← The TreppWire Podcast: A Commercial Real Estate Show
The TreppWire Podcast: A Commercial Real Estate Show
368. In the Eye of the Commercial Real Estate Storm with Michael Comparato, Benefit Street Partners
00:39:45
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Foreign.
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Welcome to the Trepwire Podcast, the show where commercial real estate meets data and insights. This is a special guest podcast. I'm Hailey Keen with trep, a data modeling and analytics firm for the CMBS commercial real Estate and CLO Markets. I'm with Lonnie Hendry, chief Product Officer. Today we're joined by Michael Comparato, president of FBRT and senior managing director, head of commercial real estate at Benefit Street Partners. Michael brings decades of experience spanning commercial real estate, credit capital markets, CMBS origination, structured finance, strategic acquisitions and platform leadership. Before joining BSP in 2015, he held key roles at Ladder Capital, Bank Atlantic, Commercial Mortgage Capital and Compson Holding Corporation. Michael, we are so excited to have you here today and ready to unpack a lot of what's going on in the markets. Welcome to the show.
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A
Thank you, Haley. Thank you, Lonnie. Pleasure to join you guys.
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B
Maybe we start with some of your background and then you'll get into specifically your role at Benefit Street. Walk us through who you are, how you found yourself in this industry, and then what you lead at Benefit.
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A
Thank you. I've got a kind of unique story. I did not have a choice to get into this business, so I was very blessed to be born into a development family. My great grandfather and grandfather, he returned from World War II in 1946 and they started their family business, which was called Comps and Development, which was short for Comparado and Son. And they started building single family homes in upstate New York in 1946, built their first shopping center in 1958. And my grandfather, God, I want to say he lived till he was 92 years old. He owned that shopping center. It's called Ridge Hudson Plaza. Owned it till the day he died. He had three sons. I think he might have loved that shopping center more than his three sons, or at least equal to. But he proceeded to build a very, very big private real estate equity empire down the east coast, opened offices in D.C. south Florida, and for 60 years was in the commercial real estate development business. So at three years old, I was on construction sites. These are probably names you haven't heard of, but we used to build service merchandise anchored shopping centers. So I was on shopping center sites, multifamily sites, condominium sites. So I was really born into the industry, worked with the family for a while and then ended up on Wall street probably 15, 16 years ago. On the credit side of the business. Commercial real estate's been in my DNA. It's been in my blood. Got a passion for it, some would say an unhealthy passion for it every once in a while, but love what I do and I've been around it literally my whole life.
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B
That's an incredible story, Mike. And I think Lonnie usually makes a joke on this show that most of our guests tell us. They kind of fell into the industry, they came into it after college or they ended up meeting someone who told them to get a job here. It's really cool to hear that your interesting story is that you really were born into this and you have a passion for it from such a young age. And I know in our pre recording we can already feel that passion. So I know our listeners will feel that today.
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A
No, I was, I was literally doing landscaping work at 13 years old at our office buildings and then I moved up to doing drywall when I was 15 and 16 for TI buildout. So like I, I really was in the, the weeds of, of commercial real estate ownership and equity and development. It was a different path. What a great way to learn. It's like literally ground up, you know, pun intended with the landscaping. But it's a, I got a perspective of the business that not many people have the opportunity to.
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C
Yeah, no, I think it's, it's incredible in the sense that what we talk about every week and what we see in the data is depending on where you sit at the table, the market looks a different way, the risk is a different level. Operators are always opportunistic, they're deal makers. Brokers are always saying now's the time to buy. Lenders are always looking at the downside risk. And you know, growing up in a family where you're seeing that happen real time, where you're raising capital, building buildings, working with tenants, building spaces out, I mean, you get a hands on perspective of what it takes to be successful. And now that where you're at with Benefit street, it's, it probably plays a lot of, or adds a lot of value to, to what you bring to the table. I mean, you know, I think what we've seen over the last couple of years is underwriting on a spreadsheet doesn't translate necessarily to what happens on the ground. And you know, having that perspective, I'm sure adds an immense amount of value for you. So maybe give us just a little bit of background on Benefit street, where you guys sit in the ecosystem, what you do there and then we'll get some more of the detailed questions.
