Jay Olshonsky, President and CEO of NAI Global
Real Estate Distress and Investment Outlook in 2020 and Beyond
Today’s show came about after I read an article in Yahoo Finance about the timing of a wave of distressed real estate assets likely to hit markets 9 to 18 months from now, which would place it in the second quarter of 2021. And this is consistent with what other guests on the podcast have predicted, including Ethan Penner at Mosaic Real Estate Investors, Greg Freedman at BH3, Willy Walker at Walker & Dunlop and others.
Considering how important this topic is, I figured it was time for an update and to hear from the brokerage industry. So I called on Jay Olshonsky, the President and CEO of NAI Global.
Today's show is more focused on market conditions and predictions than it is on digital marketing, and we do venture into how to isolate opportunities during the current economic downturn and when you might expect them to come along.
What You're Going to Learn
- Real Estate Distress is 20 Times Worse than 2009
- The Wave of Distressed Real Estate is Only Months Away
- Distressed Loan Sales for Those with Private Capital
- When Private Capital Steps in on Real Estate Investment Opportunities
- Multifamily Asset Class is not Bulletproof in this Downcycle
- How the Use of Certain Asset Classes Will Change
- Real Estate Insights from 6th Largest Brokerage Firm in the World
- Crowdfunding Activity During Downcycle and Which Asset Classes Hold Up
- Commercial Real Estate Investors and the Best Buying Opportunities We Will Ever See
- And much more!
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Real Estate Distress is 20 Times Worse than 2009
ADAM GOWER: Commercial real estate veteran, that's you, expects a wave of distressed property asset sales comparable to the early 1990s and post GFC. Question, compare and contrast.
JAY OLSHONSKY: OK. Well, let's start with anyone that has been in commercial real estate long enough to remember, whether it's the 1990s or 2009, certainly understands what, let's say, disruption in the markets can have an effect on properties, property values, lending, debt, etc. So unfortunately, we have had COVID-19 that has hit globally to where people have had to shut down their economies, shut down their restaurants, shut down their stores, shut down their businesses, work from home. And in essence, we also have a problem where, not just in the United States, but we're going to focus on the United States, that people also have been, not having the ability to pay their rents, whether they're a tenant, an apartment dweller, a mortgage holder or someone living in a house or an office building. It is so widespread that at some level, now that we're three months past this, we are going to have an enormous amount of forgiveness which will lead to debt forgiveness, which will lead to foreclosure, which will lead to receivership, which will lead to new properties being managed, sold, etc. mainly because, at some point, most of these deals are financed with non-recourse financing and people are going to have to make a decision: Can I hold on?
And why this is so different than 2009? The best example I can give you is, we had an economist from CoStar and I will quote him because I give him credit for this and he basically said, "this is at least 20 times worse than 2009". So, if you just take that volume and you look at it that way. If you really think of 2009, it was really starting in the mortgage-backed securities and housing and then it spread to the mortgage-backed securities in commercial real estate. This is spread to everywhere. This is the local bank. This is the biggest banks in the world. These are the biggest players in the world that unfortunately are going to be in a position where this is every hotel in the world, whether it's in Park Avenue or whether it's down the street on the interstate. These are drastic aspects that have hit our economy and unless something like a vaccine comes where people will "get back to normal", there's no way of stopping the train that's already left the station.
ADAM GOWER: So that's interesting, actually, 20 times worse.
JAY OLSHONSKY: 20 times.
ADAM GOWER: Is a pretty bleak outlook because I remember the global financial crisis last time and I would say that 10 percent worse would have been catastrophic, at the time.
The Wave of Distressed Real Estate is Only Months Away
ADAM GOWER: But let's just assume, for a moment, that there is a vaccine what are the lingering effects, because in the article in Yahoo Finance, you project that the distress will come through within 9 to 12 months. So, I'm not going to hold you to that, obviously but premised on that, what happens....why 9 to 12 months?
JAY OLSHONSKY: All right. Well, let's start. Well, first of all. Right now, keep in mind, if you say we jumped into this, unfortunately, in March, and then by the time people figured out what was going on, it was April. And then, all of a sudden everyone said, alright, well, my business is closed or I'm shut down and then everyone started asking for debt relief or rent relief. Some people paid, people that had the ability to pay and some people didn't. So depending on where, let's say, the property owner is sitting. They either have: they're in really good shape on some of their properties or I've heard, in some cases, on retail... I mean, in New York City, I talked to someone that said, they have a 5-unit retail building in Manhattan: not one tenant paid the rent. So, of course, they called their lender and they said, OK, well, I don't have my rent, so I can't pay you. What can we do? And the lender gave them 3 months. So now, we're coming up on those three months. So now, we're essentially, the lenders now have to make a decision: Are they going to work with these property owners? Are they going to foreclose on these property owners? What are they going to do? So, that's why it will probably take another 3 to 6 months for them to figure out the debt holders on all these properties.
