← The Kirsh Connection
The Kirsh Connection
Greatness is a Choice with Ethan Penner, the unofficial creator of CMBS and co-founder of Mosaic Real Estate Investors
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- [00:00]
A
Welcome to Real Talk Real Estate discussions with Andrew Kirsch. In each episode, Andrew interviews industry leaders. We'll hear their real time opinions on today's market, their background and unique career highlights and guidance for newcomers into the industry. You can find this show@skalkirsch.com and on YouTube, LinkedIn, Apple Podcasts, Spotify, Google Podcasts and more. Now here's the host of Real Talk, Andrew K.
- [00:32]
B
Episode 35 of Real Talk. It's unbelievable that last week we had our conversation with Giddy Cohen who talks so much about being from Israel and serving in the Israeli army military and how growing up in Israel shaped his career and him and as a person. And then fast forward just a few days and we see what's going on in Israel and the Hamas terrorist attacks and it's just gut wrenching. And spoke with Giddy who said he was flying to Israel quickly right after the first announcement of what was going on to, to, to be there, to reconvene with some of his former colleagues in the military in his unit and to see what they could do. So my best to everyone in Israel and to Elan and to his family and friends and to everyone's family and friends. Our warmest wishes to everyone. And it's a difficult situation, hard to say, hard to segue from that. But on this week we have Ethan Penner who is a good friend and client. He's credited with starting the CMBS market in real estate back in the 90s when he was with Nomura Bank. He most recently co founded a private credit fund, Mosaic Real Estate Investors before merging it with the public reit. And he's recently written a book, Greatness is a Choice. It is an unbelievable book, extremely insightful, a unique format, a lot of chapters. I think there may be 40, 50 chapters. So you must be thinking it's like a 500 page book. It's maybe 150 page book. Most chapters are two, three pages. It covers a lot of interesting topics that will help you both personally and professionally. And in our conversation we talk about today's market and he's definitely not ever short on opinions and ideas. We talk about the struggle of the office asset class and his simple answer and opinion is society has taken the fun out of going to work and that is a big problem with the office sector and that he advises people in real estate to pay attention to societal trends as they can impact real estate investing. We talk about, you know, the differences between the GFC and today, how today's market is completely locked up and what he's experiencing and what he's anticipating we will see over the next couple years. And he gives frank advice to borrowers on who are experiencing some pain in the market and how to deal with lenders. It's a wide ranging conversation that I know you will enjoy.
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C
Hello, welcome to another edition of Real Talk. I am here with my good friend CL Ethan Penner, real estate fame. Ethan, how you doing?
- [04:02]
D
I'm so great, Andrew. Thanks for having me today.
- [04:05]
C
Absolutely. I mean you're, you're well known in many circles within the real estate and finance industry. Most recently co founder of Mosaic Real estate Investors. And I know you are the proud author of a new book, Greatness is a choice. You know, let's start, let's start with the book because I was really taken away by it. But I guess my first question is why did you want to write a book?
- [04:43]
D
Well, so the impetus for writing the book is something that I've long held in my heart. A desire to write down something that I could pass on to my kids and the grandkids and you know, with the dream of one day it would be handed on beyond my grandkids and they would all kind of have some family legacy or heirloom. I always thought to myself, Andrew, that if I had that from my great, great great grandfather, you know, it would be my most treasured possession. And wouldn't it be for you too, like if you had something that you had from many generations earlier that you know, some, someone passed down and it became like a fairly a family legacy and a set of ideals by which to live by. So I always thought that, man, that would be something I wish I had as a, as a kid and I thought would be really cool to create for my own descendants. And then one day I was sitting at my breakfast nook in my house, it was Christmas was coming in Covid 2020 and my daughter asked me innocently who, you know, she asked me, what are you going to get for presents for the family that was coming to visit? It was my, my, her uncle and his, his family, mostly adults, one, one little kid. And I said to her, you know, like, I think I'm going to write a book because I don't like giving sweaters to adults for Christmas or any other holiday, nor do I like receiving them. So she laughed at me and said it was 10 days before Christmas. When are you going to write the book? And I said, literally right now. And so I, I stayed there and wrote what became the first draft of this book in one Day, really? In less than a day.
- [06:31]
C
Wow.
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D
It was a stream of consciousness. I had these ideas, and I'm a note taker, so I reference notes, and it just all came out of me pretty. Pretty much in flow state, I guess I would say. And I created that book. And I went to a printer to print 10 copies, and no printer would print less than 100 copies. So I printed 100 copies, found myself with 90 extra copies, and started giving them to people. And the feedback I got was incredible. Like, you know, from. Not just from the people I pay, but, you know, from strangers, too. And it inspired me to think about that maybe I have something that would be more than just valuable to my descendants, but something that the world might benefit from. And. And I. And I. And I let it sit for about a year, thinking, how am I going to reposition this very personal first draft of a book into something that might be buyable to. For others? And I finally came up with another version that I printed out 100, another hundred copies of, and it went out into the world. One of my friends who has authored books loved it, sent it to his agent, sent it to a publisher, and I got a call from the publisher saying, we want to sign you to a contract. And I was quite surprised and happy. And then six months of, you know, editorial work with their editors has led to this book. So that's the story of the book.
- [07:56]
B
Wow.
