The Dominoes are About to Fall

Dave:
Hey everyone. Welcome to On the Market. I’m Dave Meyer, your host joined with James Dainard up in Seattle today. James, ready for the game?

James:
I am ready. I got my cough drops. I’m ready to scream as… The 12th Man is a real thing so I will be screaming with him.

Dave:
I’ve always wanted to go to a game there. Is it really something different?

James:
Oh, when you are back here I will take you. Yeah, I’ve been seasoned ticket holder for a long time. It is loud. When Beast Mode did the beast quake, it was the most intense thing I’ve ever heard in my life, it was absolutely crazy.

Dave:
Yeah, that sounds fun. Well I’m going to be in Seattle in two weeks but you’re not going to be there unfortunately. But next year we’ll do it.

James:
If there’s a game I might be able to give you tickets, let me check the schedule.

Dave:
I’m definitely in. Well let’s get to real estate. So today we have Ben Miller who is the CEO of Fundrise who just full disclosure is the sponsor of our show. But Ben is the single most knowledgeable people about real estate I’ve met in my life. And this is a fantastic episode and interview that we just had. Can you give a brief summary to everyone listening about what they can expect to hear here?

James:
I think this is such a great episode. This is actually one of my favorite ones that we’ve done and the reason being is everyone’s looking for this opportunity and they’re frozen right now. They’re like, I’m not going to buy anything until I figure out what to buy. Ben talks about what’s coming down our pipeline and as an investor to prepare of where the major opportunities are. And the hints he drops are… everyone wants to know where to make the wealth, it is what we’re going to talk about in this episode.

Dave:
And I do want to just give a little bit of a disclosure here because some of what Ben talks about is a little more advanced. We get into the details of the banking system and how loans are generated in real estate, specifically commercial real estate. But it is crucially important to what Ben’s thoughts are about what’s happening in real estate right now. And he provides really good concrete examples of how some of the shifting dynamics in the debt markets and this big deleveraging as he calls it, that we’re going to see over the next couple years could impact commercial real estate assets. So it’s a fascinating episode, I personally learned a ton, but just be before warned that there is some nerdy wonkery in here. But I know for people like James and I, we loved it.

James:
I love shooting this sh*t with Ben, I think I sent you an email before the show, I was like, I had to listen to this podcast twice to digest it, but it is fascinating and it probably changed my whole strategy for what I’m going to do in 2023.

Dave:
Wow. All right. Well those are bold words so if James has taken it that seriously, you definitely want to listen to this. So we’re going to take a quick break but then we’ll be right back with the CEO of Fundrise, Ben Miller.
Ben Miller, the CEO of Fundrise. Welcome back to On the Market. Thanks so much for being here.

Ben:
Thanks for having me guys.

Dave:
Well we’re excited because last time we had a great conversation talking a lot about Build to Rent, but James and I have both listened to a podcast you were on recently. James admitted he listened to it twice because he liked it so much. That was talking about de-leveraging, I think it was called the Great De-Leveraging on that podcast episode and it was fascinating. So we were hoping to start there and just learn a little bit about your thoughts on this topic. So can you just start by telling us a little bit about what de-leveraging is?

Ben:
Yeah. So it means to reduce the amount of debt you have, less leverage, de-lever and that’s basically I think going to be a ratchet on the economy and on all assets this coming year or two.

Dave:
And so when you’re talking about that de-leveraging in terms of real estate, are you saying existing property owners are going to reduce the amount of leverage they have on properties or are purchases on a go forward basis going to use less of debt or how would you describe the phenomenon of de-leveraging as it pertains to real estate investing?

Ben:
So the argument I’m making right is that virtually the entire financial system, not just real estate, has to reduce the amount of debt it has, it has to de-lever. And that is because we were in a low interest rate environment, basically zero interest rate environment, for 15 years and before that we’d been in a falling interest rate environment for 40 years. So that’s a long time. And we move to a high and rising interest rate environment, so you’re basically, it’s like you’re a fish and now you’re in the air. It’s a sea change, completely different environment. And in that rising interest rate or high interest rate environment, the amount of debt a asset can support is less. So to put the math on it rather, you have a business, you have a apartment building and you have a certain amount of income from it, let’s just say a million dollars a year. When your debt service doubles, which everybody’s debt service in the new interest rate environment has gone up at least 2x, maybe 3x, you can’t support the same amount of debt service as you could before. So you have to have less debt on the asset.

