December 23, 2023

JF3397: Unlocking Downtown Office Space Opportunities ft. Matt Drouin




In this episode, we sit down with Matt Drouin, the managing partner at Oak Grove Companies. With 17 years of experience and a portfolio spanning 176 units and over 500,000 square feet of commercial real estate space, Matt's journey from residential sales to multifamily investments and ultimately, to thriving in the evolving office space sector, offers valuable lessons for both seasoned and aspiring real estate investors.

Key Takeaways:

  • Redefining Office Space: Matt's success in downtown office spaces challenges conventional wisdom. He emphasizes that smaller, sub-3,000 square feet, well-located office units geared toward mom-and-pop businesses can be the secret to thriving in this sector. Understanding the specific needs of your market and potential conversion opportunities are crucial.
  • Adaptability is Key: The discussion underscores the importance of adaptability in real estate investing. Matt's strategy revolves around finding deals that offer a plan B if the initial thesis doesn't pan out. Whether repositioning as an office building or converting to residential use, having multiple exit strategies can mitigate risks and enhance returns.
  • Networking and Education: Matt's advice for investors centers on the significance of networking and continuous learning. He encourages real estate enthusiasts to surround themselves with experienced investors and become obsessed with their aspirations. Leveraging platforms like podcasts and actively participating in real estate investor associations can provide valuable insights and support.

Matt Drouin | Real Estate Background

  • Managing Partner At OakGrove Companies
  • Portfolio:
    • 70% multifamily, 30% retail, industrial and office
  • Based in: Rochester, NY
  • Say hi to him at: 
  • Best Ever Book: The Snowball Warren Buffett Effect by Alice Schroeder
  • Greatest Lesson: If you focus on long term stakeholder value, you'll generate higher returns for your investors.


Check out Matt’s previous episode: 2507 - Financial Freedom by Age 33



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Slocomb Reed (01:53.718)
Best ever listeners. Welcome to the best real estate investing advice ever show. I'm Slocomb Reed. Today we are joined by Matt Drouin. Matt is joining us from just outside of Rochester, New York. He's the managing partner at Oak Grove Companies. He has 17 years of experience in real estate investing. Uh, his current portfolio is 70% commercial multifamily and 30% non-residential commercial. If you combine the two, they would total to 176 units or just over 500,000 square feet, again, between the, uh, between the multifamily and the non-residential commercial.

Matt, can you tell us a little bit more about your background and what you're currently focused on?

Matt Drouin (02:39.677)
Yeah, a hundred percent. First of all, thanks for, for you and team having me on. Um, my background is, uh, I got into real estate by accident. Um, when I went to college, I was, uh, went to a state school. I studied business and, uh, because I thought that business meant making money. And, uh, I thought I was going to be a cigar chomping, like Gordon Gekko type on Wall Street. Um, I got my slice of humble pie when I graduated from SUNY Geneseo.

And I couldn't find a job. This was back in 2006. Um, the best job I could find was as a part-time bank teller at Chase Bank. And I hated that job. Um, I was complaining about it so much to my dad that he made me an offer, uh, that I couldn't refuse at that time. And he said, if you get your real estate license, um, I'll take you under my wing. I'll show you the ropes. I'm not going to give you any business, but, uh, you know, I'll allow you to learn the business and grow it if you like it.

So, I was in sales, residential real estate sales with a local brokerage company. And my story in real estate investing is when my dad ended up giving me the boot. He gave me a few months to move out. It wasn't his life dream to have a 20 something year old living at home, not paying any rent. So he said, you can get an apartment with your friends or you can buy a multifamily property, and you can live there and rent out the other units. So that's what I did.

I liked the idea of not paying rent because I wasn't doing so at that point in time. So I bought a four family, I rented out the three units. My really big aha moment was when I closed in the middle of the month and magically in the first of the month, I had 1800 bucks in rent checks sitting in my mailbox from those tenants. And I felt wrong, like I didn't work for it. And I knew how hard I had to work, and residential real estate sales selling low value investment properties for $40,000 a piece in order to make $1,800 in commission checks.

So that's really where I was hooked. My big why, or my big destination was I wanted to become financially independent by the time I was 40 years old. My why behind that was because I unfortunately lost both of my parents in my 20s due to health reasons. So here I was, had parents that were loving, did the best everything the right way. And they passed away. And it was a big wake up call for me was the universe basically slapping me in the face, saying that you're not on Earth forever. And tomorrow's not even promised.

