March 20, 2024

JF3485: Have CRE Prices Bottomed Out? Big Players Think So — Here’s What it Means for Investors ft. Logan Freeman




Welcome the the Best Ever midweek news brief, a new series where we will highlight the top headlines CRE investors should be paying attention to this week, followed by a deep dive on a larger news topic or trend alongside a CRE expert.

Today’s Headlines:

  • Denver is on Fire: Despite its high home prices relative to the national average, Colorado’s Capital has taken the top spot in U.S. News’s recent list of the nation’s 20 hottest housing markets. 

  • Minneapolis Captivates Renters: Renters searched for apartments in Minneapolis more than any other market in February. Apartment searches in Minneapolis grew a staggering 234% compared to February last year.

  • Dallas Owns Industrial: Dallas led the industrial sector in terms of deliveries in 2023, with almost 61.9 million square feet delivered across 177 properties, more than doubling the average pace nationally.


Today’s Guest: Has the CRE market hit the bottom? Some big players seem to think it has. Goldman Sachs said last week that it’s ready to start actively investing in commercial real estate again, and Blackstone is on the bandwagon, too. According to Blackstone President Jon Gray, the time to make a move is not after interest rates come down, but before. He also says that as investors, sometimes, you can miss the bottom by being overly cautious, and he believes that now is probably a good time to move fast and buy real estate before rates come down. Logan Freeman, co-founder and principal at FTW Investments, joins host Paul Mueller to discuss.


Logan Freeman | Real Estate Background

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Paul (00:04.266)
Here to help us make sense of it all is Logan Freeman. Logan is a longtime friend of the show. You can check out some of his previous episodes in the show notes. He is the co-founder and chief development officer of FTW Investments, where their strategy involves acquiring, operating, and the eventual disposition of large-scale commercial real estate assets. His portfolio consists of 1,500 multifamily units across four states as a general partner, plus 600,000 square feet in the office, industrial, and retail sectors.

He's also a commercial broker based in Kansas City, Missouri. Logan, thanks for joining us today. How are you doing?

Logan Freeman (00:38.697)
I'm doing fantastic. Paul, thanks for having me on again.

Paul (00:42.11)
Yeah, excellent. It's always good to see you and I'm excited about the topic that we're here to discuss today. As I just mentioned, you know, Goldman Sachs is ready to throw some money back at commercial real estate. It looks like Blackstone is ready to do the same. And, you know, in my research and with the different articles that I read, it seems like one of the key factors for each of those moves is the anticipation of interest rates coming down sometime this year.

And you mentioned something really interesting before we started recording. And it was really the fact that There's a little bit of a myth or a misnomer among some investors that property prices are tied to interest rates. And according to you, that's not necessarily the case. I'd love to start there and talk a little bit about that.

Logan Freeman (02:35.245)
So real estate prices are not always directly tied to interest rates. And I've caught myself wondering why cap rates remain similar across vastly different interest rate environments. And for, for instance, think about January 2007, where we saw cap rates at 5.7% and the 10 year treasury was 4.7%. But in July of 2012, cap rates were only 50 basis points higher, despite a 300 basis point lower treasury yield. And so I think the answer lies deeper.

And that's in the flow of mortgage funds relative to GDP, which can shed light on cap rate behaviors more accurately than interest rates alone. And I think that plays well into the conversation we're having around all of this capital that people have been talking about that's on the sidelines and looking to be allocated to commercial real estate. So If an investor is really interested in understanding where prices could be, it's definitely a better metric in my mind to look at where capital flows are going, because that's going to really drive certain price discovery in those markets.

And typically, I call this sort of like the Amazon effect. It's like where Amazon or Google or Tesla, whenever they move their headquarters somewhere, they're moving their corporate headquarters. They've done all this research, all this analysis around, we want to be in this location. Well, after they announce, property prices and people around that development usually spurs. We see it here in Kansas City happening around the Panasonic battery plant out in DeSoto, Kansas. You know, property prices have gone through the roof because of Panasonic building a $7 billion plant there. And so I think that's something to keep in mind here as we're trying to understand where prices might be headed and or have we bottomed out in regards to prices. And I'm excited to talk more about that.