Am I going to go down the legal process, take possession of the property? And keep in mind, this can be a bank, this can be a CMBS servicer, this can be a private debt holder. This can be a mortgage REIT. This can be all kinds of different people holding that paper who will ultimately have to make a decision. Now so, I also think a lot of them are thinking, should we sell the actual notes of the properties and not go through the foreclosure? That, again, would delay the process. So that's how I kind of come up with my, let's say, 12, 6 to 18 months is sort of the range when some of these properties will start happening. Now, add one more thing. In the United States, most of the courts have been closed, so, if you're going to go the eviction route, or the foreclosure route, you're going to have to get in line. So, I think those all those elements really add up to why you're not seeing a wave of properties today, but you potentially will see them, in the near future.
ADAM GOWER: And, of course, the work that's been done with lenders currently, or to date, it's not forgiveness, is it Jay? It's deferral. So this is just backing out. Instead of taking a loan and calling it "past-due after 90 days", is your example, they're stalling, basically.
Distressed Loan Sales for Those with Private Capital
ADAM GOWER: Big question is, look, even if you do take...let's think through this, actually, a little bit. From a bank's perspective, from a lender's perspective, if you do take a property back that has tenants in it that aren't paying rent, why are you any better off than the landlord, the current landlord to extract those rents? Similarly, what about a note buyer? If you sell, you're going to take a loss. Now, a note buyer...that's where opportunity knocks, right, would you say?
JAY OLSHONSKY: That's the first bite, yup. Yeah no, there's no question that the first bite is going to be, you know like, let's just use a simple example. You're a regional bank, let's say, in Southern California, and you have a 100 loans that are now deferred for 60, 90, maybe 120 days. And then you determine that 50 of those loans are never going to get any better.
It might be a whole lot easier just to take those 50 loans to market and see what the private capital is willing to pay to buy those loans. At what discount? Now, could it be 20 cents on the dollar? Could it be 50 cents on the dollar? Could it be 60 cents? I don't know that and because there hasn't been enough distressed loan sales to actually say, OK, well, this portfolio of 50 loans sold at this discount, but it's coming, it's definitely coming.
Private capital will step in because there's so much money out there and then they will take it through the foreclosure process. They'll figure out maybe, they can make money at it and go from there.
ADAM GOWER: So actually Jay, so that's a really important point, its something we chatted about before we started today. It was the amount of liquidity that is in the market. This is a major difference between now, this time and last time is that there's just huge amounts of cash waiting, just waiting for this kind of opportunity.
When Private Capital Steps in on Real Estate Investment Opportunities
ADAM GOWER: Does that demand and that liquidity not put a floor on the extent to which the market can drop this time, compared to last time?
JAY OLSHONSKY: Yes, it does. The question is, where's the floor? That's the $99,000 question. It's like... I literally got two emails this morning from people that say, "hey, I know you guys are specializing in depressed real estate. I'd love to buy some. We've got plenty of cash". And they said, "what would you recommend I do?"
And, one of the things that I recommend people do, and this is something I learned in 1991. If you start buying, once you can start buying and even though the prices might go further down, you keep buying as the trough gets lower and then you stop buying once the trough then corrects because no... I mean, some people are good at it, but I'm not really good at it and most people are not really good at telling what the floor is. And that's my point. I mean, right now, a hotel owner called me a couple of weeks ago and said, I have a hotel. It's worth about ten million dollars. I said worth ten million dollars when? And they said, well, that was my last appraisal. And I said, is it open? They said, no, it's closed. I said, well they said, can you value it for me? And I go, sure, we can run numbers based on your last occupancy report and figure out what it would have been worth on March 1st. But, if it's closed, I don't know what someone would pay you for it. And long story short, he kind of said, well, what do I do? I got like six million dollars of debt on the property.