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A
Well, before we get there, I am going to respond to some of the things you Just said really quick because I do think it's interesting and you hit it spot on. I have convinced myself that we're a little bit different and a little bit better because of that background. Right. And we talk about things in investment committee or when we're looking at deals that I think a lot of lenders don't talk about. Like, you know, we look at parking. You're doing a shop, where do people park? Like, I know it sounds like a silly question, but like, where do people park? Like, if you can't park, you can't go to the restaurant, you can't, like, you know, size of floor plates, like, is this actually leasable? So we look at things through the lens of development because I grew up around it. But your point about a spreadsheet, it's actually one of my sayings, if you ask anybody in the company, is I say I will take a good story over a great spreadsheet any day of the week. And I think lenders do have a tendency to put it in a model and it spits out a number and okay, everything's hunky dory. We just spend more time kind of going through the actual real estate itself. But as for Benefit street, so excited for the opportunity to join the company. Ten years ago, it was literally zero assets under management in the real estate business. When I joined. I think we're somewhere at like 12 or 13 billion today. And I had a phenomenal experience working for Brian Harris at Ladder. He's one of the smartest, if not the smartest guy I've ever worked for. And we really wanted to recreate something that we created at Ladder, which was doing everything. We have the skill set to do equity, we have the skill set to do debt, we have the skill set to do every asset class. And what we really wanted to build at Benefit street was that proverbial one stop shop. And I know it is a little bit cliche, but that's what we've built. It took us 10 years to get here. And I think kind of the biggest piece of the puzzle that was missing was having that agency business, which we acquired in the middle of 2025. But we can literally walk into a borrower and do, and say we can do a const loan, we can do a bridge loan, we can do a mez piece, we can do preferred equity piece, we can do common equity and we can do every asset class and we can do cmbs and agency. Like we literally, we can do whatever we want and anything we want. And so I think We've built more of, like a. A real estate hedge fund than anything else. And we want people to think of us that way. Like, we. We want you to think of us as good lenders, but we really want you to think of us as good real estate people. And I. I think that's where we try to differentiate ourselves and do things a little bit different. So it's. It's been an awesome journey. Acquired by Franklin Templeton at this point, I think six or seven years ago, Franklin has been just a phenomenal partner for us overall and continuing to expand the platform. And I couldn't be prouder of the platform we've built. The people that we have here, I think, are some of the best human beings in the industry and just thrilled to wake up every day and do. And do what we do.
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C
Yeah, I mean, that is one common theme we've. We've heard from all of our guests is the commercial real estate industry. Once you kind of hit that critical mass, it's one of the most dynamic interactive marketplaces you can work in. And the people generally are all pulling for each other. I mean, I think we've seen a lot of people that have an abundance mindset. There's. There's plenty of opportunity for all of us to be successful and grow our businesses. And it's great for you guys. I mean, you guys have really come on the scene and, you know, offering all of the different optionality that you have. And from a practitioner's perspective, we've tilted that way over the last several years at Trap, where we're trying to bring people from industry in to build our products, because unless you've worked in the seat, it's really hard to build things that people need. Same for you guys when you're making loans or placing equity, etc. So you mentioned the. The agency side. So we, we did want to walk through that. So you guys purchased a $425 million acquisition of agency lender. New point to try to build out that more holistic platform. You know, what was the impetus for doing that now and then? You know, maybe were you just addressing a singular market gap or was this part of a more comprehensive strategy for you?
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A
What.
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C
What was the. The kind of general takeaway from that perspective?
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A
There was no impetus to do it now. I've been trying to do it for 10 years. So it's just we needed the right opportunity at the right time. I had a meeting with David Brickman, the former CEO of Freddie, 10 years ago, and I sat in a conference room with him, you know, on the 49th floor of the office overlooking Central Park. And I just said, david, how do we get a Freddie license? And he kind of looked at me and smiled. I said, mike, like there's, there's no more licenses. Like, it's just not going to happen. We've been trying to get into the agency business for the past decade. And so it's finding the right company at the right time, that's the right price, that has the right people. And so it's, you know, it's, it's just not easy to get there. The new point opportunity came along. I told people here, like, I think this is the one. We're not going to miss this opportunity and we've got to figure out a way to make it happen. And I would say kind of the cherry on top was, yeah, they've got these products, they've got all of these licenses and they've got some unique cottage businesses within the business. But the people at newpoint are just outstanding human beings. Again, culture. I know every leader says it, but like I am a culture warrior and like I just believe in working with good people and I'm 50 years old and I have no bid anymore for like certain human beings. Like, they are a great collection of human beings who are also exceptional at their jobs. And so I'm just, I'm really excited about what we can build with newpoint going forward. It's, it's really a once in a career kind of opportunity for us.
