Capitalizing on Commercial Real Estate Trends in 2024

In this episode, we explore the current market trends in commercial real estate, focusing on the recent surge in shopping center investments and the strategic adaptations to fluctuating interest rates.

What is up and welcome back to the best commercial real estate podcast in Jinx Oklahoma. That's fact, it's facts. It's fact. What episode are we on? We know 100 and 50 100 and 51. I like that. We didn't even do anything special for 100 and 50. I blame Tanner. It actually is Tanner's fault that it was great. Thank you. Uh Galerie. Yeah, so 100 and 51 episodes of talking about commercial real estate. I've anyway, we've had fun a lot. So exciting topic today. But before we get into that, we're just gonna do a quick update. So earlier this week, we closed on the Dawson Petro Max gas Station. Super excited about all of the investors who got involved in that one. raised a million seven injected into that deal. We think we'll hold uh honestly, I think the asset will sell before the end of the year just with bonus depreciation. Um and how much you can write off, you can write off 60% of, of this bill even if you buy it on the last day of the year. So super exciting there. Um We also are gonna buy four more of these Petro max stations, um, gas stations.

So we'll, we'll send that offering out here in the next, um, month to 45 days. I would imagine we're currently looking for a lender. Now, as soon as we lock that up, we'll equity raise will be bigger. 3 million. Yeah, on a package of four. Yeah, very similar return profile, if not, um, a little better. Um, so be on the lookout for that. And then also next week we are closing our Martindale um shopping center in Amarillo, Texas. We've been fundraising that one for weeks. It's been full for a week and a half. Um So yeah, if you're involved in that one, we start making money next Friday and we've got more deals coming down the line exactly what we're working on. So, yeah, and, and, and nice little pipeline existing deals, right. We've been getting the push from investors for 18 months. Now we're the shopping centers guys and, and all of a sudden we got them, we got them. So if you want to get invested in a cash flow and shopping center that already exists, it's up. We have them, we also still have some room in the Saint Louis deal if you want to uh in that one.

But anyway, uh a lot going on. We bought a piece of land 100 and 21st in Sheridan. Did we talk about that last week? We might have mentioned that. I think, I think we did. I'm excited about that. If you have any ideas about what should go to 100 and 21st. And Sheridan hit us up, man. If they're a bad idea, send them uh to Joel. No bad ideas. I'll take the good ideas. No bad ideas. IKEA. We, we know that's a bad idea. We already had one idea. There's one, here we go. OK. So, next, right. We've got a super exciting show today. We're, we're kind of just gonna go into what we think the current market looks like. Uh some market trends, some market forecast we're in, you know, just over halfway through the year. Um You know, what's, what's going on? So why are we all of a sudden buying more shopping centers? Six months ago, what, nine months ago, we had no shopping centers. We weren't buying anything. We were doing development for the prior 12 months before that. So what market trends have occurred that are causing us to be able to buy uh shopping centers now? Great question. Haven't changed. They haven't yet. And that's, that's kind of essentially why we're finally buying shopping centers.

You know, uh initially we had these stupid low rates, 34 5% and then all these, these eight cap centers around the country that were pretty good location, pretty good demographics and we were buying them up. We got three or four points spread on cap rate. To interest rate and that's how you make a lot of cash flow. And then all of a sudden rates went from 4 to 7, 7.5, short term rates all the way up to 8.5. And so, really, you know, in any cycle you have to give owners time to adjust, you know, they thought their property was worth $4 million and then interest rates double and they still want 4 million. But it doesn't make sense at 4 million anymore. But they're not just gonna be like, ok, great. I'll just take 2.5 million and call it a day. No, that's not how this works. Well, you have to have is you have to give it time for the cycle to run its course. Eventually some people are gonna need to sell and maybe they're, maybe they're older, they're wanting to retire, maybe, uh, their, their loans coming due, you know, maybe they just leased all this vacant space and now they have the value and so they have these reasons to sell. And so then they start selling instead of an eight cap, they're like maybe an 8.5, maybe a nine.

And it starts to push values up across the country. Uh, just because rates demand, that cap rates go higher, interest rates, demand that cap rates go higher over time. So we have this confluence of all these prices starting to go uh down cap rates coming up. And we thought to ourselves, we think that the feds are done raising interest rates. I don't speak for Brian. I think potentially they're done. Right. Uh, so we're at this frozen section here and we didn't want to until they started lowering rates because once they start lowering rates, we think that's gonna start pushing asset values up again because it'll bring cap rates down. We just wanna get ahead of that curve. We wanna say, hey, if there's no more long term risk of rates shooting a lot higher and the cap rates have adjusted enough where we can make sense where we can get a 7% loan and you know, buy a nine or a 10 cap and get that spread. Why not by by now? And then when rates come down, our values will go up that, that, that was our thinking. Yeah. Uh uh great explanation. Uh Just a more simpler perspective, right?

