacks.
Rachel Oh (20:05):
I mean you buy the right, yeah.
Garett Bjorkman (20:07):
Yeah, I mean these are good, high quality
assets that were just overlevered and there's liquidity
constraints and there's areadjustment happening in the
capital markets and so if you'rewell capitalized and you have
the right relationships, youknow we are talking to debt
funds, we're talking to banks,we're talking to.
You know all of the differentsources of capital that you
(20:29):
would think would be capitalconstrained and we're not out
there, you know, trying to bevultures.
It's saying, hey, can we behelpful?
How can we partner?
Can we create something whereyou know we can create a win-win
solution for you?
We feel like we're gettingstrong, risk-adjusted returns
for our position, but also we'reproviding a solution, a
long-term solution, for peopleout there.
Rachel Oh (20:49):
Yeah, no, I love that .
Historically, at PEG, the DNAwas originally development,
which we still do, as youmentioned, especially on the BFR
side.
But we also have this bigmachine of in-house property,
all these different things thatare really conducive to any sort
of strategy that allows foradditional assets under the
umbrella.
So to have someone likeyourself come in and really kind
(21:11):
of add additional focus toacquisitions, I think is super
interesting and exciting.
So I really like that.
You know, 2023 was a supertough year for capital markets.
Garett Bjorkman (21:21):
So please tell me, this will change.
Rachel Oh (21:22):
Yeah, look, I mean we're just about halfway now
into 2024.
Garett Bjorkman (21:27):
Look, private markets just take time to adjust
, right, and they're just slowto adjust and I can say you know
, I spent the first few monthsof this year really traveling
the world fundraising before Icame here and, you know,
speaking to different regions ofthe world you know different
parts of the world are in verydifferent liquidity positions.
(21:50):
You know different parts of theworld are in very different
liquidity positions and I thinkthat there is more certainty out
there with respect to wherepeople think rates will be.
People are starting to makeallocations.
I think you know thedenominator effect with where
public markets are is kind of nolonger an issue, but there
still is an issue with respectto investors getting back
(22:11):
distributions right, becausethere has been such limited
transaction activity in theprivate markets that investors
have not had the liquidity toredeploy like they expected.
But it's starting to change.
We're starting to see an uptickin M&A activity.
We're starting to see an uptickin transaction activity.
It's still down, but I thinkyou know we're definitely headed
(22:34):
in a direction where I thinkthe capital markets is starting
to.
People are starting to formcapital in this new environment
and to be able to take advantageof opportunities in this new
environment, and so I think,once that capital is formed and
is something where we'reobviously focused on here as
well, you know we're going tostart to see more transaction
(22:56):
volume.
Rachel Oh (22:57):
Good, because, again, things have to change, which I
see it.
Actually, the conversationshave changed.
There is not so much the sitand hold that I heard, all
through 2023.
It's really, truly I feel likeI think the activity will pick
back up again in the second halfof the year at least that's the
way the conversations have beentrending, which is, I think I
(23:18):
heard, in 2023, survive until2025, right, yeah, but I do feel
like that's loosening I feellike we don't have to wait all.
We don't wait that entire time.
Yeah, so that'll be Okay.
So now we are halfway through.
You know the year.
You've been around the world,everything that we just
mentioned.
The Fed is holding steady,unemployment isn't going down,
(23:41):
inflation is ticking back up andyou've got a stubborn Fed
that's just not going to bedoing anything, even though it's
an election year.
You know I was hoping for somereprieve.
How do you see the rest of 2024shaping up and where do you see
?
You know the true opportunities.
Garett Bjorkman (23:56):
Yeah, I mean, look, I think we are taking a
very, I would say, conservative,but also active approach with
respect to opportunities, andwhen I say conservative, I think
we continue to not expect ratesto go down.
(24:19):
I think that there's a lot ofpeople underwriting right now to
make transactions work thatassume long-term rates drop over
the next couple of years, and Ithink we're just that's not
what the market is saying, and Ithink we're hesitant to pretend
that we are smarter than themarket right now, and so all of
the data is pointing to thingsstaying higher for longer, and
so that's how we're underwriting, and we're not going to pursue
(24:39):
deals unless it works withinthat context.
You know, I think the good newsis we're finding deals that
work in that context.
Right.
So I really think that thereare opportunities, especially in
certain asset classes, as wethink about again, select
service, extended stay hotels.
I mean just really interestingopportunities.
Rachel Oh (24:58):
We have such a strong pipeline, which is kind of new
for you I mean not new for PEG,but it's new for you.
Yeah.
Garett Bjorkman (25:03):
I mean, you know I financed a lot.
Sure, haven't done a lot on theequity side, did more full
service on the equity side, butthis is definitely newer for me
on the equity side and it'sreally interesting.
Rachel Oh (25:16):
You know, it's definitely not as sexy as the
full service.
