So I'm excited to have Peter Pomeroy on.
So Peter is very, very active.
He's got a company called Vertical Street Ventures.
Yeah, thanks for having me. I'm a big fan of your show.
With Vertical Street Ventures, I'm not a partner of that firm.
I'm the acquisitions person for that firm.
But, you know, deep in it for sure, you know, right now
we're starting to see cracks on the Tenet office
side of the space, as you know, this work from home thing.
And, you know, we're starting to see office buildings now
even being talked about as, you know, converting back to residential.
And this is a space that you have a lot of experience.
And so what are you seeing if from that standpoint?
Because I'm seeing downsizing, I'm seeing higher vacancies, I'm
seeing values down,
and we're starting to see some of these
loan maturities come up on some of these office buildings.
And it seems to be,
you know, I'm reading something about it almost every every week.
What do you guys see?
I think you're spot on.
I mean, you know,
all real estate has a cycle and they say San Francisco for the office product,
you know, that's like a basically a ten year
cycle historically, you know, plus or minus.
But, you know, there's a lot of trouble when I chat with,
you know, friends of mine that are, you know, representing landlords
of office products or the tenants that go into that office product.
The vacancy is incredibly high.
Figure what the number is, but it's like maybe 20 plus percent
highest it's been in, you know, ten or 15 years.
And you're right, because there's you know, it's like a compounding effect.
One we had the the pandemic and
there was a reorganization of how office space is used.
So, you know, if you've got, you know, 50 people and they use 5000 square feet
or whatever the number is, those 50 people no longer need 5000 square feet.
So, you know, it drops to just four numbers like 3000 square feet.
Right.
But then then the you know, on top of that is is there
you know, they're laying people off and it's, you know, maybe not as dramatic.
You know, while with the tech sector, it's obviously very dramatic.
But so they have less people.
So their need for office space is even even less.
And now they've got you know, if you're a landlord,
you have,
you know, these tenants that don't need as much space as they once
did due to the pandemic and how people rethink office.
And then also there's you know, these companies have less employees
and you know, so they need even less.
And I mean, I remember when I was representing tenants
and some of these tenants were like great credit worthy Fortune 500 companies.
The you know, they they'll stop paying rent if they want to just because, yeah,
a big balance sheet doesn't mean they're going to, you know, keep paying rent,
you know, and Twitter's a great example or Elon Musk is like, we're done.
We're not paying rent for a while. And like, that's that.
And so it's it's a tough situation and I do think that, you know,
wherever possible landlords, you know, I'm sure they're thinking about
how they can reuse the space in some sort of way, because if a building
has a, you know, a class, a building has a 30%,
you know,
vacancy rate or 25% vacancy rate, it's not too long
until, like, they can't service their debt and then bad things happen.
Yeah, it's a good point.
I think a lot of people don't realize that if you've got a 25 to 30%
vacancy rate in an office building, you're probably negative cash flow right?
Right, right. Yeah.
And that and that's and it's a lot of them are are nearing that or at that.
Right.
And then you know these are
these are buildings you know similar to the multifamily that were bought it
you know three and a half cab for cab you know kind of in that area.
So it's even worse, even harder to deal with that that debt.
And I haven't seen and,
you know, you know, since I'm focused on multifamily, I might have missed it,
but I have not seen any reports of office landlords.
You know, bigger ones, you know, losing properties or selling them
to some kind of private equity group that they get opportunistic fund.
But I have seen as an
investor in San
Francisco, he's he would buy and sell buildings, you know,
depending on where things were in the cycle.
And they, you know, there's one of these one of the hotels on the top of Nob Hill.
You know, I don't even think he bought it for the full amount of debt.
I think it's, you know, some, you know, 50% or whatever the debt was.
And so that it's a big
that's a big buy and that reflects like, you know,
all sorts of things related to what's going on in the economy.
Yeah.
And by the way,
thank you for bringing that up, because I think there's a lot of stuff
that that that's happening right now that it's not necessarily
all broken up and flying around that, you know, lots of there's
not call for offers, but there are sneaky little deals happening around it now,
you know, everywhere when you agree with that.
No. Yeah.
I mean the if for all sorts of reasons you have all sorts of thoughts on this
but I don't think any owner wants to be like too public
with their failing or, you know, what's going right.
And so there's there is all sorts of stuff that's going on.
And I know that I mean, our markets are Phenix and Tucson
and, you know, we've heard rumblings that people that are in distress.
I don't believe there's been yet a big sponsor failure
and that see, I know folks were talking about
that that was almost needed to correct the market is a big sponsor fan
but you do hear about, you know, other folks that are, you know,
these rumblings of trouble. You know, trouble.
Yeah. Yeah. We're certainly here.
Yesterday, I was on an investment committee call.
We had about seven or eight people on that call every week.
And and there's
a tremendous amount of work being done prior to me getting on the call,
me and my partner Ros, and basically it boiled down to a really nice deal
actually, that was not even worth the debt, you know apartments
and and you know, that's something obviously that we know really well.
So they sent it right the bad.
I said, Oh, well, I still want to get into the numbers and let's take a look.
And sure enough, it was true. It was the debt.
The the value of the property was not worth the debt.
What's interesting to me, the general partner may or may not have known,
and certainly the
LPs did not know, right? Wow.
Yeah.
And they're trying to raise capital to keep the property because it's possible
that rates can go down and it's possible that cap rates could go back down.
But at the moment, it's not worth the debt.
I mean, it depends on who your capital is.
You're if they're limited partners, sophisticated investors.
I had this experience in, you know, 28, 2009.
I was working for a, you know, really smart guy with a firm and we bought
100,000 square foot empty office
building in Cupertino, California, which is where Apple is.
And, you know, the vacancy there was a 1%, point 8%.
And so we thought, wow, this is going to be a there's going to be a strong deal.
I mean, it's not necessarily can be a homerun
or grand slam, but it's going to be a double.
We had institutional equity through Deutsche Bank
and we bought the building and, you know, it was empty.
So that was the big risk point.
But there is a lot of tenants circling that we were bringing through
even prior to close.
And Lehman Brothers went bankrupt.
And like a week later, the our our capital partners said
we're done is, you know, we don't want anything else to do with it.
And it went back to the bank.
So like that's an
example of a group that's like not rebuild, flexible, not lenient.
They don't care like what's going to happen
in a month or two months, Like they had made a decision
and then it went back to the bank,
which had Prudential, and then they did terrifically with property.
So yeah, these painful lessons. Yeah.
Yeah, it is.
You bring up a good point.
These institutions, the it's all business, you know, they're there.
If they decide they want to pay rent, they will pay rent if they decide,
you know, that they're, they're cutting, they're stopping, they're stopping
the small guys like us, you know, that's a little bit different.
You know, we have a lot on the line, you know, and but it's very it's
it's a different mindset, right?
Yeah, It is.
It's a very different mindset. And,
you know, and I know that, you know, different
like sponsor groups, you know, that are kind of in our space.
I mean, you've got
you know, you have like what, 10,000 units or so somewhere in there
we have less.
And there are groups that are like have taken on, you know, institutional capital.
And I don't know if it's like, you know, true institutional capital offer.
It's family office, institutional capital.
But my point is, is that all of these I think capital groups
have different points of view and perspectives on their investment.
And like Deutsche Bank, I didn't care if it was going to get better
or, you know, as if, you know, their strategy change.
And so they were able to write that, you know, that investing,
you know, their investment off and move on.