Paul (04:24.022)
Yeah, thanks for that. And obviously, you know, Goldman and Blackstone are saying that they believe because of a variety of factors, that prices have bottomed out and that we're ready to see some type of a rebound resurgence, however you want to label it. What this means is that they're going to be injecting a lot of capital into the CRV space here in 2024, which is a win for I think everybody. So what I'd love to know from you is what have you been reading? I mean, obviously, what I'm highlighting here is what I've seen from Goldman, what I've seen from Blackstone.

What have you been reading and what have you been seeing? And do you agree that we've reached that bottom?

Logan Freeman (04:58.293)
Yeah, you know, I think we have reached the bottom in specific asset classes. But what I'm reading and what I track pretty closely is the Green Street Property Price Index, and that's dropped 21% since the peak in March of 2021. It's now just slightly above the lowest point in July of 2021. And so I mean, we've seen a subtle increase this year, believe it or not, in the price, the property price index last month it stayed really steady but in January it actually ticked up from December which sort of makes a little bit of sense. 

And so I love to understand what that is where that indices is because that gives a pretty good holistic view of where prices have been historically. And so that's where we start and then you know we always talk about and every investor should be focused on you know the idea that real estate is hyper local and you have to understand a pinpoint in time, the index is at 121.8 right now.

During the free money time, I will call it, it peaked at 155. During the lowest of lows, like I mentioned in July of 2021, it was 120.1. And so I think that most asset allocators and investors are looking at a basis standpoint right now and seeing that if you have capital and courage and you have a long-term perspective, this might be a really good time to actually start making some investments into real estate.

Paul (06:26.726)
And obviously we're not giving investment advice here. We're just kind of calling things out the way that we see them. But I'm interested in your perspective as an investor. What are the things that you consider when you are trying to determine whether or not we bottomed out and when the right time is to deploy your capital?

Logan Freeman (06:45.677)
Yeah, I have kind of four different criteria that I'm always looking at, which is, what is our investment goal? What are we aiming to achieve with this investment? What's the timeline? How long are you willing to wait for a return on your investment? What's the exit strategy? Do you have a clear plan for when you're going to exit and how you're going to exit? And then the involvement level, right? I mean, right now, to be involved in commercial real estate, it really has to be a really really enticing opportunity because of all of the aforementioned risks that we have been talking about and the whole industry has been talking about. 

It's still really difficult to make a lot of deals pencils in the prior structure, capital structures that investors have been operating in with those same return on investment expectations. And so I think that there's going to be a couple of things that happen. My experience and what I'm seeing right now is sellers are in a sense that, hey, those prices that we were seeing two years ago, those may be gone. And so right now, I think that, you know, still might be a good opportunity for us to sell.

And so we're starting to get some, some people, at least on the brokerage side, to really come to the reality that those prices are gone. And they think that they might continue to go down, right? And so that might be a pitch to, you know, property owners that are looking to unload their their projects. However, I think there's a bigger kind of tidal wave and that is the looming debt that we have all talked about. It's not just the looming debt that shows up on the headlines. I mean, we all know that commercial loans typically, at least on the deals that we're working on, yeah, they might have a 20 or 25 year amortization period, but they're really fixed for five years.

And then you got to reset that expectation. And at that reset, if that's coming up now, later this year, that's getting a lot of property owners thinking about, okay, what am I going to do with this property? Knowing that it might reappraise in today's environment, not at the level that I need it to, and the financing that I have currently versus the financing I might be able to go get could be 300, 400 basis points higher. Do I want to still hold onto this property? And so all of those things, I think, are creating an opportunity for investors that are very active in their marketplaces to be having those conversations with property owners.