But, it is.
But if making money is sexy,then I think.
Garett Bjorkman (25:22):
Look, the yields are high.
It's like you know the returnprofile.
You can get 200 plus basispoints more of current yield and
you know, 300 basis points moreof total return in an asset
class that I think maybe isn'tquite as defensive as class A
residential in a downturn.
But you know, when you look atthe data it's pretty close.
(25:42):
And you know you're doing itwith leverage levels that are 20
percentage points lower thanresidential.
So to me that's a reallycompelling you know risk reward
proposition and you knowdefinitely something that's
going to be a huge focus.
Rachel Oh (26:00):
Yeah, yeah, no, I've.
You know, I've had a little bitof travel this year and I'm
actually quite shocked at howmuch hotels are these days, you
know, just to stay anywhere inthe country.
So I definitely think thatthere's great opportunity there
and select services definitelyJust the operating costs alone,
you know.
Garett Bjorkman (26:16):
Yeah, yeah, I mean just not having the amount
of staff that's required, right?
Rachel Oh (26:20):
I mean especially in some of these, because that's
the big thing, right?
Labor is incredibly expensiveright now.
Yeah, hard to navigate.
Garett Bjorkman (26:26):
That's what's tough.
Rachel Oh (26:49):
Yeah, and that's what's tough, and that's part of
what's tough, even the way.
Yeah, well, you know, inPhoenix it's terrible.
Garett Bjorkman (26:53):
And the driver of that, which is really
infrastructure spending, iswhat's keeping costs up, you
know, across the country.
And so there's so muchinfrastructure spending with the
Inflation Reduction Act, waymore incentives for government
spending, private spending.
So you know it shows no sign atleast yet, of slowing down and
(27:16):
so that's kept costs high andwith interest rates high and all
of those factors, you know it'smaking things tough to pencil
when you consider where wagesare and just affordability
generally, and you're startingto see that getting affected in
consumer spending and you knowthere's limitations to how high
(27:36):
you can push prices.
Rachel Oh (27:38):
And we're starting to see that.
We're starting to see that.
Yeah, no, it's amazing to me.
You know, utah is just alwaysUtah, so it probably seems like
a bargain to you, but even forthese markets, I think people
are shocked at what we'respending.
Garett Bjorkman (27:50):
So yeah, I mean , look residential prices in
Utah right have skyrocketed.
Rachel Oh (27:55):
I mean in the there's a land situation right here, so
I think people tend to forgetthat.
You know we're only three and ahalf million statewide and it's
only because we have mountainsand canyons like you just can't
build.
So I think it does affect ourpricing differently.
Yeah, we're not big yeah,you're land constrained.
Absolutely yeah, yeah but a lotof growth, um, and I think
(28:18):
fundamentals here are reallystrong.
Yeah, so I've been, I was, I'mdating myself, I was here during
the gmc and, um, not that itdidn't hit us, but it was a blip
.
It wasn't bad.
I watched the rest of thecountry just crumble.
And here everyone's just thatconservative nature works out
sometimes, yeah, a little boring.
Garett Bjorkman (28:34):
Yeah Well, whereas in Phoenix right Phoenix
was really the epicenter rightIn the GFC and it's funny, I
look at the neighborhood I livein now was one of the
neighborhoods that was.
You know you could have pickedup for nothing in the GFC.
Rachel Oh (28:49):
It was like did you buy five?
Garett Bjorkman (28:56):
No, no, unfortunately, I bought.
You know I bought like rightafter COVID, but you know that's
when, when I had I had enoughkids at that point.
Where I had to, I had no choice.
So you know, look it's, it'syeah.
What's happening in theresidential sector?
We're still focused there.
Right, the solution ofaffordability and the lack of
supply is an issue.
Rachel Oh (29:17):
Yeah, and so it's like we're still catching up.
Garett Bjorkman (29:21):
Yeah.
Rachel Oh (29:21):
From 2008.
Yeah, just we're behind.
Garett Bjorkman (29:24):
And I mean right before this right, cam and
I were on a call and we'resitting there and talking with
somebody and we're like how canwe bring what people want to
them?
You know in terms of productand do it in an affordable way,
Right?
Everybody wants this kind ofluxury resort type living.
Rachel Oh (29:42):
You have to pay for it.
Garett Bjorkman (29:44):
But you got to pay for it and everybody's.
You know we're seeing it in thestatistics of.
You know people are maxed out.
So you know how can you kind ofdeliver affordable luxury right
, and how do you deliver that?
How do you deliver that and somore to come.
(30:05):
You know we're working on it,but you know I think, look, when
you just look at thefundamentals, there's such a
strong demand right.
And how do we meet the needs ofthe communities that we're
investing in and do so in a waythat provides kind of investors
strong returns but also reallymeets the needs of these
communities, is something we'resuper focused on.