Dave:
And are you seeing this already starting to happen in your portfolio or how are you noticing this manifesting itself?

Ben:
Well I can talk about us and then I can talk about what I’m seeing firsthand. So we’re a little bit different than most borrowers. We have essentially what’s like a public REIT, there are publicly registered REITs and so our leverage is much lower. Our average leverage in our funds is 45%, 43%. So that’s a lot lower than most companies or businesses lever their assets. A typical private borrower probably wants to lever 75%, 65%, maybe 80%. So for us, basically we don’t really have this higher leverage problem, but we do have a couple of assets where I have it, because it’s the average leverage, so some are higher. And when I look at a… I’ll give you an example asset and how it’s playing out and what it means and you can then extrapolate that to a lot of other borrowers. So we have a $300 million warehouse line that holds a lot of rental residential with a big investment bank and we’ve got that line of credit or warehouse line, it’s a revolver so you can buy, you can pay it down, you can borrow it again. About 18 months ago.
And so when we got it, we bought a interest rate cap and I think talking about interest rate derivative is a really interesting subset underneath this topic. And basically what the investment banks like to do is lend their balance sheet to you and then you take that and you buy real estate or anything and then they go and they securitize it. Basically their business is really by generating fees and they use their balance sheet to basically enable themselves to get more capital management fees, capital market fees. So that’s really what they’re doing. So they’re not really lending to you, they’re really just bridging you to the securitization markets. And securitization markets, last year, 12 months ago you could borrow… that portfolio we built, you could borrow a 2.25% fixed for five years and now that securitization market is 6%.
So we have to pay down that line with that investment bank, we have to pay it down, we’ll do that and we have to bring it down from what it was probably 73% leverage to 55% leverage. And that’s basically a pay down of about 15, 20%. But it’s illustrative of when interest rates have gone up so much, you basically have to pay down. And we don’t have to pay down until the cap expires, interest rate cap, basically the size of the loan we got is too big for an interest rate that’s 6, 7, 8%. So we have the liquidity, we have a lot of liquidity so it’s not going to be a problem for us. But for a lot of borrowers, if your lender turns around and says I need you to write a check for 20% of the loan and I need that in every single loan that comes due or any loan that basically you’re going to get for a new property, that’s basically the problem for a lot of borrowers.

James:
Yeah this is really interesting because with the sudden increase in rates, this is the fastest we’ve ever seen rates increase this quickly, we’re seeing this in all segments and I think everybody is seeing these interest rates rise and they’re all thinking that the housing market’s going to crash and that there is some sort of crash coming. And for a while I’ve been thinking that there’s going to be this investment graveyard because of exactly what you’re talking about where the loan out values do not work with the current money and there’s going to be this massive liquidity demand to pay down these loans right now. And I know a lot of apartment guys for the last four or five years or the last two years, I know we staggered out our portfolio to be at 5, 7 and 9 years on fixed rates because… Or in 10 years, because we didn’t want to get into that liquidity crunch. But I feel like I’m seeing this now everywhere on any kind of leverage where it’s hard money, it could be banking, it could be commercial loans where the asset now can no longer pay for itself and there’s going to be this huge shortfall of money. And I think that’s where we’re going to see the biggest opportunity coming up, is this demand for liquidity.

Dave:
So it sounds like generally… I mean across the commercial real estate spectrum, we’re seeing people who have adjustable rates or commercial loans are reaching maturity. They’re basically facing the prospect of either having their current loan going up or they’re going to have to pay off their loan or refinance at a much higher rate. And this is going to cause a lot of liquidity issues across commercial real estate. So first and foremost, is this mostly with residential commercial or are you seeing this across the asset classes?

Ben:
Residential is probably the best.

Dave:
Oh really? Yikes.

Ben:
And office is probably the worst. I don’t know, on my podcast I had Larry Silverstein, the owner developer of the World Trade Center and he and I… It was just an insane interview and he’s talking about, he’s like, I’ve been… He’s 91 years old and he’s talking about one building that he’s developing that’s 5 billion dollars.

Dave:
You only need one if it’s 5 billion, then you’re pretty good.

James:
That’s working smart.

Dave:
There you go.