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C
Well, when you. When you forwarded it to me, at first I thought it was going to be a book about real estate, since your professional experience has been in real estate, dating back to Nomura and most recently at Mosaic with your debt fund and. And many, you know, different stops in between and all of our conversations, whether social conversations or work conversations, you've always had a. Just an interesting bent and perspective, whether we're negotiating loan provisions or just with respect to your perspective on the economy, politics, et cetera. And I feel like it all comes out in this book. Why. But why did you choose to write about, I guess, greatness and like, who. Who is your designed audience?
- [08:56]
D
Well, I think that there's a couple questions embedded in that question, so let me try to answer.
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C
You can object and say compound question, counselor.
- [09:05]
D
Yeah, now that was a compound question. But let me try to answer the couple questions I heard in that question. First, I would say that, you know, I started out my career in finance and consider myself to be a finance professional who discovered real estate and then fell in love with real estate and the intersection of real estate and finance. And it's really at that intersection that I've made my career, I think that I. I've always brought a differentiated approach to my craft, and I think that's led me to have whatever kind of outside I had outsized achievement, especially early in my career. I'm a contrarian by nature. Things about my childhood formed kind of a DNA level contrarian orientation that I think has helped me be successful and. And informed how I look at the world. And I think that that unique perspective, which I think has manifested itself in some interesting success in my real estate and finance career, I is really at the root of who I am as a person. And so I had stuff to share in that regard. I also think that I've lived now 62 years. I was born in 1961 in the Bronx in New York. And I've watched, like many people, my generation, the world change unbelievably in our lifetime. You know, you. And so a lot of that change is interesting, some of it might be positive, but a lot of it is not so good. And I think that I felt that I wanted to use this book as a way to remind and tell readers about the world that I've seen and the worlds that I've lived in from my youth until now, and to share some observations that I have had that maybe many readers haven't had, especially younger readers who kind of came around much later. And I've had a much different perspective and experience in their journey because I think that things are lost generationally and I wanted to make sure that they were not lost. And I think that that's. There's an attempt of that in my book. So when. Now the third question, if there was like, who. Who is this book for? Look, I'm a. I. This book is informed by my life Walkabout. And my life Walkabout has been fairly varied, but rooted, as you suggest, in the worlds of finance and real estate. And I think people that come from those worlds are naturally going to feel it in a more obvious manner, feel what I say and have it resonate with them because I. I've walked their walk, right? But I've walked other walks too. And I come from, you know, I came from a poor family and divorced parents and, you know, I have had religious upbringing and I kind of walked away from religion and rediscovered it later in life and have a passion for some of that stuff. And a lot of that informs, as, you know, having read the book informs my observations and what I have to say to the world. So I'd like to believe that this book has very broad appeal and I'll just share one anecdote. I said that that first hundred brought back a lot of positive feedback which inspired me to kind of write the second version. Probably the most powerful feedback I got was from someone that I really barely know. It was a friend of a friend who got his hands on my book through the friend and he called me and, and he said, your book sits on the nightstand of my 12 year old son. And every night that I have the opportunity to put him to bed, we read a chapter of your book and discuss it together.
- [13:10]
B
Wow.
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D
And I thought, my God, what a, what an incredible thing for me to be able to facilitate values, conversations between a father and a son. And that my book is kind of helping that and influencing that and inspiring. That makes me feel so great, you know, and makes me feel purposeful. And I think that things like that really are what I'm aiming for and I think that that gives me an example of who might be a reader of my book. It could be real estate and finance professionals, but could also be a 12 year old son and it could be a father or mother with their 12 year old son or daughter.
- [13:51]
C
Yeah. Now that is actually inspiring me to, to read this with my, my son's probably too young, he's six going on seven. But my eight year old is a, is an active reader. And, and the nice thing about this book, it's not, it's not in that it's simple. They're, they are, they are comp, they are topics that I think in some regards are hard to discuss. But you, you write them and discuss them in a, in a simplistic way. Especially with just the chapters being. Some chapters are a page or page and a half. I think the longest chapter is like three to four pages. And so, so it is easy to, to flip the pages. I was taken away by, by certainly certain passages of the book and I want to relate, I want to relate some of the book to, to real estate since most of my audience is in the real estate business. And, and, and you have such a background in the real estate business. You know, one in particular I guess is, is your emphasis on time. Right. And time being so precious and you analogize it to the traffic that we sit in. And I think you calculated it that it could be up to two and a half years that one could waste away in traffic. Yet at the same time we have this issue, especially in the office market of working from home. So as an employer of 60 to 70 people, we struggle of Keeping culture. We want people to be efficient, but yet we want people to be in the office. But we, we, we, we're we bill by the hour and we don't want to lose productivity. So I guess how do you balance wanting to be efficient with your time but recognizing that working from an office is important to maintain culture of businesses? If you have that premise.