Logan Freeman (09:09.589)
It's very difficult to take a macro approach and apply that an investment thesis on the micro level because of the different situations that these property owners may or may not be in. But I'm starting to see those needles in the haystack become more numerous. And it does seem to me that at least in our market on the brokerage side, deals are getting penciled out. They are transacting. And those expectations for returns have been changing for investors.

For us personally, you know, I am still very focused on the commercial side and mostly on the flex industrial and retail. And in Kansas City, unfortunately for me, that space is less than 3% vacant. And so it's very difficult with a property owner right now for them to sell at an 8% or a 9% cap rate. But there are other strategies that can be implemented and or, you know, larger funds and institutions like we're talking about here with Goldman and Blackstone.

They don't have the luxury of sitting on their hands anymore. They have raised $300, $400, $500 billion that need to be going and allocated. They are very much more looking at it as a price per pound and focused on basis right now. That's driving a lot of activity. Once that happens, I do believe that smaller investors like myself and or mom and pop investors will start to have a little bit more price discovery and be feeling a little more confident out there to go make their investments.

Paul (11:14.698)
John Gray when John Gray from Blackstone. John Gray mentioned that with interest rates coming down later this year, I think a lot of people are expecting rates to come down. June is what a lot of people are saying because typically September is a great time. But with an election this year, it looks like that's going to get pushed up. And it's really anybody's guess. But June seems to be what a lot of people are keying in on. 

And a lot of investors are waiting to get back into the game until those rates come down, debt becomes cheaper and therefore they have to deploy less capital in order to acquire properties. But what also happens then is competition goes up, right? Because everybody's gonna take that capital that they've been sitting on and they're gonna throw it all out into the market. So what John Gray suggests is that the opportunity is really before the interest rates come down. So again, in terms of interest rates specifically, how does that factor into your philosophy on when you wanna deploy your capital?

Or is it just something that you kind of keep a side eye on, but it's really not one of your key factors?

Logan Freeman (12:15.009)
Yeah, I mean, obviously we're tracking interest rates. Now, prognosticating on when they might be lowered is a failing. I've at least found it to be a failing projection exercise for us, for sure. I think, and this is my opinion, I do think that can, it could continue to get kicked down the road. And so for real estate investors making decisions based on does this real estate make sense at this basis is kind of the camp that I am in.

For a couple different reasons, there's multiple capital structures that we can go employ when looking at an investment and I think that is similar to what maybe John Gray is thinking about right now, especially with that amount of capital. They can go close cash and have a unlevered yield of certain amount. It's probably better than what they're getting at sitting in a a money market account or wherever that those funds might be sitting.

So for us, you know, I'm looking at location always I'm looking at basis and I'm looking at the opportunity to refinance at a later point So we have actually purchased properties with very low leverage and or all cash to make it make sense Because we felt like it was a good opportunity at the basis and that is one thing that you mentioned Paul was when the when the sentiment turns positive and interest rates are lowered that competition it increases drastically and that's what we're trying to avoid is just to get out of bidding wars on a real estate Because it feels like you know when that was happening a few years back.

It was even more difficult to find opportunities So while we may acquire less in this period of time I do think that there are opportunities if you're willing to roll up the sleeves and really focus on on a long-term perspective and you can tie that along with the capital that you're bringing into a project. And so that's kind of our stance on this right now is I think that if the demand drivers still make sense, if the basis is at a good point where you feel comfortable about that. I mean, I'm underwriting retail deals at 75 to $85 a square foot in really, really great sub markets of Kansas City. And I'm seeing stabilized deals for the last 12 months sell for 140, $150.

Logan Freeman (14:32.857)
per square foot, that's attractive to me if I'm able to actually go acquire that real estate. So I think that's an important thing to keep in mind. Unfortunately, most of these deals in a lot of times, they get structured in ways that are levered and they have to be levered to a certain point for them to make sense. That's when I think you might really need to think about, does this still make sense for me because we've witnessed and we are going to continue to witness the folks that have been damaged and or the deals that have been damaged by taking floating rate debt.

