What's happening to commercial real estate with the current interest rates? Our guest for Episode 29 knows.
Natalie Picha, Glenn Royal, CFP®, and Jason Strzyzewski sit down with Curtis Willeford, Managing Partner at Hansen Partners, to discuss the state of commercial real estate in a post-pandemic world.
Experience the difference of working with a firm that empowers your life—a firm that focuses on what matters most—you.
Whether you are beginning your financial journey now or have already taken steps toward your ultimate life goals, we are here to guide you.
https://podcasts.apple.com/us/podcast/rhp-market-talk/id1538051530
What's happening to commercial real estate with the current interest rates? Our guest for Episode 29 knows.
Natalie Picha, Glenn Royal, CFP®, and Jason Strzyzewski sit down with Curtis Willeford, Managing Partner at Hansen Partners, to discuss the state of commercial real estate in a post-pandemic world.
Experience the difference of working with a firm that empowers your life—a firm that focuses on what matters most—you.
Whether you are beginning your financial journey now or have already taken steps toward your ultimate life goals, we are here to guide you.
https://podcasts.apple.com/us/podcast/rhp-market-talk/id1538051530
Welcome to the RHP Market Talk podcast, Episode 29. Recorded here in Houston, Texas, by RHP Wealth Management, an Independent financial services and investment advisory firm. I'm Natalie Picha, founding partner, together with founding partner and portfolio manager Glenn Royal and our investment analyst Jason Strzyzewski. Today we kick off a two-part series on the state of real estate. Joining us is special guest Curtis Willeford, managing partner of Hansen Partners, to share his insights on the commercial real estate market. Thank you for joining us today, Curtis.
Curtis Willeford:Happy to be here. Thank you.
Natalie Picha:I want to tell you a little about Curtis this morning, this afternoon. Curtis is the managing partner of Hansen Partners. Who he joined in 2013 after working several years in Houston and Moscow, Russia, in the real estate industry; he is a native Houstonian. Curtis grew up near the Museum District in Rice University, and after graduating from Trinity University in 1998, Curtis worked as a financial analyst for Marsh and McLennan. Curtis moved to Moscow, Russia, in 2005 to pursue a leadership position with Iron Mountain, tasked with creating and implementing the real estate expansion strategy for the Russian market. In 2007, he accepted an offer to join the capital markets team at CBRE, focused on debt and equity advisory for the commercial real estate marketplace in Russia. During his tenure, he worked with private equity groups, sovereign wealth funds, and real estate investment funds focused on acquiring assets in the Russian market. In 2013, Curtis returned to Houston to join Hanson Partners, pursuing opportunities in boutique office development and specialized third-party asset management of niche office products, focusing on the small-scale tenant market. During this tenure, he participated in the development of landmark office developments, including 43 0 6 Yoakam Boulevard and 3773 Richmond Avenue—the Region's Financial Center. Currently, Hanson Partners is working on a groundbreaking master development called Bridge City, which will create a new innovation district in Houston, partnering with major universities and corporate tenants to foster an ecosystem for student and employee-centered creative art technologies and life science graduate programs. Curtis speaks conversational Spanish and Russian, is married with two children, and currently lives in the Houston Heights neighborhood. He enjoys outdoor activities and spending time at the family farm near Brenham, Texas. Quite a bio. Very, very interesting. So, Curtis, thank you for sharing all that. I felt like I had to share this bio because that is just from Russia to Houston. Pretty amazing. You have a shout-out you need to do today.
Curtis Willeford:I do have a shout-out. My wife, Darcie. It's her birthday today, so I want to wish her a happy birthday.
Natalie Picha:Ah, Happy Birthday to Darcie. Yeah.
Curtis Willeford:Yeah.
Natalie Picha:Well, thank you for joining us. For our listeners out there, you know, we're pretty casual. We're basically in the conference room sitting around. Jason, Glenn, and I are excited to have Curtis here. This is the first in a two-part series. We really just want to talk about the state of real estate and what has happened since a pandemic that had us all working from home to interest rate hikes, you know, that have come so fast that it's basically changed, basically the face of all the markets, particularly commercial real estate. So with that, I think maybe setting the table would be a good idea to get us kicked off, and then we always like to say, we'll just see where it goes from there. Right, yeah, for sure. So specifically talk about your area of expertise in commercial real estate and then maybe a little bit about, you know, the different types of commercial real estate and, really, what we're going to touch on today.