Two years ago, the real estate we're buying was worth millions more, right? So people that have to sell now have to sell now and when your back is pushed up against the wall and you have to sell, you're, you're offering a discount. Very real example. The property we just bought in Saint Louis was owned by a, uh, I don't know if it was a publicly traded reed. I believe it was a big reed and they have over 3400 properties and they have half a dozen or less that have more than one tenant. It is no longer in the investment profile that multi-tenant retail, they're deciding to divest this year. You're going to divest in, in market conditions. Right. So a couple of years ago that would have been easily a cap real estate which would have driven the price up at least a million and a half 2 million bucks. Right. Right there. So, just on a very basic level, we're getting it at a discount. And if you believe that interest rates will come down eventually and you can still grow these rents and keep your tenants, you're buying at a discount and, and you can appreciate that discount as soon as the interest rates drop, right? Because if we ever get down, like say we're at 7 7.5% right now, if you get a one point drop on a, on a $10 million loan, you're saving 100,000, you're making $100,000 more that year, right?

And, and to put it in perspective, you know, if you put $2 million down on that uh real estate and you're getting 100,000 extra in cash flow that improves your return by what is it? 5%. Am I doing that right? Over 2 million? And so you can see it just for that example, every one point drop is a 5% increase in, in, in, you know, return on your, on your invested capital. So what you're talking about, uh it's not too unlike any other supply and demand, is that right? You've got a bunch of sellers out there but not a lot of buyers because the interest rates went up. So the sellers have to drop their prices to, to sell their property. Right? Yeah. And essentially what we're doing right now is, is uh you know, right now we are making a little less cash flow in a lot of these assets until some sort of value add proposition comes in line. So like the Saint Louis deal, we're doing that through spinning off the Chipotle and Panda pad and we're able to return about a third of the equity we, we believe and then just that basis reduction right there, we should be cash flowing. Great. If we get interest rate reductions, which aren't built into the returns at all, just because it's fictitious, we, we have no reason to believe when and if they're coming down.

Right. So if interest rates start to come down, then we take what we think is a good return and it really starts to get nuts and if they don't, we still have a good return. Exactly. Exactly. We don't have to have the interest rate. So I, I would put a lot of caution in, in, you know, investments that you're reviewing right now as a limited partner. Right. Hey, here's this deal, we're gonna get a 20%. Irr, we're gonna hold it for five years. Um, at cash flows, 5% a year, there's something going on there. You know what I mean? Like, where's the money coming from? Oh, we're, we're gonna double all the tenants rent and then our interest rate's gonna get cut in half. No, I think it's important when you're buying today to, if the deal works today, you get a five year fixed interest rate. If the rate doesn't, uh, come down fine, you're still making an acceptable return. It may not be ideal, but at least you're in the game and you're making returns for your investors instead of having the capital sit on the sideline for the next five years waiting on rates. Like if we can get them a double digit return, maybe 10% versus a 12% or a 13%. And, and with these higher interest rates, I believe the upside is larger, uh, on, on the deal that the rates are gonna come down.

The probability. I think the rates are gonna come down versus go up from where we are right now. It's, it's better. I think that they come down and that's my opinion. I can be wrong. You never know what world events are gonna happen. But, uh, I bet in two years from now, I bet the rates are equal to or less than they are today. The chances of that are higher than the, than the alternative? Yeah. Yeah. And I, I mean, I, I think there's a lot of, you know, murmur going on. Are we gonna get a rate cut in September right before the election? You know, is that possible? Is that the one, you know, quarter point rate cut we get this year? What will that do to the economy? Because not much. Well, the economy's doing great. Right. And, and that's why we're not having to lower interest rates. So, you know, it may do a lot more just because everyone's being kind of stagnant. Like what's gonna happen if, if you start to tick and trend in the right direction, the economy's doing great. I am worried that, yeah, that they're gonna cut too quick. I mean, hopefully they don't think that that's coming from someone that wants low interest rates, but we also can't have a runaway economy where, you know, things that shoot up must come down hard and I would rather kind of stay on this steady trend where people know what to expect.

