WEBVTT 00:00:00.000 --> 00:00:02.899 Okay, let's unpack this. Welcome back to another 00:00:02.899 --> 00:00:08.080 deep dive. Today, we're tackling something that 00:00:08.080 --> 00:00:10.919 is, I mean, it's literally all around us. It 00:00:10.919 --> 00:00:12.640 really is. If you're listening to this on your 00:00:12.640 --> 00:00:14.460 commute, you're driving past it. If you're sitting 00:00:14.460 --> 00:00:16.879 in an office, well, you're sitting inside of 00:00:16.879 --> 00:00:19.399 it. If you stopped for coffee this morning, you 00:00:19.399 --> 00:00:21.600 just did business in it. It is the backdrop of 00:00:21.600 --> 00:00:23.800 our entire lives, quite literally. You could 00:00:23.800 --> 00:00:26.500 say it's the stage upon which the entire economy 00:00:26.500 --> 00:00:30.089 performs its act. Exactly. we are talking about 00:00:30.089 --> 00:00:31.989 commercial property. And I have to be honest, 00:00:32.109 --> 00:00:34.329 before looking at these sources, and we have 00:00:34.329 --> 00:00:37.689 a stack of them today, I kind of just thought 00:00:37.689 --> 00:00:40.990 of it as buildings that aren't houses. Right, 00:00:41.210 --> 00:00:43.350 the simple definition. Yeah, skyscrapers, trip 00:00:43.350 --> 00:00:45.469 malls, maybe a warehouse here and there. But 00:00:45.469 --> 00:00:47.350 when you actually dig into the numbers, the scale 00:00:47.350 --> 00:00:50.229 of this industry is just... It's absolutely mind 00:00:50.229 --> 00:00:51.810 -boggling. It is staggering. I mean, to give 00:00:51.810 --> 00:00:53.869 you a sense of the sheer weight of this asset 00:00:53.869 --> 00:00:57.189 class, back in 2018, the total value of commercial 00:00:57.189 --> 00:00:59.630 property just in the United States was estimated 00:00:59.630 --> 00:01:03.829 at approximately $6 trillion. Six trillion. That 00:01:03.829 --> 00:01:06.390 is a number that is hard to even visualize. You 00:01:06.390 --> 00:01:08.709 can't. It's an abstraction at that point. That's 00:01:08.709 --> 00:01:10.950 not just a sector of the economy that is like 00:01:10.950 --> 00:01:12.890 the foundation of the economy. It feels like 00:01:12.890 --> 00:01:15.390 the bedrock. It is the invisible engine. That's 00:01:15.390 --> 00:01:17.129 the best way to think about it. It's not just 00:01:17.129 --> 00:01:20.010 bricks and mortar. It is where capital lives. 00:01:20.170 --> 00:01:23.810 It creates jobs. It defines the entire layout 00:01:23.810 --> 00:01:26.209 of our cities. And as we'll see later, when we 00:01:26.209 --> 00:01:28.950 get into the current market data, it is a massive 00:01:28.950 --> 00:01:32.310 flashing indicator of economic health. A leading 00:01:32.310 --> 00:01:34.390 indicator. One of the biggest. When commercial 00:01:34.390 --> 00:01:37.069 real estate catches a cold, the rest of the economy 00:01:37.069 --> 00:01:39.420 often gets pneumonia. It's that interconnected. 00:01:39.819 --> 00:01:41.700 And that is really our mission for this deep 00:01:41.700 --> 00:01:44.260 dive. We want to take you, the listener, from 00:01:44.260 --> 00:01:47.640 seeing just buildings to seeing assets. We want 00:01:47.640 --> 00:01:50.659 to decode the concrete and the glass. When you 00:01:50.659 --> 00:01:52.640 walk past a shop or an apartment block tomorrow, 00:01:52.959 --> 00:01:55.540 we don't want you to just see a facade. We want 00:01:55.540 --> 00:01:59.140 you to see. The cash flows, the risks, and the 00:01:59.140 --> 00:02:02.239 economic signals that are hidden in the architecture. 00:02:02.500 --> 00:02:04.959 Precisely. We are moving from the physical world 00:02:04.959 --> 00:02:07.040 to the financial world. You have to strip away 00:02:07.040 --> 00:02:08.780 the paint and look at the spreadsheet underneath. 00:02:09.039 --> 00:02:11.560 That's where the story is. So let's start at 00:02:11.560 --> 00:02:13.360 the very beginning. The most basic quotient, 00:02:13.460 --> 00:02:16.939 which frankly confused me at first, what actually 00:02:16.939 --> 00:02:21.240 counts as commercial property? Is it just anything 00:02:21.240 --> 00:02:24.120 that isn't a single family house? Where's the 00:02:24.120 --> 00:02:26.090 line? Well, the definition is actually quite 00:02:26.090 --> 00:02:28.389 broad, but it centers on one specific thing. 00:02:29.009 --> 00:02:32.210 Intent. Intent. Yes. Commercial property, which 00:02:32.210 --> 00:02:34.069 is also known as commercial real estate or income 00:02:34.069 --> 00:02:36.469 property, is any real estate that is intended 00:02:36.469 --> 00:02:40.610 to generate a profit. Okay. Profit. That seems 00:02:40.610 --> 00:02:43.210 simple enough. Yeah. But how exactly does a building 00:02:43.210 --> 00:02:45.620 generate profit? I mean, it just sits there. 00:02:45.719 --> 00:02:48.020 It sits there, but it works for you. The profit 00:02:48.020 --> 00:02:50.939 comes from two distinct buckets. First, you have 00:02:50.939 --> 00:02:53.979 capital gains. That's the classic buy low, sell 00:02:53.979 --> 00:02:56.219 high strategy you see everywhere. Right. You 00:02:56.219 --> 00:02:59.000 buy a property. Maybe it's a little rundown or 00:02:59.000 --> 00:03:00.919 maybe it's in a neighborhood that's, you know, 00:03:00.939 --> 00:03:03.939 up and coming and its value appreciates over 00:03:03.939 --> 00:03:06.300 time. Eventually you sell it for more than you 00:03:06.300 --> 00:03:08.259 paid for it. Right. That's the appreciation play. 00:03:08.379 --> 00:03:10.120 Just like buying a stock and hoping the chart 00:03:10.120 --> 00:03:12.680 goes up and to the right. Simple enough. Exactly. 00:03:12.819 --> 00:03:15.939 The second source, and this is really the lifeblood 00:03:15.939 --> 00:03:19.400 of the industry, is rental income. This is the 00:03:19.400 --> 00:03:22.620 cash flow. You own this space and someone else, 00:03:22.719 --> 00:03:25.960 a tenant, pays you for the right to use it month 00:03:25.960 --> 00:03:28.520 in, month out. Okay, but here is where I got 00:03:28.520 --> 00:03:31.360 stuck in the research. Let's say I buy a nice 00:03:31.360 --> 00:03:33.340 little house in the suburbs and I rent it out 00:03:33.340 --> 00:03:35.599 to a family. I have the intent of making a profit 00:03:35.599 --> 00:03:38.780 from the rent. Is my little rental house now 00:03:38.780 --> 00:03:42.409 commercial real estate? Well, technically, no. 00:03:42.569 --> 00:03:45.949 And this is where we hit the first big aha moment 00:03:45.949 --> 00:03:49.009 for a lot of people. There is a very specific 00:03:49.009 --> 00:03:51.569 and you could argue somewhat arbitrary line drawn 00:03:51.569 --> 00:03:54.030 between residential and commercial, especially 00:03:54.030 --> 00:03:56.270 in the eyes of the United States banking system. 00:03:56.430 --> 00:03:58.909 OK, unpack that for us, because I see apartment 00:03:58.909 --> 00:04:00.770 buildings that are clearly for people to live 00:04:00.770 --> 00:04:03.500 in. That's a residential use, but they are owned 00:04:03.500 --> 00:04:05.900 by these huge corporations. Correct. It all comes 00:04:05.900 --> 00:04:08.199 down to scale. In many U .S. states, residential 00:04:08.199 --> 00:04:10.580 property is considered commercial for borrowing 00:04:10.580 --> 00:04:13.080 and tax purposes only if it contains more than 00:04:13.080 --> 00:04:15.080 a certain number of units. And what's that magic 00:04:15.080 --> 00:04:17.589 number? Usually it's anything larger than a fourplex. 00:04:17.930 --> 00:04:20.990 Fourplex. So four units. Right. So a single family 00:04:20.990 --> 00:04:24.269 home, a duplex with two units, a triplex with 00:04:24.269 --> 00:04:27.230 three or a quad with four. All of that is generally 00:04:27.230 --> 00:04:29.709 considered residential. You can walk into a bank 00:04:29.709 --> 00:04:32.430 and get a standard 30 year fixed mortgage for 00:04:32.430 --> 00:04:35.029 it, much like you would for your own home. So 00:04:35.029 --> 00:04:37.589 the bank is looking at me, my income, my credit 00:04:37.589 --> 00:04:40.620 score to see if I can afford it. Exactly. The 00:04:40.620 --> 00:04:43.040 bank looks at your personal income and your credit 00:04:43.040 --> 00:04:45.680 score to qualify you. It's viewed as a personal 00:04:45.680 --> 00:04:47.959 investment, just on a slightly larger scale. 00:04:48.180 --> 00:04:50.139 But if I add one more unit to that building, 00:04:50.279 --> 00:04:53.220 if I buy a five unit building. The moment that 00:04:53.220 --> 00:04:55.579 building has five units, just one more door, 00:04:55.759 --> 00:04:58.199 it enters the world of commercial real estate. 00:04:58.339 --> 00:05:01.339 The game completely changes. That is fascinating. 00:05:02.300 --> 00:05:04.819 giant mansion with 10 bedrooms is still residential. 00:05:05.040 --> 00:05:07.839 But a small kind of ugly brick building with 00:05:07.839 --> 00:05:09.980 five little studio apartments is commercial. 