Curtis Willeford:Yeah, absolutely. Thanks for thanks for inviting me here. I appreciate it. So, Hanson Partners and what I do specifically revolve around niche office development and a little bit of retail. Still, mainly, our focus is building and developing boutique office buildings, kind of an ultra core location in the Houston market, specifically around Montrose Heights Muse District. Greenway Plaza has been our main focus, although we're always open to other opportunities. Our typical development is boutique in nature, meaning small to mid-size buildings, 60 to 80,000 square feet. And we try to employ a strategy of approaching the small tenant market as opposed to large corporate tenants. And we've been very successful with that over the last 15 years, maintaining quite a high occupancy and pretty stickiness with those tenants who end up coming into our buildings. And even though they're signing one or two-year leases, they end up sticking around for upwards of 10 years and just renewing those one or two-year leases, we a nnual increases, and we're able to attract a p retty good premium over general office market rates because of that strategy. We invest a lot into the design and the building itself, and we offer nice amenities. We are also very well located next to typically where our tenants live. So that order of convenience is massive for them because they're able to, you know, take a five-minute or two-minute drive into the office, they can park right in the building. So they're two minutes from their desk, and there's a lot of value to that. And so we've, we've been successfully doing that.
Natalie Picha:What did 2020 do to that part of the market?
Curtis Willeford:Well, just like every other part of the market, 2020 hit us like a bulldozer. Especially the office market worldwide. Yeah. Countrywide and, specifically, in Houston. Houston had a double whammy because it had the fallout from oil in 2014 and 15, which saw a lot of the major corporates and a lot of their secondary and tertiary service providers who might be our type of specific tenant, you know, 1500 to 2000 square feet, everybody was downsizing, and then you get hit with covid, and people are stuck at home. They are not coming into the office. You see midweek occupancy rates, which is a stat that I'm going to refer to a lot today. Meaning effectively bodies in chairs in the office, not the contractual lease agreements that a tenant might have with the building, but who's actually coming into the office. Right. Those obviously plummeted to the teens or twenties, 20% mark during covid, and that's taken a lot longer for that midweek occupancy to increase and get back anywhere close to pre covid levels. In fact, nowhere in the country is it at pre covid levels. Right now, Houston sits,, kind of in the 60% range 63% range. San Francisco and New York are in that 50% range. Wow. So these are people literally going into the office, and the ramifications for that are pretty substantial b ecause if it ends up being a l ong-term trend, a lot of those tenants are going to really have to think about how much space they w ant t o take upon renewal. And you're going to see a lot, not just of small tenants, but of large corporate tenants reduce their space. And so, you know, you might have two or three large corporates that decide to do that, but then it starts snowballing, everyone starts reducing space, and the effect on the aggregate market is substantial.
Natalie Picha:Yeah. So I think, just before we kicked off, we were talking a little bit about canaries in the coal mine and really the hangover from Covid. Is it here to stay? That's probably what you're talking about. And then pile on top of that, these higher interest rates that we've got going on.
Curtis Willeford:Yeah. You, you really have this perfect storm. Yeah. I'm tending to start describing it that way, where you have uncertainty about working f rom home. So people aren't coming into the office. Tenants are having to make serious decisions about reducing their space, which a ffects the occupancy of the building, which a ffects the net operating income of the building from the ownership standpoint. And then couple that with higher interest rates. And a lot of times, these interest rates are not 20 or 30% increases. Th ey're 8 0 to h undred percent increases. So you have lower in come, and higher debt service, which is not a good recipe fo r o wners of real estate, whether it's an office or any other line, multi-family industrial. They're all going to feel the significance, especially of t he rate increase. Curtis,
Glenn Royal:What is the average term of a loan for commercial real estate?