Ben:
I’m a piker compared to him. But anyways, you have office buildings throughout all these big downtowns that are just like, oh my god, they’re just… they’re unfinanceable. Literally, you couldn’t get a bank in the country to give you a loan at any price, period. Done. It’s zero liquidity. Liquidity means ability to get money. No money, so office is the worst. But if you’re a small business, forget about it, it’s everything. So I talked to another bunch of banks this week, this week? This week, yeah, yesterday and the day before, one of the banks we are a borrower, big relationship with them. And they were telling me, so this is a top 15 largest bank in the country, hundreds of billions of dollars of assets, hundreds of billions of dollars. And they said to me, so the way… where do banks get money, right? That’s a question, right? I love to understand how my counterparties work. Because if you understand how they work, you understand how they will behave. So banks, 90 some percent of their money comes from runoff.

Dave:
Never heard that term.

Ben:
Banking and insurance or asset management, you have deals that pay off and as they pay off you have money to redeploy or relend. So it’s called runoff.

Dave:
Oh okay.

Ben:
So yeah, that’s actually where most lending… When you go to a bank and you borrow money, it’s actually from somebody else paid off their loan and that’s why they can lend you more money because they’re usually pretty heavily levered up, banks are levered nine times or something. Of all the people levered banks are the most levered. And so nine times is like 90% leveraged and I think they’re actually like 92-3% levered technically. So anyways, so this bank basically probably lent 30 billion dollars in 2022. I said to them, what’s going on with you and how’s it going on with this liquidity crunch? And he says to me, for 2023 our forecast to the amount of lending we can do based on the amount of runoff we’ll have is by next December we’ll be able to lend a hundred million dollars.

Dave:
This is a bank with hundreds of millions of dollars of assets.

Ben:
Hundreds of billions.

Dave:
Billions.

Ben:
They would’ve normally lent, I don’t know, 30, 40, 50 billion in a single year. And they only have a hundred million to lend next year.

Dave:
What! Is it just…

Ben:
Yes.

Dave:
Okay. So you’re saying that none of these deals are going to pay off because they think they’re going to default or just no one’s going to sell or where does the lack of runoff come from?

Ben:
The essence is, for a deal to pay off it either has to sell and nobody’s going to sell or the borrower has to write you a check which they probably got from refinancing with someone else. But since nobody will finance you, nobody will pay off their loans. That’s whats happening, it’s a fact. Leading up to the last podcast in the last two weeks, I’ve met with probably 7 of the top 15 banks in the country. 7 of the 15, all the exact same.

Dave:
Really?

Ben:
They’re all exactly the same situation, yes.

James:
This is why I listened to that episode twice.

Ben:
People didn’t believe me. I was on Reddit and they were like, no way, this can’t be true.

James:
You were talking about the turtles, right? Will you go over the turtle concepts? Because this is a very complex topic and it made it very tangible and it’s like this never ending…. Go ahead Ben, go ahead and explain it.