I mean, the, the dow and the S and P and the Russell were hitting literal all time highs week after week right now. So, I mean, we're, how much more do we want to juice this thing? I, I think slow and steady as people have time to adjust. So we don't get ahead of it. And then, you know, if we do get too ahead of it, then they gotta start raising interest rates again and that's gonna be a really scary situation because we may not have control like we do now. Right now. I think inflation is under control. But if we get, we get too ahead of the game then, then we'll get out of control and that's when rates are gonna have to go even higher. And that's not what we want. Yeah. So, you know what, what scares me right now. I, I would say what would scare me right now is buying some like stupid, you know, low cap rate multifamily deal going in with like a, a ridiculously high rate. Um you know, maybe a negative leverage situation you're going in with 12 or three years of interest only and you've got to get 10% you know, annual rent growth a year. You know, I think, I think multifamily are starting to see a bit of a plateau and rent growth. That's a good question. We haven't talked about multifamily in a while, you know how it was just going up in value like crazy for a long time.

What do you guys have a feel for the current conditions in in multi? Is it plateaued a bit or is it still it still really hot? I mean, in, in Dallas, for example, right? There's been so much supply still and, and there's so much out there still that, that rent is starting to stagnate. They can't fill up the apartments fast enough. There's still some supply coming online. Yeah. Rumors in Dallas are, there are owners now starting to struggle. I mean, the, the frenzy that happened in Dallas was five times. What happened in Tulsa. People fighting over assets, you know, with those low interest rates and now people are saying, ok, I bought into this thing with a 3% floater. Now, my rate's seven and I, I don't know what to do. So they had a floater and they were banking on increased rents, but now there's some empty units so they can't increase or they just didn't get the rent pop that they were thinking about. Right. So like you go in, you're borrowing 5% at a five cap deal, you've got, you know, equal leverage and then you go invest a ton of money and you don't get a rent pop, you're making no money and then you can't refinance that thing you're selling for a big loss in general.

I would say Tulsa, we haven't seen a multifamily take a dive. I would say we've seen prices kind of flat plateauing and for a while they were just shooting up, shooting up. And I think we've kind of seen that level off. Now, same with rents, would you say same, same with rents. Rents are, I mean, there's still increases. Uh I think they're starting to slow. Uh You know, so that, that'll be, that'll be important to see what happens going forward. But what I have seen is, you know, the A class stuff went up first B class and I'm still seeing some C class assets that I think should sell at like 40 or 50 a door that are like, you know, they're asking 70 a door here in Tulsa, I think just the barrier to entry is so low. Now that yeah, that if you want any units, you can take these really old kind of shitty units. Uh and you can get them for less way less than eight units, but still pretty high for Tulsa C class. So I I think Tulsa is still absorbing it. We're still seeing uh a little bit of rise in the lower income stuff but, but the top end is kind of leveled off. I think Dallas is going to see uh top end prices come down if rates don't start adjusting uh over the next year.

Uh If you, if you ask me, you know what I would see in like in Dallas or in L A or a Phoenix multifamily deals are either gonna stagnate or they're gonna start coming down some until we see a rate adjustment. Yeah, and, and that being said, right? I think once that rate adjustment starts to come in, the the housing frenzy is gonna be there again, right? Like residential homes are probably gonna pop up another 1015 20% just like they did because the affordability to buy a home is going to be there and, and, you know, as a nation, we just haven't been able to build enough homes. So that's why these rents have been going through the roof. Um, so I, I don't think you'll see rents soften when that happens. I, I think if anything rents will go up with home values again just because we've been at such a shortage in home building. Yeah, I mean, you think about, uh, after COVID when rate shot up, but also uh construction cost, it was a literal double whammy. And I, you know, I think that shut down a lot of multifamily, multifamily development. And so you're right, we're gonna have a shortage of units uh on online that will, that will like further support rents that have kind of really gone up a lot now they've kind of stagnant but, you know, there that upward pressure of, hey, there's not enough housing, population growth, population growth driving it.

And so now, uh, you know, you see construction costs coming down, interest rates are still high. But, uh, you know, the demand that's building up in the market is, is, is gonna start to materialize here over the next 6 to 12 months. I know. Yeah, I know. Owosso, you know where I live, a one bedroom apartment is double now what? It was 10 years ago when I moved into my first little apartment there, I believe that over the last 10 years, for sure. What's the next topic. Yeah. So we kinda got into a little bit but just, uh, you know, leveraging and funding if you're doing deals right now, um, and you're getting able to make them work, you know, what is, what is the thought process behind it? How are you putting it together to make sure you don't get, um, you know, screwed. Right. Yeah. What we've done, uh, both on precision side and some on the criterion side is we're still kind of opting out of institutional money where we have to lock in the interest rate for 10 years. You know, we still see, you know, three years from now, five years from now rates that are demonstrably lower than they are today.