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C
Yeah, that's great. So is that going to be rolled up under the umbrella or has been. Are they going to still operate independent? I mean like under their own flag? How does that work for you guys with the acquisition?
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A
So I would say we're still in the figuring that out moment. For the time being, we've decided to keep them independently branded. I am the CEO of NewPoint. I am also the president of FBRT. So you know, from an operational standpoint, I oversee everything. But from a branding and marketing standpoint, we've kept them separate. We talk about it once a quarter. What are we going to do? I think we're still game theorying that out of, of where we want to go. But the great thing is everybody has the ability to sell all of our products, right? NewPoint People have the ability to do everything that our balance sheet has to offer. And the benefit street people have the ability to bring loans to NewPoint on the agency side. So the cross selling of products, we've already closed, you know, hundreds of millions together on very unique, interesting opportunities. So it's, it's worked out great to start and we're still figuring out what it looks like as kind of like the final branding side of things, but for today we're keeping them separate.
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C
Yeah, that makes sense. And I like that you hit on some of the company culture stuff because I think this industry, I mentioned earlier, it's great. There are some challenges with it. I mean, sometimes interest rates go up like crazy. Nobody had that written into their five year dcf. I'll tell you, by the way, the Fed going crazy for 18 months, period.
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A
But back to your point about spreadsheets, what I tell people is I don't know how many hundreds of thousands of people are in the commercial real estate industry, but there are hundreds of thousands. There is not one that said rents and multifamily were going to grow 20% in 2021. Not one. Someone might have thought it was six. Like maybe the high end of the range was 6%, who knows? But no one picked that. No one in their crystal ball had sofr going from 0 to 5. So it's like I always say to the guys, like guys you're walking into investment committee, your model is wrong, right? Like your model's wrong. I don't know how wrong, if it's directionally wrong, I don't know the magnitude of it wrong, but it's wrong. There's no way that this loan is a 7.2 debt yield three years from now. It won't. It just won't be. It's going to be a six and a half or an eight and a half, I don't know. So make sure that we get the story right. Let's make sure that we're lending to the right people. Let's make sure that we're in the right markets. Like there's just so much more to the business than the spreadsheet because the spreadsheet sheet literally is always wrong.
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C
It's a great grad school exercise. It doesn't hold water in the, in the market. And I think to that end, with the disruptions that we've seen, right? I mean, office been detailed. When I do presentations, I ask a question. How many of you have read an office article saying that office is never coming back? And everyone raises their hand and I say, how many of you read 10,000 articles that says office is never coming back? And everyone laughs because for the last five years that's all we've heard. And now you're starting to hear whispers of multifamily showing some cracks. There was, you know, obviously some challenges with the short term bridge lending from 21 where the floating rate stuff really got hammered on renewal. You know what have you guys seen? What has your position been? There's been a lot of talk around extend and pretend modifications. Have you guys been party to some of those transactions? Kind of. What's your approach been? Because you've kind of underwritten the story. Do you have sponsors and borrowers that you felt like you could work with if this happened? Just give us some, some color on kind of where you guys see today's challenges and what you've done to kind of work through them.
