Hey everybody, Ken McElroy here. I'm practicing social distancing… and so for a lot of you, you
might not know we made almost all of our money in 2008. So I've been in the real estate game
for 30 years we bought over a billion dollars of real estate from 2008 till the peak of the
market and I'm gonna kind of walk through that. All apartments, some self-storage, some office,
even a resort. All during this this last run. And so how did we attract money you know in 2008
after all that happened? And how did we grow our business etc etc etc because we were doing that?
Well everybody was kind of hunkering down and we ended up getting a lot of our real estate from a
lot of the banks during the last recession, so I'm gonna kind of walk you guys through what I believe
are the four stages of every market. So these are the four stages of every market and so typically I
like to talk about the recovery, which of course we're not in right now, the expansion, which we
were in, the hyper supply, which is when things get really really hot really, tight which is kind
of what we all just are experiencing. And that's honestly you know it was a surprise to me when all
this happened with the this vi- with this virus, but the truth is you know we're in a recession
just like we were in 2008. So I went and I you know just went back into my notes and well for us,
the the recession started in December of 2007 and so I guess technically you could say that we were
in a hyper supply somewhere in the 2006 timeframe. And technically if you go on the internet it says
the recession started in 2007. The truth was in 2005, six-seven people were buying condos
and houses as you guys know, with- and they had almost- they didn't have jobs. And so so
all of that was happening and the signs were all there, so when we got to the, you know, so-called
recession, it wasn't surprise. This one was very much a surprise obviously, although I do believe
that we were all in a hyper supply. So those of you guys that don't know we sold, Russ and I,
my partner, we sold 10 projects last year all at low for cap rates. And everybody's like, “oh my
god, why are you- why are you, you know, selling?” and I'm- Because we bought in the recovery and the
expansion timeframe and we were up here on those properties. I wasn't trying to time the market.
I think that's a really important point. I was saying look at all the profit that we've gotten
so far. I think the fundamentals of the market are correct. In other words, we're not seeing
the cash flow and we're stretching for deals and and all that. All meanwhile, the lenders were
dropping their rates and so you know things were getting better and better and better and better
but now interest rates went all the way almost a zero and so it just keeps pushing prices up. So
somewhere in here the Fed started dropping rates and so it just kept the market going up through
this hyper supply and the same thing happened in 2007. And so there's a lot of similarities. Yes,
the current day is the virus and people are out of work and unemployment- so things are
definitely different. But in 2007, we had a lot of the same things happening. So and technically,
we're in a recession so I'm going to walk you guys through, I think, these four stages and kind of
where we are. So the next thing that happened was, you know, of course we're back into this expansion
and recovery here. So as things started to recover and the recession started to happen, you know,
we started to see this in 2008 and 2009. Things were still moving down during this recession and
then recovery for us was about 2010. And then we started to kind of go up to about 2012,
and then from 2012 to 2016 we were seeing this massive expansion and then what was happening is
the Fed was kind of jacking the markets with all this low with all this low money. And so
what we were doing was we were trying to figure out you know, how do we compete here? And so we
we were from this period of time to here as a lot of you guys know, we were having a tough
time buying because that’s when the money was flooding into the market and it was like oh my
gosh this is great and and what it does is that it pushes the market up even more. And the Fed with
the low interest rates kept it going up even more and so from a hyper supply standpoint, you know,
my experience is now we can look back and say that even though this is a virus, we're in a recession
it doesn't really matter how we got here. I mean it's horrible what's happening to people there's
no question. And I think we're we're moving into pretty rapid unemployment and defaults and
all those kinds of things but that's for another video. Um but for now you can tactically say that
hyper supply kind of peaked in 2019 and now here we are in this recession again, kind of coming
down from to 2020. And here's where we are now and the question is is you know what's going to happen
and so- but if you go back and take a look, you guys can see that the stages of this happened over
a long period of time. So you know this is- these are years that it took, these are years, you know,
from here to here is nine years, okay? So the good news is is that you guys have lots of time. What
you don't want to be, is you don't want to be here and what- you know- and the term back in the day
was “I don't want to catch a falling knife” that- and think about that. You know how far is this
gonna go? Nobody knows, you know, in 2020. Right? But we're going to start to see a freefall in my
opinion and you definitely are gonna see defaults on credit cards, defaults on hou- on houses,
defaults on apartments, defaults on commercial, defaults on retail, you know defaults on a copy
machine and a business. You're gonna see all of this happening. You're gonna see businesses close
up because a lack of income and they're gonna start to be this trickle effect and as that
happens we are definitely going to move further and further into this recession. And so what the
government is really trying to do right now for everyone is prevent a global depression that's
actually what's happening. If you guys- so you're gonna see all these fantastic stimulus packages
and we don't all know what those are going to be but we're already starting to see things with
Fannie Mae and Freddie Mac and the government on evictions and you know that's just in the housing.