Curtis Willeford:It depends on the asset class. But typically, in office, it can be five to seven years is the typical term.
Glenn Royal:And one of the things we're seeing is in 23, 24, the lion's share of the investment. The notes are coming up for renewal somewhere in the neighborhood at 1.1 trillion. And that's all going to be renewed at these potentially higher rates.
Curtis Willeford:Exactly. I mean, that's really the largest overall risk is that you have a lot of these loans coming due, and they have to be refinanced, or they have to be worked out with the bank one way or the other.
Glenn Royal:Is that what we're seeing with the big pimp cos the Brookfields, et cetera, the world that are walking away from loans because they can't finish the term?
Curtis Willeford:Yeah. What we're seeing right now is just the start of what I think is a lot of publicity and a lot of these major funds, whether they be REITs or insurance companies, or just investments that are letting, they can't hide behind a scenario where they can't talk about it. They're defaulting. And that has, that's pub becomes public news. So it's uncertain what's going to happen. I tend to believe that most of those situations will be worked out because most banks, the last thing they want to do is take the keys and then start managing real estate. Right. That's not their business. They want to stay at them, the loans, and, hopefully, work them out and obviously hopefully not lose any value.
Glenn Royal:And I think with the recent bank failures that we've come to mind, SVB Bank, that space banks that have less than 250 billion in assets, we kind of think of as our community banks. They are responsible for some 80% of all commercial real estate lending in the country. Correct. One of the things we are concerned about from the investor standpoint on our side is we can move pretty quickly and publicly traded real estate and things like that. But the more privately held that overhanging that's coming, are you seeing the risk effect that these banks may have to absorb these loans and put a little bit further pressure on credit availability?
Curtis Willeford:Yeah, I mean, no doubt in my opinion that that is coming. We're, we're already seeing it this past week. I had several conversations with bankers who I had relationships with just to get you to know an understanding of the current status and what they're thinking. And most of the community banks that I have talked to, based on relationships that we have had, are all being very cautious right now. And most of them are telling me that they're in good shape and that they're doing okay. However, they need to be very cautious about what they do in the future going forward. They don't have any significant fires right now, but they see that potentially coming along the way.
Glenn Royal:Are their portfolios mixed a little bit better? I mean, our local banks in this Texas market know the up and down cycles of energy. They've been exposed to that type of lending before. So are they diversified from, say, office buildings to hotels to multi-family?
Curtis Willeford:They are. And that's, that's a good thing. You really, there are very few banks that just focus on one particular asset class within real estate. Most of t hem try to get diversity. So that is a good thing because I think the other asset classes, primarily industrial and multi-family apartments, are going to fare better than an office. Y eah. The problem with the office is that you have this demand destruction and loss of income in addition to the h ike a nd rates. Whereas the multi-families, on the residential side, they're still pretty good organic growth with population density people moving into the area. I'm talking specifically about Houston and the general region here. So the demand is, t here i s just a question of how far off of the, what is going to be the delta between their existing rate and what they're going to have to renew in. So they're going to g et hit with higher debt service. And also, by the way, it's important to note that they will be hit with higher insurance and property taxes a s well. So the insurance market is also going crazy right now. Insurance rates are, are you seeing 50, 60, or 80% increases in premium? N ow that's a significant line item; it doesn't matter what the real estate is. Right, right, sure. As it relates to your income l ine. Y eah.
Natalie Picha:And some of that's got to be covid hangover from basically supply chains, materials, just all of that and inflation in general. Right?
Curtis Willeford:Inflation. But also, there's just been catastrophic events that have happened. So you might have a hurricane, or a major flood, or something that happened along the Texas Gulf Coast. Well, that affects all the underwriters, which bumps your insurance rate. And again, it's another hit to your income line. So
Jason Strzyzewski:Yeah, it's interesting to know, you're kind of alluding to this snowball effect in some of the lower class of office space and retail a little bit where, you know, you have those members, the, the office and retail, those are some of the most dependent on these small regional banks for their financing operations. So you have that slowing rent growth, negative net absorption, a fed that's still working against you. It puts you in a tough spot. What kind of opportunities are you seeing, you know, because this is o obviously, you know, you have the single-family, multi-family, the demand is still there, but the supply isn't. So where are you seeing as far as like new construction changes in that space? You know, since 2021, the crazy year that we had post covid?