Ben:
Okay. If I can do it justice here, because I’m not normally good at being succinct. So the point of the story about the banks is you don’t often think about where the banks are getting their money. And there’s a saying in politics, which is always follow the money. You to got to follow the money, so you’re going to borrow from the bank, but where did the bank get the money? The bank got it from depositors, they got it from a payoff and then the bank levered that, the banks are levered, they borrow, anybody in the market who’s lending to you borrowed against their asset. Just to try to make that simpler, if you go to a bank and give them your house as collateral, you get money from them and they have your collateral. A collateral is an asset and they take those assets and they borrow against them.
So now your lender is a borrower from someone else, your lender is also a borrower and who do they borrow that money from? Another institution who also borrowed money. So there’s this infinite chain of everybody is a borrower and a lender in the system and it stacks up. In a hard money world, you have a property with a hard money lender, the hard money lender may have borrowed against that portfolio of hard money loans from a bank. And the bank has that collateral and that bank has borrowed against that portfolio of loans. So the bank is levered and where did they borrow the money from? They borrow the money from different parts of the securitization market. For example, who levered that up with repo loans. And so there’s just so much more debt in the system than you can see. And because basically we went from a low interest rate environment to a high interest rate environment, everybody in that chain of borrowing to lender, the lender to borrower, everybody’s over levered. 90 some percent of the market, some huge part of the market’s over levered.
And so as the defaults happen or as the pay downs happen, it’s just a cascading effect. And I’ll give you an example. I know a big, big private equity fund, everybody’s probably heard of them, let’s say, I don’t know, top three or four and country, every private equity fund started credit funds over the last 10 years, debt funds. And they went out and became lenders. So if you have an apartment building or an office building and you borrowed from them, let’s say 75% of the money, they turned around and borrowed that money from a bank. And so they have a hundred million dollar property, they lend you 75 million, they turn around and borrowed 55 million from Wells Fargo who is actually pretty active in this part of the market, they call it an A note. And then the private equity fund, we keep it B note and then the borrower basically just thinks that the money was borrowed from this fund, but it’s actually really more complicated than that.
So what happens is, let’s say you have a loan with this credit fund and your loan’s coming due on December 1st and you go over to the credit fund and say, hey I need an extension, the market’s horrible, I’m not going to sell this today, let’s just extend this loan by 12 months. Well that credit fund’s going to say no because they have a loan from a bank and they turn around to the bank and say hey bank, we need to extend this loan. And the bank’s like no, pay me. Because certain banks are saying, F-you pay me. And so the credit fund is turning around and saying, no, pay me. And you’re with the borrower saying no, no, look its fine, the property’s doing fine, just give me an extension. I mean what are we talking about? Just give me extension.
How many times have you gone to a bank and it’s just expected to extend the loan. It’s like nothing, fine I’ll pay a small fee, let’s just extend this thing. No, you can’t extend it, pay me. Well how much do you want? 10%, 20%, they need to turn around pay down their lender because they have to de-lever the loan, they actually used this collateral to get the money to pay you. So there’s this chain of nobody cannot pay down because everybody’s borrowed from someone else. And so if you have a loan, you think you’re going to extend it in the next 12 months just because the property’s doing fine and you go to the bank, you might be surprised to them say, no.

Dave:
So what happens then? I just think the whole system is obviously so dependent on this chain continuing to operate, what happens when… Like you said, at any point any one of the lenders could just be like, no pay me. So what happens to, let’s just say an operator of a multi-family property, what happens when they can’t get liquidity or they can’t refinance? How does this all play out?

Ben:
So there’s a few possibilities, so let’s do the easy to the hard. So the easy way is that multifamily operator says fine, I’m going to go sell all of my freaking stocks and bonds I own, they probably have money outside and they sell it all and pay down, they’re not going to lose their apartment buildings. So they can turn around and sell all their assets and pay down the lender. That’s a luxury situation to be. I just want to point out the second order consequences of that is a lot of people are going to have to be selling their liquid assets like stocks and bonds to pay down their loans. And I’m talking about even massive institutions are going to have to do this. They’re going to have to pay down their loans and so the amount of liquidity is going to go away.
And when you have forced sellers, prices fall. So that was exactly what happened in England. If you guys remember UK two months ago, the gilt or the UK treasury spiked and all these pension funds had to go turn around and sell other assets to basically cover their margin on their treasuries, on their gilts. So the liquidity crisis happened not in gilt but actually in CLOs. So that’s why the cascading effects are much more sneaky because it will hit the liquid markets because that’s where you get money, that’s where you get liquidity. Somebody along the line is going to have to get liquidity. So let’s just say the borrower says I can pay down.
Scenario two they can’t pay down, they go to the lender and the lender says… Depends on the lender, so now if you’re talking about credit fund, they’re going to foreclose, they have to, they don’t have a choice, the extend and pretend that was the playbook for all of banking for the last 15 years, they can’t do, they can’t extend and pretend because the loan no longer covers. Who’s going to pay the interest rate that it doesn’t cover, it just literally fails their FDIC regulations that say you have to have capital ratios, so it just fails it, so they don’t have a choice. The regulator is going to make them default that loan. So credit funds are going to foreclose.
The private equity fund I was thinking about foreclosed on two deals last month from huge famous borrowers. And all this is happening, nobody’s talking about it, its not hitting the news. But you would’ve heard of the borrower and you would’ve heard of the private equity fund. The residential deal they foreclosed on, they’re happy to own it. But even though they are the lender, they still have to pay down the senior. Because if they foreclose, they have a big apartment building and they’ll say 80%… And I know of a deal where this happened in a major city, the deal basically… Even at 80% that credit fund has to pay down their senior lender, it’s not enough. Even if they foreclosed, the senior lender who that has that asset now they foreclosed on, it’s still over levered with their senior lender. Do you follow?