And I said, well, two things. One, you might want to actually get bids on it to figure out what someone will pay you. Maybe someone will pay you seven, maybe someone will pay you 4. And then there's another ugly thing out there that everyone forgets and you said you had worked at banks, so you'll understand this and lot of people forget there's this ugly thing called "debt forgiveness tax". And whenever you have debt forgiveness, you then get to bankruptcies and work-outs and then other ways of handing properties back for investors that invest in the property and whether that's an individual investor or a large scale investor. There's so many issues going around right now. There's definitely a floor on capital and certainly you can do things like some of the 1031s with the zero returns to offset some of that but it's still...we haven't seen anything coming of any significance yet. And it's just... I don't know where the floor is. If I had to guess a floor, I think that in the 30 to 50 percent to value is, I think private capital steps in at that number. But I can remember in the 90s, people were paying, I remember selling an office building for $10 a square foot that was valued at $100. So at some level, I don't know if it's going to get that bad.
Multifamily Asset Class is not Bulletproof in this Downcycle
ADAM GOWER: What I've noticed in the news recently, and it's certainly not life saving, but it implies recovery in hospitality is now gone from 20 percent occupancy is now up to 50 percent. So, we saw hospitality drop off the cliff and is now slowly pulling back. What about other asset classes, specifically multifamily, that everybody talks about being bulletproof and offices, for example, and industrial? Tell me something about, how those are different, and how you think things are going to pan out over the next few months?
JAY OLSHONSKY: Well, let's actually start with hospitality quickly. One thing to remember, and you just hit on it. The aspect of hospitality is: where the hotel or resort is. You know, at some level, if you're in Las Vegas right now, you know, that's a much different animal than if you have something, let's say, a 5-star hotel in New York City. And also, if you can drive to it, you have a much better chance of recovery versus something that you were depended upon, convention business, that was travel-related, or resort business that was travel -elated, meaning you had to fly there to get there. So hospitality will definitely improve with the driving first. If you then think of the retail, retail wasn't in great shape coming into this whole thing. And now, you can't even go out and eat a pizza, in a pizza restaurant in most places, which is... that's never happened. Keep in mind, some of these things have never in our lifetime happened. I think I've gone through 4 economic recessions or maybe 5 and every time, you could get on an airplane, you could take your family out. If you had 20 bucks left, and that was your last 20 bucks because you just got laid off in 2009 or in 2008, you could still take your family to the pizzeria and order a large pizza and a few drinks and feed your family for 20 bucks.
ADAM GOWER: Isn't that incredible? You could go and see a movie. Movie theaters did well during the last downturn.
JAY OLSHONSKY: I live in New York City. I used to pay $36 to go to the movies normally with my wife. So would I pay $25 to watch the first run, movie that's out on Netflix or on Amazon? Of course I would. So, you know, that will change quickly. Now you raised multifamily, which traditionally has been bulletproof.
Now, I can't remember any time in my lifetime where people weren't paying their rent on an apartment because they had lost their jobs in masses amounts like people have or they were getting, whether it's $400, $600, $800 from the US government a week to support themselves during this off cycle and the prospects of the next employment is not there. Plus, the governments have said, you can't evict them and then those have just been extended. So, a product type that traditionally was bulletproof: multifamily, I don't see how that's going to also be unscathed in this and certainly there were other things in multifamily in certain areas and I think I could use downtown Los Angeles, I certainly could use Nashville, where you had oversupply of class A apartments. So, if you can't afford to be in your Class B or C apartment because you can't anymore, you're not moving up to the class A vacant apartment in some of these new cities. So, multifamily will always be better than most assets because people have to live there but I don't think it goes unscathed in this down cycle.
How the Use of Certain Asset Classes Will Change
JAY OLSHONSKY: Office is an interesting one. Office, I read something recently that said maybe it'll go to 10 percent of people work from home from where it was, kind of like, five percent, coming into this. And, at some level, I think there are a couple good signs here. Facebook actually leasing 750,000 square feet in New York City, for the future.
ADAM GOWER: Did you broker that Jay?
JAY OLSHONSKY: I did not, unfortunately.
ADAM GOWER: We wouldn't be talking today if you had.
JAY OLSHONSKY: Yeah, we'd probably still be talking.
But no. Is a good sign of a company that certainly could have all of their people work from home and they've said, most of their people can work from home, for a long time. They're making a pretty good bet that things will get better. And keep in mind, things always get better. Nothing lasts forever. I can remember in 1990 we had enough office space for the rest of our lives and then they kept building, and things got better. Even after 9/11, I was in Washington, D.C. then and certainly in New York and Washington are much better, than after 9/11 and times like that. So, this too will pass. It just will take time and it's a question of how long and how deep it will get. And now you mentioned industrial. Let's touch on that.