And so I don't, I don't want to get a kind of an onerous loan uh that is 10 year fixed with a massive prepay penalty because I just feel like I want that flexibility. Uh when rates come down, two things are gonna happen first, I want the ability to refinance down to that lower rate or if rates come down, it's gonna push up prices, push up sale values and I, I want the flexibility to sell it. And so you're saying that if you get a traditional loan or a loan from a bank, you don't have that uh pay as big of a, like a non course to season in life. Co CN BS something something where, yeah, bank debt, you know, I, the, the interest rates are, are basically similar. I think you can get lower, maybe a slightly lower interest rate from institution like a Fannie Freddie. But the flexibility I get with the bank, I can pay it off or refinance it at any time and, and the a 10 year, you know, Fannie Freddie deal. Yeah, I may get, instead of a seven rate, I may get a six or 6.5, but II I gotta own that, that loan now. And even if I try to let someone assume it, it's gonna hamper my purchase price. Uh So for us, we're staying flexible right now because we're not sure exactly how the market's gonna go and we we want to be able to sell or refi and the event rates come down.

Yeah, I think uh it's all about debt service coverage ratio right now. Obviously, your interest rate is a lot more expensive so that debt service is a lot more expensive. So you just need to make sure your property covers um which is driving leverage down so consistently a couple of years ago, we were going in at 80%. I think we did a deal or two at 85% when debt was stupid cheap. Like that tells you how much you can leverage it up because it's so cheap. It still covers um the debt now we're doing 7070 five, 7075. Um I think Houston is is 70 um, maybe even 65 which is insane. I didn't think we would do a deal like that. I mean, it's $14 million deal and we're putting in 5 million bucks so lower leverage. Right? And in exchange you're, you're getting lower returns. So, um, in my opinion, the, the thesis is you're, you're buying at a discount, you're ok with the lower return because you feel like you're gonna get that interest rate pop or, or you're gonna continue to put push rents or whatever it is, a lot of the assets we're going in on now.

Um have a spin off or an immediate value add opportunity or we believe, you know, rents are just severely under market and we can just push them up so much that we can get the cash flow that way, right. So let's talk about, we've talked a little bit of multifamily retail, you know, I, I think uh going through COVID retail kind of became, you know, the less desirable asset class, I mean, office like way less desirable retail, slightly less desirable and, you know, multifamily self storage kind of over here kind of really positive, you know, assets. Uh And so what, what we see is that with construction prices high and interest rates high and retail kind of being this thing that people aren't quite sure about coming out of COVID, we saw a lot of, a lot of, a lot more fewer retail construction starts and, and so we, we think that's actually Buoying up the occupancy in retail that otherwise maybe would be straining. Uh Most of our properties are 100% are really close to 100% occupied.

National occupancy is I think 95 across neighborhood retail because you know, nobody was building retail over the last not, I wouldn't say nobody. I'm just talking in general, less people were building retail over the last 3 to 4 years. And the top retailers are still expanding the top 25 the top 50 retailers are actively still expanding, opening up new stores and you know, we haven't seen the fall off there. Uh You know, office is, is another one we can talk about. I, you, you can read the reports, the big cities, San Francisco, New York, you know, Chicago, uh they're gonna, they're, they're still, they're getting hit hard now and it's gonna get worse. Uh Less people are going back to work but also some of these leases that people, I mean, the offices are vacant. Ok. But they had good leases with good companies. So they've been paying maybe it was a 10 year lease, eight year lease. Well, COVID, you know, we came out of COVID, you know, two years ago, three years ago. So as these leases renew, people are gonna be like, you know what I want half the square footage or I want zero square footage. So I think office in especially in big cities remains to be a problem. I don't think that you have to shy away from like a very specific office building in a, like a sub market.

Uh, that, that has a story to it. I, I think you could probably do ok with a smaller office building, you know, you know, maybe a good company, a good lease and, and it's not so big that you could fill it, but in general offices is a tougher one for us and we just don't, we're not as active in looking for office because I just don't see an office boom, you know, in the next five years, like, you know, multifamily, I think you're safe. Uh I mean, there is getting so good that there's gonna be more people needed to work in an office job, right? It makes total sense. It makes no sense, right? Like the the people working office, desk jobs is, is going down right? Specifically in, in Tulsa. And then these, these big markets, I mean, every big market, every big primary market you go to, there's vacant office. But yeah, I mean, I'm not saying you can't make money, but it's something you should proceed with. Caution, especially in a market that there's high vacancy because there's just too much, there's too many places for your current tenants to go and it doesn't give you any leverage when you're trying to renew leases that increases where on our multifamily on our retail, we have leverage.