Curtis Willeford:are you talking specifically about multi-family right now or just in general? Just the in general.
Jason Strzyzewski:Anything to attack the cost of living, crisis also.
Curtis Willeford:Yeah. I mean, unfortunately, you're going to see straight development completely dry up, and there will be pockets. Of course, there are always pockets, but those forces, those headwinds, are massive. And so if you're a developer who was doing a proforma a year ago right before rates hit, you know, things have totally changed. Construction costs are also very uncertain right now. There, that's getting better. The supply chain issue is getting better. So that hangover from Covid, I think, is dissipating. But they're still uncertainty within costs, and inflation plays a huge part in that. So construction costs are high or uncertain, which is a significant risk if you're a developer; you're in a very high-rate environment and getting your construction loan. It makes it difficult. And outside of multi-family and industrial, I mean, those two are fairly stable as it relates to pro-performing your rental income. Right. Your potential demand. Especially on the industrial side, there's a that's pretty deep market and...
Glenn Royal:Warehouses.
Curtis Willeford:Yeah. Warehouses. Correct. And because of what you just mentioned a second ago, as it relates to the actual supply that exists, there are still massive supply constraints that are going on on the residential side. What you tend to see in markets like this when they turn is that it affects the residential side and the higher-end product. Right. Which, so if you're, if you believe that we're going into a period of recession or maybe a mild recession, that's the type of product that it's harder to lease. So you have to end up dropping rates. And again, you're dealing with the increased refinance rate. So.
Glenn Royal:I'm curious, too; I mean, we talked about the apartments, the squeeze they're having on inflation, et cetera. the net operating income that's being squeezed the, to the developers, one of the sticky parts of inflation that kicked off this fed hike cycle is owner equivalent rents. Are we at a point where we're finally going to start to see perhaps a little rent compression, rent prices declining, or because of these underlying factors, they're going to try to keep it sticky?
Curtis Willeford:It's going to be fairly sticky. And that's because of the fact that there will be less development and much more supply coming online. So especially in high, very highly desirable locations within the city, central, central city, they'll be able to maintain their rent levels. They're not going to be able to grow them at what they thought they were going to be able to grow them at. But I see that as being relatively stable on the income side of things. The expense side of the side of things is where there's going to be a large difference.
Glenn Royal:Okay. That NOI gets hit.
Curtis Willeford:yeah, NOI gets hit. Correct. And that, that, that also, so when you have higher rates, obviously you have cap rate expansion, that decreases your end, you end up val ending value of your asset. And so, from the owner's standpoint, you have your decreased NOI and expanded cap rates.
Glenn Royal:Well, see, from an investor's side, you know, a couple of things I'm looking at here is that one, the loan to value covenants compared to prior years, like 55% now. Right. Much stronger covenants on these loans.
Curtis Willeford:No.
Glenn Royal:Question. I see that. We see the warehouses, we do Sunbelt regions, we see certain things where there's opportunity in here, but that cap rate in my mind is, you know, old bond guy here, I'd like to see it about two to 5% above the 10- year treasury note. That would get me excited to come in. And I think cap rates are still at five and a half, somewhere in there.
Curtis Willeford:Well, it depends on the asset. But, yes, I mean, you're still at 250, 300 basis point increase over, over LIBOR. I mean, we have a couple of loans which are li variable rate loans. So yes, anytime you have upheaval and distress, there's going to be opportunity.
Glenn Royal:I'm sniffing it.
Curtis Willeford:And for the savvy investor, whether you're an individual or a small family office or a fund, I think there's going to be significant opportunity in the next two to three years if you have the guts to put your money to work.
Glenn Royal:It's always scary to buy low. We know that it's t he most frightening thing you'll ever do.
Curtis Willeford:But it's also the best opportunity.