James:
Yeah, it’s just leveraged to the till, it’s a complete mess.

Ben:
Yeah, so it’s confusing. So I almost wish I could say names but it’ll get me in too much trouble. So I’m just going to name like, you went to ABC lender and you borrowed 80%, ABC lender, now foreclosed on your 200 unit apartment building, great, they have a 200 unit apartment building, but they borrowed from XYZ lender and XYZ lender is still saying pay me down, pay me off, pay me down. So even that ABC lender has to sell some… They have to do a capital call, they have to get liquidity, pay down. And so there’s again liquidity getting sucked out of the system. As liquidity gets sucked out of the system, prices fall. It’s the opposite of quantitative easing, opposite of what happened in 2021 where there was all this money everywhere and prices went up everywhere, money is being withdrawn from the system.
If you’re familiar with money supply, the M2 is going to fall because of this deleveraging dynamic and also quantitative tightening. So you actually are going to see, I think a liquidity shock next year as all this money leaves the system. So that’s a second scenario. They also foreclosed on an office building and they’re like F this, what am I going to do with this office building? The office building’s probably worth less than their loan, way less, maybe actually less than the senior lenders loan. They may give that whole office building to the actual bank XYZ bank, bank of America or something. Offices just defaults left and right. It’s going to be a blood bath and everybody talks about office to residential conversion, they don’t know what they’re talking about.

Dave:
Yeah, we’ve had a few people on this show come on and be like, yeah that doesn’t work.

Ben:
It’s just some academic or somebody talking about it, government policy, it’s like, you’re dreaming.

Dave:
It sounds like maybe 5% of offices could realistically be converted, if that.

Ben:
One obvious point, how often is an office building a hundred percent vacant?

Dave:
Yeah, right.

Ben:
Never, there’s always some five tenants in there and this building’s 20% leased, how do you renovate a building when there’s 20% leased with five tenants, you can’t.

Dave:
Yeah, it doesn’t make sense.

Ben:
Anyways, the question [inaudible 00:26:43] interesting is basically does the regulator… Right now the regulator has the hurt on the banks that really… Just absolute [inaudible 00:26:50] to them. So the question is, does the regulator start looking the other way and saying, okay, I know that you have all these assets that are basically in default and not covering, I’m going to look the other way. That’s a question that is… I don’t know, I suspect the regulator is not going to do that, for a bunch of reasons. I say this a lot in my little world, but this is more 1992 than it is any other period in our lifetimes.

James:
In 1992 the investment companies got… Everyone thinks of the crash as 2008. But in 1988 to 1992 the investment banks got rocked and it was the same type of liquidity crunch because the Fed did not step in at all. They did not look the other way in these investment… I was reading up on that and wasn’t like 90% of investment companies just got hammered during that time? It was some astronomical amount that it kind of shocked me and they couldn’t recover for a good two, three years, I want to say.

Ben:
Yeah. So I say that that was the worst real estate crisis in American history, way worse than 2008. Most people our age, it’s way before us… So basically the policy approach back then was let them all burn and they foreclosed on I think 8,000 banks and every developer had their loans called, so every developer you can possibly name either lost all their assets or basically was nearly about to lose all their assets, nobody was spared. And so a lot of times you see with policy and actually generally with human behavior is, if something happened that was bad, people don’t repeat that mistake until enough’s times passed that people forgot and then they do it again.

Dave:
Seems like it’s about time. Yeah, it’s been 30 years.

James:
We’re overdue really.

Ben:
Yeah, so we’re like the full circle. If it doesn’t happen in this cycle, it’s definitely happening next time we have a down cycle. Because it just seems like all these lenders who got over levered, all these borrowers who got over levered, they seem like the bad guy and we should just let them all burn. And it feels very politically satisfying, so we might end up there again this time.

Dave:
You just don’t think there’s political appetite to bail out banks again after what happened 15 years ago?

Ben:
And bail out private equity funds and bail out the rich, that doesn’t… I think there’s probably not going to be any more stimulus this decade. Bailouts and stimulus, forget about it.

