May 17, 2022
Joe Fairless

JF2814: Develop the Staying Power You Need to Survive the Next Recession ft. Vicky Schiff


Vicky Schiff started her first company when she was 30 in the self-storage industry. Since then, she has founded or co-founded five firms in real estate, real estate private equity, and capital formation, as well as a lending platform. In this episode, Vicky discusses the importance of staying power, the psychology behind economic cycles, and how she tempers the existing fear about what’s next for commercial real estate. 

 

Staying Power

When Vicky was asked what she thinks will happen when the younger generation of investors experiences its first severe market pullback, she reflected on her own experiences with recessions. People with staying power, she says, have capital available and the right amount of leverage to weather a storm that can last anywhere from six months to three years. She encourages listeners to ask themselves, “What does staying power mean for you and your own portfolio, and how protected are you against losing a property because you have a bad loan or you’re over-leveraging?” 

 

Economic Cycles and the Psychology Behind Them

“I think that cycles are very psychological,” Vicky says. “They are even caused by psychology sometimes.” During the downturn of an economic cycle, it’s important to stick to the fundamentals, understand the demand, and know that downturns don’t last forever. Vicky also notes that she was trained by sophisticated mentors who had been through many of these cycles, which helped her prepare to face them herself. To learn more about the nature and history of economic cycles, she recommends reading Principles for Dealing with the Changing World Order: Why Nations Succeed and Fail by Ray Dalio

 

Tempering Fear of What’s to Come

Vicky encourages people to do their homework and understand the assumptions that sponsors are making so they can leave themselves some cushion. Question exit cap rates and rents and understand what is being built in your market. “ The fundamentals never change,” Vicky says. “It’s just how much you are willing to pay for something and whether now is a good time to step back and wait a little bit.” The key to preparing for an economic downturn, she says, is to remain conservative — now is not the time to get overzealous.

 

Vicky Schiff | Real Estate Background

  • Strategic advisor at Saul Urban LLC, which evaluates and develops multifamily sites and projects for adaptive and strategic reuse. She has founded/co-founded five firms in the real estate and finance sectors.
  • Portfolio: LP of over $10B transactions
  • Based in: Los Angeles, CA
  • Say hi to her at:
  • Best Ever Book: The Black Obelisk by Erich Maria Remarque

Greatest lesson:

  1. Show up: Be present at critical times.
  2. Just do it: Be the person who gets stuff done.
  3. Unique strength: Discover it, leverage it, and be of service to others.
  4. Resilience: Again (and again), get up after falling.
  5. Be you: Be yourself and do the right thing.

 

 

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TRANSCRIPT

Ash Patel: Hello, Best Ever listeners. Welcome to the Best Real Estate Investing Advice Ever Show. I'm Ash Patel and I'm with today's guest, Vicky Schiff. Vicky is joining us from Los Angeles, California. She is the strategic advisor at Saul Urban LLC which evaluates and develops multifamily sites and projects for adaptive and strategic reuse. Vicky also co-founded and founded a number of companies in finance and real estate over the years. Her portfolio consists of her being an LP on over $10 billion in transactions. Vicky, thank you so much for joining us today. How are you?

Vicky Schiff: I'm great, it's so fun to be here. Thank you, Ash.

Ash Patel: It's our pleasure to have you. Vicky, before we get started, can you give the Best Ever listeners a little bit more about your background and what you're focused on now?

Vicky Schiff: Absolutely. I started my first company when I was 30, in the self-storage industry. I was working for a private equity-backed firm in Los Angeles, buying assets in a pretty deep recessionary period, right after the S&L bust, and learned how to buy office buildings in downtown San Francisco at $80 a foot, but those days are gone. Since then, I have founded or co-founded five firms total in real estate, real estate private equity, and capital formation. My last firm was a lending platform where we did $3 billion of originations and managed discretionary capital for over 2,000 investors.

Ash Patel: Okay, there's a lot to talk about here. You started your career in a recessionary period?

Vicky Schiff: I did. Yes.

Ash Patel: And you saw the value in self-storage in the late '90s. I got to ask you, what do you think of the self-storage boom today?