Rachel Oh (30:23):
Yeah, no, I love that .
I love that Again, in your 12days here you're not going to
fundamentally change the way PEGdoes things, but obviously
broaden our horizons and bringus new things, which we're going
to have to talk about thisaffordable luxury, I think on a
future episode, because I'mintrigued.
(30:43):
So I think our you sitting here, chatting, sharing, you know
what you're doing and you knowhelping us to better understand,
kind of this whole landscape,so your thoughts have been
really insightful.
Garett Bjorkman (30:57):
And so I want to thank you for joining us
today.
Rachel Oh (31:00):
So, in the meantime, thank you to all who have
listened in today.
I know that I had a great timewith my new boss, and so I think
we're going to hear more fromhim in the future.
But from the peaks of theMountain West, I am Rachel Oh,
your host for Peaks andPortfolios presented by PEG
Companies as we continue to diginto all things real estate.
Have a fabulous day, 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
(00:25):
landscape.
It's time to maximizeportfolios here in the peaks of
the Mountain West and beyond.
Okay, welcome everybody fromthe peaks of the Mountain West
high up here on the WasatchFront.
We are excited again to talkreal estate, the economy and
(00:46):
anything else that may comeabout.
Thank you for joining us todayfor this week's episode of Peaks
and Portfolios.
You know, over the weeks we havecovered various topics,
including the Fed funds rateoffice to multifamily conversion
, securing debt in thisenvironment, securing debt in
this environment.
I wanted to shift gears alittle bit and kind of talk
(01:06):
about private credit, which isactually experiencing an
extraordinary moment due tocyclical and secular trends in
the real estate lendingenvironment, and to help us
better understand what'shappening in the real estate
credit markets.
We are pleased to have ouresteemed guest and my new boss,
Garett Bjorkman, co-chiefexecutive officer for PEG
(01:28):
Companies.
Welcome, Garett.
Thank you, Rachel.
So what are we now in Day 12?
Garett Bjorkman (01:33):
I think it's day 12.
Rachel Oh (01:34):
Yeah, yeah, so what do you think?
What do you think aboutaltitude here?
Anything, the altitude's great.
Garett Bjorkman (01:39):
I think it makes me move a little bit more
fluid, a little quicker.
It's good.
It's good we're moving fast.
Rachel Oh (01:46):
Yeah, how about you missing Scottsdale?
Garett Bjorkman (01:48):
You know I'm missing my kids a little bit,
since they're not here yet.
But other than that lovingbeing, in the mountains right
now.
Rachel Oh (01:56):
Well, let's get them here.
Well, they're coming soon.
They're coming soon.
Utah is very kid-friendly.
I don't know if you've noticed.
Garett Bjorkman (02:00):
I've noticed there's a lot of them and you
know they're coming, they'recoming.
Rachel Oh (02:05):
We aren't the fastest growing state in the union, for
no reason.
Garett Bjorkman (02:08):
I know Number one state I saw.
Rachel Oh (02:10):
Yes, In the last census count I don't know if
everyone knows, but 2010 to 2020, we were the fastest growing
state in the entire union.
Yeah, yeah so it's a good place.
Yeah for today's podcast.
I did dig into your bio a bitmore, which I'm going to go into
, but it does turn out that youstudied in Shanghai, so ni hao
ma.
Garett Bjorkman (02:27):
Yeah, ni hao, ni hao, yes, yes.
In 2008, I studied in Shanghai.
Okay, and how fluent are you inMandarin Conversationally?
You know I'm okay, butdefinitely not fluent.
I'm working on it.
My kids are in Mandarinimmersion oh, excellent.
(02:48):
So we're trying to get themthere and I'm trying to get
there with them.
Rachel Oh (02:51):
Okay, well, I feel I'm not in my free time.
Garett Bjorkman (02:53):
That's what I'm going to be focused on.
Rachel Oh (02:54):
I feel like there's some offshore activities in the
future.
Garett Bjorkman (02:58):
Yeah, we hope so, once those capital
constraints ease up.
Rachel Oh (03:01):
Well, good, let's talk about that a little more.
So, just so the audience isbetter acquainted with you, I'm
going to share a little bitabout your background.
Garett has had significantexperience in the financial and
real estate industry, start offhis career at JCR Capital
Investment and ThoroughfareCapital with roles in research
and capital markets.
(03:21):
In 2015, Garett became amanaging director at the CIM
Group which is where you camefrom, a real estate and
infrastructure investment firm,where he managed CIM's credit
platform, which grew to $10billion, and also oversaw a
build-to-core equity deploymentstrategy to over about $2.5
billion, if I have that right,and since May 1st of this year,
(03:43):
Garett is now the co-chiefexecutive officer of PEG
Companies.