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A
It's certainly been a challenge. A bomb went off. The magnitude of which no one can avoid. Right. When something like this happens, there's no way that you bat a thousand and don't have a defaulted loan or don't have a loss or something there. I will say we made two macro calls at the peak of the market and even before COVID that just put us incrementally in a much better spot than others. We've been anti office for a long time before it was cool to be anti office. And this goes all the way back to my days with the family is I just never understood in all of our asset classes like we would give people 50, $75 TI buildouts on our office buildings for a guy paying $17 in rent. Like it just. I could never do the math. And so we just didn't lend in the office space. I mean, I think our max exposure in the public company was like 5% office at its peak. I think we're down to like 1% at this point. So we had very little office exposure. And then at the peak of the market, you know, Q4 of 21, we actually went on our public company earnings call and said we're seeing some unhealthy things out there. We think there's a correction coming. We called the correction at the peak of the market and we said 2020 vintage assets in Miami are trading for the same cap rate as 1974 vintage assets in Little Rock, Arkansas. That's not right. Like that's not how this is supposed to work. I can't change the market. So if I've got an originator that walks in with that first deal, 2020 in Fort Lauderdale, and then the next guy walks in 1974 in Little Rock, and they're both the same debt yield, like of course I'm going to pick the nicer newer asset in the big liquid Market. And we said to the market we're going to stop lending on 1970s and 1980s vintage multifamily and focus on newer assets and big liquid markets. So I think we're dealing with less problems than other people just because of those decisions. But again, when a bomb goes off of this magnitude, there's no avoiding it. So we're a little bit different than other lenders. I think again because of my equity background and we've got some people in the business. Brian Buffone has been doing equity with me for 25 years. We're comfortable owning real estate, right? We're not a bank, right? Like a bank avoids owning, having REO at all costs. Like I don't necessarily want to own real estate, but I'm comfortable owning real estate. So we've actually, you know, again, just going back to kind of public company, you know, this whole extend and pretend, we said maybe a year, 18 months ago. We're taking the exact opposite approach. We're taking the acknowledge and address approach. And we've been foreclosing assets and we've been taking them and we've been fixing them up and we've been liquidating them. Knock on wood. So far, everything that we've taken back and liquidated, we've either done it at break even or a slight gain. We are definitely going to take losses. Like there's again no way to avoid the bomb that went off. We've marked the assets that we think need marking. We're going to work through the last of the portfolio. But I would say the market as a whole still hasn't addressed some of the most obvious issues. And those obvious issues are off office and the older vintage stuff in the secondary and tertiary markets. Like I just put out a white paper in, in September. We wrote one in September of 23 and we did a follow up in September of 25. And the theme of the, the one in September of this year was I think we're in the eye of the storm, right? And I do believe that's where we are. And I grew up in South Florida and if you've never been in a hurricane, I've been through plenty of them. The eye of the storm is really interesting, right? You're getting pounded. Wind, rain, damage, blah, blah, blah. And then the eye. And if you've ever been in the eye, it's sunny, the wind stops, the rain stops, you get this false sense of security that the storm is over and then 20 minutes later it's like bam, you get the second half of the storm. And I feel like that's where we are in commercial real estate, right? Credit spreads have tightened. Liquidity is ridiculous. And I mean anything is oversubscribed 10 times. And I just feel like we've got a little bit of a false sense of security that the worst is over. I think the, the easy stuff has been addressed, which is the really liquid real estate, the Class A multifamily and the big liquid markets. We haven't really truly addressed office and we haven't really truly addressed the 1978 Chattanooga, Tennessee deal. Like those need to be dealt with. And I think that they're going to be dealt with in 26 or 27. And until you kind of have that kind of like final capitulation flush, I just don't think we'll get to a totally healthy market. But I'll add one more thing. Negative leverage in any industry is a really bad thing. In commercial real estate, it's devastating because it's so heavily debt reliant. And we've been living in a negative leverage world for close to three years now. And negative leverage obviously is when debt costs are higher than a cap rate that you're buying an asset for. And I just don't think we can wave the all clear sign until we're back to positive leverage environment. So does that mean that rates need to come down or cap rates need to expand? I think it's probably a little bit of both. But until we see that dynamic, it's just going to be interesting times.
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C
I mean, I think we're going to probably carve this part out and use this because that was really, really good. And we've been seeing and saying a lot of those same things. I mean, on the office side, we've talked about this tale of two markets. If you're a highly amenitized Class A office in New York City, things are going really well for you got great tenants, you're pushing rents. All of those things are positive. But if you're anything else, it's really challenging. And I think you hit the nail on the head with the TI cost. I mean, people don't realize how capital intensive offices are, and they didn't realize that until office occupancy plummeted like it has over the last five years. And guess what? You still have to fix the elevators and you still have to renovate the lobby and you still have to do all these things and you're not increasing the rent by doing those things. And so it's an interesting dynamic. There's a lot of of class B office across the US and to your point, it hasn't been dealt with.