So I didn't want to do what they did in terms of going the track of working for a company and retiring eventually, because they worked like animals and I didn't want to work like an animal. I was okay working hard, but I wanted to have some residual benefits for that. And that's how I found real estate as a result. So I just went gangbusters buying small multifamily, utilizing the BRRRR strategy before it was even a BRRRR, before it was even a thing, the buy, rehab, refinance, repeat.

I was able to scale the portfolio up to about 76 units. I was financially independent by the time I was 33 years old. And this big goal that I had thinking every day about over the course of 11 years was now a thing on my doorstep. And I ended up suffering from depression as a result of it because that one thing that I thought about for every single day, obsessing over it, I achieved. And I was like, what's next? I was married at the time.

My wife was a school teacher and this big dream that I had of going backpacking through Italy for two months wasn't going to be a thing because she was stuck in a high school math classroom. So I always knew I wanted to go big on doing bigger, larger commercial real estate deals, but I didn't feel like I had the universe's permission to do that. I thought that I had to go big to be big and or be big to go big.

And so I decided just to be like, Hey, I'm going to do this, I'm going to buy a larger commercial investment property. And that's my next big aha moment is I bought a million dollar commercial office building that one deal alone replaced my wife's income. And then I just started scaling from there because I couldn't, I couldn't go back to what I was doing before.

So I just started pushing the envelope from there and that's where we are today with our company and We basically we buy maybe one to two deals a year and mostly asset class agnostic Mostly in the Rochester, New York or Greater Rochester, New York area And we look for very specific things and we're very picky. So that's what we do today.

Slocomb Reed (07:09.592)
That's awesome. When did you first get into real estate?

Matt Drouin (07:13.101)

Slocomb Reed (07:14.726)
'06. Gotcha. Cool. Uh, man, after my own heart, you got started, uh, several years before I did, but very similar, uh, trajectory started with a house hack became a, uh, a residential agent. And, uh, here we are having a conversation in the commercial real estate investing podcast. Your second conversation on this podcast, I will add, I should have said this in your intro, uh, but Matt was on episode 2507 as well. If you want to look that up from a few years back.

So you answered a bunch of my questions right there at the end. I was going to ask where you're buying and you said primarily in the Rochester area, which makes sense, especially when you are asset class agnostic. Are you are you operating self managing this portfolio?

Matt Drouin (08:07.917)
So that's a great question. My next job after I started buying commercial real estate deals was to fire myself out of operations. So I found a gentleman by the name of David Martin, who is my partner in Oak Grove Companies. Our first deal together essentially was creating a management company that he would run to run all the assets that I had acquired up until that point. Because I knew that my time was getting sucked into low dollar per hour activities such as leasing, coordinating maintenance, that sort of thing. And I knew that the $1,000 an hour to $10,000 tasks were on the growth front in terms of developing relationships with our investment partners and finding deals for our company to take down.

So that's where I wanted to focus 100% of my time because that's where I enjoy it better than you know, maintenance and operations, that sort of thing. So, uh, we do self-manage per se, cause we have a management company for that. David runs that and I run the growth engine of the company.

Slocomb Reed (09:14.122)
Yeah, that makes sense. Growth engine of the company, Matt. We're recording in the fourth quarter of 2023. It's been a very interesting year this year for acquisitions. So I wanna ask how that's been going for you. You said you typically acquire a couple of properties a year now.

Generally speaking, we have a very sophisticated listener base, as you already know, Matt. So we all have a pretty good idea of what's going on in the economy at large, especially commercial multifamily market at large. So I want to ask, where is it that you're seeing opportunities and what kind of growth is it that you're focused on?

Matt Drouin (10:10.285)
So my background's in multifamily, love multifamily. It's easy to write business plans for, it's a lot easier to raise the capital for because you have a clear exit strategy. We got squeezed out of that market, you know, 2018, 2019, because prices were going crazy and they went crazier after that. So, I had a background as a director of operations for a national real estate development company after I left brokerage. So I was experienced on turnaround management for every single asset class you could think of for this company. So I saw that there was some market efficiencies in office, so to speak, after COVID hit, right? We were able to get great deals on office product and we bought a few deals in that market at a great basis.

The problem was that then the banking started changing, right? Banks started to pull back even on great deals, not offering 70 to 80% loan to value, but 50 to 45% loan to value in that market, even when you were getting a smoking hot deal on it. So that's happened within the last nine months, so to speak. So we've actually pulled back on that because we think that there's greater price discovery to happen in the marketplace with that amount of capital being, or liquidity fleeing out of that product segment.