Glenn Royal:With these better covenants, you feel better about the collateral. You can see things, you know, a lot of times we, particularly in the financial markets, we use historical data and compare it with today. Our historical data is really modern post World War 2. We've never had a pandemic-based data point to reflect off of. So I think a lot of us are running off of historical data and not taking into account this is a pandemic influence thing where you saw the tide come in with inflation. You could see it roll back out fairly quickly, which would benefit the real estate.
Curtis Willeford:Yeah. I mean, the biggest, the$10,000 question is how persistent is inflation going to be? And there's mixed data on that. I think, you know, CPI comes out tomorrow, is
Glenn Royal:That correct? Right. That's right. And we're looking for 5.1% year over year with the core rate of food and energy at 5.6. If we beat those numbers, you're going to get a good rally in the bond market.
Curtis Willeford:Yeah. so that's my biggest question is when is the inflation number going to get to a point where it gives the Fed an excuse to either pause or start dropping?
Glenn Royal:Rates? Well, and so the other side of that is the effect we're seeing on banks there, the tightening of the lender standard, et cetera. In essence, that's a hike and the Fed funds rate. Right. It's just a different way of doing it. So financial conditions are tightening right now doing the work for the Fed where they can start to step away. It's May 2nd, I believe, the next fed meeting. We're looking right now, the streets looking for another quarter of a point height, five and a quarter. And most of us think that's probably the peak. Yeah. Great start to either flatten out or plateau. But if we do get that DFL or disinflationary pressures, that will allow the Fed to start to lower rates.
Curtis Willeford:Yeah, I agree with that.
Glenn Royal:Well, that ought to help real estate for those of us that are looking at this as an opportunistic investors.
Curtis Willeford:Yeah. I mean, you might make, I mean, you could make the argument that now is the right time, literally like in the next six months is the right time to be making some deals happen. My personal opinion is that. I think inflation's going to persist longer than most people think. Thus, I think the Fed wants to keep rates high. The only way rates come down is if something else breaks. Like you have another Silicon Valley bank and, or there are significant insurmountable data on the inflation side, which just shows that we have now entered an inflationary environment, which allows them to lower rates. Yeah. But once rates start lowering, that's obviously a positive move for real estate. So it will be for all risk assets. Correct. Yes. It's all at the end of the day; it's all about inflation. That's right. Yeah.
Glenn Royal:I, one of the things that we are kind of looking at too in the bank side of it, we, y ou know, we had the SVB the stresses in the bank system. The federal home loan bank was the lender of last resort where the banks went to get their money to meet these depositor runs. At the peak of it, the FHLB loaned 304 billion i n the last two weeks; that's dropped t o 37 billion. So we are starting to see recovery in this banking crisis. A large part of it is now behind us. maybe the o ld cockroach theory. There, if you see one, there are others. Right. Maybe some other issues. But it looks like most of us are behind us; I'm encouraged about that as an investor. We're seeing the bond market, the irony of the bond market when SVB news hit, and their bond portfolios w ould put them under w ater. We've seen rates rally like nobody's business a s a result of that. Yeah. Which is improving their bond portfolios o r holdings. Kind of k ind of w ild how that all works.
Curtis Willeford:I mean, I hope so. I mean, it's good to be proactive in scenarios like this, and hopefully, the Fed sees that, and hopefully, they translate that into actionable items in terms of reduction. That's what I hope.
Glenn Royal:Yeah.
Curtis Willeford:It was just moving off of rates for a second. I, I'd like to talk about the office side; I think that there's a huge driver who is going to affect a lot of things. And that is, this bifurcation of the office market that exists and has existed for 50 years in the United States. And what we are seeing and what we have been focused on at Hanson I is this bifurcation and really truly trying to understand if you have 70% of the market, which are office billions that were built, you know, 15 years and earlier than that 30, 40-year-old product, which it is becoming obsolete especially as it compares to new development, which has happened over the last five to seven years. And that's a pretty big shakeup, notwithstanding covid or interest rate hikes or work-from-home that were happening anyway. And so a lot of these large assets, large office assets, which are owned by REITs and insurance companies, are now in a pretty pickle and a more exaggerated fashion because of these recent events. And there's value destruction that is happening because a lot of their tenants are either shrinking, they're moving to a new product, and it's very difficult for them to keep them. And if they're competing with other obsolete products, it's almost a race to the bottom. Right? Because the only thing that they can do, the only differentiator they have, is to offer them more amenities or more, meaning more capital expense to the building or concessions on rent, concessions on TI. Tenant allowances. Tenant improvements. So it's very difficult to see any of those assets outperform, if not maintain, the value they have today.