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A
I don't want to pick on Chattanooga and Little Rock, but you know, they're, they're markets that everybody knows in their secondary markets. But like if you have an office built, a 1982 vintage B office building in Chattanooga, Tennessee, what's that worth? And honestly, I don't know, but let's just say 50 bucks a foot because I don't think I'm wrong by much. But it costs 50 bucks a foot to put a new tenant in it, right? Yeah, the math doesn't math. So like that building, legitimately, it's probably worth land value, less demolition costs if we're going to call a spade a spade. And, and I just don't think we've dealt with it right. And, and I talk to a lot of borrowers and I talk to a lot of owners and they've told me, we've called the bank and we've told the bank we aren't carrying this anymore. And not only aren't we carrying it anymore, we're not going to operate the asset anymore. Where do we send the keys? And the bank says we're not going to take the keys because a mortgage is a non mark to market asset. Guess what REO is. It's a mark to market asset. So the minute they take the keys and take that deed, they've got to mark that asset. So what's happening to that building? Pipe breaks, landlord's gone, property management's gone, lender isn't running it. I actually think we're dealing with a market where we're going to see some office. Like you can't bring these assets back to life once they get to 50% occupancy, like it's death spiral. So we do have an issue in Office X South Florida. Yeah, Brickell. Okay, that's fine. Class A in New York, probably going to be fine. But we got to deal with the other 99% of the office in the United States that isn't that. We just haven't dealt with it yet.
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C
Yeah, I agree with you. We have a long way to go to see that play itself out. And I do think that that part of the market is going to take more than a couple of years just because of the volume of, of office space that meet that class B criteria. I mean it is a very, very large number of square footage and total buildings. And then you hit on something that we've been talking about with the multifamily stuff. And it's great to hear you guys kind of called the peak because we were sounding the alarm bells when 1970 vintage Class C multifamily and podunk wherever is trading on the same cap rate, newer built class A stuff on trailing twelve month noi. Something's not right. You know, it's amazing to me to just see how many people, because of FOMO or whatever it was at the peak of the market. Happens every single time we hit that part of the cycle where volumes go up, no one wants to miss out. So, you know, people push the leverage. They require less debt yield or debt service coverage and, you know, deals keep getting done. But when you look back, like what are we talking about? A 1970s class C multi at a, you know, 3.75 cap on trailing 12, there's no real value added. I mean, like this whole concept of value add in multifamily, I think coming out of this, this disruption is going to have to be reframed. There's nothing proprietary about, you know, adding some new cabinets, granite countertops and some laminate floors. That really drives value. I mean, after enough properties in your market have done that, you're not getting a commensurate lift when you do it. And by the time you do it, they're already moving on to some other type of amenity that now is the market flavor. So say, what are your thoughts on all of that? I mean, like, that was the business model for.
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A
It was a business model. Look, there's, there's a few things. I mean, one, it drove me crazy because like every guy was walking in, in 2021 saying, I'm the smartest multifamily guy ever. It's like, no, you're not okay. Interest rates went to zero. Cap rates went to three and a half. Like, of course you 3x your equity and it had nothing to do with you refacing some cabinets. Do you just rode the wave? I will say, are some guys better operators than others? 1,000%. There are guys that have been doing this for 30 years. They know real estate, they know how to operate it. Like, but let's just call again a spade, a spade. Like, you guys all rode a wave. And unfortunately that wave crashed and crashed hard, right? And so it was tough. I would also say, you know, there's something for kind of the new generation that if you got into this business in 2009 or 2010, you had 15 years. What's a defaulted loan? What's a cap rate expansion? What's a concession? What's free Rent like, like they never heard of any of this stuff. I understand. I remember being young, I remember, I remember thinking like, everything I'm gonna touch is gonna turn to gold. And it did for a while. And then, oh my God, Lehman Brothers and, oh my God, Bear Stearns and that next generation, like everything they touched went great. So it was just like put it in sixth gear, cram the pedal to the floor and just keep going. And look, the reality is it's like every other bull market. There's a blow off top, whether it's the stock market, whether it's.com, whether it's tulips, whether it's commercial real estate, whether it's 1974 crap. And there's always blow off tops to markets. And that's what we saw in Q4. 