James:
Yeah, stop the stimulus. But sometimes you have to let things burn a little bit, right? I mean that’s capitalism.

Dave:
That’s capitalism. Yeah, that’s the basic…

Ben:
Okay.

James:
And what Ben’s talking about is a big deal, it’s in all different spaces of this… People were just middle manning money everywhere for the last two years and making good returns. And it’s not just in the multi-family space and these office buildings, the hard money space was really bad as well. These lenders would come in, they would sell the notes off at 7%, 8% and now these lenders are paying to their senior bank, they’re paying 10, 11% and what’s happening is these fix and flip or burn investors, they’re coming in and they’re going, hey my projects are taking too long, I’m over budget, the value kind of fell, I need that extension and their rates are getting jacked up five, six points or they’re having to come in with money or they’re just not getting extended at all. We’re actually a hard money lender up in Washington and we’ve had so many requests for refinancing other lenders because they have no choice, the lender will not extend right now and it’s causing a big, big deal. And then we’re looking at the loan to values and that’s our answer, yeah we can do this loan but you need to bring in another 15% down and these people do not have it.
And that’s what’s so terrifying, in 2008 we saw a lot of REOs and bank owns through the residential space. But this is like, if you don’t have the money, you can’t pay your bills. And these investment banks and lenders, they’re going to have to take this… There’s going to be a lot of REOs and deed in lieus going back to these banks and banks are going to become… we’re all freaked out that the hedge funds were going to be the biggest residential owner with all this acquisition of housing and they might be just based on bad loans coming back to them.

Ben:
And so again, all the interesting things are the second/third order consequences. So the second order consequence is everything you just said James, is that appraisals are going to start coming down because you’re going to have all these bad REO marks and people are going to be forced to sell and that’s going to really hurt your LTVs. So then you’re going to go to borrow money or refinance and then the LTVs are going to be even worse and then they’re going to be more foreclosures. So we’re going into this cycle that just starts to tear apart… it’s this vicious cycle down and that’s one of the other consequences across the board. And in every [inaudible 00:32:19] we’re a FinTech, buy now pay later. Guess what? Super levered.

Dave:
Yeah. You said appraisals are going to come down, so I presume that you think there’s going to be a significant decline in property values across commercial real estate assets? It has to, right?

Ben:
Yeah, there’s no question. It’s a great opportunity essentially because we’re not talking about organic pricing, the price that banks sell things at, there’s no relationship to what you think is actually worth after the next, I think, probably 24 months of real downturn and distress. And so there’s an opportunity to buy or opportunity to lend to and if you have low amount of debt, this is literally what Larry Silverstein was saying, you go through horrible crises, you come out of it, you still own the building and now he’s worth 10 billion dollars or something. It is part of the game, don’t get caught in the part of the game where you basically lose your asset.

Dave:
So you mentioned Ben, that there’s a lot of opportunity, for people listening to this how would you recommend they take advantage of some of the upcoming opportunity you see?

Ben:
You can go talk to the banks, approach the banks, the banks are going to have… They don’t have it yet and they’re really slow. The brokers that were doing all of the lending will move to become the brokers for this middle capital, this bridge capital, I call it gap funding, rescue funding. All the brokers that were previously doing the work to find you senior loans will now do this work. So the brokers are probably the biggest source of flow. Its funny, the stock market, I still think they’re another leg down, and then overall markets, the recession hits earnings. So you want to be in credit, you want to be in credit this part of the cycle because the real value, the real opportunistic value I think is still a ways off. But the lenders they’re really the headwaters. But the deal flow is going to percolate everywhere else.

James:
I know we’ve reached out and we’re definitely getting a lot of response. The different types of lenders are a little bit, I think seeing it first. These local hard money guys are definitely seeing it first right now because the notes are shorter term, they’re usually 6 to 12 month notes where some of these other ones, they’re 2, 3, 5 years. And there is a lot of inventory starting to show up. I have been getting quite a bit of calls from lenders saying, hey, we just took this back deed in lieu or we’re going to foreclose this, what can you pay for this? And they don’t typically like my number, but the number is the number. But you can do it right now with the local smaller lenders, they’re not big deals but there is volume coming through for the smaller investors or the mid grade investors right now. And it is coming to market as we speak.

Dave:
And it sounds like Ben, you’re putting together a credit fund at Fundrise to take advantage of some of this.