Vicky Schiff: Well, the business has doubled, there are some incredible operators out there. I'm involved with Spartan, you probably know them well.

Ash Patel: We've had them as guests on here as well.

Vicky Schiff: Okay, they're great. They run a pretty tight ship, given that the CEO is a former military trainer. Look, I think that self-storage overall is a micro-market business, and you really need to understand supply and demand. When you say “self-storage” to most people, automatically - great investment, and tons of cash flow, but you really need expertise to be able to execute on a self-storage, acquisition and/or development and business plan. I think people that have great management skills and really understand the micro-markets that they're in will win. I do see a lot of people entering the market that have no idea. Self-storage is not real estate, it's an operating business. It's a 7-Eleven where instead of selling Slurpee's, they sell little pieces of space.

Ash Patel: Yeah, great point. Laundromats and car washes - same thing. It's not real estate. But I want to dive in - back in the late '90s, self-storage, there was nothing appealing about it. There were usually the rusted-out metal-sided places that were eyesores. How did you have the vision to turn a piece of land that nobody really wanted into self-storage?

Vicky Schiff: I would say there was rising technology in the market, even in the '90s. I started in 1996. There were still multi-level climate control, beautiful properties that were newer. Obviously, Public Storage is a very, very early leader in the industry. They were already building four, five, and six-story projects, as well as players like Manhattan Mini Storage that were converting buildings and building in the middle of Manhattan multi-story properties.

So I think my vision was really of not so much the physical plant being better, because that was out there. Although, there was a lot of property, like you say, old metal buildings that look like they were falling down. But rather how the industry was really growing and the use of the product, the adaptation of the product by a lot of consumers. People just unfortunately accumulating stuff being one bucket, and the other is just the migration of people across the United States moving to different markets, cities expanding and growing, and that lending itself to an expansion of the market. So just what was behind the market needing more facilities overall. So I picked up on those trends, and it was -- I wouldn't say in the infancy of the business, but in the early days.

Ash Patel: Do you think it was a benefit that you hit the market during a recessionary period?

Vicky Schiff: Well, I was borrowing at 10%. When people talk about interest rates being high now, they have no idea. So yeah, I think it was a benefit. I think one nice thing about storage is it does well in economic cycles, regardless of what's going on. You've probably seen that yourself. Probably, it was a good time to buy, and not a great time to borrow. So they sort of balance out. But we did well. We were building up between a 10 and a 12 cap, building too, and buying at an 8 to 10 cap.

Ash Patel: Anybody under the age of 33 has only experienced boom times. They've only seen the economy on the up and up; every asset that they've touched or invested in has only gone up. Stocks, real estate, whatever the asset might be. What do you think is going to happen once they see a severe pullback in the market, or an all-out recession, a deep recession?

Vicky Schiff: Look, lessons are learned. I actually did a presentation at the Best Ever Conference, which was so much fun to participate in. I was one of the keynote speakers, and I actually mapped my career against recessions and mapped every company that I started on a graph against what was going on in the market at that time. People that are over-leveraged will be hurt; people that have what I like to call and a lot of people in the industry like to call “staying power”, where you have the right amount of leverage, you're able to weather a storm, and the storms last anywhere from six months to three years. Having capital available is the name of the game and is key. So to the extent you can weather -- move out if you have a retail center, move out if you have an apartment complex, a certain period of time where people maybe are not paying their rent on time - and that happened - or other complications that occur during a crisis. Sometimes you have a loan coming due and you can't refinance. Start talking to lenders early; make sure that if you have a portfolio of properties, that your loans are spaced out and everything's not coming due at the same time.

So to the extent that our listeners will have to ask themselves, what does “staying power” mean for you and your own portfolio, and how protected are you against losing a property because you have a bad loan, or you're over-leveraging. The leverage side of our business is very key to being successful over the long run.

Ash Patel: It makes a lot of sense. How are you positioning yourself for what's inevitably to come? How soon do you think it'll come?

Vicky Schiff: I'm a pretty active investor right now, with sponsors that are very experienced, and I've got dozens of investments in other people's deals and funds. To me, it's the experience of the manager, the depth of their team, and their basis. So what are they able to buy things for? Now, I've had friends come to me that are not real estate people, that are looking at investing in sponsors and deals, and I'm looking at the underwriting and I've seen three cap exits at 10 years from now, and the investor is thinking, “Oh great, I'm going to get a 15% return,” but the assumptions are nonsensical.