00:05:10.220 --> 00:05:12.160 In the eyes of the bank and the taxman, yes. 00:05:12.379 --> 00:05:14.579 And it changes everything about how you buy and 00:05:14.579 --> 00:05:16.620 own it. You can no longer get that 30 year fixed 00:05:16.620 --> 00:05:18.699 mortgage. What do you get instead? Now you're 00:05:18.699 --> 00:05:21.160 looking at commercial loans. They have shorter 00:05:21.160 --> 00:05:24.240 terms, maybe five or 10 years, not 30. They often 00:05:24.240 --> 00:05:27.579 have higher interest rates. And crucially, the 00:05:27.579 --> 00:05:29.939 bank stops looking at you and starts looking 00:05:29.939 --> 00:05:32.060 at the building. What do you mean by that? They 00:05:32.060 --> 00:05:34.060 underwrite the property itself. They analyze 00:05:34.060 --> 00:05:36.779 the income of the property. Can the rent generated 00:05:36.779 --> 00:05:39.139 by those five units cover the mortgage payment, 00:05:39.360 --> 00:05:42.839 the taxes, the insurance, and still leave a profit? 00:05:43.040 --> 00:05:45.000 So even if I'm a billionaire? Even if you're 00:05:45.000 --> 00:05:47.480 a billionaire, if the building itself loses money 00:05:47.480 --> 00:05:49.800 every month, a commercial lender might still 00:05:49.800 --> 00:05:52.819 say no. It shifts from being a home that you 00:05:52.819 --> 00:05:55.319 happen to rent out to being a business that has 00:05:55.319 --> 00:05:57.100 to stand on its own two feet. It's about the 00:05:57.100 --> 00:05:59.509 scale and the intent. the building has to perform 00:05:59.509 --> 00:06:02.389 as an economic entity. Exactly. The regulations 00:06:02.389 --> 00:06:05.569 tighten, the scrutiny increases, and the financing 00:06:05.569 --> 00:06:07.730 becomes strictly about the math of the asset, 00:06:07.870 --> 00:06:10.629 not the wealth of the owner. Okay, so we've established 00:06:10.629 --> 00:06:13.449 the definition. It's for profit, and if it's 00:06:13.449 --> 00:06:16.129 housing, it has to be big enough, five units 00:06:16.129 --> 00:06:19.050 or more to count. Now, the sources we looked 00:06:19.050 --> 00:06:21.310 at categorized this massive commercial world 00:06:21.310 --> 00:06:25.279 into six specific... buckets. I love this because 00:06:25.279 --> 00:06:28.459 it gives us a mental map to organize the chaos 00:06:28.459 --> 00:06:30.759 of a city. It does. It organizes the landscape. 00:06:30.899 --> 00:06:33.839 It's a taxonomy for the built world. Once you 00:06:33.839 --> 00:06:35.980 understand these six buckets, you can look at 00:06:35.980 --> 00:06:38.759 any skyline or any suburban sprawl and instantly 00:06:38.759 --> 00:06:40.560 categorize what you're seeing. It's like putting 00:06:40.560 --> 00:06:42.740 labels on everything. Let's walk through them. 00:06:43.180 --> 00:06:45.079 Bucket number one is probably what everyone thinks 00:06:45.079 --> 00:06:47.980 of first. office buildings. This is the classic 00:06:47.980 --> 00:06:50.699 image of business, right? With a glass tower. 00:06:50.920 --> 00:06:53.279 But even within this one bucket, there's a huge 00:06:53.279 --> 00:06:55.899 range. You have the single tenant property, maybe 00:06:55.899 --> 00:06:57.839 a small brick building on Main Street owned by 00:06:57.839 --> 00:07:00.420 a dentist or an insurance agent who uses the 00:07:00.420 --> 00:07:02.339 whole thing. Right. The little standalone structure 00:07:02.339 --> 00:07:04.759 with the lawyer shingle hanging out front. Exactly. 00:07:05.019 --> 00:07:07.480 That is a commercial office asset. And then on 00:07:07.480 --> 00:07:09.040 the other end of the spectrum, you have the downtown 00:07:09.040 --> 00:07:12.870 skyscrapers. massive multi -tenant towers housing 00:07:12.870 --> 00:07:15.370 thousands of workers for dozens of different 00:07:15.370 --> 00:07:17.750 companies. One of the fancy names like the Salesforce 00:07:17.750 --> 00:07:21.529 Tower or the Bank of America Plaza. Those are 00:07:21.529 --> 00:07:23.769 what we call Class A buildings. The shiny glass 00:07:23.769 --> 00:07:26.430 towers with the marble lobbies and the high -speed 00:07:26.430 --> 00:07:29.110 elevators. They're the premium product. And then 00:07:29.110 --> 00:07:31.670 you have everything in between. Suburban office 00:07:31.670 --> 00:07:34.269 parks, the professional centers. The sources 00:07:34.269 --> 00:07:37.470 mentioned Class B and Class C buildings. What's 00:07:37.470 --> 00:07:39.449 the difference there? It's a grading system based 00:07:39.449 --> 00:07:42.430 on age, quality, and location. Class A is the 00:07:42.430 --> 00:07:45.110 best. Class B buildings are a little older, maybe 00:07:45.110 --> 00:07:47.350 not in the absolute best location, but still 00:07:47.350 --> 00:07:50.129 very functional and desirable. Class C is the 00:07:50.129 --> 00:07:53.029 oldest stock, often in need of renovations with 00:07:53.029 --> 00:07:55.230 lower rents. Got it. So it's a quality scale. 00:07:55.490 --> 00:07:58.329 And despite the rise of remote work, which I 00:07:58.329 --> 00:07:59.709 know we'll touch on later in the state of the 00:07:59.709 --> 00:08:02.569 market segment, these are still a dominant part 00:08:02.569 --> 00:08:05.319 of the landscape. Absolutely. They are the factories 00:08:05.319 --> 00:08:07.860 of the knowledge economy. For better or worse, 00:08:08.000 --> 00:08:10.300 a huge amount of business still happens in these 00:08:10.300 --> 00:08:13.699 buildings. OK, bucket number two, retail. Now, 00:08:13.740 --> 00:08:16.180 this isn't just shops, right? The sources broke 00:08:16.180 --> 00:08:18.180 this down into some really interesting subtypes. 00:08:18.240 --> 00:08:21.019 It seems like there is a whole psychology to 00:08:21.019 --> 00:08:23.800 retail real estate. Retail is fascinating because 00:08:23.800 --> 00:08:26.899 it is where commerce physically meets the consumer. 00:08:27.139 --> 00:08:30.220 The real estate is explicitly designed to capture 00:08:30.220 --> 00:08:32.769 your attention and your wallet. So let's start 00:08:32.769 --> 00:08:35.610 with the first one on the list, pad sites. That 00:08:35.610 --> 00:08:38.169 sounds like a launch pad. In a way, it is. It's 00:08:38.169 --> 00:08:40.049 launching a business into the consumer's view. 00:08:40.389 --> 00:08:43.129 These are usually single -tenant buildings located 00:08:43.129 --> 00:08:45.649 on highway frontages or right in front of a larger 00:08:45.649 --> 00:08:48.129 shopping center. Give me an example. Think of 00:08:48.129 --> 00:08:50.490 a standalone bank branch in the corner of a Target 00:08:50.490 --> 00:08:53.639 parking lot. or a Starbucks or a fast food restaurant 00:08:53.639 --> 00:08:56.340 with a drive -thru, a tire shop right on the 00:08:56.340 --> 00:08:58.159 edge of a big parking lot, they're on an out 00:08:58.159 --> 00:09:01.019 parcel. Got it. The stuff you see right off the 00:09:01.019 --> 00:09:03.360 exit ramp, you drive by, you see the sign, you 00:09:03.360 --> 00:09:05.840 pull in. It's all about visibility and convenience. 00:09:06.580 --> 00:09:09.299 Visibility and access are everything. They pay 00:09:09.299 --> 00:09:11.720 a premium for that frontage to be right on the 00:09:11.720 --> 00:09:13.700 road. Then you move into the bigger centers. 00:09:14.240 --> 00:09:16.919 Next up, you have power centers. Power centers. 00:09:16.960 --> 00:09:19.679 That sounds intense. Like a power plant. Well, 00:09:19.720 --> 00:09:21.559 it refers to the drawing power of the tenants. 00:09:21.820 --> 00:09:24.399 These are large open -air centers dominated by 00:09:24.399 --> 00:09:26.519 anchor stores. We're talking about the category 00:09:26.519 --> 00:09:30.919 killers. Big box stores. Exactly. Best Buy, PetSmart, 00:09:31.179 --> 00:09:34.799 OfficeMax, Home Depot, Target. Ah, the Saturday 00:09:34.799 --> 00:09:37.879 afternoon errand run. You go there because you 00:09:37.879 --> 00:09:41.220 need something specific. A drill, dog food, a 00:09:41.220 --> 00:09:44.110 laptop. And you know for sure they have it. Precisely. 00:09:44.110 --> 00:09:45.990 They aren't necessarily designed for leisurely 00:09:45.990 --> 00:09:47.870 strolling. They're designed for efficiency and 00:09:47.870 --> 00:09:51.029 volume. They are usually long strip centers with 00:09:51.029 --> 00:09:53.409 a massive sea of parking in front. Get in, get 00:09:53.409 --> 00:09:55.789 your stuff, get out. But then to contrast that, 00:09:55.870 --> 00:09:57.870 you have the lifestyle center. The polar opposite 00:09:57.870 --> 00:09:59.809 in many ways. I feel like I know what this is 00:09:59.809 --> 00:10:01.690 just by the name. It's where you go to hang out. 00:10:01.889 --> 00:10:05.470 Yes. This is a blend of indoor and outdoor shopping. 00:10:06.029 --> 00:10:08.429 It often tries to mimic a traditional main street 00:10:08.429 --> 00:10:11.070 feel. Even if it's built from scratch in the 00:10:11.070 --> 00:10:13.789 middle of the suburbs, you see nice landscaping, 00:10:13.789 --> 00:10:17.240 fountains, brick walkways. Maybe a cinema. Or 00:10:17.240 --> 00:10:19.320 some upscale restaurants mixed in with the clothing 00:10:19.320 --> 00:10:21.700 stores, like an Apple store and a Lululemon. 