But then you're gonna start to see money and the small businesses and all that stuff so it depends
on, you know, cash, you know, how much cash do you have? What cash positions do you have to kind of
ride this out? I will tell you that I made a lot of money during this time frame a lot because we
were buying properties from banks, we were buying properties from individuals and they were broken
and there's a time frame. What happens- there's a lag from here and so there's a lag from here
to here and well here's kind of what happens most of the time. It starts with just basic denial so
you know if if somebody is trying to hold on the cash first, they're looking at their operating
expenses then they're trying to restructure their debt and maybe the lender’s working with them,
maybe they won't. There's only so many things that you can cut during a recession. And and as you're
trying to you know lower your expenses because you don't have the income, and that's definitely not
property taxes, it's definitely not insurance, it's definitely not utilities, and a lot of
cases it's definitely not the loan because a lot of times the loans are connected to something
bigger. Maybe they're sold off and maybe they're fully amortized and who knows how leveraged they
are. Maybe they're seven eight nine percent, maybe there are three maybe, therefore it doesn't really
matter. The point is is that all that stuff is happening right now and there's a lag with it all
and right now we don't even know what people are gonna pay next month. Like we don't know we don't
know if our tenants are going pay, we don't know if the landlords are gonna pay the banks, we don't
know if the bank’s gonna work with us or anything like that so there's a lot of uncertainty. But I
can assure you one thing, we're definitely going to see a great deal of defaults. It's probably
gonna start at you know the spot where a lot of my residents are. The people that have, you know,
five- there's only five hundred fifty percent of all Americans only have like five hundred dollars
in the bank, okay? So they're hurting financially and so you know everybody's gonna be dealing with
this a little bit differently and the ones that have cash are the ones that are gonna survive it.
So what happens is let's say you own a commercial building and you can't pay. Well the reason you
can't pay is because the residents aren't paying you. And so then you can't pay the mortgage and
then the rest of the- the lender’s either going to work with you or they're not going to work
with you, and then they're gonna move through a process of default but I can assure you no
landlord is just gonna give up their property. It’s gonna come you know kicking and screaming.
And so depending on how long this lasts, depending on how long the unemployment rate, you know, stays
because they're saying it's it's it's definitely gonna be somewhere between twenty and thirty
percent unemployment. Well all those people, what do they do? They buy goods and services. They go
out to dinner, they pay rent, they buy cars, they- all those things. So all those people
are affected. Millions and millions of people. So all that's going to happen and it's going to
affect the operating expenses and the ability to pay debt and so you're gonna start to see a long,
slow decline of people that own real estate. And it's gonna slowly slowly slowly slowly true-up.
It’s gonna true-up based on the lender’s ability to work with you the- your management plan,
your management team, the cash that you have, all of those kinds of things. And at the end of the
day down here, the lenders are going to look for people just like you that are being educated and
trying to figure out how do I put the best teams around me? How do I have the best amount of cash?
So this is definitely going to happen guys, it's definitely going to slide. Make no mistake about
it. And here we are now in 2020, the question is is you know how long is this going to last and I
just don't know. And I wish I could give you guys the definitive answer, but a lot of this
is going to be determined on on how much money we get from the government, you know, both state and
federal. You guys are starting to see some of that stuff rolling out. If it's going to depend on how
capitalized people are, it's gonna pin on their debt structure, it's going to depend on how they
handle their operating expenses because right now we've been, as a lot of you guys know, we've been
focused on operations, it's going to depend on when they bought. If they bought something
that said value add next year, they could be in trouble potentially because if they bought it for
20 million and they're trying to raise the value to 25, they might not have that rent lift. All of
those things are coming to fruition right now and the question is is when's it going to happen? But
my experience, as I told you guys, the last time- this was nine years from here to here so the good
news is that you guys have lots of time lots of time to be very educated, lots of time to ask
very good questions, but you for sure want to make sure that you don't catch a falling knife. That
you get your your snagging something too early and it continues to go down even more and so with that
just continue to get educated and please make sure that when you're buying something that you really
have a great understanding of where the rents are gonna go, where the vacancy is going to go,
where the expenses are gonna g,o and more importantly what your debt’s gonna be. And in my
opinion what's going to happen is the government's going to really come in. They're gonna step in,
they're gonna help small business, they're gonna help a lot of these people that own mortgages and
they're gonna step in and help. In addition to that, we're gonna continue to have these really
really low interest rates that will definitely help this. But I don't know if this curve is
gonna be like this or like this. We're not sure, but it's going to come out rolling
organically and it's gonna be entirely based on everything we're doing. Guys every single
thing is based on the people that are living in our apartments or living in our our, you know,
have businesses in our commercial office buildings or storage units or in there, you know, all those
things. It's going to depend on the health- the financial health of those people and so until that
gets shored up, all this stuff doesn't- it's super hard to predict. So good luck, I hope you guys
learned a little bit about this this recession. I believe we definitely- there's no just- there's
no arguing we're definitely in a recession. Thanks a lot for watching so again thanks for
watching. So one of the things that I want you guys to know is I just did a great video on this
financial stress test which basically walks you through, personally, from a business standpoint,
and from an investment standpoint, on some of the things that you really need to know on on how to
test your properties financially and see what the financial stress test is. We've done that on
every single property that we own and you can find that on our website at KenMcElroy.com/StressTest
and you can download the document, you can do the exact same thing that we use internally.