Natalie Picha:So is there a possibility of, I mean, we still have an inventory problem on the residential side? We still see that, you know, and I know you're not in the residential market, but is there a potential to swap some of that commercial space into residential space?
Curtis Willeford:Yeah, that's one of the more interesting potential solutions for all of this office space, which will become obsolete. And it is losing value. And when you have an owner who is exacerbated by not seeing a path forward, that is a potential path forward that they can choose, which would require more investment. Obviously, more investment goes into that asset because you must effectively gut the building and reinvest, Right?
Natalie Picha:All you have.
Curtis Willeford:To start over. Yeah. You have to start over with the shell. But if you're in the right place, meaning you're in the right part of the city, which has significant demand, rental growth, demand or condo demand, the numbers might work on that. And I think you're going to end up seeing that for a lot of assets that don't have anywhere else to turn.
Glenn Royal:In San Francisco.
Curtis Willeford:No question. Yeah. Especially places that are really supply-constricted. Right. On the residential side where you have permitting issues that are governmental political risk scenarios where it's just very difficult to build. You might be able to get sign-off because you're not actually taking more land. You're, there's no NIMBY aspect to that. You're just repurposing an existing product, which is vertical.
Glenn Royal:Natalie knows all about NIMBY. Having served on the city council.
Curtis Willeford:It's a very real risk as a developer.
Natalie Picha:Well, I know, and we actually have someone on our staff who specifically asked if I would ask the question about the new bus lanes coming through the area and your thoughts on that.
Curtis Willeford:Well, I mean, I can give you my direct experiences living in, in the heights where there's been a ton of reconfiguration of existing lanes where they're turning, you know, two-lane roads into single-lane roads with bike lanes and the congestion that is causing. I honestly don't have a strong feeling about it yet because I don't think we've had enough time, at least my microcosm experience, but Right? That's not necessarily a bad thing. It just has to be done the correct way. Right. And I'm not sure that that's been done the correct way in a lot.
Natalie Picha:Of places. Well, I'm very interested in your new Bridgeland development, exactly what that is.
Curtis Willeford:Yeah. So we've, we started about two years ago, putting together a thesis, which piggybacks off of what I was talking about a second ago on this bifurcation of office. Suppose you're going to be involved in office development. In that case, you need to be producing a product which offers the amenities and offers flexibility for all of the tenants and their employees to have a work-play environment. And one that's collaborative, not just with corporate office tenants, but with universities' educational components. So we're right in the middle, my office building is right in the middle of Montrose, and we're right next door to the University of St.Thomas. We're hop skipping away from Rice University. We find that there's a lot of value not only for the tenants and universities but for the individual employees to be involved in a collaborative environment that gives them an opportunity to go work for a corporate but also maybe work with a university in a lab type environment where they're experimenting on stuff. And it doesn't necessarily have to be medicine or bio; it could be technology. We believe creative arts working with, e ven blockchain; I mean, crypto's kind of a dirty word right now, but the reality is crypto, in the l ong term, is going to be very beneficial. A nd there's going to be a lot o f breakthroughs within that. So our idea i s to build it smaller, make it more work and play, have a lot of retail amenities, and have it be close to apartments where people live so they can walk to the office or take a short commute. And B ridge City is kind of the culmination of this ecosystem that we're trying to create i n collaboration with the universities in the area. Wow, that sounds interesting. A nd so our idea is focused on very core development to do that, which is very hard to do because your land pricing i n core areas is very expensive. Right. So if you're going to go out and try to assemble a piece of land that's frontage on, you know, main Street or Monts or Kirby, I mean, that's close to impossible because you have to get an aggregate amount of land to develop and go vertical. A nd that's just hard to do. You basically have to have a pre-lease in place in order to get the financing. And in today's market, getting the financing on something like that is, i s, i s going to be hard. So it's a, it's quite a challenge. We think that that's really the only way to go for us going out and trying to or something that's creative, like doing the repurposing of the office buildings, it's residential that, that could be an opportunity. But for us, our core competence and expertise is really understanding that small tenant market i n an infield location and trying to create an ecosystem so you're creating a destination for people to come to. Right, right. And it just so happens we're also five blocks away from the ion, which is a Rice University development, the old Sears building. Oh yeah. In Midtown, right? Oh yeah, they converted that into incubator. Yeah. Kind of an incubator. And they have 16 acres right around there that they're going to be master redeveloping over the next ten years. So the pro is the proximity of what we want to do is very close to that. So there's, there are synergies that exist. If you don't have that type of mentality and that out-of-the-box idea and you're just building a standard office building, it's going to be very tough to compete, in my opinion.