00:10:21.840 --> 00:10:24.159 That's the perfect description. It's selling 00:10:24.159 --> 00:10:27.019 an experience, not just goods. It wants to be 00:10:27.019 --> 00:10:29.440 a destination. It's the place you go to buy a 00:10:29.440 --> 00:10:32.259 $6 latte and walk around looking at expensive 00:10:32.259 --> 00:10:34.500 yoga pants. Yeah. You aren't just running an 00:10:34.500 --> 00:10:36.240 errand. You're spending your afternoon there. 00:10:36.360 --> 00:10:38.480 That's the goal. Keep you there longer, which 00:10:38.480 --> 00:10:41.419 usually means you spend more money. And finally, 00:10:41.519 --> 00:10:44.379 in retail, you have the most common type. The 00:10:44.379 --> 00:10:47.500 grocery -anchored community center. So the supermarket 00:10:47.500 --> 00:10:50.019 is the big draw. The supermarket is the anchor, 00:10:50.159 --> 00:10:51.720 and then you have all the daily needs services 00:10:51.720 --> 00:10:54.720 around it. The dry cleaner, the nail salon, the 00:10:54.720 --> 00:10:57.820 local pizza place, the UPS store. The neighborhood 00:10:57.820 --> 00:11:01.120 hub. This feels really stable, maybe even recession 00:11:01.120 --> 00:11:03.860 -proof. People always need groceries and haircuts. 00:11:04.250 --> 00:11:06.350 It's considered one of the most stable assets 00:11:06.350 --> 00:11:09.190 in retail for that very reason. It's not sexy, 00:11:09.250 --> 00:11:11.870 but it's consistent. So retail covers everything 00:11:11.870 --> 00:11:14.990 from that local strip mall to the massive regional 00:11:14.990 --> 00:11:18.470 shopping malls. It's a huge bucket. OK, moving 00:11:18.470 --> 00:11:21.220 on to bucket number three. Multi -family residential. 00:11:21.259 --> 00:11:23.259 We touched on this with the five -unit rule. 00:11:23.440 --> 00:11:26.519 Yes. So this category includes your standard 00:11:26.519 --> 00:11:29.860 apartment complexes. You have garden style, which 00:11:29.860 --> 00:11:31.919 are those two - or three -story walk -ups that 00:11:31.919 --> 00:11:34.019 are spread out over a lot of land, usually with 00:11:34.019 --> 00:11:36.539 some green space. Common in the suburbs. Very. 00:11:36.679 --> 00:11:38.620 And then you have the high -rise apartment buildings 00:11:38.620 --> 00:11:41.590 in the city. But it also includes things people 00:11:41.590 --> 00:11:44.149 might not think of, like student housing and 00:11:44.149 --> 00:11:46.710 dormitories. Oh, that's interesting. I hadn't 00:11:46.710 --> 00:11:48.730 thought about dorms as commercial real estate, 00:11:48.809 --> 00:11:51.250 but of course they are. They generate rent, a 00:11:51.250 --> 00:11:53.889 lot of it. Huge amounts of rent, usually. Student 00:11:53.889 --> 00:11:57.129 housing is a very specialized niche within multifamily. 00:11:57.309 --> 00:12:00.889 You often rent by the bed rather than by the 00:12:00.889 --> 00:12:03.389 unit. So four students in a four -bedroom apartment 00:12:03.389 --> 00:12:05.929 are each signing their own individual lease. 00:12:06.230 --> 00:12:09.139 Correct. Which is great for the landlord. If 00:12:09.139 --> 00:12:12.460 one student drops out, you only have a 25 % vacancy 00:12:12.460 --> 00:12:15.600 in that unit, not 100%. And because the turnover 00:12:15.600 --> 00:12:17.899 is high and guaranteed by the academic calendar, 00:12:18.100 --> 00:12:21.220 it's a very specific, predictable asset class. 00:12:21.559 --> 00:12:24.159 It's a business model built on semester leases. 00:12:24.379 --> 00:12:26.700 And they're often backed by parental guarantees, 00:12:26.960 --> 00:12:29.419 which I imagine makes landlords very happy. It 00:12:29.419 --> 00:12:31.940 certainly reduces the credit risk. It's a very 00:12:31.940 --> 00:12:34.679 attractive model for investors. Okay. Bucket 00:12:34.679 --> 00:12:37.960 number four. This one feels like the unsung hero 00:12:37.960 --> 00:12:41.059 of the economy, especially these days. Industrial. 00:12:41.610 --> 00:12:43.789 Industrial is the backbone. You're right. For 00:12:43.789 --> 00:12:46.009 a long time, it wasn't considered sexy real estate. 00:12:46.070 --> 00:12:48.190 It was just dusty warehouses on the edge of town. 00:12:48.330 --> 00:12:50.490 The places you only see from the highway. Exactly. 00:12:50.750 --> 00:12:53.009 But with the rise of e -commerce, it has become 00:12:53.009 --> 00:12:55.029 the hottest ticket in town. The Amazon effect. 00:12:55.330 --> 00:12:58.830 100 % the Amazon effect. This bucket includes 00:12:58.830 --> 00:13:01.610 warehouses and distribution centers, everything 00:13:01.610 --> 00:13:03.990 from the massive million square foot fulfillment 00:13:03.990 --> 00:13:06.750 centers out in the countryside to the smaller 00:13:06.750 --> 00:13:09.529 last mile facilities in the city where your overnight 00:13:09.529 --> 00:13:11.700 shipping comes from. What makes these buildings 00:13:11.700 --> 00:13:13.600 special? They're just big boxes, right? On the 00:13:13.600 --> 00:13:16.840 surface, yes. But they have very specific requirements. 00:13:17.480 --> 00:13:20.299 They need incredibly high ceilings, maybe 30 00:13:20.299 --> 00:13:23.500 or 40 feet for stacking pallets. They need perfectly 00:13:23.500 --> 00:13:26.059 flat concrete floors for the robotic systems. 00:13:26.539 --> 00:13:29.259 And they need dozens and dozens of loading docks 00:13:29.259 --> 00:13:32.539 for trucks. So it's not just a box. It's a highly 00:13:32.539 --> 00:13:35.440 engineered box. And it's not just for storage, 00:13:35.500 --> 00:13:38.370 is it? No. It also includes more specialized 00:13:38.370 --> 00:13:41.629 facilities. Large R &D research and development 00:13:41.629 --> 00:13:44.529 facilities often fall under industrial. Think 00:13:44.529 --> 00:13:46.529 about where tech companies build prototypes or 00:13:46.529 --> 00:13:49.149 biotech firms have their labs. And there is one 00:13:49.149 --> 00:13:51.350 subtype that the sources mentioned that I find 00:13:51.350 --> 00:13:54.350 particularly fascinating. Cold storage. Cold 00:13:54.350 --> 00:13:57.509 storage, yes. Essentially giant... building -sized 00:13:57.509 --> 00:13:59.250 freezers. We aren't just talking about a walking 00:13:59.250 --> 00:14:01.210 fridge in a restaurant. No. We are talking about 00:14:01.210 --> 00:14:03.990 entire warehouses that are refrigerated to sub 00:14:03.990 --> 00:14:06.549 -zero temperatures. These are cold -chain properties. 00:14:06.789 --> 00:14:09.049 They are absolutely essential for the food supply, 00:14:09.269 --> 00:14:11.750 keeping your frozen pizzas and ice cream frozen 00:14:11.750 --> 00:14:13.970 from the factory to the store. And for medicine, 00:14:14.009 --> 00:14:16.860 too, right? Crucially, for medicine. Think about 00:14:16.860 --> 00:14:19.159 vaccines or other pharmaceuticals that need to 00:14:19.159 --> 00:14:22.039 be stored at very specific, very cold temperatures. 00:14:22.360 --> 00:14:25.399 The entire supply chain relies on these buildings. 00:14:25.480 --> 00:14:27.940 Wow. We don't think about the building that keeps 00:14:27.940 --> 00:14:30.259 the medicine safe. But without that specific 00:14:30.259 --> 00:14:33.100 piece of commercial real estate? The whole system 00:14:33.100 --> 00:14:35.460 breaks down. And building a cold storage facility 00:14:35.460 --> 00:14:37.940 is much more expensive and complex than building 00:14:37.940 --> 00:14:40.700 a regular warehouse. You need massive insulation, 00:14:41.179 --> 00:14:44.779 specialized HVAC systems, redundant backup power 00:14:44.779 --> 00:14:47.340 generators because you absolutely cannot lose 00:14:47.340 --> 00:14:50.000 power for even an hour. It's a very technical, 00:14:50.200 --> 00:14:53.500 very expensive asset. Incredible. OK, bucket 00:14:53.500 --> 00:14:56.350 number five, land. This seems straightforward, 00:14:56.629 --> 00:14:58.529 but I assume there's nuance here, too. It's not 00:14:58.529 --> 00:15:00.809 just buying a field. There is. You have investment 00:15:00.809 --> 00:15:03.750 in raw rural land, often called greenfield land. 00:15:03.929 --> 00:15:06.330 This is often a speculative play. You're buying 00:15:06.330 --> 00:15:08.690 land in the path of future development. So you're 00:15:08.690 --> 00:15:10.950 betting. You're betting that the city will expand 00:15:10.950 --> 00:15:12.490 in that direction. You're waiting for the suburbs 00:15:12.490 --> 00:15:14.730 to crawl out to you. It might be a cornfield 00:15:14.730 --> 00:15:16.830 today, but you're betting that in 10 years it's 00:15:16.830 --> 00:15:18.730 going to be a new subdivision or a shopping center. 00:15:18.889 --> 00:15:21.710 A long -term game. Very. And then in contrast, 00:15:21.789 --> 00:15:25.460 you have infill land. This is vacant land within 00:15:25.460 --> 00:15:28.460 an already urbanized area. Maybe it's an old, 00:15:28.539 --> 00:15:31.100 underused parking lot in downtown that is ripe 00:15:31.100 --> 00:15:34.879 to become a new condo building. Infill. I like 00:15:34.879 --> 00:15:36.659 that term. It's like you're filling in the gaps 00:15:36.659 --> 00:15:39.639 of the city. Exactly. It's often more valuable 00:15:39.639 --> 00:15:42.120 per square foot because the infrastructure, the 00:15:42.120 --> 00:15:45.259 roads, the water, the power is already there. 