- [16:16]
D
Yeah. Again, you've asked a number of questions embedded in that question. It's fine, it's great, it's very efficient. So I guess I would say my book has a number of key takeaways. And one of the key takeaways that I believe is there is again comes from my childhood, my young childhood. I have a genuine questioning of authority and there is a backstory to why that's who I am. And it's in my DNA. And I have a natural contrarian orientation that's part of my DNA for similar backstory reasons. I think that one of the things that I've noticed in my life is that, you know, Americans are hard working. You're a hard working guy, you're making your way in your career and you've, you know, built something to be very proud of. I'd like to think that I've done the same thing and many of your listeners are on their journey doing that. But what we have kind of almost implicitly done is entrust everything we do to government. Right? We, you know, when we turn on the faucet, there's this presumption that we're going to get drinkable water when we turn it on, or at least and we take a shower, that the water is not filled with chemicals that is going to make our skin unhealthy. When we flush the toilet, there is this implicit trust that the government's going to make sure that this stuff we just flushed goes in the right place, right, not the wrong place, and that it's going to all work. And that when roads are and when city and local governments approve housing development, that there's ample roads to service all the people that are going to live in those housing units. Man, we've been betrayed on every level, every single level. And I've seen the deterioration in so many ways in our country because of this unfortunately betrayed trust that we've invested in people in government. And we're all too busy doing what we do to kind of like really pay attention to it. So my book is a little bit of a wake up, you know, kind of a say, hey, wake up and let's, let's really see what has what our trust has brought us and, and see if we could kind of change things. So that's part of it. And the traffic thing is just one prime example of that.
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C
Where, you know, I brought Bob. So I was going to. I brought it up as to. To relate it to real estate.
- [19:05]
D
I know, and I'm going to bring. I'm going to bring it to real estate now. So. So. But of course, public policy influences real estate to a very large extent, too, and public planning and all that stuff. So now the question you've asked. I'm a huge fan of in person connection. Right. In fact, as you know, were not for the fact that my knee, which is about to be replaced, exploded with fluid last night and this morning, I would have been in your office today with you to do this in person, because I'm a huge fan of in person. I grew up in a work environment that I adored. I loved coming to work every day of my career and still do because I love the social interaction. But the joy of coming to work today, it's a lot less than it used to be because of litigation risk and, you know, HR rules. And look, I mean, I'm just going to be straight as I was in my book the 80s and 90s, which were incredible times to go to work. It was like going to work at a frat party or going to work in a bar, you know, and these are places people like to go. They're fun. So why shouldn't work be fun? You know what I mean? And. And the fun has been sucked out of work because of political correctness and all that stuff. And. And so I think that when people today say, gee, do I want to fight traffic and. Or do I want to just work from my apartment? The calculus is changed because we've sucked the fun out of going to work to a very large extent. And so I think if it were more fun, there'd be a lot more people who would say, I'm in for. I want to go to the office six days a week because that's where all the fun is. I think that the fact that you're having to fight with people to come to the office is a reflection, a logical reaction and a reflection of the sucking out of fun that's happened in our society over the last 25 years.
- [21:15]
C
Yeah, well, I feel badly for the young attorneys and summer associates who are coming up the ranks now versus when I was a summer associate in 1999 and a junior associate at Latham Hawkins in the early 2000s, and Latham's unofficial motto was play hard or work hard?
- [21:37]
B
Play hard.
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C
And just, you know, whether it was the cocktail parties, the dinners, the, you know, going to retreats throughout the country, including Vegas and other great cities, it's. You're right, it is hard to. To duplicate those. Those functions. And just that. I'm not saying just, you know, lewd behavior, but just relaxed behavior where you really got to know your colleagues. And I mean, I, I knew this before reading the book, and then it. It re. Reminded me when I read the book of your famous party where you had Elton John perform.
- [22:17]
D
Yeah, well, I mean, look, my. My career has been as one of my chapters entitled A Bubble of Joy. And I. It's by design because I want to live in a bubble of joy. And I know that by having a bubble of joy around me, it attracts people, because who doesn't want to live in a bubble of joy? And I think that, you know, here's a wonderful conversation that you would not think is a real estate conversation, but it is a real estate conversation, because what I love about real estate is that real estate is a. To be great at real estate, there's so many things you have to be good at and pay attention to, obviously financial markets, which unfortunately, many real estate professionals are not very good at and don't pay good enough attention to. But that's the obvious one. Perhaps, maybe less obvious is social trends. So here we are having a discussion about social trends, human behavior, societal kind of guidelines, and how that influences the calculus of bringing people back to work. Right. And I think that again, if you, you know, if you were paying attention to the sucking out of the fun of going to the office, you might have been a little nervous about investing in office over the last 25 years. You might have seen something coming.
- [23:41]
C
So how does. So how are you talk about the business that. That you have Mosaic and, And you had a. A capital event a year or two ago. So what are you doing now here. Here comes another compound question. I can't help myself.
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B
So what.
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C
What are you doing now? And then relating to what we just talked about. How are you? How are you, I guess, keeping the fun at the workplace?
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D
Well, it's. I would say. Let me start with the first one.
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B
Yeah.