So I would really encourage people to do their homework and understand the assumptions that sponsors are making, or that they're making themselves, and leave a little bit of cushion. Really question your exit cap rate, question your rents, and understand what's being built in your market. I think the fundamentals never change. It's just how much are you willing to pay for something and whether now is a good time to step back and wait a little bit.

Ash Patel: You don't seem overly panicked or overly excited. This is just another cycle, and this is how we're going to play it.

Vicky Schiff: Right. You need the spread between your debt and your cap rate. If you have floating debt, and you don't want to be too close to your cap rate where you're buying your property. Does it make sense?

Ash Patel: 100%. Yup.

Vicky Schiff: I don't mean to be overly technical. If I am, just let me know. But I think you just have to be conservative and not overzealous. A lot of sponsors that are out there are not conservative. They say they are, but they're not. You really have to spend time getting on the phone and saying, “Let's go through your underwriting," and ask those relevant questions. How are you getting this information? Are you sure you're over market? How did you shock your competition? What did you do? You really push the sponsors or yourself internally to find the answers to those questions that could hurt you if you're wrong.

Ash Patel: Yeah, so much good advice there. I think there's just such an abundance of dollars coming into these investments that a lot of the questions often are not being asked by a typical investor. Your cap rate example was so good, because if they're buying at a four cap, which is low already, and interest rates are going up, but their exit proforma cap rate is at 3% - it doesn't make sense, it doesn't add up. So yeah, nvestors really need to do a lot more due diligence, if they're not already. What is strategic and adaptive reuse?

Vicky Schiff: For example, you mentioned I was an advisor to Saul Urban. Amazing company, by the way, run by Frank Saul, who is an extraordinarily experienced real estate professional, ran a publicly-traded REIT. Their strategy is looking at obsolescence in the real estate market and converting some of those good bones of buildings into multifamily; and it hits on a couple of things. One, the cost per unit is lower. So you’re taking a building that was something else and turning it into another product, a real estate project that's in demand right now. So an older hotel into multifamily, an older office building into a hotel or condos; you see these all over the country.

There’s a story about returns there, how you're able to utilize some of the good bones of a project and not have to build from the ground up, but you're also getting in at a lower price per unit. And there's an ESG story, and I don't know if you ever talked about ESG on your program, but environmental, social, and governance where you're reusing, you're recycling a product that's obsolete, and it's great for the environment as well. That’s something that's very important to a lot of big institutional investors these days. They want to know what you're doing, not only to make money, but how you're affecting the community and environment around you.

Break: [00:13:01.08] – [00:14:46.27]

Ash Patel: Vicky, the question that gets asked a lot - all of this high-rise office vacancy, can that be converted to multifamily?

Vicky Schiff: It depends on the building. You know why hotels are great, it's because the plumbing is there. That's expensive to duplicate that. In an office building you have one floor, you have a bathroom, and a little bit of plumbing. So I think you really need to look at the bones of the building and then what your basis is. If you're able to buy an office building for $20 a foot, put that money into the conversion, and it still makes sense with the rents... It's just all underwriting. It's what are your construction costs based on how long is it going to take, and what's the process with the city to change the use. You still have to go in for a change of use. So there’s an entitlement process there. And then what kind of rents are you going to get to justify the amount of money that you're putting in to really rebuild the inside of a building.

I've seen some great conversions of office buildings to hotels. The Langham in Chicago is a great example; a beautiful project. There are a few projects in Dallas that have done that really well.

Ash Patel: What are some of the fun reuse projects that you've worked on or advised on?

Vicky Schiff: I've worked on a project early in my career to convert a parking garage to a storage property. It was in Oakland; it was actually an old Sears building that was kind of like that 1950s, 1960s Sears building, and it had a large garage in the back, to actually convert the Sears building into storage and convert the garage to car storage for some local auto dealers. What ended up happening is I worked on it for three years and couldn't get the final approvals from the city. But somebody else came in and took that Sears building, which was a historic building, and converted it to condos, and it was beautiful.