Ben:
Yeah, we’ve had a credit strategy for a long time, but we had sort of sized it back over the last two couple years because it just was… We were deploying mostly elsewhere because it wasn’t attractive. And now all of a sudden its like… I feel like what’s happening now or in the next couple years will happen to us or for us five times in our life, the kind of deals we’ll see, the kind of lending we can make. I went through 2008, I have all these scars from 2008 and so 85% of the time it’s business as usual. And then there’s a few times where it’s just the entire ballgame’s made or lost. And so yeah we’re going to do credit first and then we’ll do equity second. Because you could almost see the other side of this, you could feel confident that it’s not permanent. It’s a couple years of transition to essentially a new borrowing environment.
And some people are unlucky, they had maturities come due in the middle of this, basically this period where there’s high rates and no liquidity and that sucks. It’s unfortunate for them but it’s an opportunity for someone else, problem is an opportunity. I’ll give you another example, this is outside real estate, but we have a tech fund we launched and we’re debating this, I don’t know if we’re going to do this because it’s so controversial, but I have sales coverage, I was buying all this… I came in and started lending to all these big… Investment banks, they get these deals and they securitize them and the problem is all these deals they intended to lay off or syndicate they say, they got stuck with, it’s called hung loans. So they have tens of billions of all these hung loans. And an example of one that’s well known is they have 12 billion dollars of Twitter’s debt. And I know exactly who has it and I’m talking to them and I’m like, at some point they’re going to just dump this debt for nothing. They’re just going to be like get me away from this thing. And we’re debating internally, is this a good opportunity or is this just too messy?

Dave:
Wow.

Ben:
It’s so messy.

Dave:
It’s the brand new debt.

Ben:
Yeah, yeah, the new debt. So I don’t know if it’s a good idea or not. This is an interesting question, but that kind of thing is insane. Twitter was worth 44 billion a year ago and you’re like, do I like it at 5 billion? I don’t know, maybe.

Dave:
That must be a fun debate to have.

Ben:
Well also it’s just like, I don’t really want the noise. That’s the problem with it, it’s not just evaluation question, I’m only making an economic decision here, but I’m not sure that’s allowed. But it’s just illustrative, it’s just totally illustrative of that it’s a special time to have that kind of investment opportunity.

Dave:
All right. Well Ben, thank you so much. This has been very, very insightful, I’ve learned a tremendous amount. And honestly it’s really surprising people aren’t talking about this. So I guess maybe that’s my last question to you, is why is this not being talked about more broadly?

Ben:
Yeah, it was so fun to be here. Everybody talks about this, but back in early February, I was obsessed with the pandemic, February, 2020. And we were going to California, my kids and my wife and I, we were going to be in California for Valentine’s Day. And I was like, we can’t go and made the kids wear masks on the plane and my wife’s like, you’re f*cking losing it, she was so annoyed with me and at some point everybody woke up to it. There’s something where information has to leak out to the public and it adds up, it requires a preponderance of data before people will shift. And it then happens all at once.

Dave:
People don’t want to believe inconvenient news.

Ben:
And it’s just like people are busy, it’s not what they’re focused on. And so it just takes enough pings before people will start to pay attention. So that’s why… at least I think that’s like… And of course everybody, in this case its all the participants in the financial system, they’re not talking about it, this is the last thing they want to talk about. They want to say everything’s great. And same thing with China, they’re like, everything is great, pay no attention to the the doors we’re welding shut in Wuhan. So again, there’s active participants trying to stop this from becoming a story and that’s confusing for the media and it takes a while for it to just to graduate.

Dave:
All right, well we’ll have to follow up with you soon as this unfolds, we would love to get your opinion because you’re obviously a bit of a canary in the coal mine right now, warning us ahead of time. So we really appreciate your time Ben, this is always a lot of fun when you come, so thanks so much for joining us.

Ben:
Yeah, thanks for having me.

James:
Thanks Ben.

Dave:
I don’t know whether I should be excited or scared right now.

James:
I’m actually extremely excited because I feel like we’re all looking for that massive opportunity and this is going to be a big deal. For a while I’ve always thought about this investor graveyard and I think it could be a banker graveyard, not an investor graveyard.

