This essay series is about commercial real estate. But unlike many other books or blogs, my intent is not to show how great commercial real estate is compared with other investment alternatives. Rather, my intent is to discuss, as objectively as possible, commercial real estate as an asset class. Specifically, I hope to reach smaller investors, who can now invest in real estate partnerships and private deals easier than ever. These investors need to know how real estate operators analyze and invest in real estate deals.
In my career, I have had the privilege of operating in three areas: small business finance, public equity research, and real estate finance (both residential and commercial). These areas are all interesting in their own way, and operating in them has helped me become a more effective financial manager and business advisor. I have to admit, however, that among these areas, commercial real estate is probably the most intriguing. It is also the area in which I have the deepest personal connection.
My interest in real estate began as a child. My parents owned a small construction company, and I had an uncle who was a successful real estate investor. Growing up, our kitchen table was as likely to contain construction plans as it was family dinner, and family conversation often centered around real estate and construction.
My real education in real estate, however, started in a dimly lit bar.
When I was a young man in college, I worked as a bartender at a local upscale steakhouse. It was a great experience. I ended up learning as much about business as I did from studying finance at a local university.
The restaurant was located in an area surrounded by office buildings. Most of the firms occupying these buildings were stock brokerages, real estate brokerages, accounting firms, and law firms. The area was the closest thing that our town had to a financial district.
The professionals at these firms would come into the bar for happy hour. I would speak with them and listen in on the conversations that they would have among themselves. I was young, and I wanted to learn as much as I could about business and finance. I was a sponge. I was particularly interested in conversing with the securities and commercial real estate brokers. It was my first real introduction to two worlds in which I would spend a significant amount of my career.
I worked at this restaurant from 2000 to 2003. This was an interesting time. As the internet bubble burst in 2000, the Federal Reserve responded by aggressively cutting interest rates. From the winter of 2000 to the winter of 2001, the Federal Reserve cut its short-term benchmark rate (the federal funds rate) from over 6% to under 2%. Real estate responded favorably. The euphoria had shifted from stocks to real estate. The stockbrokers were coming in less frequently. The real estate brokers were coming in more frequently. And they were spending lots of money purchasing top shelf champagne and cognac. Their generous tips helped fund my undergraduate education.
I left the restaurant in 2003 to focus on finishing my last semester in college. I graduated with a degree in finance with a specialization in real estate finance. As for career aspirations, I wanted to combine my uncle’s financial savvy with my father’s knowledge of construction, so real estate development was a natural path for me. I figured I should “learn on someone else’s dime”, so my plan was to work in the development field for at least five years and learn as much as I could before venturing on my own.
By 2006 I was putting together land deals and doing entitlement work for a large national builder-developer. I learned a tremendous amount about how to create budgets and financial forecasts, navigate the local municipal landscape, and work with large infrastructure contractors. I also met some of my dearest friends during this period. But I certainly did not want to continue to work in the corporate world. I wanted to be an independent operator, and I felt that this experience was a means to that end. In late 2006, my experience was cut short when we received word from our corporate office that they would no longer approve funding for Florida projects. The writing was on the wall. Many of my colleagues and I received our walking papers shortly after.
Sometimes in life decisions are made for us. For me, this was the beginning of a satisfactory career as a private investor, business consultant, and securities analyst. But 2007 and 2008 were challenging years, to put things mildly. When the financial firm Lehman Brothers failed in the fall of 2008, it seemed like the world was ending. In our area of the country, it took years for the real estate inventory overhang to sell off and new construction activity to begin again. My parents, who were both in ill-health, were forced to liquidate their business. I had many dear friends who lost their jobs, their businesses, or their homes.
I lost touch with the commercial brokers who were patrons at the restaurant I once worked in. But the following may be an indication that they too went through tough times. There is a gas station close to the restaurant. One day in 2009 I stopped at the station to get gas. As I looked towards the restaurant, I noticed a paper taped to the door. The paper was a notice from the IRS that the contents of the restaurant had been seized.
I have several purposes for sharing all of the above. First, all of us view the world through the lens of our experiences, regardless of education and training. The following posts in this series are about commercial real estate as an investment, with a focus on property due-diligence and financial feasibility. However, the reader deserves to know the roller-coaster which shaped my formative years in real estate, as these experiences have shaped how I view risk.
Second, while the severity of the 2008-2009 financial crisis may have been an anomaly, real estate and credit cycles in general are common features of a market economy. At the time of this writing, the Federal Reserve has been on a two year long interest rate hiking cycle, and this has significantly slowed new construction and impaired commercial real estate values. Several trillion dollars of commercial mortgage “balloon payments” are coming due, and this will likely affect the commercial real estate market for years to come. To be sure, there will be opportunities for many investors, and pain for many others. Thats just how markets work.
Finally, the post crisis period was defined by abundant and cheap capital. This paralleled the rise of social media and regulatory changes which made it easier for real estate operators to raise capital through the internet. The consequence was the rise of an army of real estate “gurus”, many of whom were too young to have experienced the last credit cycle and were unprepared for the downturn. The world doesn’t need another real estate, stock, options, or business guru. To be fair, I’m not sure the world needs another life-hardened, slightly cynical, middle-aged man sharing his knowledge and experiences. But if the above narrative can remind readers of the inherent risk of investing, directly or indirectly, in real estate, then I am satisfied.
I was recently reminded of my personal connection to construction and real estate investing. Over the last several years, my father, mother, and uncle passed away. One day my brother and I were driving down the main corridor in the town where we grew up. We noticed the buildings which my father had renovated, or my uncle had owned. We began to talk about legacy. We endeavored soon after to start a real estate development and investment firm.