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D
I, I knew when Covid first hit that something that was going to portend that there'd be something negative that occurred in reaction to a global pandemic. I didn't really know what, but I've been around long enough to know that. That dislocations of that magnitude tend to have negative impacts on asset values for whatever reason. Okay. I didn't really know what it would be. And I also felt that there was a heightened risk of financial system collapse. And so I sought, as you said, as you suggested, I ended up merging the fund. But I sought to bring my investors to a safe harbor and give them an exit as quickly as possible. Once Covid came and I closed what was an open ended fund, stopped making new investments and just started to hunker down and try to find liquidity as quickly as I could. And we merged our fund, which is. I don't know if it's unprecedented, but if it's not unprecedented, it's very rare. We merged our fund into a publicly traded REIT in exchange for limited partnership interests and got our investors liquidity. There was no lockup on the shares that they took in in March of 2022 before interest rates began to march up and asset values and REIT prices got hit pretty hard in reaction to rates being marched up. I also knew that having lived through many cycles, that when there's a significant change in valuations, which interest rates having been marched up as dramatically as they have precipitated, that there would be a period of non transactions. Right. That there would be a period, a lock market where sellers wouldn't want to sell at the new prices and buyers wouldn't want to buy at the old prices and nothing really happens. And so raising money, thinking there's going to be something, which a lot of people do, thinking there's going to be distress and I'm going to put it all to work. And I was like, you know what, that's not really going to happen for a while. And why raise money and then charge fees and sit around disappointing investors that nothing's happened? And so I didn't do that. And I also felt that there is so much uncertainty in the world today that I'm. I really haven't had conviction or passion for a real estate investment strategy since COVID came about. And it's only recently now, here we are, 18 months after the merger that I'm starting to become a little bit passionate and begin to form a little conviction about some strategies that I think might be interesting and opportune to pursue and getting ready to kind of start to gingerly walk down the path to affect something in that regard. So that's the answer on the before.
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C
We go into how to make office fund. But so on the credit side or, or what?
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D
Well, I think that there's, there's clearly a change in the real estate credit and private credit world that I think will be a trend that will continue for many years to come because I think that our banking system is in a compromised spot and will continue to shrink and continue to not be around as they had been to service some of the demand. So I think private credit opportunities, including real estate finance is going to be rather rewarding. I've never liked it, to tell you the truth, for taxable money because you know, it just unfortunately it's treated as ordinary income, the interest you earn. So it's not a great taxable investment. But it's wonderful for tax exempt capital and I believe that will grow significantly. So that's one area I think the CMBS market, which I'm credited with having kind of fathered back in the early 1990s and periodically becomes very interesting. I only kind of, I come in and out of it pretty much once a decade when it becomes highly dislocated and thus opportune. So the last, my last involvement in CMBS was in 2009 and 2010 in the wake of that extreme crisis that I thought created opportunities in cmbs, and it did. I think that we're now approaching a period of time when there is going to be interesting opportunities in CMBS again. So I'm starting to kick the tires in cmbs. I like that it's a complex area that requires this intersection of skills. Structured finance, credit, real estate, that is not, not everybody has that. And so I think that that barrier to entry for too much competition itself makes it a pretty attractive proposition.
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C
You know, one of the more recent times that I heard you speak, not recent in like the last 12 or 18 months, but the last time I heard you speak to a public audience it may have been a YPO event or another conference. You had a thesis that we would be in a, in a long term low interest rate environment relative to historical times and over the last 50, 60 plus years. Do you still believe that?
- [30:05]
D
I do and I'm not happy. I don't know. I didn't say that then happily and I, I don't say that today happily because the inference or the implication of that is a non free capital market, a government controlled capital market. And so as probably many of your listeners probably know by now, in 2008, in response to what was then seemingly a crisis of such magnitude that people, that I think people in government feared a complete collapse of our society and maybe they weren't wrong, the Fed essentially hijacked the capital markets and have since printed seven or eight trillion dollars have exercised incredible soft monetary policies even beyond that, and jury rigged the interest rate markets, which is really what drives the financial markets to being very low. You know, people who disagree with that, I like to say to them, you know, do you really think. Who do you know was buying 10 year treasuries at one and a half percent, you know, would you have done that? No. No one with a brain really was doing that, or no one who wasn't forced to do that was doing that. And so we lived in a since 08, a government suppressed interest rate environment. I never thought, given how bad our debt and deficit situation was, that the government would let go of that kind of suppression influence because I felt it was a death spiral. But they did. And I was caught by surprise in the last year and a half. As I said, I knew that Covid was going to probably bring something bad, but it wouldn't have gotten me to guess. It would be that interest rates would have tripled in a year and a half. I wouldn't have guessed that. But I think that that will prove to have been a mistake and an unsustainable situation. And I believe it will be reversed. And I think soon enough we'll see the government controlled interest rate suppression policies back in force.
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C
What would you have done differently in 2008?
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D
I probably would have nationalized all the banks. You know, I definitely wouldn't have allowed the executives of these companies to survive and be rewarded and continue to suck huge bonuses out of the system. I probably would have said you failed. You failed the government. The government gives you insurance insuring deposits and allows you to kind of operate that way. But you failed, failed in your job. And there's gotta be a price for failure that's part and parcel of a free market. So when there's no price for failure, that's a terrible precedent and it sets us up for where we are today, which is, I think we're in a very fragile, tenuous place financially in the world.
- [33:10]
C
And so if I carry that question to what would you have done coming out of COVID I mean, 2021, first quarter of 2022, that 15 to 18 month period, the busiest period of my career. I've talked about it on prior podcasts. Cap rates were at all time low, interest rates were at zero. I mean, it was drinking out of a fire hose. In terms of transactional volume, what would you have done to I guess, prevent such a dramatic increase in, in interest rates?