00:15:45.379 --> 00:15:47.419 You don't have to pay to run a sewer line five 00:15:47.419 --> 00:15:50.279 miles to get to it. Makes sense. And finally, 00:15:50.360 --> 00:15:53.539 bucket number six, the miscellaneous or catch 00:15:53.539 --> 00:15:56.480 -all drawer. The industry sometimes calls this 00:15:56.480 --> 00:15:58.879 special purpose real estate. It's everything 00:15:58.879 --> 00:16:01.019 that doesn't neatly fit into the other categories. 00:16:01.159 --> 00:16:02.960 So what's in there? It includes hospitality, 00:16:03.299 --> 00:16:06.519 so hotels and motels. It includes medical centers, 00:16:06.620 --> 00:16:08.899 hospitals, nursing homes, outpatient clinics. 00:16:09.159 --> 00:16:11.559 Which are huge businesses unto themselves. Massive. 00:16:11.559 --> 00:16:14.100 And a very popular one these days is self -storage. 00:16:14.559 --> 00:16:16.360 Self -storage seems like it's everywhere. There 00:16:16.360 --> 00:16:18.639 are new ones popping up all the time. Why is 00:16:18.639 --> 00:16:20.809 that considered such a good business? It is a 00:16:20.809 --> 00:16:23.169 really unique asset class because the tenant 00:16:23.169 --> 00:16:25.889 is just regular people storing their excess stuff, 00:16:26.149 --> 00:16:29.570 holiday decorations, old furniture, things they 00:16:29.570 --> 00:16:32.269 don't have room for. But the operating costs 00:16:32.269 --> 00:16:35.929 are very, very low compared to, say, an apartment 00:16:35.929 --> 00:16:38.909 building. How so? Well, boxes of old sweaters 00:16:38.909 --> 00:16:41.330 don't call you at 3 a .m. to say their toilet 00:16:41.330 --> 00:16:43.250 is clogged. Right. They don't complain about 00:16:43.250 --> 00:16:46.090 noisy neighbors. You don't have to fix leaky 00:16:46.090 --> 00:16:48.889 faucets or repaint walls nearly as often. There 00:16:48.889 --> 00:16:51.049 are no tenants. to screen, really. It's a very 00:16:51.049 --> 00:16:53.350 low -maintenance, steady source of rent. That 00:16:53.350 --> 00:16:55.210 makes a ton of sense. It's a simpler operation. 00:16:55.529 --> 00:16:58.049 Much simpler. Now, before we leave these buckets, 00:16:58.250 --> 00:17:00.009 we have to talk about how they blur together 00:17:00.009 --> 00:17:02.509 in the real world. We have to talk about zoning 00:17:02.509 --> 00:17:05.190 and mixed -use development. Right, because in 00:17:05.190 --> 00:17:07.309 a city, you rarely see just a field of office 00:17:07.309 --> 00:17:09.589 buildings and then a mile away, a field of shops. 00:17:09.769 --> 00:17:12.049 They're all mixed up. Sometimes they're stacked 00:17:12.049 --> 00:17:14.730 on top of each other. Especially in modern urban 00:17:14.730 --> 00:17:17.539 planning. A single commercial building might 00:17:17.539 --> 00:17:19.980 have retail on the first floor. That's your coffee 00:17:19.980 --> 00:17:22.839 shop and your bank. Then floors 2 through 10 00:17:22.839 --> 00:17:25.519 might be offices. And then floors 11 through 00:17:25.519 --> 00:17:28.160 20 might be residential apartments or condos. 00:17:28.160 --> 00:17:30.779 So what bucket is that? Is it retail, office, 00:17:31.019 --> 00:17:34.059 multifamily? It's mixed use, and this is all 00:17:34.059 --> 00:17:37.539 dictated by zoning. Local authorities, your city 00:17:37.539 --> 00:17:40.319 or county government, have very strict regulations. 00:17:40.480 --> 00:17:42.900 You can't just open a factory in the middle of 00:17:42.900 --> 00:17:45.880 a quiet neighborhood. A business must be located 00:17:45.880 --> 00:17:49.539 in an area that is zoned for commerce. So the 00:17:49.539 --> 00:17:51.339 city planners are literally the ones drawing 00:17:51.339 --> 00:17:53.460 the lines on the map, saying, this corner is 00:17:53.460 --> 00:17:56.339 for shops, this block is for houses. Yes. And 00:17:56.339 --> 00:17:58.960 they have the authority to change those designations, 00:17:58.960 --> 00:18:01.480 which can massively increase or decrease the 00:18:01.480 --> 00:18:04.180 value of a property overnight. If you own a piece 00:18:04.180 --> 00:18:06.200 of farmland on the edge of town and the city 00:18:06.200 --> 00:18:08.839 rezones it for commercial, you just hit the jackpot. 00:18:08.920 --> 00:18:11.640 Your land value could go up 10x in a day. It's 00:18:11.640 --> 00:18:14.619 like a game of SimCity, but with very, very real 00:18:14.619 --> 00:18:17.440 money. Extremely real money. So we have the map. 00:18:17.619 --> 00:18:21.299 We know the six buckets. Office, retail, multifamily, 00:18:21.460 --> 00:18:25.160 industrial land, and miscellaneous. Now let's 00:18:25.160 --> 00:18:28.099 transition to the engine room, segment two, the 00:18:28.099 --> 00:18:31.079 money machine. The investment mechanics. Right. 00:18:31.279 --> 00:18:33.819 Because, as we said at the top, the definition 00:18:33.819 --> 00:18:36.539 of this property is the intent to make a profit. 00:18:36.900 --> 00:18:39.720 So how do they actually make money? I'm assuming 00:18:39.720 --> 00:18:41.599 it's not just collecting a rent check and putting 00:18:41.599 --> 00:18:43.660 it in the bank. No, it's much more complex than 00:18:43.660 --> 00:18:45.180 that. To really understand the profitability 00:18:45.180 --> 00:18:47.559 of a commercial building, you have to look at 00:18:47.559 --> 00:18:50.380 the cash inflows, the good column on the spreadsheet. 00:18:50.940 --> 00:18:52.940 and the cash outflows, the bad column. Let's 00:18:52.940 --> 00:18:55.740 start with the good, cash inflows. Obviously, 00:18:55.799 --> 00:18:58.039 rent is the big one. That's number one on the 00:18:58.039 --> 00:19:00.079 list. Rent is the primary driver, absolutely. 00:19:00.500 --> 00:19:02.660 But there are other important streams of income. 00:19:02.880 --> 00:19:04.779 One of the most important concepts in commercial 00:19:04.779 --> 00:19:07.420 real estate, and one that totally differs from 00:19:07.420 --> 00:19:10.259 residential, is operating expense recoveries. 00:19:10.839 --> 00:19:12.759 Operating expense recoveries. That sounds like 00:19:12.759 --> 00:19:14.779 some kind of legal jargon. What does it mean 00:19:14.779 --> 00:19:17.799 in plain English? It means the tenant pays the 00:19:17.799 --> 00:19:20.259 landlord back for the costs of running the building. 00:19:20.700 --> 00:19:23.200 Oh, really? So the tenant is paying more than 00:19:23.200 --> 00:19:26.079 just their rent? In many cases, yes. It depends 00:19:26.079 --> 00:19:28.519 on the lease structure. For example, in what 00:19:28.519 --> 00:19:31.480 we call a triple net lease or an NNN lease, which 00:19:31.480 --> 00:19:34.380 is very common in retail and industrial. Triple 00:19:34.380 --> 00:19:36.539 net. What are the three nets? The three nets 00:19:36.539 --> 00:19:39.700 are property taxes, building insurance and maintenance. 00:19:40.140 --> 00:19:42.940 So the tenant pays their base rent to the landlord, 00:19:43.160 --> 00:19:45.680 but they also pay their proportional share of 00:19:45.680 --> 00:19:48.890 those three expenses. So if the parking lot needs 00:19:48.890 --> 00:19:51.809 to be plowed in the winter, The tenant effectively 00:19:51.809 --> 00:19:55.369 pays for it. Indirectly, yes. The landlord hires 00:19:55.369 --> 00:19:57.950 and pays the snowplow company, and then at the 00:19:57.950 --> 00:20:00.430 end of the year, they reconcile the expenses 00:20:00.430 --> 00:20:03.930 and bill the tenants for their share. That reimbursement 00:20:03.930 --> 00:20:06.190 is a cash inflow for the landlord. That is a 00:20:06.190 --> 00:20:08.069 fantastic deal for the landlord. It protects 00:20:08.069 --> 00:20:10.549 the landlord from rising costs. If the city raises 00:20:10.549 --> 00:20:13.190 property taxes by 20%, the landlord doesn't care. 00:20:13.329 --> 00:20:15.750 That cost is passed directly through to the tenant. 00:20:15.890 --> 00:20:18.769 It makes the landlord's net income very predictable 00:20:18.769 --> 00:20:21.630 and stable. Wow. Okay, so what else comes in 00:20:21.630 --> 00:20:25.049 besides rent and these recoveries? Fees. All 00:20:25.049 --> 00:20:27.190 sorts of fees. Parking fees are a big one in 00:20:27.190 --> 00:20:29.609 downtown office buildings or apartment complexes. 00:20:29.990 --> 00:20:32.049 You could have vending machines, laundry machines 00:20:32.049 --> 00:20:35.390 and apartment basements. Fees for using a clubhouse 00:20:35.390 --> 00:20:37.789 or a gym. Renting out the roof for cell phone 00:20:37.789 --> 00:20:39.509 towers. That's another great example. Those can 00:20:39.509 --> 00:20:41.750 be very lucrative. All these little trickles 00:20:41.750 --> 00:20:44.930 can add up to a significant river of revenue 00:20:44.930 --> 00:20:47.349 over time. And then there are the invisible inflows, 00:20:47.349 --> 00:20:49.970 the tax stuff. This is where it gets really interesting. 