I don't know if you saw the news this morning, but the news this morning is Amazon's thinking of either buying Simon or buying..
ADAM GOWER: I did see that. It's really interesting, isn't it?
JAY OLSHONSKY: You know, at some level, if you think that through, it's funny, I commented to my wife and she said, so the Nordstroms that might be empty is going to become an Amazon distribution center? And I said potentially, especially if it's close to a major metropolitan area and the zoning will allow for it and the use of the building will allow for it. But, I think it's a very creative reuse of retail. And certainly, we've seen big-box retail go to different, whether it's medical.
ADAM GOWER: It is interesting. Let's talk about it for a second, because it dramatically changes the makeup of a mall. Right? Instead of walking into a department store, now you've got a boarded-up thing with a distribution center behind it. When I was building movie theaters, it was a condition of our lease that certain tenants stayed in place. In fact, actually, people made it a condition of their lease that we stayed in business. So it's a fundamental shift and this is important actually. It's a fundamental shift in the way that we will recover from this downturn, is that certain asset classes are going to fundamentally change. Right. Hospitality, even offices and we've talked about that. Instead of densification, inside the office, more and more people packed into smaller areas that people will spread out to even inside offices because they need more social distancing, etc. How do you think overall, that's going to impact, retail for example.
JAY OLSHONSKY: But keep in mind and we're seeing this already. You're seeing people, some that are doing it correctly and some that just don't care already saying, you know what, I want to go out. I want to get on a plane. I want to go swim in a pool. I want to go back to the office.
There's no question that there's things that are lacking and not being able to be around coworkers, around people to collaborate with customers, clients. I mean, I used to travel 70% of the time. I don't travel at all now. And in a certain regard, that will come back but it won't come back until the customer and I feel safe that getting on that plane will not infect him or her or me. And so, that's that's where, but keep in mind, that will be time. And we're not talking ten years. We're talking hopefully two or a year and a half, or even sooner, depending on which... that's the other thing, you know, as much as I'd like to say, we all watch CNN or FOX...none of us are infectious disease experts so we have no clue on what's really going to happen, including some of our political leaders.
So, it's hard to really make judgment here. But the schools, like you said, need to reopen. People need to get back to work and I hate to make just broad statements that it'll never be like it was. The question is, and this is what we're focused on is: how much damage and opportunity will be done in the next one to, let's say, three years.
Real Estate Insights from 6th Largest Brokerage Firm in the World
JAY OLSHONSKY: So what we're seeing right now, and I hate to say it is, we're seeing that, what I call that pause. We're seeing that, leasing activity has dropped just because people are trying to figure out either work from home or when do I go back in. And so, the only leases that are getting done are leases that were in the pipeline or leases that had to get done or renewals that had to happen. You're seeing very limited new leasing and you're seeing some people say, well, you know what, I don't need as much space, so maybe I'll take less space. You're seeing that. Investment sales have also come to a grinding halt, mainly due to 1) there's not a lot of product being put out onto the market right now because there's a disconnect between what the seller thinks the property's worth and the fear that someone will come in and offer 50 cents on the dollar, even though that might be the right market. So, investment sales has dropped off. Then it depends. We did have one transaction that we did recently that was with a large retailer that made a decision to sell their industrial distribution building on a sale leaseback in order to raise cash. So, there are unique deals that are happening too. So, it just depends. And then we are seeing some some depressed real estate come out.
We have some of our member firms have already gotten receivership opportunities, which is the beginning of the foreclosure. We also have some of our hotel receiver companies within NAI already seeing some hotels that they want to be received and that is the beginning or the baby steps towards the foreclosure because you have to have receivership. You have to have management. You have to have leasing and then ultimately sale at the property level.
If that's what...if someone's going to take a property back. We have had lots of people also contact us about potential note sales and we've been contacting a lot of banks talking about that.
ADAM GOWER: Buyers or sellers on notes?
JAY OLSHONSKY: We have....I'd say it's 20 to 1 buyers, 20 to 1. Now, we tend to not do a lot of work on the "buy side". And that's really for one fundamental reason. Not too many buyers like to pay you, and not too many sellers like to pay buyer brokers these days because essentially there have been major shifts in technology on the selling of properties that you don't need to have the buyer exclusive as much as you need to have the seller exclusive, because essentially whether it's Ten-X or whether it's Real Capital Markets or CREXI or some of these firms that specialize in technology-based product/software as a service to sell properties, we do not sell any property that we work on that is not using one of those type companies basically, because it's process-driven investment sales and how do I know that you're not going to be the buyer of a building and as long as it gets in front of you, you could end up buying something in New York. I have no way of knowing you- just because you're in California doesn't mean you wouldn't consider it. So that's the big area. But I'd say it's 20-to-1 people that want to buy versus people that want to sell, right now.