- [33:50]
D
Well, I wouldn't have allowed it. I mean.
- [33:52]
C
Well, let me shift the question what would you have done to prevent inflation?
- [33:58]
D
Well, I think you're asking the wrong question. I think inflation is the natural byproduct of our society's decisions and we have over borrowed. That's why we have a $33 trillion headline debt and we're in a mess. And so the only way out of this mess is debasing the currency, which is a phrase that equals inflation. And so you know, if you, Andrew, let's say you had a personal debt of $100 million. I suspect you would not sleep very well at night if you owed a hundred million dollars. However, if your income, and I don't know exactly your income, but if your income went up to 50 million a year, you wouldn't mind so much your $100 million, that wouldn't look so unserviceable, be fine, you'd sleep well. And so we owe. We are in a similar spot as a country. Our debt burden is not manageable at today's gdp, which is our version of national income. And so our GDP has to go up nominally to a level that it would get there. And debasing currency or inflation is the way to do that. So inflation I think is with us naturally. I think it will be there naturally. And I think there's nothing we could do about it. In the years leading up to the last couple, there's been different measures of inflation, right. If you look at kind of alternative, if anyone can Google this, but alternative measures of inflation over the last decade or two and they showed inflation between 5 and 10% pretty steadily when the CPI numbers were 1, 1 1/2%. And I also think inflation is a funny thing because it's a basket of goods and services. But you buy a very different basket of goods and services you do than let's say a blue collar steel worker does. And so we all have a different inflation and I think we experience different inflation because our basket of goods and services there.
- [36:01]
C
All right, so Ethan, given the backdrop of where we are today and the dislocation of the market, the rising interest rates, heard about, you know, your potential re entry into the credit side, maybe cmbs. Are there particular asset classes that intrigue you sitting here towards the end of 2023?
- [36:33]
D
I never think about real estate that way, Andrew. I think that one of the reasons I actually love real estate, having started in the financial markets, having been a securities trader on Wall street and having seen how most markets grind to efficiency because of competition and I came to real estate and what I found was incredible. Heterogeneity Right. That. So real estate by its very nature defies kind of this efficient frontier that most markets seem to find because, and the reason for it is a couple. But one of them is that there is no such thing as a real estate market or an office market or a retail market, because every location, every configuration is very, makes it its own unique story, its own unique credit story. And so I don't think of real estate that way. I think, I think that, I guess I do think we can group certain things. Right. So antiquated class B office in big American work cities is not my favorite asset class. But you know, who, who likes that stuff at this point. Right. But I've been saying that those are doomed for probably 10 or 15 years. I think that for reasons that we discussed before, like the, what I'll call the fun aspect of work, because everybody wants to have fun in life, right? And if you're spending your majority of your waking hours at work, let's say ostensibly potentially in the office, and you're not having fun, you know, you would look for something alternative. And so when, when work is fun again and it's okay to, you know, have fun at work, maybe the office market will revive. Until then I, I'm deeply suspicious of office. And I also think younger, generations younger than you even let alone me, were not brought up in a kind of a way of thinking or culture that prized that kind of collaborative work environment. And so, you know, so I'm not too sanguine about office. I wouldn't go running to buy office. Doesn't mean there's not great deals, right. And I would look at them, right. Because I think again, going back to what I first said, real estate is very highly situational. And so I wouldn't throw office in the garbage, but I would be quite skeptical in general about office. And I, even when office was good back in the 90s, I never, you know, I saw, I did many, many office financings and I got to really appreciate how the lender's position is often better than the owner's position because the, the friction costs of retenanting is often underestimated in the calculus of what the long term ownership returns are. So I've never been a huge fan of office, you know, hotels, I like hotels because it's a fun place to be creative. Right. Where you can think, okay, where, how do people want to spend their fun time? Right. When you think about again, vacation type hotels, not business traveler hotels.
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C
Yeah.
- [40:11]
D
Which by the way, I think are in big Trouble because of zoom. Right. So business travel is not going to go back to what it was in my heyday of my career or pre Covid times. And I think business traveler hotels are not something that I would be excited about investing in. Destination hotels, on the other hand, they're fun, you know and as tastes change, you know, like for example, I, as you know, I think we share this a really a love and appreciation for health and fitness and I think that that's going to be continued growth area and hotels that are health and fitness oriented and offer that deliverable to families and individuals I think could be a very exciting area to be in and invested in. So I think there's some creative opportunities there. The housing situation in America and we all know the numbers. I don't know whether it's 6 million or 7 million. Too few units today with obsolescence eating away at that. And that's an interesting story too. It's always nice to have the wind at your sales from a supply demand standpoint. So I do like housing in general. Although I read an unbelievable statistic yesterday. Maybe not that unbelievable that half of and I forgot what the age cutoff was. Maybe it was under 30 or under 25, but half of young adults in America live with their parents today. Half. Okay, what is that implication for real estate, right? Who the hell even knows? What is that implication for population growth? Because as I'm known to have said, it's not very romantic when you invite your girlfriend to your parents basement. Okay. Procreation is much less likely to occur now.