Like where, you know your retail business, let's say it's in South Tulsa. Like where are you gonna go? There's not a lot of vacancy and are those vacant spaces even asking less than what we're asking? Like we have some leverage to say you're gonna move your whole business over a buck, a square foot a year. No, there's nowhere to go. And that's what, that's what you want is you want that high occupancy where you at least have some leverage to keep your tenants. I think light industrial, um like small Bay, light industrial is got a lot of similarities to what we do in retail right now. A lot of the same principles, right. Very high occupancy. Um expiring rents, you know, half to 50% less than new construction if it's even being delivered. And a lot of people aren't even building those small Bay Light industrial stuff. You're, you're seeing big tilt up wall shit go up right now. So I think there's AAA big play for a small Bay light industrial, just like retail. I think you're gonna be left with a lot of 67 $8 expiring rents and you have a compelling case to go back to them for 1011 12. That's a, that's a massive increase. That's huge. So we're almost out of time.

But um, so that was excellent coverage of the market. But I have one question that maybe our listeners and, or investors might have in all this, you know, you said uh that nobody was in, no, nobody was building big industrial complexes over the last couple of years. But our listeners might say, well, hey, criterion I invested in some of your developments. How are our developments different than what you're talking about on some of this big retail development? Was it because we did single tenant development. We already had leases in place. I mean, I don't think we did any developments more than what four tenant spaces or something like that. And we already had leases in hand, long term leases in hand, right? Not only are people, not really specking dirt, but people are definitely not specking buildings with construction costs hundreds and hundreds of dollars per square foot. The, the only reason we're developing things is because we know the the market cap rate for a brand new Chipotle is, is like is what it is. You can dial that pretty damn close to what you think your exit is gonna be. Your biggest variable is the time of when you're gonna exit it. So I I think the the biggest frustration on the new retail developments right now is there's just, there's such a backlog of inventory kind of sitting on the market because interest rates are so high that it needs that catalyst.

I mean, people forget that the buyers and owners of these assets are are 1031 sellers and they're not, those, those things aren't selling the big multifamily class a assets and primary markets. Your, your massive tilt up, um, uh, concrete industrial assets that are, are, are $50 million. Right. That, that gets bifurcated down into 100 Chipotle and, and 100 Starbucks and, and 50 kiddy academies or whatever it is. So, I think again, once you see that catalyst on, on the bigger assets and those things start to trade, it's, it's all just gonna funneled down into this stuff. So to answer your question, the reason we're developing now is just because it's, it's pre leased and we know it's gonna cover the debt and be fine until it's sold. It's a guarantee, the guaranteed lease when I was talking about new, you know, construction starts for retail is more spec retail. You see people put up these, you know, strip centers or power centers and they, and they were trying, they were like, ok, I got one or two of the tenants, but I, I'll figure it out there, there's one a mile away and that's what I'm saying, like we're doing single tenant or two or three tenants where we have the leases in hand, uh by, you know, with the national tenants.

And so we know we're gonna get the rent. So it's not a spec building. Uh but in general to close this out guys, I wanna talk real specifically about, you know, we're talking about our, our thoughts on national trends, our opinions, which don't, don't mean much, you know, we're here in Tulsa, Oklahoma, Jinx Oklahoma. Uh, but what, what you should be able to deduce is, is that no matter what the market is doing, ok, if it's up or if it's down, there's gonna be areas that are, uh, going in the wrong direction, population are leaving the areas, tenants are leaving the area for whatever reason and then there's gonna be the new areas of growth, right? A suburb of Dallas that, that is the new hot area and a and a brand new Walmart Supercenter is gonna go there and you know, retail's gonna surround it and there's gonna be Chick Fil A and Chipotle and all these things. So, you know, don't get caught up too much in the matter micro because there's always a micro opportunity in a certain market and a growth area to make money in real estate. And so you just can't get discouraged by the, hey, the market's not doing well overall. Well, that's true in some cases. But uh always look for your opportunities locally because there's gonna be some and you in your city know where the growth is, where is the hottest part of growth in your city is and it's gonna be way different from the worst part of the of growth in your city.

And, and so those between those two are your opportunity. All right, great thoughts. All right guys. Well, we will see you next week on how to invest in commercial real estate. All right, thanks guys.