And I'm not saying that you shouldn't do that, but I am saying that the basis of these properties needs to make sense. And it seems like right now where we're at, you know, July of 2021 levels could be a really good time to start seriously thinking about getting in at a good basis on some of these properties.

Paul (15:24.634)
Logan, you mentioned the sort of four pillars that you have in terms of how you decide whether or not it's time for you to deploy your capital. I'm interested in how you formed those. Were there mistakes that you made or mistiming the market events that you had previously that sort of helped you define what those four pillars really are?

Logan Freeman (15:44.889)
Yeah, I've been investing for the last seven years and into commercial real estate. And those really have never changed. I think that for me and for our firm, it really is about thinking about these projects in a longer term framework. Because I have been a part of projects that have been what I'll call mistakes. And it wasn't necessarily a timing mistake whatsoever. But when you get started as an investor, you're typically getting started on smaller and or maybe less desirable properties in areas that are a little rougher sometimes.

And what I would say, you know, the evolution of at least myself in the operations side is, you know, I'm not really willing to pay for the headache anymore. And I know what the headache is in regards to either a multifamily or commercial property. And so while they might look great on a pro forma, the execution of the operations, there's a specific types of deals that I probably would stay more away from.

And so right now, the investment goal, that's the number one thing, is what are we trying to accomplish with this? And what needs to happen to make that goal to take it to fruition, I would say is a little more risk averse than it was previously. And so I think that's a big part of maybe what our philosophy is currently, is how do we mitigate risk? How are we thinking about risk? Look, everybody's gotten a little bit older. We all have more children now.

We have a little bit less time to maybe go swing hammers and roll up the sleeves at the properties. And so making the decision to purchase better located and or newer properties that may be a little less on the capital expenditure side is kind of what we're focused on. I think that's a pretty natural evolution for just about every real estate investor out there.

Paul (17:35.786)
Yeah, definitely. And you kind of alluded to a little bit there, but I'm interested in what the biggest challenge is for you right now in your business. Like what's the thing that, what's the thing that keeps you up at night that you're not sure where this is going to pan out or the thing that you're wrestling with the most?

Logan Freeman (17:51.393)
Yeah, I mean, I think a lot of people are in this same scenario. But as a real estate investor and a real estate, the way that we are structured is we're an acquisition business. And the last two years have been really difficult for acquisitions. And so if you're not doing acquisitions, then how do you continue to keep the lights on, right? And so that's a big piece of any real estate investor's, I guess, portfolio and or thesis is, you know, we have to have ancillary businesses and or other revenue streams to make sure that, you know, you can keep the people that you have employed and you can keep the lights on, so to speak.

And so, you know, the way that a lot of our projects are structured is, you know, in the first and early years, you know, the limited partners in these projects are highly incentivized and the cash flows, rightfully so, do not go to general partners outside of the capital that they have invested into the project. And so, you know, if you're doing value add projects, which we did a decent amount of, and you're not quite past that point of the preferred return and kicking into the waterfall promote structure, there's not a lot of cashflow a lot of times for those projects. And these can be structured in so many different ways.

But at the end of the day, acquisitions have been tough for the last two years. That's the thing that kind of keeps me up at night is thinking through, okay, when is the next opportunity going to be able to come for us to to go acquire something. And that's why I guess this topic is of interest to me so much trying to maybe, you know, look through the windshield a little bit more than the rear view mirror. I hope that I'm not being, you know, too glossy eyed and want to, you know, have a self-fulfilling prophecy in regards to making transactions happen.

But, you know, on the brokerage side alone, you know, our pipeline of active deals, either being under contract listed or out for proposal has increased 140 percent over the last two weeks And so that seems like a seeming, you know, that seems like a pretty good metric in regards to okay You know sellers are willing to come down on their price.