- [42:04]
C
Okay, well that's interesting. I, I did not know that stat. And you're right, the definitely stymies a. A romantic interest when, when, when you bring someone and mom and dad are upstairs, you know. You know a lot of people assume that I'm seeing a ton of distress. Foreclosures, loan modifications, note purchases. And we're seeing it, but nothing like what we saw between 08 and maybe 2011. Now granted we're probably just in the first couple innings of the distress cycle and there's you know, maturity dates that will pick up, you know, 2024 with all the 2021 originations of three year debt. But I guess my question to you is, you know, how do you vision what we're going through today versus what we went through in the gfc?
- [43:22]
D
Couple things, a couple of big differences. Well, one, the. The system is organized to extend and pretend it just is. Okay? So when you think about the banks and the insurance companies, they're just not geared up to own real estate. And so foreclosing on someone who's been a pretty good, if not very good operator and a very decent borrower and who has not done anything to kind of cross the line of ethics, you know, why? So you can go in there and manage it yourself, you know, and deal with all the legal costs associated with that. So, and then you have the Fed literally telling banks to go easy on borrowers and to give them some breathing room and not to jump the gun on them. On the CMBS side you have special servicers who get, literally don't get paid fees until a loan goes into special servicing. And then they want to have that fee stream as long as possible so they don't have any incentive to resolve problems quickly. They want to keep you in special servicing and extend and pretend so their fee stream is better. Plus they own the junior most part of the bonds typically and, and those are going to get wiped out in a quick resolution. So the system has an extend and pretend orientation to it, which is why every downturn there's this period of inactivity and ultimately if it lasts long enough and if we really are on a higher rate regime that will give way to transactions and losses. But you can understand why it doesn't happen right away. As far as what's different this time, I think what's different this time is a high, a much higher level of obsolescence in the real estate that collateralizes a lot of the loans. And so I mean you probably know this living in la. I know it firsthand, not only because I live in the LA area, but I also, you know, my last fund, we had 48 different investments and the two that were just horrible, you know, horrible were the two loans we made in downtown LA. And I mean, I honestly I, I don't know if, if anything in downtown LA is worth anything. Like, I mean if you owned a building in downtown LA and you could sell it for $1, I would be surprised. I know it sounds crazy, but I think I'd be surprised today because nobody wants to go down to downtown LA anymore. And so if you own buildings that become liabilities, right, so where it's actually got negative cash flow, which most of them do today, why would you want to own that at any price? Right. And so I think there's very great complexities brought about by the question of permanent impairment caused by obsolescence, either locationally or structurally or some combination thereof. And I think that creates a differentiation between what we knew in the past and what we See today.
- [46:47]
C
So what advice would you give a.
- [46:49]
D
Borrower who is.
- [46:54]
C
Suffering because of, let's say they had a variable loan with a cap. But you know, they, they, their interest rate costs have gone up significantly, the, the values have gone down, cap rates have risen. They're staring at a seven figure check that they'd have to write to extend the rate cap for another year and a maturity date that they just is coming in the next 12 months or 24 months and they just don't see a light at the end of the tunnel. How do they?
- [47:38]
D
What, what?
- [47:39]
C
And I know every deal is specific, but in terms of how to communicate with a lender, with you having so much lending experience, you know what, what would, what advice would you give a borrower?
- [47:51]
D
Well, I would say first of all know this. Lenders don't have the bandwidth to own and operate real estate. So it's one of the kind of least appreciated truths and it's kind of sad for lenders because we can talk about that, but it's a finance lesson that we may not want to go into today. But I think if you're a lender and you are not able to or willing to exercise your option to foreclose when foreclosure is in the money, then you're, you're just, you're short an option. That's not, that's, that's compromised the value of your investment. It's not a good place to be, but that's the reality. So what I would tell every borrower is this. Lenders are not inclined to get rid of you just to get rid of you. Lenders are inclined to be collaborative in general. Okay, obviously there are lenders who do want to, they're, I guess what's called predatorial lenders. They really just want you out and they want to take away your property. But that's not banks, that's not insurance companies, and that's not really cmbs, special servicers. And so if those are your lenders, what I would say is you need to make your case of why patience is warranted, which is, is the asset viable? Right. So that's the first thing you need to address is the viability, the long term viability of the asset and the likelihood of regaining value over time. So that's the story, that's the first part of the story you need to make so that this is a temporary loss in value, not a permanent one. The second part of the story is kind of making the case for your competence as the manager. And because in the end that's really important. Can they trust you and could they believe that you are the best person or best company to run that asset? And I think at that point you've done the best you can. And most borrowers, to the extent they have latitude, will give you wide berth or as wide berth as they can and be patient with you. So that would be the advice I give every, every borrower.
- [50:13]
C
I mean, what are you expecting to see of the 2021 and early 22 acquisitions? When cap rates were at 3, maybe even lower, interest rates were, you know, at an all time low and now the interest rates have more than doubled and they're, they're staring at, at these maturity dates, especially on these three year bridge loans. What are you ex, are you expecting a flood of paper to trade next year? Are you expecting, I mean, I guess what is it that we're going to see? Because we haven't seen it yet.
- [50:56]
D
Yet. I think that, as I said, I think that periods of patience ultimately give way towards periods of resignation. Right. And the period of, of resignation is not yet upon us. So I think we're still in a period of patience. I think we'll remain in a period of patience for a little while. How long? You know, it's really anybody's guess.