Glenn Royal:Yeah, I believe that. And I wish you great success o n that. Thank y ou. Let me know when it breaks ground. I'll be one of the tenants. It's like a fun place to live. Workplace.
Curtis Willeford:I'm going to hold you to that, Glenn.
Glenn Royal:I'm sure.
Curtis Willeford:I know it's going to be your central, your central satellite office. Right.
Natalie Picha:So I have to ask after all this conversation about the inflation risk and all things we've been talking about for the next; I mean, this sounds like an amazing project. Does the market present you with an opportunity or a headwind?
Curtis Willeford:Well, right now, it's clearly a headwind. So, but that also presents, it's a paradox. It's a headwind, but it's also an opportunity, right? Because the headwind is very difficult to be able to secure visibility within our cost, very difficult to obtain financing, very difficult for tenants to pull the trigger and sign a pre-lease when they are, and they have uncertainty as to how much space they'll actually need. So those are massive headwinds, but it also creates and wipes away any sort of premium that existing landowners have and their thoughts of what their land is worth. Right. So it might present a window for us to swoop in and be able to acquire some of this land at a decent rate and then develop on it as opposed to waiting for everything to turn. And now we have a lot of competition. That premium of land price ends up skyrocketing, and, you know, the value proposition's less at that point.
Natalie Picha:Right. Right.
Glenn Royal:Yeah.
Curtis Willeford:Does that make sense?
Glenn Royal:It does. I mean, you're speaking to my heart as a contrarian investor.
Curtis Willeford:Oh, this stuff. I know that part of me wishes I had a bucket of a hundred million dollars. Yeah. Because I can make dream half dreams happen with that.
Glenn Royal:Yeah. You look 10, you know, 20 years down the road, you're going to do quite well.
Curtis Willeford:I mean, that's the problem. It's always the, it's always the problem, right? That, and when times are, when people are fear fearful, they're less apt to spend money. But that's the most opportunistic time to do it.
Glenn Royal:And markets are their two main emotions, fear and greed. And if you can be, you know, fearful when people are greedy or vice versa. You can do quite well in the stock market.
Curtis Willeford:I mean, in another, another philosophical way to try to convince somebody that contrarian is, is really the way to go is to look at all the people that ended up buying these assets from 2015 to 2019. I mean, they were playing cap rates were getting com compressed severely. I mean, so on the multi-family side, cap rates were down below 4%.
Glenn Royal:I know I was; I was banging my head on the table looking at that. It was, it was painful.
Curtis Willeford:You have very little wiggle room when things turn the other way, and that is what has happened. And that is where a lot of the pain is going to come from. That's right. So, you want to be in a position where you're taking advantage of the cyclicality of rates and having a pretty good idea that sometime within the next six to 12 months, the transition is going to happen. And so that's when you're supposed to strike. I mean...
Glenn Royal:Yeah. Business cycles...
Curtis Willeford:...business cycles,
Glenn Royal:We have not done away with an economic cycle. Nope. Still with us. Yeah. Even though we sometimes we think we've done away with it. That's right. Even crypto's breaking 30,000 a day, you.
