Episode #083 - Analyzing the Stock Market vs. Commercial Real Estate!

Today hosts Braden Cheek, Brian Duck and Joel Thompson from The Criterion Fund discuss the various investment options available in today's volatile market.

All right. Welcome back to how to invest in commercial real estate. We are back again talking about some different investment options that some people may have in this crazy market. But before we get to that, we want to talk about a cool deal. That's breaking ground this week, Joel tell us a little more. Yeah, I just got out of a meeting. Its iconic Bigsby. It's mixed use, multi family retail development going to downtown and uh downtown Bigsby despite interest rates going up and and increasing our costs were moving ahead. We're gonna, we're gonna do it anyway. How many square feet is that Thing? How many square feet? I don't know. But it's like 130, units. It's got retail along the bottom. It's got two or three levels of parking. So the building itself is three stories, three stories. Yeah, we'll put some pictures up so they can see it iconic Bigsby. Check it out. We're breaking ground. I think it's next week. Um, it'll be about an 18 month build this release next week. That's why I said this week.

So way to mess that up. Well, it's this week, it's being broken ground this week. All right this week. Drive by. It's 151st in Memoria. Yeah, I think one of the coolest things about this is the kind of public private partnership, right? Like that's the first time the three of us have have done anything like that. So you're actually partnering up with the city of broken or bixby I apologize and they maybe gave you a piece of land and some sort of incentive. So real quick how does that work? And why would they do that? Yeah, so they put out an RFP or a request for a proposal and there was only two or three of us that bid and and we won the we won the bid and then they've developed a tax incentive district district and so then they're offering us tiff dollars based on the value and economic impact of the project that we're doing. And as far as the Freeland goes, it's really not free land. It's once we spend an equivalent amount to the value of the land and infrastructure improvements, that's when they did the land to us. So we actually don't own the land yet but as we start spending money on infrastructure at the site uh as soon as we get to a certain number number that equals the value of land, that's when they did it over to us.

So yeah, they're, they're able to do this because you're gonna go in and generate sales tax and they're going to recoup that investment, so to speak. So that's really how cities invest in in commercial real estate. And I believe broken Arrow's done it as well. Not only will the retail provide sales tax but the just getting, you know, 130 residents or it's not gonna 130 maybe it's two or three people per apartment, maybe it's 2, 250 people in downtown living and spending their money in downtown Bigsby. That's really what that was the pitch that we gave them these guys that downtown is dead or it's it's, you know, not nobody lives there. Everybody just drives by it. They're driving north to, you know, on the memorial to spend their money. They may be driving west 101st to go spend their money in Tulsa Hills. So it's like we gotta get people living here and spending here so real quick. What's the project timeline and estimated costs right right now. Okay. It's roughly $30-$35 million. We're finalizing budget and timeline is about 18 months. So the spring of 2024 will be trying to fill that, that deal up hopefully.

Alright, we'll basically be on the lookout spring in 2020 for summer summer of 2024. Anyway, Well, we'll go and kick it off here. So I thought it'd be an interesting time. Obviously it's a super volatile market right now, stocks are going uh, down crazy. Um, debt is going up crazy. Real estate is kind of stagnating a little bit. There's some delta in between the Federal Reserve and the Treasury bills and we'll kind of get into why that maybe not as correlated as it is, but let's just start in the stock Market because I think that's where most people have their investments right there company 401K. They're they're you know robin hood account. It's it's kind of the first point for a lot of people to invest is the stock market, right? Yeah. Right. Yeah. Like I said uh everything's going down right? So um I've got some numbers here. Let's see the dow and S. And P. 500 at the end of Q. Three Uh closed at their lowest since November 2020. So basically in two years you've made nothing on any of your stocks this Year, just year to date.