- [51:29]
C
All right, we're almost done here and I'm going to transition to a lightning round set of questions. But before we do the lightning round, and this is a world famous real talk lightning round, so be ready for it. Ethan.
- [51:42]
D
Okay.
- [51:43]
C
You're, you, I think you're going to remember this. It was eight, over eight years ago in 2015, around the summertime, I hosted, I don't know, 30, 40 people in my conference room. You were my co tenant, sub tenant. And we started Mosaic and I was very honored that, that we were able to share an office together. And you made a statement and you bet one of my friends and clients, but you made a statement in 2015, right, right after Trump came down the, the Trump Tower stairs with Melania. That, and this is before he even.
- [52:28]
D
Had his, before the primaries, before the.
- [52:30]
C
Primaries, before his, the first debate. You said Trump's going to win in the biggest landslide in American political history. Now, it may not have been a big landslide, but he won. And you bet this guy. And I don't know if you, if you collected, you may have. So my question is today, what's your prediction for 2024?
- [52:57]
D
Well, I, I believed that would happen because I believe that it, that there was a pent up demand, deep pent up demand amongst the voter population for a non political insider and it didn't even matter who it was, they were going to be excited for anyone. And this guy had a brand because of tv, because of self promotion that, you know, like Arnold Schwarzenegger with governor that got him attention. But I, I thought that there was huge pent up demand for a non political hack to attract a lot of votes. That's really why I felt that way. I, I still feel that way. I still think he wasn't the guy. You know what I mean? Like, I think now people go oh well we, we, we would like to not have a political insider but, but not that guy. Right, right. Like gee, could it be somebody else from the private world? Didn't have to be him. Why did it have to be him? So I think it's, you know, our political situation is a very, I would almost say frightening Andrew, like literally frightening. And it's not only because of the choices we have which get worse literally seemingly every election cycle, but it's, I'll tell you what really scares me is the, the utilization of government and governmental power to suppress rights in America and enact in ways that are completely against the founding principles of our country and our Constitution. So I don't think most of your listeners read the New York Post. I don't read the New York Post either, although I used to when I lived in New York because they had a great sports section. Yeah. But someone forwarded me a link just yesterday whereby. And I'm trying to remember who it was. Oh, it was a Stanford professor, a scientist who, who sued the government in lower court. In federal court. Lower federal court. And he sued different parts of the government for having suppressed him on social media because he questioned the response of government, the lockdown response to Covid. And well, whether we agree with him or not, whether his ideas were good or bad, his point was that was not acceptable. That government, literally government, including the FBI and other parts of government made phone calls and reached out to places like Facebook and Twitter and said this guy needs to be suppressed. And so now he proved, he actually was able to prove in court that those things happened. And of course when Twitter or Facebook get a call from the government saying if you don't suppress him, well, you know, we regulate you. That's a pretty heavy threat. And all of a sudden we see government has been the power of government being wielded in opposition to human rights and individual liberties. That is even more scary to me than the terrible choices we have in elected officials and Worse, perhaps still, is the absence of broad media coverage of that suppression. Right. So that happened. That lower court case happened. The New York Post covered it. It was pretty much nowhere else. Right. So no one even knows about it. And that's incredible to me. And when we think about that juxtaposed against. And I lived, even though I was very young, through the Nixon fiasco where he listened in on Democratic campaign headquarters in what later became Watergate because the name of the building where the Democratic headquarters was called Watergate. So he listened in with listening devices so he would know what they're planning in their, in their campaign against him. And he resigned in disgrace over that and was reviled for that. And here we have government doing what it's doing and there's no curiosity amongst media. It boggles my mind and makes me feel like we're living in some version of the USSR that we used to make fun of and feel sad for when we were young in my generation.
- [57:23]
C
Sounds like the premise of your next book could be.
- [57:26]
D
You never know.
- [57:29]
C
Are you ready for. By the way, you never made a prediction, by the way, that you.
- [57:32]
D
Oh, I mean, who's going to be president? I mean, I, I hope it's a decent fellow or woman. You know, there are decent fellows and women out there. They're not the top, top line candidates right now. Yeah, I really like the governor of Virginia. I think he seems like a decent fellow and, and a capable fellow. And I have others that I like, but I think it's, it's, it's impossible. I felt strongly about the Trump thing for the reasons I mentioned. I don't, I don't have a clear.
- [58:04]
C
All right, lightning round. So quick answers to these last several questions. You ready?
- [58:11]
D
Sure.
- [58:11]
C
All right. So your book is called Greatness is a Choice. I'm curious what your greatest success to date, what you would consider your greatest success to be.
- [58:27]
D
Happy marriage.
- [58:29]
B
I love that.
- [58:30]
C
What about greatest failure?
- [58:43]
D
I look back at all the things that I would call failures and I would say they all have the same theme, which is bad communication by me. I think whenever I've kind of done things or not done things that didn't come out the way I wanted, the common theme was I didn't communicate clearly or well enough to the other party. And, and that never resulted in good things, including when I've had marital problems like we all do. And it's like I look back in my first marriage and I also know I was just a terrible communicator, you know, which is weird because I think I'm a good communicator, but that's what.