00:20:50.190 --> 00:20:53.250 Yes. The tax benefits are a huge reason why wealthy 00:20:53.250 --> 00:20:55.730 investors love. real estate. And the biggest 00:20:55.730 --> 00:20:59.079 one is depreciation. I've always found this concept 00:20:59.079 --> 00:21:01.359 so confusing. Depreciation means the building 00:21:01.359 --> 00:21:04.420 is getting older and less valuable, right? It's 00:21:04.420 --> 00:21:07.000 losing value. How is that a benefit? It's what 00:21:07.000 --> 00:21:10.079 we call a phantom expense. The tax code allows 00:21:10.079 --> 00:21:12.220 you to assume that the physical structure of 00:21:12.220 --> 00:21:14.380 the building is wearing out over a set number 00:21:14.380 --> 00:21:16.839 of years. For commercial property, it's currently 00:21:16.839 --> 00:21:20.619 39 years. So every single year, you get to deduct 00:21:20.619 --> 00:21:23.599 139th of the building's value from your taxable 00:21:23.599 --> 00:21:25.940 income as if it were a real cash expense. But 00:21:25.940 --> 00:21:27.450 you didn't actually write it. check for that 00:21:27.450 --> 00:21:30.089 amount. No money left your bank account. Exactly. 00:21:30.430 --> 00:21:32.950 You didn't spend the cash. So you might have 00:21:32.950 --> 00:21:35.549 positive cash flow, real money in your pocket 00:21:35.549 --> 00:21:37.750 from the rent after paying all the bills. But 00:21:37.750 --> 00:21:39.690 on your tax return, you could actually show a 00:21:39.690 --> 00:21:43.089 loss or a much lower profit because of this massive 00:21:43.089 --> 00:21:45.710 depreciation deduction. So it shelters your real 00:21:45.710 --> 00:21:48.230 income from taxes. It's one of the most powerful 00:21:48.230 --> 00:21:50.750 wealth building tools there is. You make money, 00:21:50.769 --> 00:21:53.549 but you get to tell the IRS you didn't legally. 00:21:54.380 --> 00:21:56.559 And there are other things, too, like historic 00:21:56.559 --> 00:21:59.599 tax credits. If you renovate a designated historic 00:21:59.599 --> 00:22:02.019 building, the government gives you incentives. 00:22:02.559 --> 00:22:04.960 OK, that's the sunny side of the ledger. Now 00:22:04.960 --> 00:22:07.460 let's look at the dark clouds, the cash outflows, 00:22:07.720 --> 00:22:10.980 the bad column. Well, the biggest one starts 00:22:10.980 --> 00:22:14.299 on day one, the initial investment. Your down 00:22:14.299 --> 00:22:16.400 payment. Commercial loans aren't like the 3 % 00:22:16.400 --> 00:22:18.740 down home loans you see advertised. They often 00:22:18.740 --> 00:22:20.819 require substantial equity. How much are we talking? 00:22:20.960 --> 00:22:24.099 20, 30, sometimes even 40 % down in cash. So 00:22:24.099 --> 00:22:26.920 if you're buying a $10 million building, you 00:22:26.920 --> 00:22:30.579 need $3 million in cold hard cash just to get 00:22:30.579 --> 00:22:33.420 in the game. Correct. Then after that, you have 00:22:33.420 --> 00:22:35.859 the biggest recurring outflow. Debt service. 00:22:35.960 --> 00:22:38.400 That's your mortgage payment. Principal and interest. 00:22:38.579 --> 00:22:41.940 The bank always, always gets paid first. The 00:22:41.940 --> 00:22:44.299 monthly nut you have to crack. Then come the 00:22:44.299 --> 00:22:46.880 operating expenses, the ones that aren't reimbursed 00:22:46.880 --> 00:22:49.160 by tenants or that you have to pay during periods 00:22:49.160 --> 00:22:52.420 when the building is empty. Property taxes, insurance, 00:22:52.920 --> 00:22:56.059 utilities, landscaping, janitorial, property 00:22:56.059 --> 00:22:59.759 management fees. The list goes on and on. You 00:22:59.759 --> 00:23:01.660 have to pay the person who fixes the toilets. 00:23:01.920 --> 00:23:04.980 And things break. Big things. That's the next 00:23:04.980 --> 00:23:07.859 category. Capital expenses or capex. This is 00:23:07.859 --> 00:23:10.099 the oh no fund. This is for major non -recurring 00:23:10.099 --> 00:23:12.640 items. The roof leaks and needs to be replaced. 00:23:13.309 --> 00:23:15.930 The HVAC system dies on the hottest day of the 00:23:15.930 --> 00:23:17.970 year. The parking lot needs to be completely 00:23:17.970 --> 00:23:21.009 repaved. These are big, lumpy expenses that can 00:23:21.009 --> 00:23:23.190 just appear out of nowhere. And they can wipe 00:23:23.190 --> 00:23:25.329 out an entire year's profit if you haven't been 00:23:25.329 --> 00:23:27.609 saving for them in a reserve account. A new roof 00:23:27.609 --> 00:23:30.089 on a large building can cost hundreds of thousands 00:23:30.089 --> 00:23:32.109 of dollars. And there's a cost to getting tenants 00:23:32.109 --> 00:23:34.170 in the first place, right? The outline mentioned 00:23:34.170 --> 00:23:36.839 leasing costs. Yes, and this is another huge 00:23:36.839 --> 00:23:39.180 difference from residential. In residential, 00:23:39.420 --> 00:23:41.759 you might just post an ad on Craigslist or Zillow 00:23:41.759 --> 00:23:45.039 for free. In commercial, you almost always have 00:23:45.039 --> 00:23:47.680 to pay a broker a commission. And how much is 00:23:47.680 --> 00:23:51.079 that? It can be a percentage of the total value 00:23:51.079 --> 00:23:54.119 of the lease over its entire term. So if you 00:23:54.119 --> 00:23:56.720 sign a tenant to a 10 -year lease worth a total 00:23:56.720 --> 00:24:00.259 of $1 million in rent, you might have to pay 00:24:00.259 --> 00:24:04.180 a broker a $30 ,000 or $40 ,000 commission right 00:24:04.180 --> 00:24:06.880 up front. Wow. That's a huge check to write. 00:24:06.960 --> 00:24:08.960 It is. And on top of that, you often have to 00:24:08.960 --> 00:24:12.019 pay for tenant improvements or TIs. What are 00:24:12.019 --> 00:24:14.700 TIs? Let's say a law firm wants to rent your 00:24:14.700 --> 00:24:17.180 empty office space, but the layout is all wrong 00:24:17.180 --> 00:24:19.380 for them. They need five new glass conference 00:24:19.380 --> 00:24:22.279 rooms and a fancy new kitchen. As the landlord, 00:24:22.480 --> 00:24:24.380 to entice them to sign that long -term lease, 00:24:24.559 --> 00:24:26.359 you might agree to pay for those renovations 00:24:26.359 --> 00:24:28.799 yourself. So you're spending tens or even hundreds 00:24:28.799 --> 00:24:30.900 of thousands of dollars before they even move 00:24:30.900 --> 00:24:33.000 in and pay you a single dollar of rent. You are 00:24:33.000 --> 00:24:36.269 spending money to make money. Always. You are 00:24:36.269 --> 00:24:38.190 essentially investing in that tenant's business 00:24:38.190 --> 00:24:40.369 in the hopes of securing their long term rent 00:24:40.369 --> 00:24:43.230 payments. Now, this brings us perfectly to the 00:24:43.230 --> 00:24:46.230 concept of risk. You mentioned earlier that risk 00:24:46.230 --> 00:24:48.569 in this game isn't just will the building burn 00:24:48.569 --> 00:24:51.230 down? No, fire is easy. Insurance covers fire. 00:24:51.450 --> 00:24:54.190 The real day to day gut wrenching risk in commercial 00:24:54.190 --> 00:24:56.690 property is tied to tenancy. The people inside, 00:24:56.970 --> 00:24:59.970 the businesses renting the space. Specifically, 00:25:00.230 --> 00:25:03.390 tenant renewal risk. It's a game of probability. 00:25:03.990 --> 00:25:06.849 When a tenant's 10 -year lease ends, will they 00:25:06.849 --> 00:25:09.410 sign up for another 10 years? Because if they 00:25:09.410 --> 00:25:11.650 don't, if they don't, you have a vacancy. Suddenly 00:25:11.650 --> 00:25:13.849 you have zero rent coming in from that space. 00:25:13.950 --> 00:25:15.750 But you still have to pay 100 percent of the 00:25:15.750 --> 00:25:17.849 mortgage, the taxes and the insurance for it. 00:25:17.890 --> 00:25:20.450 And now you have to go out and pay a broker a 00:25:20.450 --> 00:25:22.670 huge commission to find a new tenant and then 00:25:22.670 --> 00:25:24.829 pay for a whole new round of tenant improvements 00:25:24.829 --> 00:25:27.150 to suit the new business. So a vacant building 00:25:27.150 --> 00:25:29.809 is just a cash burning furnace. It is toxic. 00:25:30.069 --> 00:25:32.410 It is the number one killer of real estate investments. 00:25:32.750 --> 00:25:35.170 That is why investors look so closely at the 00:25:35.170 --> 00:25:38.099 credit worthiness of a tenant. A 10 -year lease 00:25:38.099 --> 00:25:40.720 with a Fortune 500 company like Starbucks is 00:25:40.720 --> 00:25:43.119 worth infinitely more than a 10 -year lease with 00:25:43.119 --> 00:25:46.119 Bob's Coffee Shack. Because the probability of 00:25:46.119 --> 00:25:48.519 Starbucks being around and paying rent for the 00:25:48.519 --> 00:25:51.799 full 10 years is much, much higher. Exactly. 00:25:52.019 --> 00:25:54.539 The whole business is about predicting the future 00:25:54.539 --> 00:25:57.240 cash flows. You're analyzing the timing and the 00:25:57.240 --> 00:25:59.880 amount of money. What is the probability that 00:25:59.880 --> 00:26:01.880 the cash will come in when you expect it? And 00:26:01.880 --> 00:26:04.400 what is the probability of an unexpected outflow, 00:26:04.519 --> 00:26:07.779 like a major repair, a lawsuit, or a natural 00:26:07.779 --> 00:26:10.799 disaster? It's not just owning bricks. It's owning 00:26:10.799 --> 00:26:13.579 a stream of probabilities. Beautifully put. That's 00:26:13.579 --> 00:26:15.920 exactly what it is. Okay, so we know what the 00:26:15.920 --> 00:26:17.720 buildings are, and we know how the math works. 