21, Q1 of 22. And there's been a whole lot of pain. And I think that there's winning and there's learning lessons and I think a lot of people learned lessons from this. I think the market ultimately will be better coming out of it. But we're not done. There is not going to be a V shaped recovery like period, hard stop. I've been telling real estate guys for three years, if you see a two handle on the 10 year, I promise you something bad happened that didn't happen naturally. So just be careful what you wish for. I think we're in the later stages of kind of the price discovery and the correction and it's going to work itself out and the market will recover. But I do think we're going to go back to a little bit of a healthier equity investing environment, which again, coming from a family that did this, you own real estate for 7, 10, 20 years. You let the natural compounding effect of inflation and rent growth and noi growth kind of like do their things. This whole I'm going to buy an asset and sell it 18 months later. Like I'll give you one real world example because we do a decent amount of equity investing. We had a group, I'm never going to name names, but they probably, they brought us a deal in Orlando and this must have been in Q1 of 22. And this thing traded for 125,000 a key six years ago, then 200 a key four years ago and then like 260 a key. And this guy wanted to buy it for like 260 a door. And his model was showing in three years, he was going to sell it for 375 a door. And I was just like, Come on, at some point this has to stop. Like it's Orlando, Florida. Like there's land in every direction and this thing was literally worth 125,000 a unit six years ago. I'm sorry, I just can't with a straight face think that this thing is legitimately worth 375,000 a unit six years later. Like it just, it defies any level of logic. But again, people were making so much money so fast that I understand why it happened. Like manias happened for a reason. And I, I get it. It's tough to stop when you're making.
- [26:10]
C
That kind of money 100%, especially for those that are maybe newer to the business where the first couple deals they did were home runs. And so it just gives us false sense of our model is correct and we're going to continue to replicate this. And you know, Phoenix was another example where it was like, you go back and look at the sales transaction history on a five or six year time horizon and prices had doubled and logic just says that's not sustainable. And then you add in, you know.
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A
Guys, if you 3x your equity in, in two to three years, that's an anomaly.
- [26:40]
C
Agreed.
- [26:41]
A
That's, that's not how this industry works.
- [26:44]
B
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A
I'll give you one more example. I was driving with a sponsor developer and you know, they were, they were building in 2020, 2021 and I'm driving around a market that they're focused in and he's literally driving me around and he's pointing out his window, he goes, I'm under contract under that, you know, we're going to make 40 million there and we're under contract on this one and you know that one's going to be a $60 million profit. He's saying this like, it's just like matter of fact and I'm just like, it's not supposed to be that easy. I just drove around with you for 45 minutes and I think you're making $300 million on like seven projects over the next 18 months. Like this can't be how this works. And so it's just, you get to these euphoric blow off tops. It's just, it's exactly what we had. And again look, while we did call the top and we, we kind of called the correction, I did not think the correction would be the magnitude that it ended up being. Right. Because I would, I would have closed, I would have shut the lights off. I would have told everybody go fishing and golfing for the next six to nine months and you know, we'll come back later and start our business up again. Like we would have never lent into this magnitude of correction. But no one, again, hard stop, exclamation point. No one thought the 10 year was going from 75 basis points to a 5 handle in 12 months. And you know that's, that's just a bomb that goes off the magnitude of which you can't go totally unscathed.
- [28:44]
C
Yeah. And then I was going to say that when you added about 1.3 million new units to the supply on the multi side over that time period, which did not help with rent growth or anything else, we're still of battling through that. I mean the forward looking supply constraints are pretty real. So hopefully these new units get absorbed and some pricing power comes back to the owner. But it's, it's got to work its way through the system. I like your comment about concessions and free rent. It's, it is amazing. There are a whole generation of people that just never, they don't know what loss to leases. They've never experienced a concession built into the model. And so we've, we've talked to a lot of people. Markets are starting to recover. You're starting to see some, some good leasing activity, some, some price recovery but nothing like what, what people had underwritten a lot of these deals at. So I think that's another, you know, not as bad as office but I think there's definitely going to be some challenges we got to work through in Maltese. Maybe let's change gears a little bit here. Where are the opportunities? I mean we've, we've talked so much about data centers on our show and it seems like every article you read talks about data centers and AI and power and all these things. You have any comments or construct on that? Are there any other asset classes maybe we haven't talked about where you think there's some real upside.