So I wouldn't say I worked on it directly, but because of my failure to get this approved by the city, somebody did a beautiful job in converting this gorgeous historic building into condos.

Ash Patel: One of my first apartments was a converted parking garage to apartments.

Vicky Schiff: Oh, really?

Ash Patel: Yeah, it was a great building. In terms of cycles, when do people go all in? We had the luxury of seeing several of these cycles in real life, and there's that panic stage when things are starting to go down. To me, it's almost like people justifying, “Oh, it's a minor correction. We needed that. The economy needed that.” Then it goes deep down, and then that real deep panic sets in. How do you overcome that and when do you turn things around and start deploying capital?

Vicky Schiff: I actually talked about this book during my keynote at your conference. I think that cycles are very psychological; they even are caused by psychology sometimes. One of the most important things that we just talked about together was sticking to the fundamentals, understanding the demand, and knowing that downturns don't last forever, just like market exuberance doesn't last forever. It's really, really never changing the strategy. I've seen also larger private equity firms build up a big war chests to get ready for a recession that actually never came, but they still keep investing, utilizing those fundamentals.

So I think that the “Don't panic, put your mask on first” idea is really useful, and understand that this too shall pass. But this book that I just showed, the Ray Dalio, the Changing World Order - you might even be able to find it online. He does a psychology map of cycles, and exactly what you said just now, that "Everything's okay. I don't really understand what's happening. Maybe it's not happening. Oh, geez, it's happening. Gee, it's too late. I just got crushed”, and putting those safeguards in with the staying power, using logical leverage, not going for it, not over-leveraging, not trying to get the highest rents, but just being conservative is a great tool. The devil's in the details on the underwriting.

Ash Patel: Vicky, that's easy for you and me to say, because again, we've lived through these cycles. But what about these millennials and Gen Zs that are going to panic? We've built up 10, 12 years of good times, so we've created a huge population of people that have never seen that panic or experienced that, “Oh my God. The world is caving in.” Is the next downturn going to be so much more severe? Because like you said, a lot of it can be caused by psychology.

Vicky Schiff: Yeah, I think that if we look to COVID, and -- there was a downturn in certain businesses. Retail suffered dramatically, hotels suffered dramatically. Sometimes people just have to learn their lesson; sometimes people just have to get punched in the face to learn a little bit about boxing and some of the skills there. I find that I was trained by other people that were very sophisticated, that had been through cycles. I had the advantage of mentorship just like you're trying to do with your show, which is really giving people information and sharing experiences. Again, some people are just going to have to learn.

If we have a second, I have a story to tell. I created a business investing in other funds. We have pension fund capital, big pension funds, and we are trying to find the best emerging managers in the country. So we met with lots and lots and lots of fund managers. One of the people that came in was a large home builder. He was starting his first fund, a very experienced guy, and this was right before the global financial crisis. He said, “I sold my home building company.” “How did you know how to get out in time? That's amazing. It’s the best home building cycle ever.”

He says to us, he had these fairs where he'd open up a community, and they would have the lenders, they'd have different vendors there, and people buying homes would walk around... And he said, “I noticed a woman signing a lot of applications for loan documents in this fair. I walked up to her, and I asked her, ‘Hey, what do you do?’. She said, ‘I'm a cocktail waitress.’ She was buying five houses." He said, “That was the moment I knew I had to get out.” This on-the-ground talking with the cab drivers, on-the-ground being able to notice what's going on, and the exuberance of people buying at 100% loan to cost and having no skin in the game... He knew that there was going to be a major problem. So he sold his home building company and made a very big return on that, and then started to do something in the recession that was able to take advantage of what was going on in the market. I love that story. Many people would not take that -- I would say that was a drastic action to take based on a conversation with someone.

Ash Patel: Go with your gut feeling... And what attributed to a lot of your success is picking up on trends.

Vicky Schiff: Yes.

Ash Patel: Great lessons there. Vicky, you've built a number of companies and you've seen a lot of success. What are some of the hardest lessons you've learned?