00:26:18.119 --> 00:26:20.420 Now let's talk about how you actually go about 00:26:20.420 --> 00:26:23.559 buying one. Segment three, how the sausage is 00:26:23.559 --> 00:26:26.000 made. The transaction process. Buying a house 00:26:26.000 --> 00:26:28.170 is stressful enough for most people. I have to 00:26:28.170 --> 00:26:31.289 imagine buying a shopping mall is worse. It is 00:26:31.289 --> 00:26:33.950 exponentially more complex with many more moving 00:26:33.950 --> 00:26:36.470 parts and much higher stakes. It's a rigorous, 00:26:36.650 --> 00:26:39.250 multi -stage process that can easily take six 00:26:39.250 --> 00:26:41.369 months or even a year from start to finish. Walk 00:26:41.369 --> 00:26:43.890 us through the life cycle. Step one, the search. 00:26:44.269 --> 00:26:47.109 How do you even find a building to buy? It usually 00:26:47.109 --> 00:26:49.990 starts with a broker. In the commercial world, 00:26:50.150 --> 00:26:52.710 listings aren't always public like they are on 00:26:52.710 --> 00:26:55.869 Zillow for Houses. Brokers are the gatekeepers. 00:26:56.410 --> 00:26:58.130 They market a property on behalf of the seller 00:26:58.130 --> 00:27:00.950 and they identify properties for a buyer based 00:27:00.950 --> 00:27:05.029 on very specific criteria. Criteria like, I want 00:27:05.029 --> 00:27:07.789 a warehouse in Ohio. Much more specific than 00:27:07.789 --> 00:27:10.599 that. It's more like. I want an industrial warehouse 00:27:10.599 --> 00:27:14.619 between 50 ,000 and 100 ,000 square feet built 00:27:14.619 --> 00:27:17.720 after the year 2000, located within 10 miles 00:27:17.720 --> 00:27:20.759 of a major highway with at least a 6 % return 00:27:20.759 --> 00:27:22.759 on investment. Oh, wow. OK, so very targeted. 00:27:22.859 --> 00:27:24.539 And you have different kinds of buyers looking 00:27:24.539 --> 00:27:26.480 for these things, right? You have the owner user. 00:27:26.599 --> 00:27:28.279 That's the business that wants to own its own 00:27:28.279 --> 00:27:30.200 building to operate out of like a manufacturing 00:27:30.200 --> 00:27:32.400 company. And then you have the investor, the 00:27:32.400 --> 00:27:34.079 person or company who just wants the ash flow. 00:27:34.160 --> 00:27:36.440 This could be a private individual or a massive 00:27:36.440 --> 00:27:38.740 private equity firm like Blackstone. Okay, so 00:27:38.740 --> 00:27:40.619 the broker finds a property that fits the criteria. 00:27:41.259 --> 00:27:44.000 Do they just make a formal offer? Not usually. 00:27:44.059 --> 00:27:46.819 They typically start with an LOI, a letter of 00:27:46.819 --> 00:27:49.059 intent. The outline called this dating before 00:27:49.059 --> 00:27:52.369 marriage. I like that. That is a perfect analogy. 00:27:52.690 --> 00:27:56.230 An LOI is a non -binding or mostly non -binding 00:27:56.230 --> 00:27:59.170 document that outlines the major business terms 00:27:59.170 --> 00:28:01.809 before the lawyers get involved. It will have 00:28:01.809 --> 00:28:04.690 the price, the proposed closing date, the length 00:28:04.690 --> 00:28:07.750 of the inspection period, the big stuff. So it's 00:28:07.750 --> 00:28:10.009 not a legal contract to buy. Correct. It's more 00:28:10.009 --> 00:28:12.609 like a handshake on paper. It says, I am serious 00:28:12.609 --> 00:28:14.869 about buying this property and here's generally 00:28:14.869 --> 00:28:17.730 what I'm willing to do. The main benefit is that 00:28:17.730 --> 00:28:19.750 it saves money. You don't want to pay a lawyer 00:28:19.750 --> 00:28:23.339 $500. an hour to draft a 50 -page contract if 00:28:23.339 --> 00:28:25.099 you can't even agree on the price. That's smart. 00:28:25.259 --> 00:28:27.539 So you agree on the LOI, you've had a few dates, 00:28:27.559 --> 00:28:29.440 you like each other, then comes the engagement 00:28:29.440 --> 00:28:32.779 ring. Then comes step two, the PSA, the purchase 00:28:32.779 --> 00:28:35.720 and sale agreement. This is the formal, legally 00:28:35.720 --> 00:28:38.160 binding contract. This is the marriage contract. 00:28:38.359 --> 00:28:40.380 And this is where the money gets real. Yes. At 00:28:40.380 --> 00:28:42.640 this stage, the buyer is commonly required to 00:28:42.640 --> 00:28:45.720 submit an escrow deposit or earnest money. It's 00:28:45.720 --> 00:28:48.099 a good faith deposit held by a neutral third 00:28:48.099 --> 00:28:50.279 party, like a title company. How much are we 00:28:50.279 --> 00:28:54.140 talking? It can be 1 % to 5 % of the purchase 00:28:54.140 --> 00:28:57.640 price. So on that $10 million building, you're 00:28:57.640 --> 00:29:00.160 putting up $100 ,000 or more just to show the 00:29:00.160 --> 00:29:02.230 seller you're not wasting their time. And then 00:29:02.230 --> 00:29:03.930 the clock starts ticking on the most important 00:29:03.930 --> 00:29:08.950 part. Step three, due diligence. The detective 00:29:08.950 --> 00:29:11.930 work. This is the most critical phase of the 00:29:11.930 --> 00:29:14.029 entire transaction. What are they looking for? 00:29:14.089 --> 00:29:16.359 What's in the file? Everything. Unlike buying 00:29:16.359 --> 00:29:18.299 a house where you just get a simple home inspection, 00:29:18.640 --> 00:29:21.660 commercial due diligence is a full forensic audit 00:29:21.660 --> 00:29:23.720 of the property. Give me the checklist. Okay. 00:29:23.819 --> 00:29:25.839 You review the property financial statements 00:29:25.839 --> 00:29:28.779 for the last three to five years. Are the sellers 00:29:28.779 --> 00:29:30.740 telling the truth about how much money the building 00:29:30.740 --> 00:29:33.559 makes? You review the rent rolls. Who are all 00:29:33.559 --> 00:29:36.019 the tenants? How much space do they have? When 00:29:36.019 --> 00:29:37.880 do their leases expire? And most importantly, 00:29:38.059 --> 00:29:40.059 are they actually paying their rent or are they 00:29:40.059 --> 00:29:42.380 three months behind? You check the vendor contracts, 00:29:42.579 --> 00:29:45.019 who picks up the trash, who mows the lawn, and 00:29:45.019 --> 00:29:47.279 can I cancel those contracts or am I stuck with 00:29:47.279 --> 00:29:50.140 them? You check the zoning. Is the building actually 00:29:50.140 --> 00:29:53.660 legal for its current use? Or was it grandfathered 00:29:53.660 --> 00:29:55.599 in under old rules that could cause problems 00:29:55.599 --> 00:29:58.299 later? You check trapping patterns. Is the city 00:29:58.299 --> 00:30:00.539 about to close the road in front for a year for 00:30:00.539 --> 00:30:03.420 construction, killing your retail tenants' business? 00:30:03.759 --> 00:30:05.759 And the physical building itself. Of course. 00:30:05.819 --> 00:30:09.160 You hire engineers to inspect the roof, the structure, 00:30:09.319 --> 00:30:12.880 the HVAC, the elevators. But just as important 00:30:12.880 --> 00:30:16.990 is the environmental condition. This is huge. 00:30:17.390 --> 00:30:19.089 Environmental. Like, is it a green building? 00:30:19.470 --> 00:30:22.430 No. Like, is the ground underneath it contaminated 00:30:22.430 --> 00:30:25.869 with toxic waste? Oh. This is an absolute nightmare 00:30:25.869 --> 00:30:27.970 scenario. Let's say you're buying that strip 00:30:27.970 --> 00:30:30.150 mall and 30 years ago, one of the tenants was 00:30:30.150 --> 00:30:32.890 a dry cleaner. Okay. Old dry cleaning businesses 00:30:32.890 --> 00:30:36.490 used very harsh industrial chemicals. If those 00:30:36.490 --> 00:30:38.769 chemicals leaked into the ground over the years, 00:30:38.930 --> 00:30:42.509 you have serious soil contamination. If you buy 00:30:42.509 --> 00:30:45.069 that building, under the law, you become the 00:30:45.069 --> 00:30:47.690 new owner of that pollution. You are now liable 00:30:47.690 --> 00:30:49.410 for cleaning it up. Even though you had nothing 00:30:49.410 --> 00:30:51.390 to do with it. Even though it happened decades 00:30:51.390 --> 00:30:53.589 before you were born. And the cleanup could cost 00:30:53.589 --> 00:30:56.309 more than the building itself is worth. So you 00:30:56.309 --> 00:30:59.410 always, always order a Phase 1 environmental 00:30:59.410 --> 00:31:01.890 report to check the history of the site and look 00:31:01.890 --> 00:31:04.589 for red flags. Yikes. So you really have to turn 00:31:04.589 --> 00:31:07.750 over every single stone. This is where contingencies 00:31:07.750 --> 00:31:11.160 come in. The PSA, that legal contract, usually 00:31:11.160 --> 00:31:14.240 says, I will buy this building contingent on 00:31:14.240 --> 00:31:16.640 me approving all of this stuff during my due 00:31:16.640 --> 00:31:20.779 diligence period. If I find a problem, bad soil, 00:31:21.200 --> 00:31:24.700 a bad roof, a major tenant about to go bankrupt, 00:31:24.900 --> 00:31:26.880 I can back out of the deal and get my deposit 00:31:26.880 --> 00:31:29.000 back. It's your skate patch. Your get -out -of 00:31:29.000 --> 00:31:31.720 -jail -free card. It is. But here's the twist. 