- [29:49]
A
We avoid it like the plague. We are meat and potato guys, multi industrial, you know, the occasional shopping center, the occasional hotel. I don't think people are going to stop going on vacation. You know, no matter what happens, work from home, AI blah, blah, blah. Like, you're going to take your kids to Disney, you're going to take your kids to the beach. Like, I think people are going to go on vacation. So, you know, we avoided life science like the plague. We had people bringing us deals in San Diego. We would have a guy walk in saying, I'm buying an office building in san Diego for 300 bucks a foot. I'm going to put 200 bucks a foot into it and call it lab space. And it's going to be worth a thousand bucks a foot vacant. And I was just like, again, it can't be that easy. If it is, let's go do that, guys. Like, it didn't pass like the sniff test. So we avoided the life sciences, you know, completely. Data center again. I'm just not smart enough. I don't view that as real estate. What I know is that it is a binary asset class. And that's what scares me about it. I would call it more infrastructure, I think, than I would call it real estate. I can't convert it into multi. I can't convert it into a hotel. I can't convert it into anything. It is either a data center or it is a just empty, useless pile of billions of dollars or something. And so my concern is twofold on that front is Moore's Law and Nvidia. Nvidia could create a chip tomorrow that makes every data center in the world obsolete overnight. I mean, honestly, I just had, have, I have no clue. I'm not smart enough. I'm not a tech guy. I can barely like, send an email to people. Like, I, I just don't know enough about it to say, like, we can look at a multifamily asset and say, okay, it's 70,000 a unit in this location. Like, how do you do that with data set? It's a, it's a tech play more than it is a real estate play. The whole power thing is interesting. I've heard about data centers in some markets that have been sitting there for five years, finished, and they can't get power. I don't know how real that is when you extrapolate that across the country. I was just watching something with Bezos where he's saying they're talking about putting data centers into orbit because it solves the, the heat issue. I was like, holy cow, that's freaking genius. I'm sure Elon's, you know, already got it like going up in SpaceX. Like, I know that I don't know enough to just stay away from it. Like it's just not, it's just not what we do, it's not what we understand. It might be the singular best investment of all time. I just don't know enough about it to be smart. I was on a panel the other day with Blackstone and, and they, their conviction is in that space and I agree with what they're doing. Right. The guy said, you know, they're, they' data centers at an 8 or 9 yield on cost that are net lease to Amazon for 20 years. Sign me up. I'm all in on that. Like, I'll do that all day long. But you know, that requires $3 billion equity check. I can't do that today. So they're probably a great trade in there, but I'm just not smart enough to understand it. So I'm going to watch from the sidelines and write my boring, predictable multifamily loans.
- [32:46]
C
Well, they say slow and steady wins the race, right? And I'm with you. It's easy to come back to the fundament fundamentals on some of these core asset classes and it's easy to have a gut check and logic and a basis of comp analysis and other things on some of these newer options. It's so new to your point, like none of us can be experts in it. And yeah, if you're Blackstone, you obviously have a different lens because you're just in a different stratosphere than everyone else's and so spent a lot of time talking about it just because it's been so newsworthy. But on the real estate side, there.
- [33:16]
A
Will be an opportunity in office, right? I mean, we're sitting here like totally, you know, poo pooing on office. By the way, show me an office building that I can buy for 40 or 50 bucks a foot. Like think that you could make real money. And I've, I've contended they like the downside risk of office between credit and equity. It looks very similar, right? If the equity's wrong, the credit's probably wrong too. So if you're, if you've got the intestinal fortitude to deal with the potential volatility of office and you want to dip your toe into the office space, do it in the equity. Like give yourself a chance to 2x or 3 extra money if you get it right. Like, if I get it right, I get SOFR plus 400. Like that to me doesn't seem like the right risk return to take office risk. If I walked into My board of directors and I said, oh, we just wrote a $75 million office loan and it went bad. They would kind of like tilt their head to the side and be like, did you not get the memo that office is kind of tough right now. So it's like if the return is there, maybe the risk is worth it it. But I just, I don't see it being worth it in credit at the moment in the office space. But I do think it could be an interesting equity play at the right basis in the right markets.
- [34:23]
C
Yeah, I think we're starting to see that play itself out. You have to be well capitalized because there are going to be some carrying costs on those assets to kind of get them going.
- [34:31]
A
And patient.
- [34:32]
C
And patient.