They're down what 2025% on the Dow well The Dow is down a little over 21%. The s. p. 500 is down a little bit over 25% and the NASDAQ is down more than 33%. 30 3% just this year this year. And I'm not an economist and I'm definitely not an expert on the stock market but write me down. I'm making a prediction. We're not we're not to the bottom of this this cycle yet. I don't I don't think so either. And I haven't I have a feeling that it could be get a lot worse before it gets better. It could a lot of times in my experience what happens in the stock market is as soon as you get some bad news it's it just starts plummeting and but then it tries to a lot of people try to time it so that okay I'm gonna start buying before it goes back up. And so sometimes it will plummet and then it will, it will actually start going up before things start getting a little bit better because the experts are trying to value in what they think is going to the drop is going to be quickly, right, and then start re buying. Alright. I think the biggest thing is, and we've talked about before in the show is like, I think less than a third of the stocks on the new york stock exchange, pay a dividend.

And I think that average dividend is like 3 to 4%. So you're not getting you're not, most people aren't even getting dividends, they don't even know that, you know, it was a thing of the stock market, so really you're just seeing all of this money being lost and you're not getting anything in return, you don't see yourself paying down the debt, you don't see any cash flow. It's really just a bad day, you just have to sit on it and hope it goes back up. That's all you can do. So with with real estate, real estate is interesting because specifically we're not selling our real estate right now right, like we don't have to sell our real estate right now and I know you can make a similar point for stocks and we'll circle up with that in a second, but right now our dividend is has stayed the same in the real estate business, right? We're being paid to hold it and we don't have to sell it right now. So our value hasn't decreased at all. So theoretically our real estate is fine. If anything, it's it's doing better because it's appreciating still, the rents are still going up with lease renewals and already contracted rents that are scheduled to go up and our debts going down. So we're making money right now and the stock market losing money and what happens in the stock market, at least for a lot of people is it starts going down and they panic and they sell it at a loss maybe or not as much as they could, and then it starts going back up and they're like, oh, I missed the upswing happens every day.

It happens every day. It's happened to me many times actually. And with what I like about real estate is you really, you have to be disciplined with real estate, you can't go, you really can't sell it. It's a liquid. Yeah, it's, it's a liquid. So I will add though that we are selling uh some properties right now and I'm definitely not selling them at a discount. Sure there's so much money out there chasing property and real estate is such a solid investment that I'm still seeing real estate values maintain and or go up because of the inflationary uh situation that we're in where you may say, well, I know, but but houses in my neighborhood are aren't selling for as much? Yes, personal homes based on the mortgage payment that's based on the interest rate and people's incomes yet those are gonna get depressed when we and we're going to go into a small recession most likely next year, that may put more downward pressure on single family homes. But as far as commercial real estate goes, I think the demand is high and the amount of capital chasing it as high, so I don't think we're gonna see even if you wanted to sell your real estate, much of a drop in value there.

Yeah, when I say you can't sell it, I shouldn't say you can, you can you can sell your, but it takes a lot longer when you, if you panic in the stock market, you push a button and it's sold, you push a button and you know, it's it's not, not quite that easy in real estate is I guess my point. Yeah. And and going back to some of the sales, right, like multi family is still an incredibly hot asset class, I would say large, institutional, industrial, still massively hot asset class. We haven't seen any price reductions on our kiddie academy sales were about to close on one and then about to list another two and those are still uh being sold at at better prices than we underwrote. And I'd like to get into that a little more so the kiddie academy specifically, why do you think we're not seeing a drop off in prices given the increase in debt on those kiddie academy's? Well for me it's either because they're small enough for all cash buyers who may not care or maybe they wanna maybe they want to get some debt later refinance later or it's 10 31 money again, that's that'd be all cash, but it's 10 31 money and they've got to do something.