We are a 20 plus year verticallyintegrated real estate
investment firm with over 2.7billion AUM and, as I mentioned
before, he is my new boss, sothank you, boss, for joining us
today.
So, as I started off, we areseeing private credit is
(04:04):
experiencing increasedopportunities due to the
changing trends in the realestate lending environment.
The great financial crisis andrecent bank failures have led to
greater regulation and limitedtraditional capital availability
and rising interest rates.
The cap stack has changed, sothis is where you came from, so
(04:24):
I was wondering to see you knowif you could tell us a little
bit about what is happening inthe real estate credit markets
and how is that impacting theopportunities we are seeing
today?
Garett Bjorkman (04:33):
Yeah, yeah, no, it's a great question.
So let's just take a step backand, I think, big picture going
back to the GFC to understandwhat was happening, that caused
a lot of issues to happen withlending and why regulators moved
in in a big way and reallycreated the market for private
(04:55):
credit.
So if you just think about howbanks work right, banks take
deposits- and deposits havedaily liquidity right and then
banks go and take that thosedeposits and make loans and
invest in assets that areilliquid or less liquid, and
(05:20):
there is a fundamental mismatchbetween the liquidity of the
assets and liabilities on abank's balance sheet Right.
And so I think that's alwaysbeen a fundamental problem that
many people have seen in thebanking industry in general, and
it's one of the things that hasreally created the regional
(05:40):
banking crisis.
You know, last year regionalbanking crisis last year, and it
was that same issue of peoplewanting their deposits out at
the same time when banks hadinvested in securities that were
longer dated and didn't havethat same maturity.
And so that aspect, I think,combined with the fact that
banks historically wereinvesting in real estate assets
(06:03):
that had some kind oftransitional element to it
whether it was a value-add playto increase occupancy, increase
rents or some sort ofconstruction component that just
wasn't what banks did and theyweren't good at managing that
risk Right.
And so Dodd-Frank and Basel IIIwere really the regulations
coming out of the GFC thatcreated the void for private
(06:25):
credit to start coming into thespace, and it was really focused
on changing the capitalrequirements for banks to make
the capital charges so punitive,to the extent that banks were
lending on these kind oftransitional assets at higher
(06:46):
leverage levels.
And so, you know, privatecapital came in to fill that
void.
So, whereas banks would nowkind of lend up, to call it 50%
loan to value, whereashistorically they were lending
75, 80%, you know, pre-GFC.
Now banks are lending kind of50% and then private capital's
coming in and filling that voidfrom 50 to 75.
(07:10):
So it was a space that hasbecome, you know, now it's an
institutional asset class right.
It's in pretty much everyinstitutional portfolio
allocation there's a, you know,for private credit and I think
more frequently real estatecredit in institutional
portfolio allocations and youknow there's been mortgage REITs
(07:32):
that have been formed.
There's private funds that havebeen formed really to fill that
void.
And they've become a reallymajor player in the real estate
market and so kind of theiractive participation and their
ability to provide liquidity tothe market is a key factor in
transaction volume occurring forowners being able to refinance
(07:56):
loans to acquire properties.
The standards at which privatecapital is able to lend is
critical for the market to exist.
Rachel Oh (08:04):
Right, you know we talk about this and I've
mentioned this in a fewdifferent episodes is this
looming debt situation that'scoming about?
Right, they say it'sunprecedented.
I mean, I've heard billions,I've heard trillions, and I
understand there's groups thatare accustomed to paying I don't
know three, four percent, andnow, with a refi event coming,
(08:25):
you know you're upwards of what?
7%, 8% plus.
And so is that then setting thestage for even a bigger
opportunity for these, forprivate credit, like how is
private credit seeing you knowkind of landscape?
Because it does seem like it'son everyone's minds right now.
Garett Bjorkman (08:41):
Yeah.
So I think, look, the banks aregetting continued pressure by
the regulators, after theregional banking crisis, to
shore up their balance sheet andreduce their exposure to
commercial real estate, inparticular, in office.
So let's just talk aboutliquidity in the market.
I think there's a few factorsthat you need to consider.
There's liquidity pressures onowners of real estate because
(09:08):
most of the transitional lendingthat was done was done in the
floating rate context.
So, you know, think back to2020, you know, we're just
coming out of COVID interestrates are at zero.
Rachel Oh (09:20):
2020 had the highest volume of commercial real estate
activity in US historycommercial real estate activity
in US history, which is crazy tome, because the whole world was
like at home with masks can'tgo out, and yet we're just
lending like crazy.
There's so much right.
Garett Bjorkman (09:34):
Money supply was high.
It was all the stimulus.
Interest rates are at zero andpeople were buying, not
necessarily going in.
Actually, at the time they weregoing into office thinking
there would be a quick rebound.