Curtis Willeford:Know? Yeah. I mean, yep. Bitcoin is what, at 30,200 today? It's up 80% from the start of the year. Yeah. So, you know, that's a whole other podcast.
Glenn Royal:Right. Whole other can of worms.
Curtis Willeford:Whole other discussion.
Glenn Royal:Hey, one thing on the contrarian: I'm just going to a little market note here to close for me, but earning season kicks off on Friday. It starts with the banks in two weeks from now. We're going to get the right in the crux of it all. But here's an interesting stat. Analysts have been downgrading earnings expectations coming into this. We're looking for earnings to be down 8%, which should be the trough in this cycle. Next quarter is expected to be down about 6%., then we start to flatten out, a nd then the fourth quarter should produce 8% returns a nd earnings growth. But here's an interesting stat. Whenever analysts come in with negative revision ratios, like we are seeing now, six months from this time forward, the average return is positive 2.07%, which is 80% of the time we have a positive market outcome. When analysts are this negative on earnings revisions when they go into it with a very positive earning, the contrarian side of that, the average return is only three-tenths of a percent. That's happened about 60% of the time. So, we may be coming to the trough of this whole cycle, even the peak and interest rates by the fed. Maybe one more hike. I see the light at the end of the tunnel. I don't believe it's a freight train. I actually think it's light. I'm looking a little bit more optimistic after what we've been through the last, you know, 16 months or so.
Curtis Willeford:Yeah, no, I mean I tend to; I think it's going to be a longer lag for real estate. There are going to be a lot of workouts just because real estate as an asset class, it's, it, it moves slower as in terms of that physical asset. Yeah. Changing hands. It's not like equities, where you can kind of change your investment strategy almost immediately. Right, right, right. You're. Still, you're still lagging behind some of these issues of value destruction that exist. And you might have owners who have seen the majority of their equity wipes, and what do they do at that point? It's not like they can just turn the key and sell. I mean, they could, but then they're losing all of their investment. I mean, it's, so, it's, it's a big problem. And some of them will be forced, some of them will hold on, some of them will, will work out something with their bank and, but it's going to be challenging before it gets better in real estate.
Glenn Royal:Side. So the bankers actually are picking up their phone when, when you call.
Curtis Willeford:Yeah. I mean, that'd be, well, at least the bankers that I spoke to, I don't have any outstanding loans with, so I don't think they're, they saw my name, and they didn't, they weren't fearful of that I was going to start crying to them. But, but no, it, I mean, again, banking, you know, obviously, it comes down to numbers, but a lot is relationship based as well. Sure. So we have long-standing relationships with several bankers in town. And another highlight from my conversations with them last week was, look, Curtis, we will; we have had a long-standing relationship. What's going to happen in the next two years? And what has happened over the last month is short-term; we know you guys have a solid reputation; we've experienced it, and we want to see everything that you're thinking about doing. He's like, I'm not going to promise anything, but for people that we have relationships with, we can get deals done. So that's encouraging to hear that. Absolutely. Because obviously, other, other developers and other people in the real estate game have those similar relationships. And so you want to obviously be working with your banker, to be able to build a new product and to be able to service existing loans that you have. So I think that's a positive light, but very good. Yeah.
Natalie Picha:All right. Well, thank you, Curtis, so much for joining us. I really appreciate it. And thank you to Glenn and Jason as well for always coming to the table with lots of great information to talk about. And thank you to the listeners for subscribing to RHP Market Talk. Please leave us a review, and you can follow us on LinkedIn and Facebook. Join us for our May edition of the RHP Market Talk podcast, where we're going to have another special guest joining us, and we're going to discuss the residential real estate market. I'm also excited to announce that RHP will host a Women in Wealth educational happy hour on Thursday, April 27th. So if you are in the local Houston area and would like more information more information about that, please send us an email or check out our LinkedIn and Facebook page. And as always, if you have any questions or would like to discuss today's topics, please feel free to contact us through our website@royalharborpartners.com. At RHP, we're passionate about planning for your financial future. Through our one-on-one conversations, we can help you navigate your personal wealth management and investment journey. How different will your life look with the right advice?
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