- [59:24]
C
I was going to say.
- [59:24]
D
You're the irony of all ironies. But I've, I've failed in communication, whether it be career or personal. It's the underlying theme of every, what I would call disappointment in my life.
- [59:40]
C
You have so many different elements of greatness or you talk about so many different elements of greatness in your book. Are there a couple that stick out that these are the most important factors in order to become great at something?
- [59:53]
D
I think the foundation, which is why it's the first chapter, the foundation of being great in your life is truly having self esteem. Right? And I think our society is so geared at gaining the esteem of others and impressing others at the expense of actually having self esteem. But you can't be great without self esteem. Now the other thing about greatness, I'm sorry to make a lightning round into a little bit longer than that.
- [60:20]
C
Oh, good.
- [60:21]
D
Is that greatness elevates everyone who touches it. So like when we go, it's the obvious one, is when we go see if you ever saw Michael Jordan play basketball, you're, you're elevated from that experience, right? That's the obvious one. But maybe a less obvious one is how about when you go to a restaurant and the waitress or waiter is kind and, and relates to you in a human way rather than less, less that way. And how that experience elevates, you know, that encounter, that positive encounter that that person brought greatness to your table, elevates the table and that elevates everyone at the table. And I think that we create a ripple effect through our being great in our own way, right? And so I like to say I like cheeseburgers when I bite into a cheeseburger. And it's incredible, right? And that's a lot different than the average one that you bite into. You are elevated because you know that whoever prepared that brought their greatness to that cheeseburger. And, and it puts a different tone on your day in that moment. And I think it's elevating. So greatness can be brought about by anyone at any time and the ripple effect is very powerful.
- [61:40]
C
I guess I'll end on with this question and maybe the answer is going to be similar to what you just said. But if a college grad, you know, walked into your office, and I know you say in your book you hate giving advice because it all is based on your perspective, right? And, and, and your characteristics and your upbringing compared to, I don't know, maybe someone Grew up in Bel Air and had a completely different perspective and got anything they wanted. But a young person walks into your office and wants to start in the real estate business. What advice? I know you don't like giving advice, but what would you, what would you, what would you tell them?
- [62:23]
D
Well, so as you know, because I said in the book, I'm not, I'm. I'm against giving specific advice for the reason, but there are general things that I think are, are valid to share with people. I would say at the foundation of the answer to your question, is this self esteem, which is really know who you are and appreciate who you are, conduct yourself in a way that is deserving of self esteem, and then bring that unique self to your encounters, whether it be with a prospective employer or a client or a girlfriend or a boyfriend or anybody else. And I think that everyone's got that ability to be beautiful and be attractive. And if they have self esteem and are bringing their unique selves, I think what's unattractive, particularly in young people, and I cringe because I probably did this myself, everybody does, is to think of yourself as not good enough and come in and act and act right acts are really unattractive. But a lot of times young people, including me, we do that because we don't think we're enough. And it's natural. And we go in there and we maybe fudge answers to questions instead of saying, I honestly don't know the answer to that question. I have no idea. That's much more appealing. And I like when people come in with humility and say, look, I am just out of school. There's very little that I know about the practical world of real estate or finance or whatever it is that I want to talk about. But I'm really committed to success and to bringing my best self into being great. And I'll be a very, very dedicated hard worker. I love that. And I think that it's the opposite which of a. Someone who might come in and think they need to impress me with their knowledge found from school, which is mostly impractical and, and not relevant to the real world. And I just go like, oh, man, you know, this person's got a lot to learn in life and I don't want to be their teacher. So I wish them, I wish their next employer good luck, but it won't be me.
- [64:35]
C
Well, you know, Ethan, I. I really am appreciative of you coming on to the show. Congratulations on your book. Although I only got a PDF copy, so maybe nobody, nobody even I haven't seen.
- [64:50]
D
And I'm so excited to see the physical copy, but it's not out until the end of October. Okay. You would have definitely gotten an autograph.
- [64:57]
C
I can't wait to.
- [64:59]
D
From me. But you know I would. First of all, I appreciate you having me on. I would love for every one of your listeners to go get my book. It's available on Amazon right now and elsewhere on pre order for delivery the end of October. And I'll give you the money back guarantee. If it's not good, I'll. I'll buy it from you.
- [65:22]
C
Well, I appreciate your time and you're always candid and I think that's why everyone just loves hearing you and your thoughts and your perspective and your background. And we could have had this be, like you said, a Joe Rogan four hour podcast and maybe we'll do a sequel and talk about Elton John and how you got Dr. J to write your forward and anything else in between. But for now, I just want to thank you for being a friend and client and just a special person in my life. And let's get back onto the golf course once your knee is fully rehabilitated and brand new.
- [65:59]
D
I'm looking forward to that. Thanks again for having me. It's been a great pleasure.
- [66:03]
C
All right, Ethan, always fun talking.
- [66:06]
D
Bye, Andrew. Bye.
- [66:07]
C
Bye.
- [66:08]
A
You've been listening to Real Talk Real estate discussions with Andrew Kirsch. You can catch prior episodes@skalar kirsch.com and on YouTube, LinkedIn, upperclass podcasts, Spotify, Google podcasts and more. Thank you for your positive reviews, comments and for sharing this show with others.