But all of that transitionaldebt was basically floating rate
(09:56):
debt and a lot of that that wasissued by the private markets
was structured with three-yearinitial maturities with two
one-year extension options andthat's how that, all the time,
that's how you structure theloans and that's just industry
practice.
So all of those loans that weretaken out in 2020 are now coming
due 2023, 24, 25.
(10:17):
And it's also happening at thesame time when long-term rates,
in terms of, if you look at thetreasury, which has been just
bumping around four and a halfpercent, is up in a significant
way from where it was.
You know, if you look kind ofat how do people value real
estate and how do you thinkabout cap rates, and you think
about long term rates.
You know people have alwayslooked for some premium to the
(10:41):
risk free rate to be buying realestate, and people have looked
to the 10 year treasury as arisk free rate, Whereas you know
real estate and people havelooked to the 10-year treasury
as a risk-free rate, whereas youknow you go back to 2020, again
, look at apartments.
Right, the fundamentals ofapartments.
There's an undersupply ofhousing.
We were seeing strong rentgrowth.
The fundamentals really madesense for multifamily
development and so people werewilling to lend high on
(11:05):
multifamily.
People were willing to pay highamounts and low cap rates
because of those strongfundamentals.
What they weren't expecting wasthat long-term interest rates
were going to make the shiftthat they have in that, all of a
sudden, now you can buy 10-yeartreasuries for 4.5% and now
people are going to want somepremium to that 10-year when
(11:27):
they're valuing the underlyingasset.
So let's just say, on average,people maybe want 130, 150 basis
point premium to the 10-year inorder to say, hey, the
incremental risk through owningthis asset is worth it.
That means 25%, 30% discountfrom peak values on multifamily,
despite the fundamentals stillremaining relatively strong.
(11:50):
So when you, you know that'skind of the overall market
dynamic and then go back andthink about you know all of the
lenders, the private lenders whowere lending in those years,
who were the issuers of thoseloans, and you know these loans
(12:11):
are now maturing and you knowthey are having very difficult
conversations with the owners ofthese assets who are their
borrowers in terms of you know,what does it take to give me
more time?
And lenders are asking is myloan impaired?
Rachel Oh (12:29):
right.
Garett Bjorkman (12:29):
Is the value of the asset gone lower than my
loan amount.
And I think we're in a reallyinteresting time because, if you
look at, especially in themultifamily space, which is a
space where people never reallyanticipated this would happen,
because cap rates were so lowand we've seen values now
decline because of this capitalmarkets shift and long-term
(12:50):
rates, you know there's manylenders now who really are
impaired in the debt fund spacebecause they were actively
lending at 75 to 80 percent.
Rachel Oh (13:02):
Which is crazy to me, because I mean just you know,
just fundamentally, and I'm sureyou'll carry on the tradition.
We've never hit that, I don'tthink.
Garett Bjorkman (13:10):
We've always been very conservative.
Rachel Oh (13:12):
I mean, I think we're at—we've always been at like
50-60.
Well, actually I wasn't sure.
There's probably a period wherewe were maybe at 75, but in
general in the last five yearsit's been 60%.
Garett Bjorkman (13:23):
Yeah, I mean going through our book.
Since I've been here, I thinkI've been really pleased with
the conservative and disciplinedway in which we've leveraged.
We've leveraged with strongbanking relationships where I
think we've designed therelationships strategically such
that no one project is worthblowing up the entire
(13:45):
relationship.
And we're working together toget through issues.
But you're absolutely right, Ithink banks are willing to work
with us because of the fact thatwe have so low leverage and
nobody feels like they reallyare impaired, and so we've had a
lot of cooperation with ourbanks people willing to give us
time.
I think on the debt fund sideit's different in the sense that
(14:07):
you know a lot of these debtfunds.
The way that they utilizeleverage was with a real lack of
discipline.
And you know, as the market gotreally competitive, in order to
drive their cost of funds down,in order to originate loans you
know the public mortgage REITs,the private debt funds they
would easily take on four timesleverage, you know four times
(14:33):
being their debt to equity ratio.
Or you know, effectively 80% ofthe senior loan they would go
out and get financed in thesestructures from banks.
And it's kind of funny I meanunfortunate but funny.
But it goes back to the sameissue, which is the fundamental
issue in the banking system is alot of these debt funds have
(14:56):
borrowed short and lent longright, so they've borrowed, you
know, four times leverage oncredit facilities that have
durations that don't match theunderlying loans.
So you know, if you look at thepublic mortgage REITs, they're
trading at prices that arereally way down right.
(15:17):
And I think it's not justbecause of, hey, we think that
value is impaired.
I think that there's aperception and a reality that,
as these loans have issues,these entities, these funds,
they're going to get pressurefrom the banks to be paying down
debt.
And where is that liquiditygoing to come from?