Dave:
Yeah. You’ve been saying this for a while that, specifically, and just for everyone to understand, we’re talking about mostly commercial, this could bleed into residential as Ben was saying, there’s all these secondary and tertiary impacts, but it could be really interesting for people who have… Syndicators, people who can raise money to start going and trying to buy these assets really cheap right now or in the next six months, whatever.

James:
And especially because banks don’t want to own assets. A lot of times they don’t want them, they want to get rid of them. And if you have liquidity, it’s going to make a big, big difference in… I’ve been saying that for a while because the weird thing is I’ve saw people make a lot of money over two years and then six months ago they’d be like, oh, I’m strapped on cash. And I’m like, well, you’ve just made this much money over the last two years, why are you strapped on cash? And that could come to a fruition in 2023, there’s going to be a call for some liquidity and it might all be on the street.

Dave:
You’re a perfect person to answer this question because you do a little bit of everything, you lend, you flip, you buy distressed assets. If all of what Ben thinks is going to come to fruition does, and we start to see liquidity crunch, declining prices in commercial real estate, how would you look to best take advantage of it?

James:
For us, I think we’re trying to gear up with more private equity and equity partners to where we’re trying to bring in some bigger dollars on this. A good example is we’ve done more syndicating deals in the last 120 to 150 days than we did the previous two years because the liquidity is on a crunch. But partnering up with investors that have cash right now is key to everything. And whether it’s fix and flip apartments, it could be burr properties or cash flow properties, for us, you want to attach to where the liquidity is. For us, we’re raising some money right now because we do see the opportunity with these buying notes, buying defaulted buildings, and then just really start building the relationship with these people with paper.
And like what Ben talked about, it’s hard to get ahold of the big banks. You can’t get ahold of them, I don’t know anybody there. But these small local lenders, you could be reaching out to them and saying, hey, I have liquidity, I’m looking for projects, let me know what you have. And I can tell you we’ve gotten some fairly good buys recently where I’m like, I just throw a low number out and they do the deal. They’re like, can you close it in five days? And we’re able to kind of click that out. So just talking to the people that have been in that space, all these hard money guys that have been harassing you for two years to lend you money, talk to them, see what opportunities are and then keep your liquidity on hand, don’t rush into that deal, make sure it’s the right one.

Dave:
That’s very good advice. All right, well thanks James, this was a lot of fun. I really do enjoy having conversation with you and Ben. It’s always a high level conversation, pretty nerdy and wonky stuff, but I think for those of us who really like the economy and the nuts and bolts of how this all works, this is a really fun episode.

James:
Oh, I love having Ben on. I start geeking out and we go down rabbit holes, they’re all fun to go down.

Dave:
Oh yeah, absolutely. When the cameras turned off, we were trying to convince Ben to let us come out to DC and hang out with him in person, so maybe we’ll do that next time.

James:
Oh, I’m a hundred percent in.

Dave:
All right, well thanks a lot James, have fun at the game.

James:
Yeah, go Hawks.

Dave:
I don’t really have any dog in this fight, but I’ll root for the Hawks for you, so hopefully you don’t have to… I guess, can I say that on the air?

James:
Yeah, I got a big bet on the line right now.

Dave:
Do you want to tell everyone what your bet is on this Seahawks game?

James:
Yeah, I think my mouth got me into trouble because we’re playing the 49ers, they have a better talented team. And I made a bet with one of my good buddies who’s also a 49er fan that the loser has to wear the other team’s logo Speedo to the pool for a whole day. So I’m really hoping it’s not me.

Dave:
Yeah. Well I’ll root for the Seahawks for your sake, but that is a pretty funny bet, and hopefully you didn’t just tell too many people, this is the tail end of the episode, so maybe no one’s listening anymore.

James:
Yeah, everyone should be rooting that the Seahawks win, no one wants to see me in a Speedo.

Dave:
All right. Well thanks a lot man, this was a lot of fun. Thank you all for listening, this is our last episode of the year, so happy New Year to everyone, we really appreciate you helping us and supporting us through our first year for On The Market, we’ll see you in 2023.
On The Market is Created by me, Dave Meyer and Kaylin Bennett. Produced by Kaylin Bennett, editing by Joel Esparza and Onyx Media, researched by Pooja Jinda, and a big thanks to the entire BiggerPockets team.
The content on the show On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.