It'll be a little bit more. I guess Reasonable with what they're asking for now. The big question is are those deals going to trade? You know, are they going to actually get under contract and close and you know through our dispositions of our own portfolio and through the brokerage we have nine deals that are under contract looking to go to closing tables. So I guess that's kind of creating a lot of, I guess, positivity in my mind that might free up some more investor sentiment and or if that continues that could really shake out this price discovery position that we've been in and try to get some transactions going. Truly, I do believe that the third and fourth quarters are going to be better, but you have mentioned previously in this show that you know, there's a lot of other uncertainty out there in regards to an election year.

And so I did do a little bit of research in regards to understanding how election years really impact commercial real estate. And, you know, frankly, there's not really a good tie. There's not a really good correlation. However, this might be an election that's different than most that we've already have. If you kind of track Ray Dalio and all of the different pieces of the puzzle that he is tracking, it's not just an election year.

I mean, this is, we're talking about geopolitical risk, we're talking a lot about a lot of social unrest and I do wonder how that might impact getting transactions done or is everybody just so pent up and ready to do deals that exuberance is ready to be unleashed. I think that's still to be seen and to be told but at least the markers that I'm tracking and seeing in real time are showing that deals are starting to get under contract and moving to the closing table.

Paul (21:31.882)
So for you, Logan, does it really come down to transactions? Like all of this is hypothetical. It's all projections. Once transactions start to tick up and properties are trading hands and there's some momentum on that side, is that really the key indicator for you to be like, okay, we've hit the bottom, we're on the way back up now?

Logan Freeman (21:50.469)
Well, I think so. And I think back to my experience during COVID, when there was a period of time where you couldn't travel much, it was difficult to get to new locations. And so, but that was paired with a period of time where the debt was extremely cheap to get deals done. And that's really when we made a lot of acquisitions with our firm was, there was still a lot of uncertainty in the marketplace there hadn't been a lot of deals that had transacted.

It was almost like that three month period before people started to trade real estate. And I think that's kind of where we're at right now. It's like that three to four month period where Blackstone and Goldman might be going out and making acquisitions. I'm starting to see it kind of pick back up in regards to the brokerage and the dispositions that we're doing. And right now feels like kind of that period, that little grace period before maybe transactions really start to to really be consummated and we start to see sentiment changing.

And so that's the dislocation that I'm looking for. And I just kind of look back to the period during COVID-19 where that's where we made the most acquisitions. And so I think that's starting to come to fruition, which is exciting. But also that's the land of what the late great Sam Zell would always say, when everybody's looking right, you have to go left. And that's easier said than done.

And so I think that's what what I'm trying to see here with Blackstone and Fundrise and Brookfield and all of these different firms is they're saying, we're gonna go start making moves and starting to acquire real estate. But, you know, mom and pop and smaller owners and or smaller investors, they're typically not, they don't have the same data points, right? And so, you know, they feel what they experience. And, you know, a lot of times, you know, they might not feel like they are are feeling or seeing the same things that these larger firms are.

So I think that might be where the disconnect is. And so I'm looking for those disconnections because I feel like that's where the opportunity lies. And it feels like right now, some people are sitting on their hands, the big guys are saying they're gonna start making moves. Have they already or not? I think that they have. And I'm starting to see transactions pick back up in our marketplace, which helps me because I'm looking through the windshield on the brokerage side and talking to a lot of other folks in the trade here locally that it feels like the storm is sort of brewing and the tidal wave is starting to get a little bit bigger. It's just how long and who's going to jump on that to ride it. And I think the first movers here, the experienced folks, are already doing transactions, Paul.

Paul (24:31.574)
Yeah, it seems Logan like Q2, particularly the end of Q2 when we get into June, that time when so many people are forecasting that rate change to come in, it seems like Q2 is gonna be really pivotal to see how Q3 and Q4 shake out and determine what that momentum is really gonna look like. I'm interested, before I get to my last question, Logan, is there anything, any of these nuances here that we didn't discuss that you'd like to touch on before we wrap up?