(15:37):
And so you know, there's realliquidity issues, which I think
is what is causing a lot ofpeople to say, hey, there's
going to be a lot of near-termopportunity to see one.
These debt funds are going tobe putting pressure on their
borrowers to be kind of forcedsellers to sell assets to
generate liquidity so they canpay back their loans, which is
(15:59):
something that's very differentfrom the GFC.
Right In the GFC, you had theFed which was going to say, hey,
you know, just wait.
And we're going to kind of lookthe other way.
Rachel Oh (16:11):
That's not the case here.
Garett Bjorkman (16:12):
Right.
So I think there's differentplayers that are going to be the
catalyst for forced sales asthese loans do mature, in
particular from the privatelenders who are making higher
advance rate loans and arehaving to deal with their own
liquidity issues.
And you know, I think that isgoing to lead to distress.
You know, distress sales from acapital markets perspective.
Rachel Oh (16:36):
I keep hearing that and I'm just curious is it
really happening, right?
Garett Bjorkman (16:40):
Yeah, so it's happening.
I would say we're seeing it.
It's happening very quietlyright, and I would say over the
past two and a half years you'veseen the headlines of people
handing back the keys on officeassets right Office absolutely.
Large office assets right, andthere's been no fighting.
(17:02):
It's just been take back thekeys no negotiations right.
Everybody's kind of said takethe keys, we're not.
No negotiations right.
Everybody's kind of said takethe keys.
And now the banks are justsitting on it.
I think where we're at now andwe're just again early is in the
multi-sector is all of thisstuff that was.
I think people had hope thatlong-term rates were going to
(17:25):
come down, hope that long-termrates were going to come down,
that maybe we would get somerelief sooner in terms of
interest rates, and people lastyear I think, were willing to
put in some money to getextensions, and banks and debt
funds were willing to work withthose borrowers to give them a
little bit more time.
But there does seem to be moreconsensus in the market that
(17:49):
interest rates are going to stayhigher for longer and it seems
like every time the Fed speaks,you know they feel more and more
comfortable with keeping ratesat the levels that they are.
And so you know, to the extentthat things stay constant and
you just kind of apply thesimple math that we talked about
before about having 120 to 130basis point spread over the 10
(18:10):
year and we have a 30% declinefrom peak valuations and
multifamily.
You know, once that realitysets in, you know and lenders
are saying, hey, we're impairedyou know, they have to take some
action right.
So we are seeing it.
I think we're relatively early,but it is happening.
(18:31):
But we're seeing people go outand raise preferred equity.
We're seeing people have to goout and raise mezzanine loans
right.
We're seeing people have to getcreative in order to meet
extensions.
But these debt funds arelooking for cash and people are
capital constrained.
Rachel Oh (18:49):
Yeah, so that all sounds like opportunity, as you
mentioned all that.
Garett Bjorkman (18:54):
Yeah, I mean, look, I think that's absolutely
where we're focused right now.
Right, I mean we're not superfocused on the debt side of
things here at PEG, at least yet.
But I think that debt iscertainly going to be the
catalyst for a lot ofopportunity in the near term and
I think it's going to give usthe ability to be acquiring
(19:16):
assets below what we believe tobe long-term intrinsic value.
And you know, look, it's toughto build right now.
There are markets wherebuilding absolutely still makes
sense.
We're seeing it, obviously,given the fundamentals in the
residential sector, there'sstill opportunities.
We're seeing it in build forrent.
Rachel Oh (19:39):
There is no build for rent, so you have to have a
build for rent.
Garett Bjorkman (19:41):
Yeah, I mean the build for rent is still
where we're seeing strong equitycoming in and you know this
select service, limitedhospitality strategy that we
have.
You know we're still able tobuild to levels that make a lot
of sense.
But the acquisitionopportunities of distress assets
I shouldn't say distress assetsbecause they're really
performing assets with stronglong-term fundamentals that just
(20:04):
have distressed capital stacks.
Rachel Oh (20:05):
I mean you buy the right, yeah.
Garett Bjorkman (20:07):
Yeah, I mean these are good, high quality
assets that were just overlevered and there's liquidity
constraints and there's areadjustment happening in the
capital markets and so if you'rewell capitalized and you have
the right relationships, youknow we are talking to debt
funds, we're talking to banks,we're talking to.
You know all of the differentsources of capital that you
(20:29):
would think would be capitalconstrained and we're not out
there, you know, trying to bevultures.
It's saying, hey, can we behelpful?
How can we partner?
Can we create something whereyou know we can create a win-win
solution for you?
We feel like we're gettingstrong, risk-adjusted returns
for our position, but also we'reproviding a solution, a
long-term solution, for peopleout there.
Rachel Oh (20:49):
Yeah, no, I love that .
Historically, at PEG, the DNAwas originally development,
which we still do, as youmentioned, especially on the BFR
side.