So we're really looking at, we're out there making offers. Like I said, we're asset class agnostic. We can do multifamily, industrial, retail. We have all of those product types in our portfolio, but it's a weird place right now. Transaction volume is way down in Rochester. It's down probably about 75%. And we're still getting sent off market deals from our commercial broker partners, but there's a big disconnect in terms of the bid ask spread between what we can pay considering the environment that we're in from an interest rate perspective and the risk free rate of return. But the expectations from sellers really haven't come in line with that. So we're witnessing the same exact thing that a lot of other operators are across the country.

But I think it's very important to stay active and not stay on the sidelines because I think that when you have a contraction, it's important to expand into that contraction and stay active because things will start to, uh, we'll start to normalize and you want to be top of mind with not only your investment partners, but also brokers in the marketplace as well. So we're still out there looking at deals, making offers, but a lot less is sticking than usual.

Slocomb Reed (12:56.642)
Offers sticking a lot less than usual. It's definitely going to resonate with our with our listeners Matt. Priced out of multifamily since before COVID. What is it? What is it that you've acquired the last couple of years?

Matt Drouin (13:16.853)
We've acquired over the past couple of years is industrial and office actually, um, is what we've acquired over the last couple of years, because that's where we've actually seen the greatest opportunities for us. Our business plan typically is our deals or acquisitions have to have enough meat on the bone for us to be able to add significant amount of value and refinance those properties within less than five years and deliver 100% of the investment capital back to our capital partners. So that's why we're not that active in terms of buying deals like crazy because we are very, very picky in terms of what we buy.

So therefore, you know, that's kind of like what's been happening in our marketplace and we would buy office again. The most recent deal that we acquired was a 50,000 square foot high rise office building that was acquired, that was occupied by all state agencies on super long-term leases. Those are super sticky tenant base.

And we were able to acquire that at a 9% cap rate based upon in-place occupancy and trailing financials. So it was a great deal. We were able to get attractive financing on that, but what's changed is the banking arena. Because interest rates are higher, a lot of cash has been sucked off of the bank's balance sheets and they've even become a lot pickier. So we've really been in more observation mode. Like I said, we're still making offers out there, but 
but we are definitely patiently waiting for other opportunities to come down the pike and we're actively pursuing them.

Slocomb Reed (15:22.098)
The general message, at least the media is sending is that the office exodus from COVID is at least partially permanent. Ash Patel, who is a fellow host of this podcast and non-residential commercial real estate investor has some strong opinions to share and some strong success stories to share as well about where it is the office segment is working. And I'll say I do have one multi-tenant office building that is basically constantly full with the waiting lists that also matches Ashpatel's advice about smaller, more like suburban downtown, uh, with walkability as opposed to urban core office.

For those of our listeners who are only listening, Matt has been doing a lot of smiling while I've been getting ready to ask a question about office. Where is it that you're seeing opportunities in that asset class, Matt?

Matt Drouin (16:26.749)
I think that a lot of the fear has subsided out of there. We had a lot of tenants that were hesitant to renew leases until they found out where their workforce was going to shake out. This is the thing is that I do a lot of driving around town because I'm looking at deals and meeting with people and that sort of thing. The morning, there's still rush hour. In the evening, there's still rush hour. Where are these people going? Are they just pretending to go to work you know, Michael Douglas from falling down to quote a movie, or are they, you know, in going to home goods instead of going to an office, or are they actually going to a place of work?

So there still is demand for office. It's just the product type has changed and the work environment has changed. So the sector that we found that has had buoyancy in this, in the environment that we're in is small office, typically businesses that are owned by mom and pops.

The office segment that has probably suffered the most is like these huge office floor plates that do a lot of administrative back-ends type of work. They've lost a lot of their office bodies to hybrid and remote work environments. Additionally, government agencies are still growing and needing office space even if there's not bodies in the office, that deal that we did recently, the remaining 10,000 square feet of space in that building, one of the tenants wants it, that's a state agency, because they need the additional space.

So we definitely have strong demand. I think it's just important to be aware of where the demand is. This is actually a great opportunity when there's fear in the marketplace and when the investing community throws an entire asset class, like the, like a baby out with a bath water, that's one of those things where, you know, you zig when they zag it was like, okay, is there actual opportunity here to, uh, to capitalize on? And I think that for the longterm office is probably going to look different than what we've seen in the past, but there's still going to be a demand for it. You just have to be aware of the market environment of wherever you're investing.