00:31:32.299 --> 00:31:35.039 In a hot competitive market when lots of people 00:31:35.039 --> 00:31:37.900 want to buy the same building, buyers might waive 00:31:37.900 --> 00:31:39.779 these contingencies to make their offer look 00:31:39.779 --> 00:31:41.960 more attractive to the seller. So they're saying, 00:31:42.039 --> 00:31:44.619 I promise to buy it no matter what I find, even 00:31:44.619 --> 00:31:47.180 if I haven't checked the plumbing yet. That sounds 00:31:47.180 --> 00:31:49.680 incredibly dangerous. It's high stakes poker. 00:31:49.900 --> 00:31:52.019 You are betting that the risk is manageable because 00:31:52.019 --> 00:31:54.359 you want to win the asset so badly. You're flying 00:31:54.359 --> 00:31:56.599 blind. Okay, so let's say the detective work 00:31:56.599 --> 00:31:59.240 is done. You didn't find any toxic waste. The 00:31:59.240 --> 00:32:02.230 roof is okay. The numbers check out. What happens 00:32:02.230 --> 00:32:07.009 next? Step four, hard money and closing. At a 00:32:07.009 --> 00:32:08.670 certain date that's defined in the contract, 00:32:08.869 --> 00:32:11.849 the contingency period ends. At that point, the 00:32:11.849 --> 00:32:15.069 escrow deposit becomes hard, which means it's 00:32:15.069 --> 00:32:17.509 non -refundable. The point of no return. That's 00:32:17.509 --> 00:32:20.369 it. If you walk away from the deal for any reason 00:32:20.369 --> 00:32:22.789 after this point, the seller keeps your money. 00:32:23.170 --> 00:32:26.329 They keep that $100 ,000 deposit just for the 00:32:26.329 --> 00:32:28.289 inconvenience you caused them. That definitely 00:32:28.289 --> 00:32:30.529 focuses the mind. It does. It forces you to commit. 00:32:30.869 --> 00:32:33.849 And then finally, you have the closing. The funds 00:32:33.849 --> 00:32:35.809 are wired from the lender and the buyer. The 00:32:35.809 --> 00:32:38.029 title is legally transferred. The keys are handed 00:32:38.029 --> 00:32:40.309 over. And you now own a commercial building. 00:32:40.529 --> 00:32:43.000 And then the real work begins. actually managing 00:32:43.000 --> 00:32:46.059 the thing. Right. Notifying all the tenants there's 00:32:46.059 --> 00:32:48.160 a new owner, transferring the vendor relationships, 00:32:48.339 --> 00:32:50.440 and crossing your fingers that the roof doesn't 00:32:50.440 --> 00:32:52.900 leak the next day. Incredible. It really is a 00:32:52.900 --> 00:32:54.700 massive operation compared to buying a house. 00:32:55.200 --> 00:32:58.640 Now, I want to pivot here. We've been talking 00:32:58.640 --> 00:33:00.920 about how things work in theory, the buckets, 00:33:01.059 --> 00:33:03.480 the money, the transaction process, but we have 00:33:03.480 --> 00:33:06.519 some very fresh, very specific data. about what 00:33:06.519 --> 00:33:09.640 is happening right now in the real world of commercial 00:33:09.640 --> 00:33:13.119 real estate. The 2024 -2025 Snapshot. Segment 00:33:13.119 --> 00:33:16.440 four, the state of the market. And folks, you 00:33:16.440 --> 00:33:18.160 might want to buckle up because there is some 00:33:18.160 --> 00:33:20.859 serious turbulence ahead. There is. Let's start 00:33:20.859 --> 00:33:22.599 with the most recent data point we have from 00:33:22.599 --> 00:33:25.519 the sources. The confidence drop in April 2025. 00:33:26.039 --> 00:33:29.000 This comes from the 1Q 2025 Board of Governors 00:33:29.000 --> 00:33:31.500 Sentiment Index. What did they find? They measure 00:33:31.500 --> 00:33:33.359 what they call positive sentiment. It's basically 00:33:33.359 --> 00:33:36.099 a poll of the big players in the industry, the 00:33:36.099 --> 00:33:38.599 developers, the lenders, the brokers, asking 00:33:38.599 --> 00:33:41.160 how good do you feel about the future? In late 00:33:41.160 --> 00:33:45.259 2024, that number was at a very healthy 126 .5%. 00:33:45.259 --> 00:33:47.500 Okay, so people were optimistic. Very, but by 00:33:47.500 --> 00:33:50.720 April 2025, it had crashed to 87 .9%. That is 00:33:50.720 --> 00:33:52.720 a massive drop. That's not a dip, that's a cliff. 00:33:52.880 --> 00:33:55.000 It is the single steepest drop in confidence 00:33:55.000 --> 00:33:57.740 since the start of the COVID -19 pandemic. The 00:33:57.740 --> 00:34:00.569 market got very scared very fast. And do we know 00:34:00.569 --> 00:34:03.589 why? The source was pretty specific about the 00:34:03.589 --> 00:34:07.150 driver for this. Yes. The source explicitly attributes 00:34:07.150 --> 00:34:09.849 this sharp drop to the Trump administration's 00:34:09.849 --> 00:34:13.570 latest tariff policies. OK. So let's just report 00:34:13.570 --> 00:34:15.349 on the mechanics here without taking any political 00:34:15.349 --> 00:34:18.150 sides. Yeah. Why would tariffs on foreign goods 00:34:18.150 --> 00:34:20.730 hurt real estate sentiment in the U .S.? It comes 00:34:20.730 --> 00:34:24.409 down to two things. Costs and uncertainty. Tariffs 00:34:24.409 --> 00:34:26.989 usually mean higher costs for raw materials that 00:34:26.989 --> 00:34:29.289 are using construction steel, glass, lumber, 00:34:29.469 --> 00:34:32.710 concrete, HVAC equipment. If it suddenly costs 00:34:32.710 --> 00:34:35.030 20 % more to build a new building because steel 00:34:35.030 --> 00:34:37.139 is more expensive. Developers stop building. 00:34:37.280 --> 00:34:39.280 It freezes new projects. It creates a supply 00:34:39.280 --> 00:34:41.940 shock and grinds development to a halt. And just 00:34:41.940 --> 00:34:44.119 as importantly, it creates massive uncertainty. 00:34:44.599 --> 00:34:46.539 Markets hate uncertainty more than anything. 00:34:46.780 --> 00:34:49.719 If global trade flows are disrupted, that affects 00:34:49.719 --> 00:34:52.380 the tenants who occupy these buildings. It affects 00:34:52.380 --> 00:34:54.880 the warehouses that store imported goods. It 00:34:54.880 --> 00:34:56.739 affects the retailers that sell those goods. 00:34:56.900 --> 00:34:59.599 If the tenants' businesses are hurting, the landlords 00:34:59.599 --> 00:35:01.559 get very worried about their ability to pay rent. 00:35:02.150 --> 00:35:04.429 So the data from this source shows the entire 00:35:04.429 --> 00:35:07.050 industry is spooked by this policy shift. So 00:35:07.050 --> 00:35:09.690 sentiment is way down. But let's look at the 00:35:09.690 --> 00:35:12.110 office market specifically. We have a really 00:35:12.110 --> 00:35:14.869 weird paradox here in the 2024 data. The office 00:35:14.869 --> 00:35:17.670 space paradox, yes. If you just look at the headline 00:35:17.670 --> 00:35:20.630 numbers, the leasing volume, the amount of new 00:35:20.630 --> 00:35:23.349 office space rented in 2024 actually rose to 00:35:23.349 --> 00:35:25.550 its highest level since 2020. Which sounds good. 00:35:25.590 --> 00:35:27.250 That sounds like a recovery. People are going 00:35:27.250 --> 00:35:29.210 back to the office. Companies are renting space 00:35:29.210 --> 00:35:33.010 again. But... There is a huge catch, a massive 00:35:33.010 --> 00:35:35.869 catch that changes the entire story. The source 00:35:35.869 --> 00:35:38.730 notes that roughly 60 % of all active office 00:35:38.730 --> 00:35:41.309 leases currently in effect went into effect prior 00:35:41.309 --> 00:35:44.230 to the pandemic. Wait, unpack that for me. 60%. 00:35:44.230 --> 00:35:46.550 Why is that a problem? It means that more than 00:35:46.550 --> 00:35:48.769 half of the companies occupying office space 00:35:48.769 --> 00:35:51.929 right now are sitting on legacy leases. They 00:35:51.929 --> 00:35:55.170 signed these contracts in, say, 2018 or 2019, 00:35:55.469 --> 00:35:58.710 usually for a term of 7 to 10 years. They are 00:35:58.710 --> 00:36:01.519 still paying rent. based on the old world logic 00:36:01.519 --> 00:36:05.019 before remote work became mainstream. So they 00:36:05.019 --> 00:36:07.219 might have a giant office that is half empty 00:36:07.219 --> 00:36:09.780 because everyone is working from home on Tuesdays 00:36:09.780 --> 00:36:12.000 and Fridays, but they are still stuck in that 00:36:12.000 --> 00:36:14.500 10 -year lease they signed in 2019. Exactly. 00:36:14.539 --> 00:36:16.739 They haven't had to make the hard decision yet 00:36:16.739 --> 00:36:19.000 about their future space needs. They are just 00:36:19.000 --> 00:36:21.179 paying rent on thousands of empty desks because 00:36:21.179 --> 00:36:24.059 the contract says they have to. But as those 00:36:24.059 --> 00:36:27.260 leases expire over the next few years... We are 00:36:27.260 --> 00:36:30.780 facing a looming cliff. A lease expiration cliff. 00:36:30.880 --> 00:36:33.280 A massive one. When those companies finally come 00:36:33.280 --> 00:36:34.960 up for renewal, are they going to renew for the 00:36:34.960 --> 00:36:37.559 same amount of space? Almost certainly not. They'll 00:36:37.559 --> 00:36:39.639 downsize. They'll realize they only need half 00:36:39.639 --> 00:36:42.110 a floor instead of a whole floor. Or they might 00:36:42.110 --> 00:36:44.250 decide to go fully remote and get rid of their 00:36:44.250 --> 00:36:47.090 office entirely. So that high leasing volume 00:36:47.090 --> 00:36:50.789 statistic for 2024, it masks this ticking time 00:36:50.789 --> 00:36:54.090 bomb of expirations. The real pain hasn't fully 00:36:54.090 --> 00:36:56.269 hit the market yet. We're in the eye of the storm. 