But we also have this bigmachine of in-house property,
all these different things thatare really conducive to any sort
of strategy that allows foradditional assets under the
umbrella.
So to have someone likeyourself come in and really kind
(21:11):
of add additional focus toacquisitions, I think is super
interesting and exciting.
So I really like that.
You know, 2023 was a supertough year for capital markets.
Garett Bjorkman (21:21):
So please tell me, this will change.
Rachel Oh (21:22):
Yeah, look, I mean we're just about halfway now
into 2024.
Garett Bjorkman (21:27):
Look, private markets just take time to adjust
, right, and they're just slowto adjust and I can say you know
, I spent the first few monthsof this year really traveling
the world fundraising before Icame here and, you know,
speaking to different regions ofthe world you know different
parts of the world are in verydifferent liquidity positions.
(21:50):
You know different parts of theworld are in very different
liquidity positions and I thinkthat there is more certainty out
there with respect to wherepeople think rates will be.
People are starting to makeallocations.
I think you know thedenominator effect with where
public markets are is kind of nolonger an issue, but there
still is an issue with respectto investors getting back
(22:11):
distributions right, becausethere has been such limited
transaction activity in theprivate markets that investors
have not had the liquidity toredeploy like they expected.
But it's starting to change.
We're starting to see an uptickin M&A activity.
We're starting to see an uptickin transaction activity.
It's still down, but I thinkyou know we're definitely headed
(22:34):
in a direction where I thinkthe capital markets is starting
to.
People are starting to formcapital in this new environment
and to be able to take advantageof opportunities in this new
environment, and so I think,once that capital is formed and
is something where we'reobviously focused on here as
well, you know we're going tostart to see more transaction
(22:56):
volume.
Rachel Oh (22:57):
Good, because, again, things have to change, which I
see it.
Actually, the conversationshave changed.
There is not so much the sitand hold that I heard, all
through 2023.
It's really, truly I feel likeI think the activity will pick
back up again in the second halfof the year at least that's the
way the conversations have beentrending, which is, I think I
(23:18):
heard, in 2023, survive until2025, right, yeah, but I do feel
like that's loosening I feellike we don't have to wait all.
We don't wait that entire time.
Yeah, so that'll be Okay.
So now we are halfway through.
You know the year.
You've been around the world,everything that we just
mentioned.
The Fed is holding steady,unemployment isn't going down,
(23:41):
inflation is ticking back up andyou've got a stubborn Fed
that's just not going to bedoing anything, even though it's
an election year.
You know I was hoping for somereprieve.
How do you see the rest of 2024shaping up and where do you see
?
You know the true opportunities.
Garett Bjorkman (23:56):
Yeah, I mean, look, I think we are taking a
very, I would say, conservative,but also active approach with
respect to opportunities, andwhen I say conservative, I think
we continue to not expect ratesto go down.
(24:19):
I think that there's a lot ofpeople underwriting right now to
make transactions work thatassume long-term rates drop over
the next couple of years, and Ithink we're just that's not
what the market is saying, and Ithink we're hesitant to pretend
that we are smarter than themarket right now, and so all of
the data is pointing to thingsstaying higher for longer, and
so that's how we're underwriting, and we're not going to pursue
(24:39):
deals unless it works withinthat context.
You know, I think the good newsis we're finding deals that
work in that context.
Right.
So I really think that thereare opportunities, especially in
certain asset classes, as wethink about again, select
service, extended stay hotels.
I mean just really interestingopportunities.
Rachel Oh (24:58):
We have such a strong pipeline, which is kind of new
for you I mean not new for PEG,but it's new for you.
Yeah.
Garett Bjorkman (25:03):
I mean, you know I financed a lot.
Sure, haven't done a lot on theequity side, did more full
service on the equity side, butthis is definitely newer for me
on the equity side and it'sreally interesting.
Rachel Oh (25:16):
You know, it's definitely not as sexy as the
full service.
But, it is.
But if making money is sexy,then I think.
Garett Bjorkman (25:22):
Look, the yields are high.
It's like you know the returnprofile.
You can get 200 plus basispoints more of current yield and
you know, 300 basis points moreof total return in an asset
class that I think maybe isn'tquite as defensive as class A
residential in a downturn.
But you know, when you look atthe data it's pretty close.
(25:42):
And you know you're doing itwith leverage levels that are 20
percentage points lower thanresidential.
So to me that's a reallycompelling you know risk reward
proposition and you knowdefinitely something that's
going to be a huge focus.
Rachel Oh (26:00):
Yeah, yeah, no, I've.
You know, I've had a little bitof travel this year and I'm
actually quite shocked at howmuch hotels are these days, you
know, just to stay anywhere inthe country.
So I definitely think thatthere's great opportunity there
and select services definitelyJust the operating costs alone,
you know.