Logan Freeman (24:58.561)
Yeah, you know these deals can take four, five, six months, right? So if I'm right about this little grace period that we might be in Q2 before Transactions really start to be I guess reported on in Q3 and Q4 It may make sense, you know to really start to try to get deals under contract right now Knowing that they may not close until Q3 or Q4, right? I mean these are large transactions and they take a lot of time.

And so I do think that is something to keep in mind as an investor is forecasting that and maybe getting ahead of some of that. And I think that's the signals that we're seeing from these larger firms that they're trying to accomplish that right now. And knowing that the timetable of these deals are not like a single family home where you're closing in 30, 45 days. While that does happen, that is outside the norm in my experience.

It might be a really good time to start making those calls, talking to people, seeing what's going on and seeing where prices are at currently, and try not to miss the boat, so to speak, in regards to waiting until the Fed comes out and says that, because once they do, if they do, that is when everybody's going to jump in with two feet. And so just being right in front of that, being cautious, but being right in front of that and being open to it, I think is a really good nuance and to be a thesis to be focused on for sure.

Paul (26:27.346)
So Logan, for those investors who have been sitting on their capital and have been waiting for the right time to deploy it, what is your best-ever advice, whether they decide to jump in now or they decide to wait until those interest rates come down, for those who are going to dust off that old capital and get it back out there, what's your best-ever advice to them?

Logan Freeman (26:47.321)
Yeah, I mean, right now, I think talking with, you know, if you haven't called those brokers that you've spoken to in a while, if you haven't talked to your investors in a while, just having those conversations is so important because I'll tell you, you're having 400 plus investors now. I have people on both sides of the spectrum. You know, it just kind of really depends on what their current perspective is and what their prognostication is of the future. And you're going to find it to be vastly different.

What I've experienced in the last two to three weeks is that investors that have been in the game have felt this type of market dislocation in the past. I feel more confidence right now. And so they're starting to dust it off. They're starting to make calls. They're starting to get out there talking to their lenders. I had two or three mortgage brokers that I talked to the last three weeks that I was working on a project on, say this is the most activity we have had since during the peak of COVID.

Now, they don't know if those deals are going to consummate or pencil or not, but their phones are ringing off the hooks. And I've seen similar sentiment on LinkedIn. So I think right now is the time to get ready, right? Get ready for that next opportunity, that buying opportunity. And the only way that I know how to do that as an investor is to not wait and read market reports and, you know, backward looking reports, you know, from the previous quarter. It's to get out there, start having conversations and start to really see where pricing is and seeing what debt comes in at and potentially even looking at changing your own capital structure and trying to align your investor capital, your capital, to a different type of return expectation. Because I think that's the market that we're kind of moving into. We've had a great run since 2010.

You know, one thing that I track very closely is the 18.6 year real estate cycle. Maybe we'll have to do a show just on that, or we can kind of break that down. But we have, you know, I think we have another two years of prices continuing to increase before something larger happens. We've got 100% bonus depreciation back on the docket, right? That could really influx some investor decisions, and make the landscape ripe for investment.

And so there's a couple different things that could be happening paired alongside an election year and geopolitical risk that's going to keep people on the sidelines regardless because of fear that if you can look past that, stay objective, and really stick to your numbers, stick to your basis. I think it could be a good opportunity for investors the next three to four months.

Paul (29:28.37)
Yeah, and after a couple of forgettable years, hopefully 2024 is a memorable one for all the right reasons.

Logan Freeman (29:34.134)
Exactly. Yes.

Paul (29:36.546)
All right, well, thank you so much, Logan, for joining us today for your knowledge and your perspective. As always, it's great to have you, great to learn from you and speak with you. Hopefully we can have you on again soon to talk about another great topic. In the meantime, best of luck to you as you go out there and start to deploy your capital in this crazy world, win of a market. And hopefully we'll talk again soon.

Logan Freeman (29:56.209)
Thanks for having me, Paul.

Paul (29:58.051)
Thanks, Logan.

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