So I think that's the majority of it. I think we've had such a run real estate. Okay. You could probably say real estates on a multi 100 year run. Okay. But let's just say from 2008 till now it's on a 14 year run and the amount of gain people are getting when they sell is so high that they just They can't take a 25% hit or more on on the total value there and so they just they're motivated to go ahead and buy the next piece of real estate, and yes maybe they have to pay all cash but still that that all cash is gonna it's almost guaranteed sick Percent 7% depending on the cap rate and in an inflationary environment that that's going to go up the value of that real estate is gonna go up in addition to the cash flow that it provides and so I think that's what's going to continue to prop up values on commercial real estate. What Real quick. What about the homeowner or not? The homeowner the stock owner that says, well you're not gonna sell your real estate. I'm not gonna sell my stocks, I'm gonna hold your right, you can hold your stocks but they're not paying you, they're not paying you are.

Real estate is paying us and our investors are getting paid to the tune of 10-12% a year in cash flow alone. And and then when you add in the fact that we're paying down those loans and our properties going up in value because the rents are going up, it really is a strong case for real estate Overstock's. I'm not saying don't have stocks as part of your portfolio, but you can't spend stocks and and our investors can spend the cash that we send them every quarter. And that that's the And they're still getting all the benefits of the real estate investment. Just like if you were holding stock, you're getting the benefit long term if it goes up but we're paying 10 12% in cash in their pocket, which is way more than if you have a portfolio of stocks, maybe some of them are dividend paying and they're paying it to 3%. So your overall portfolio might be playing paying, I don't know, half percent record or something Compared to our two or 3% per quarter. Yeah, I mean we're all complaining about the interest rates being high. But realistically they should they should be higher.

Like the prime prime is way higher than than the Treasury's right now. I mean, and I'm not a massive bond guy, but at four and a quarter for a five year Treasury, I mean that's looking that's looking pretty appetizing. That gets up to six. Yeah, bonds are actually getting more popular right now because they're over 4% like you said, and like, well the U. S. Treasury, uh it's taxed at the federal level, but it's tax free at at state and local levels. So those are, those are attractive if you wanted to do that in the short term. And I think going back to the kitty cat and I think what's artificially propping up the market right now is that, you know, Yeah, the Treasuries are getting a little higher, you know, for and a quarter. But if you can still go buy a 6.5 cap kiddie academy in cash or a six cap kiddie academy in cash. Now, you've essentially got a six year kiddie academy bond, right? I mean, that's kind of the same thing or a six cap Walgreens, you have a 6% bond on, on Walgreens stock, essentially on Walgreens company. So I mean those are too, so that that's going to go up every year. The return plus if that goes down, you have the possibility to refi you know, I wouldn't necessarily just pencil that in if that's what makes it work, you know, refining in two years down to four, you know, I wouldn't necessarily do that.

But still a six cap deal buying in cash, that's a that's a decent return. And I think that's what's keeping up a lot of these single tenant deals that and you know, just the institutional stuff, there's just still so much money out there. I think, I think that that's a good comparison between the stocks, the bonds, real estate, obviously we love real estate. Obviously a lot of our investors right now specifically are loving real estate because everyone's seeing the stock market drop, everyone's seeing their Ameritrade account or their Robin Hood account or whatever brokerage there and everyone's saying that go down, most people aren't getting paid the dividend yet. Our investors, they really start to believe after that first or second deal, you know that that second year of distribution maybe or when the market starts to get a little volatile, like you guys, you guys still send out checks this quarter. It's like, yeah, man, of course, I can tell you personally, I got three checks today, I got a couple yesterday and it's making me feel a whole lot better about my overall financial after situation after watching stocks go down for months. Yeah, it's not gonna stop guys the next year's stock market is probably going to go down, I could see I could see it going down another, Could be, I just I feel like we had such a run in the stock Market and it's so volatile based on people's opinion of the overall market.

Uh, they're raising rates for a reason. They're trying to create a recession or some, something like that to get inflation under control. And so at some point the dam will break and we'll get some capitulation and we'll have a massive drop. And I guarantee you after that, we'll still send out $1 million dollars in distributions between the two companies, uh, every quarter. Well, well, obviously we're a little partial. We love real estate. Get involved. If you need help go to our website, it's the criterion fun dot com. You can join our investor list and other than that, I think we'll catch you next week. All right. Thanks guys. Thanks.