Vicky Schiff: I think that you really have to just get up after failing again, and again and again, and just keep going. I've certainly had failures. I haven't had a lot of big financial failures, knock on wood. I’ve avoided those. But I think the good part about -- Spartan likes to call it “grit”, that part about just being persistent and getting up again and again, and then knowing the people that you're in business with is very important. I had to invest in other people when I was a fund of fund manager, so spending that time looking people in the eye, understanding their backgrounds, and how they think... Just spending a little bit more time and doing your due diligence is such an important lesson that I've learned over time.

I think that investors today see their friends doing something and see people piling into something and they have this fear of missing out, and they skip that step. They skip that due diligence step, or really understanding the person that you're dealing with, doing those reference checks, and trusting your gut. That's the biggest lesson, I think, is trusting your gut, because your gut will tell you something. And then also doing the head part and the heart part. The head part is doing the due diligence, asking those tough questions, and understanding what you're investing in. Don't trust other people to make those decisions for you, but also trust your gut, your heart. If it doesn't feel right, go with that. Make sure you follow that, you won't be wrong.

Ash Patel: Great advice. Vicky, I know you invest in a lot of other people's deals. If you had to invest in your own deals, what asset class would you be looking at right now?

Vicky Schiff: It's hard, because everyone loves industrial and multifamily. That's the top line of everybody. My friend, Spencer Levy at CBRE, made a pretty good case at the conference about there's certain retail that would be very interesting to invest in right now. So going the other way, I like the retail market, with certain experiential retail. Boutique hotels are super-interesting; we did really well during the recession in making loans to resort-type of properties. I think there are two sides of the market I love. Workforce housing, which is providing homes for people that are working class. I think that's a market that is insatiable right now. And some certain high-end retail and hotels, I think, is another end of the market. You get two ends of the spectrum, but those are the two things I like.

Ash Patel: You have one that can pay the bills and one that's going to be a lot of fun to work on.

Vicky Schiff: Absolutely. Hopefully, pay the bills, too.

Ash Patel: Yes. Vicky, what is your Best Real Estate Investing Advice Ever?

Vicky Schiff: Listen to your gut.

Ash Patel: Vicky, are you ready for the Best Ever lightning round?

Vicky Schiff: Go for it.

Ash Patel: Alright. Vicky, what is the Best Ever book you've recently read?

Vicky Schiff: Okay, I have my books here. The Black Obelisk, Erich Maria Remarque, about hyperinflation in Germany between World War I and World War II. Love this book. I've read it before and I'm reading it again.

Ash Patel: What's your big takeaway with our current climate now?

Vicky Schiff: Keep your eyes open, watch the Fed, and don't stress too much about interest rates. They were the same, they were at the end of 2019, and still historically low.

Ash Patel: Thank you for tempering all of the fear that's out there. Vicky, what is the Best Ever way you like to give back?

Vicky Schiff: I mentor young people in the industry, particularly women and minorities.

Ash Patel: How does somebody get your attention? There's got to be a line of people, once they see your resume, your background, hear about you, or Google you, they all want to be mentored by you. How do you pick and choose who you mentor?

Vicky Schiff: Desire, drive, willingness to do what it takes, and respect and kindness.

Ash Patel: Is there an initial test that you use, a litmus test, that separates people that move forward from the ones that don't?

Vicky Schiff: Ability to admit you're wrong, and learn and get better every day.

Ash Patel: Vicky, how can the Best Ever listeners reach out to you?

Vicky Schiff: Reach out to me on LinkedIn. Vicky Schiff on LinkedIn; happy to connect with your listeners and just super-excited to be here.

Ash Patel: Vicky, thank you so much for your time. You had an incredible keynote speech at the Best Ever conference. We got to learn from you here again today. You're over 30 years in this industry, and again, your temperament, your experience, your outlook on the future, and hard lessons that you've learned are immensely valuable to us. Thank you again for your time.

Vicky Schiff: Thank you so much for inviting me. Anytime, I'm happy to join.

Ash Patel: Best Ever listeners. thank you so much for joining us. If you enjoyed this podcast, please leave us a five-star review, and share this episode with someone you think would benefit from it. Also, follow, subscribe and have a Best Ever day.

 

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