00:36:56.429 --> 00:36:58.690 That is a scary thought for anyone who owns an 00:36:58.690 --> 00:37:01.250 office building. And we are already seeing signs 00:37:01.250 --> 00:37:03.429 of trouble. The source has mentioned distress. 00:37:03.610 --> 00:37:06.539 Yes. The data from Real Capital Analytics is 00:37:06.539 --> 00:37:09.739 pretty stark. It shows that over $160 billion 00:37:09.739 --> 00:37:12.519 of U .S. commercial properties are currently 00:37:12.519 --> 00:37:14.699 in some form of distress. What does distress 00:37:14.699 --> 00:37:17.719 mean? It means they are in default on their loan, 00:37:17.920 --> 00:37:20.079 they're in the process of foreclosure, or the 00:37:20.079 --> 00:37:22.719 owner is in bankruptcy. $160 billion. That's 00:37:22.719 --> 00:37:25.219 not small change. That's a huge number. It's 00:37:25.219 --> 00:37:27.480 a very significant chunk of the market that is 00:37:27.480 --> 00:37:30.079 actively failing to pay its debts. And that number 00:37:30.079 --> 00:37:32.079 has been rising steadily. And it's not just a 00:37:32.079 --> 00:37:33.699 U .S. problem, right? We have data on Europe 00:37:33.699 --> 00:37:36.659 as well. No, this is a global issue. Europe is 00:37:36.659 --> 00:37:39.440 facing what many analysts are calling a debt 00:37:39.440 --> 00:37:41.789 wall. A debt wall. According to the sources, 00:37:42.030 --> 00:37:45.449 there is 960 billion of debt backed by European 00:37:45.449 --> 00:37:48.289 commercial real estate. Nearly a trillion euros. 00:37:48.489 --> 00:37:51.889 And here is the kicker. Half of that debt, almost 00:37:51.889 --> 00:37:54.369 500 billion, needs to be refinanced in the next 00:37:54.369 --> 00:37:56.869 three years. Why is that a problem? Can't they 00:37:56.869 --> 00:37:58.690 just go to the bank and get a new loan when the 00:37:58.690 --> 00:38:00.929 old one comes due? Because the entire environment 00:38:00.929 --> 00:38:03.110 has changed. Interest rates across Europe and 00:38:03.110 --> 00:38:04.809 the world are much higher now than they were 00:38:04.809 --> 00:38:06.590 when those loans were taken out five or seven 00:38:06.590 --> 00:38:09.429 years ago. If you borrowed money at 2 % interest 00:38:09.429 --> 00:38:12.530 and now you have to refinance at 5 % or 6%, your 00:38:12.530 --> 00:38:15.030 monthly mortgage payment could double or even 00:38:15.030 --> 00:38:17.449 triple overnight. But your rental income from 00:38:17.449 --> 00:38:19.789 the tenants didn't double. Exactly. Your income 00:38:19.789 --> 00:38:22.530 is flat, but your biggest expense just exploded. 00:38:22.789 --> 00:38:26.230 So suddenly the math breaks. The building's income 00:38:26.230 --> 00:38:29.429 can no longer pay the mortgage. This puts massive 00:38:29.429 --> 00:38:32.469 downward pressure on valuations. If the building 00:38:32.469 --> 00:38:35.369 can't support the debt, it's worth less. And 00:38:35.369 --> 00:38:37.510 if it's worth less than the loan amount, the 00:38:37.510 --> 00:38:39.710 bank has to take a huge loss. And this matters 00:38:39.710 --> 00:38:42.570 to everyone because... Yes. The sources note 00:38:42.570 --> 00:38:44.570 that the commercial real estate sector secures 00:38:44.570 --> 00:38:47.989 approximately 4 million jobs across Europe. That's 00:38:47.989 --> 00:38:49.989 construction workers, architects, engineers, 00:38:50.389 --> 00:38:53.010 property managers, brokers, lawyers, accountants. 00:38:53.489 --> 00:38:56.110 If the sector seizes up because of this debt 00:38:56.110 --> 00:38:58.769 wall, millions of jobs are at risk. It's all 00:38:58.769 --> 00:39:01.219 connected. The tariffs in the U .S. affecting 00:39:01.219 --> 00:39:04.059 construction costs, this debt wall in Europe 00:39:04.059 --> 00:39:06.699 affecting the banks, the ghost leases in office 00:39:06.699 --> 00:39:09.260 towers affecting the viability of our downtowns. 00:39:09.300 --> 00:39:12.300 It is a very precarious moment. We are in a major 00:39:12.300 --> 00:39:15.099 transition period between the pre -pandemic economy 00:39:15.099 --> 00:39:18.059 and whatever is settling in now. And commercial 00:39:18.059 --> 00:39:20.440 real estate is the physical place where all that 00:39:20.440 --> 00:39:23.019 tension is being felt. Wow. OK, let's try to 00:39:23.019 --> 00:39:24.780 wrap this up. We have covered a lot of ground 00:39:24.780 --> 00:39:26.980 today. We certainly have. We started by defining 00:39:26.980 --> 00:39:29.630 the beast. Commercial property. is anything with 00:39:29.630 --> 00:39:32.230 the intent of profit, from that tiny five -unit 00:39:32.230 --> 00:39:34.489 apartment building all the way up to a skyscraper. 00:39:34.630 --> 00:39:37.809 We mapped out the six buckets, office, retail, 00:39:38.130 --> 00:39:40.869 multifamily, industrial, land, and the catch 00:39:40.869 --> 00:39:42.809 -all miscellaneous bucket. Then we looked under 00:39:42.809 --> 00:39:45.210 the hood at the money machine, how inflows like 00:39:45.210 --> 00:39:48.090 rent and those important expense recoveries battle 00:39:48.090 --> 00:39:50.869 against outflows like debt and the dreaded capex. 00:39:51.150 --> 00:39:54.389 We learned about the phantom expense of depreciation 00:39:54.389 --> 00:39:56.429 that shelters income. And we walked through the 00:39:56.429 --> 00:39:59.110 anxiety of the transaction from the dating phase 00:39:59.110 --> 00:40:01.889 of the LOI through the detective work of due 00:40:01.889 --> 00:40:04.469 diligence all the way to that point of no return 00:40:04.469 --> 00:40:06.940 with hard money. And finally, we looked at the 00:40:06.940 --> 00:40:09.139 storm clouds that seem to be gathering in 2025, 00:40:09.619 --> 00:40:12.880 the tariff -driven sentiment drop, the $160 billion 00:40:12.880 --> 00:40:15.940 already in distress in the U .S., and that looming 00:40:15.940 --> 00:40:18.579 office lease cliff. It's a complicated picture. 00:40:18.659 --> 00:40:20.480 It's an industry in major flux. That's putting 00:40:20.480 --> 00:40:22.760 it mildly. So what does this all mean for the 00:40:22.760 --> 00:40:24.539 listener? Why should someone who doesn't own 00:40:24.539 --> 00:40:27.800 a skyscraper care about any of this? Because 00:40:27.800 --> 00:40:30.059 whether you invest in it or not, you exist in 00:40:30.059 --> 00:40:32.710 it. And its health affects you. This sector holds 00:40:32.710 --> 00:40:35.889 trillions in value, that $6 trillion number in 00:40:35.889 --> 00:40:38.530 the U .S. alone. It drives millions of jobs. 00:40:38.670 --> 00:40:40.809 And when commercial real estate values drop, 00:40:40.949 --> 00:40:43.090 it hits the pension funds that invest in these 00:40:43.090 --> 00:40:45.070 buildings on behalf of teachers and firefighters. 00:40:45.530 --> 00:40:47.789 It hits the regional banks that lend to them, 00:40:47.869 --> 00:40:50.130 which could lead to a credit crunch for everyone. 00:40:50.349 --> 00:40:53.800 And it hits city tax revenues. How so? If that 00:40:53.800 --> 00:40:57.539 big office building downtown loses half its value 00:40:57.539 --> 00:40:59.980 because tenants are leaving, the city collects 00:40:59.980 --> 00:41:02.280 a lot less in property tax from that building. 00:41:02.440 --> 00:41:04.780 And that might mean less funding for schools 00:41:04.780 --> 00:41:08.340 or parks or the fire department. It is the invisible 00:41:08.340 --> 00:41:11.400 scaffolding of our civic society. I want to leave 00:41:11.400 --> 00:41:13.519 everyone with a final provocative thought, building 00:41:13.519 --> 00:41:14.880 on what we've discussed. We talked about that 00:41:14.880 --> 00:41:18.789 office paradox. 60 % of leases are these ghosts 00:41:18.789 --> 00:41:21.570 from before the pandemic. And we talked about 00:41:21.570 --> 00:41:23.809 sentiment dropping sharply due to new tariff 00:41:23.809 --> 00:41:27.050 policies in 2025. Right. Two separate storm systems. 00:41:27.090 --> 00:41:29.289 So here's the question. What happens if those 00:41:29.289 --> 00:41:31.389 ghost leases finally expire and companies start 00:41:31.389 --> 00:41:33.769 downsizing en masse at the exact same moment 00:41:33.769 --> 00:41:36.570 that the broader economy is getting hit by tariff 00:41:36.570 --> 00:41:39.309 shocks and the pressure of high interest refinancing? 00:41:39.449 --> 00:41:41.570 What happens to our downtowns when those two 00:41:41.570 --> 00:41:45.269 timelines finally collide? That is the multi 00:41:45.269 --> 00:41:47.389 -trillion dollar question, isn't it? Are we looking 00:41:47.389 --> 00:41:51.869 at a slow, manageable correction? Or are we looking 00:41:51.869 --> 00:41:54.510 at a genuine hollowing out of our urban cores? 00:41:54.849 --> 00:41:56.829 Something to think about the next time you walk 00:41:56.829 --> 00:41:59.289 past an office tower at night. Look up at the 00:41:59.289 --> 00:42:01.929 windows. How many of them are dark? And more 00:42:01.929 --> 00:42:04.289 importantly, who is still paying for them? For 00:42:04.289 --> 00:42:06.929 now. Thanks for joining us on this deep dive. 00:42:07.010 --> 00:42:08.909 We hope you will never look at a strip mall the 00:42:08.909 --> 00:42:11.170 same way again. See you next time. Stay curious.