Garett Bjorkman (26:16):
Yeah, yeah, I mean just not having the amount
of staff that's required, right?
Rachel Oh (26:20):
I mean especially in some of these, because that's
the big thing, right?
Labor is incredibly expensiveright now.
Yeah, hard to navigate.
Garett Bjorkman (26:26):
That's what's tough.
Rachel Oh (26:49):
Yeah, and that's what's tough, and that's part of
what's tough, even the way.
Yeah, well, you know, inPhoenix it's terrible.
Garett Bjorkman (26:53):
And the driver of that, which is really
infrastructure spending, iswhat's keeping costs up, you
know, across the country.
And so there's so muchinfrastructure spending with the
Inflation Reduction Act, waymore incentives for government
spending, private spending.
So you know it shows no sign atleast yet, of slowing down and
(27:16):
so that's kept costs high andwith interest rates high and all
of those factors, you know it'smaking things tough to pencil
when you consider where wagesare and just affordability
generally, and you're startingto see that getting affected in
consumer spending and you knowthere's limitations to how high
(27:36):
you can push prices.
Rachel Oh (27:38):
And we're starting to see that.
We're starting to see that.
Yeah, no, it's amazing to me.
You know, utah is just alwaysUtah, so it probably seems like
a bargain to you, but even forthese markets, I think people
are shocked at what we'respending.
Garett Bjorkman (27:50):
So yeah, I mean , look residential prices in
Utah right have skyrocketed.
Rachel Oh (27:55):
I mean in the there's a land situation right here, so
I think people tend to forgetthat.
You know we're only three and ahalf million statewide and it's
only because we have mountainsand canyons like you just can't
build.
So I think it does affect ourpricing differently.
Yeah, we're not big yeah,you're land constrained.
Absolutely yeah, yeah but a lotof growth, um, and I think
(28:18):
fundamentals here are reallystrong.
Yeah, so I've been, I was, I'mdating myself, I was here during
the gmc and, um, not that itdidn't hit us, but it was a blip
.
It wasn't bad.
I watched the rest of thecountry just crumble.
And here everyone's just thatconservative nature works out
sometimes, yeah, a little boring.
Garett Bjorkman (28:34):
Yeah Well, whereas in Phoenix right Phoenix
was really the epicenter rightIn the GFC and it's funny, I
look at the neighborhood I livein now was one of the
neighborhoods that was.
You know you could have pickedup for nothing in the GFC.
Rachel Oh (28:49):
It was like did you buy five?
Garett Bjorkman (28:56):
No, no, unfortunately, I bought.
You know I bought like rightafter COVID, but you know that's
when, when I had I had enoughkids at that point.
Where I had to, I had no choice.
So you know, look it's, it'syeah.
What's happening in theresidential sector?
We're still focused there.
Right, the solution ofaffordability and the lack of
supply is an issue.
Rachel Oh (29:17):
Yeah, and so it's like we're still catching up.
Garett Bjorkman (29:21):
Yeah.
Rachel Oh (29:21):
From 2008.
Yeah, just we're behind.
Garett Bjorkman (29:24):
And I mean right before this right, cam and
I were on a call and we'resitting there and talking with
somebody and we're like how canwe bring what people want to
them?
You know in terms of productand do it in an affordable way,
Right?
Everybody wants this kind ofluxury resort type living.
Rachel Oh (29:42):
You have to pay for it.
Garett Bjorkman (29:44):
But you got to pay for it and everybody's.
You know we're seeing it in thestatistics of.
You know people are maxed out.
So you know how can you kind ofdeliver affordable luxury right
, and how do you deliver that?
How do you deliver that and somore to come.
(30:05):
You know we're working on it,but you know I think, look, when
you just look at thefundamentals, there's such a
strong demand right.
And how do we meet the needs ofthe communities that we're
investing in and do so in a waythat provides kind of investors
strong returns but also reallymeets the needs of these
communities, is something we'resuper focused on.
Rachel Oh (30:23):
Yeah, no, I love that .
I love that Again, in your 12days here you're not going to
fundamentally change the way PEGdoes things, but obviously
broaden our horizons and bringus new things, which we're going
to have to talk about thisaffordable luxury, I think on a
future episode, because I'mintrigued.
(30:43):
So I think our you sitting here, chatting, sharing, you know
what you're doing and you knowhelping us to better understand,
kind of this whole landscape,so your thoughts have been
really insightful.
Garett Bjorkman (30:57):
And so I want to thank you for joining us
today.
Rachel Oh (31:00):
So, in the meantime, thank you to all who have
listened in today.
I know that I had a great timewith my new boss, and so I think
we're going to hear more fromhim in the future.
But from the peaks of theMountain West, I am Rachel Oh,
your host for Peaks andPortfolios presented by PEG
Companies as we continue to diginto all things real estate.
Have a fabulous day, everybody.
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