Crowdfunding Activity During Downcycle and Which Asset Classes Hold Up
ADAM GOWER: If there are no buyers currently that you've seen who are crowdfunding, and this is a totally self-serving question, I'll tell you that right now. Are there any that you can think of who should? And I ask that because, right, who would benefit from it? If there's so much liquidity, where are they getting their liquidity and will they run out? Right? If the spigot really opens up in 9 to 12 months, they'll regret not having sought alternate sources for capital.
JAY OLSHONSKY: I certainly think, you know, if you go back to product type. If you go back to product type that, I can tell you, there's all kinds of people that are raising funds for hospitality and hotel. So, I think anyone that has any expertise in crowdfunding, either with a hotel, teaming up with hotel buyers, or things like that, I think that's an area. I also do think there will be some aspects of multifamily and I know there's been crowdfunding in multifamily, from the point of view, just because ultimately, look, this will correct.
This will correct and as a good old friend of mine in Washington, D.C., who owned 4,000 apartment units used to always say, in his whole lifetime, he's never had apartment buildings go to 75% percent or less vacant. He also owned office buildings and he said, if the law firm moves out of my office building, I go to zero. So, multifamily is always a very good and safe. And also, I think individual investors can understand multifamily better - the dynamics of multifamily. You know, I mean, is Amazon going to take over the world? I don't know. It seems like it. But, it's harder to understand that: will office, will work at home be five percent, 10 percent. What happens if it's 20 percent? I don't, you know, it's hard to say right now what demand of office space. Will we go back to the movie theaters? Yes. Will it be in or will we all start watching it at Netflix? I don't know. It reminds me of a drive-in movie theater that I saw 30-years ago in Cape Cod, Massachusetts, and it was for sale. And I said to myself, I should just buy that and hold it, because it was cheap. And now, people actually go to drive-in movie theaters for concerts and for movies. So, you know, it's so hard to predict some of these things. So I would think those two areas, certainly hospitality and retail and multi-family.
Commercial Real Estate Investors and the Best Buying Opportunities We Will Ever See
ADAM GOWER: Advice for somebody looking to invest in commercial real estate today. What would be advice you would give them?
JAY OLSHONSKY: Boy. Well, let's start with advice on investing in commercial real estate. Are we talking more individual in general or both?
ADAM GOWER: Yeah, I guess however you want to take it. I mean my angle is crowdfunding so individuals who are looking for deals, I suppose.
JAY OLSHONSKY: Well, two things. Staying on that, on the individual level, if you have no expertise in investing or owning or managing or leasing or maintaining commercial real estate, you're probably best doing it through crowdfunding, through REIT investment, where you have professional people, that's what they do every day. The best example I can give you is, I am a licensed real estate broker, which is great, but I will not help myself find a home because I don't know anything about homes except how to live there. And so, the advice I'd give is that, it's easy to watch television. It's easy to see things and say, OK, I'm going to go buy a 6-plex apartment building and manage it yourself, and then I'll come to you and go, well, what do you know about zoning? What do you know about environmental? What do you know about landlord-tenant laws? What do you know about cash-flow? What do you know about any of that? Who are you going to call to get a loan? I mean..so, that would be my advice on an individual basis. And certainly, look, there are people that have invested individually and made millions and billions of dollars. So, Sam Zell started with very individualized investments and now is one of the wealthiest men in the world.
On an institutional level. It really depends on your money. It depends on your money and something that and a good economist once said to me: and your time horizon. If your time horizon is forever, which some institutions have a time horizon of forever, I would start looking to buy, and buy, and buy as much as I can over the next, I'd say 1- 3 years, in whatever product-type I felt comfortable or whatever geography, because it might be, might be one of the best buying opportunities we're ever going to see.
So it's somewhat because of the discounting caused by the disruption. Now, if your horizon is forever. If your horizon is much shorter at some level, you maybe want to team up with somebody that has a longer horizon and maybe then have the ability - they pay you a preferred return or some level of return over that short period of time and then they can take you out or something like that. So it really depends on time horizon, when you get to, what I'd call more institutional or more sophisticated investments.
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