- [34:33]
A
And that's probably more, I'm not going to say more important. Well, capitalized is probably the most important. But you've got to be patient, right? I can't tell you that your office building is going to be worth X in 2028. You got to be comfortable. That year might not exit till 2035, I don't know. So it's got to be well capitalized, not over levered and patient. And we live in a society that isn't overly patient at the moment. Someone will make a lot of money coming out of this office debacle for sure.
- [35:01]
C
Yeah, I'll say it goes back to your thesis of back in the day, people bought buildings for a long term hold and so you could buy something at a really great price today and you were patient and now all these deals are engineered. They want a three, five, seven year exit and it is manufactured and that won't work. There's too much of a, you know, incongruency there. So this has been awesome, Mike. I really appreciate you joining us.
- [35:22]
B
Yeah, this has been an awesome episode, Mike. Thank you for all your insights and some really interesting commentary here today. You mentioned today some of your outlook for the next year. You talked about how we're in the eye of the storm right now and that it won't be a voice shaped recovery. But we did see your LinkedIn post where you were talking about how survive till 25 didn't really play out. And we actually have asked our listeners that same question. We said, okay, 2025 is ending. What are your catchphrases, your slogans, your taglines for the next year? So if you had to kind of sum up the year ahead or the outlook or put the 2026 tagline into words, what, what would you say?
- [36:03]
A
Wow, good question. And Since I put that post up, there was a lot of great responses and I should have picked one and been ready for this question. But I'm not, I'm not, I'm not sure that I have one. Although I, I would go back to what Lonnie said. Like, I love commercial real estate as an asset class, right. I think if anything, we are going to be in a new inflationary environment for the foreseeable future. I don't know if that's 3% C4 or 5, I don't know. But we are printing money the likes of which we've never seen before. Right? You look at a chart of M2 and any economic professor will tell you that inflation is a monetary event. We are just creating more dollars than could ever have been thought to be created. So I think owning hard physical assets like gold and all of these things, it's always a great inflation hedge. The great thing about real estate is it's an inflation hedge that has a current return. Owning a bar of gold, you can't chisel a little piece off and go to Publix and groceries. Commercial real estate, you get a return. So I think today is a very interesting time. I get asked all the time the relative value. Would you put a dollar into credit or would you put a dollar into equity? And I think the piece of that question that's always left out is what's your investment horizon? Right. If you're going to invest for the next two to four years, I will tell you mathematically there's no way that equity can outperform credit. And that's just on a notional basis when you adjust it for risk, like it's not even close. If your investment horizon is 7, 10, 15 years. And again, you're patient, you know, capital P, go buy a good asset. You can go buy a brand new class a multifamily asset in a great market. And I promise you, like in 10 years that will be worth much more than it's worth today. Is it worth 30% more or 80% more? I don't know. But you're going to get a nice little return along the way. You're going to get the tax benefits of depreciation. I'm bullish. Commercial real estate in all parts of the capital stack. I think we just need to be thinking about the capital stack as a duration investment as well as a return investment. And, and I'm just, I'm hoping people are getting back to that because this whole like buying, you know, the fix and flip, while that might work for like the single family home and wherever like commercial real estate was just never intended to be a fix and flip in 18 months month's business. I'm hoping that that goes away for a little bit and we get back to kind of the way the industry ran for a long, long time.
- [38:33]
B
Well, thank you, thanks for joining us today. You've had a lot of great insights. I mentioned your LinkedIn, but if our listeners want to reach out to you, learn about what you're doing, your business, how can they get in touch?
- [38:45]
A
I, I guess LinkedIn. Feel free to hit me on LinkedIn or you know, find my email, text me on my cell phone. I, I'll talk shop with almost anybody. I, I've been doing it a long time. I love very interested to see where it all goes. But thank you guys for having me. Really great question. Love the back and forth and appreciate the opportunity.
- [39:05]
B
We can feel your passion through this zoom screen. So it's, it's really refreshing to have you on and share your takes and we'll continue to follow your posts on LinkedIn and what you guys are doing at Benefit Street. So with that, we'll close this special podcast. Thank you, Michael, for joining us today. Join us later this week as we look at what's happened during the week and how it may be impacting you. If you have a question or just a comment, send an email to podcastrep.com until then, visit trep.com for more info and subscribe to the Tripwire podcast with your favorite provider. Thank you for listening and stay well.
- [39:38]
C
All right.
- [39:39]
A
Awesome.
- [39:41]
B
That was great.