Slocomb Reed (18:47.738)
Smaller office complexes, smaller office suites, targeting more so mom and pop type businesses, throwing my minimal experience in here as well. Individual white collar professionals who need a place, a professional place to meet with clients. That's where my success has come. In a in a neighborhood that has a lot of those white collar professionals living in it here, but also walkable to interesting shops and restaurants. Assuming all of your office, uh, properties are in, uh, the Rochester area. Are they focused in a particular sub market or type of sub market? Are we talking downtown or talking suburbs? Is it all over the place?

Matt Drouin (19:45.633)
We've actually found the greatest amount of opportunity in our downtown urban core from an office standpoint.

Really, I think that there's, you buy a margin of safety when you're buying something at a substantial discount to replacement costs and also just getting a great deal on it. So for instance, a deal that we closed on, it was a 11 story high rise office building, about 65,000 square feet. We bought that deal about a year and a half ago for 1.5 million. Was about 50% occupied at the time we bought it. Still cash flowing based upon 50% occupancy. That's how good of a deal we got on it.

We just saw that the former ownership group wasn't really aggressive about leasing up space in their building. And we saw in our other buildings that we were having a significant amount of demand for the similar type of office space. So we were able to bring that property over a 12-month period from 50% occupancy to 80% occupancy and push the value of that asset from $1.5 million to $3.25 million in the course of 12 months was able to refinance that property and get 100% of our investors capital back to them.

So I definitely think that there's opportunities out there in that space. And I think that in the urban core, I think it really depends upon the geography. We have probably about a billion dollars worth of public and private investment that is being invested right now into the downtown urban core of Rochester. There's a Fortune 500 company, Constellation Brands, which is putting their world headquarters in right behind our building and relocating about 500 employees, which is big for a tertiary market like Rochester.

So, but I can see in other markets, I have colleagues that are doing relatively well in the suburban off of market space. I just think that you can't apply a one size fits all to every single asset class. You have to be really have a deep, rich understanding of your market and really what makes it tick to make informed decisions on where you're going to place your capital.

Slocomb Reed (22:03.246)
Couple of really interesting points there, Matt.

The vast majority of our listeners are not invested in or investing in Rochester, New York. But there are other markets, tertiary and otherwise across the United States that will feel similar in a lot of ways. I understand you've already partially answered this question. I'd like to phrase it a little more in a little more targeted manner though.

Why is it that downtown office is working specific to the deals that you're buying in Rochester, New York? Is it just the discount on replacement cost? Is it because of other redevelopment and sociocultural changing activity, lifestyle changes happening in Rochester and the way that people look at downtown?

Why is it that office is working there?

Matt Drouin (23:15.565)
One, I think is the type of unit mix that's at the office that we are acquiring. You know, these are smaller offices, typically less than 3000 square feet. So that's one. We find a lot of weakness in that 10,000, 15,000, 20,000 square foot office floorplates. That being said, if we look at a deal that has 20,000 square foot of contiguous vacancy, we're going to look at, all right, how easy is it to subdivide this down into the smaller, uh, office footprints that are actually in demand in this marketplace. And so we'll look at deals that way as well.

I think it's a confluence of many factors, the amount of public and private investment that's happening in downtown Rochester and across other similar type of Rust Belt cities throughout the country, but also the combination of smaller office space. Additionally, when we looked at this deal originally, our plan A was to reposition the property as an office building. But our plan B, if our thesis didn't work out, we were at enough of a good cost basis on the property in terms of us buying it at a million and a half for a 65,000 square foot office space that we would be able to do a residential conversion as a plan B and be able to make the numbers work on that and be advantageous for our partners on that deal.

So that's the way we're looking at all of these office deals is like, all right. Is it a, is it a pretty looking building? Does it have historic value? Is it something that has curb appeal? Some of these office buildings that you might be able to buy real cheap. May have really, really thick floor plates. They don't have a lot of access to windows. Not going to be a great conversion to residential if that's what it comes, if that's what it comes to.

Also, does the building actually look like, hey, would I be interested in living here? Would I be proud to call this my home? These are some of the factors that we take into consideration when we're acquiring deals. So we always have to have a plan A, but also a plan B exit strategy if our thesis doesn't end up panning out. And that's how we look at every deal.

Slocomb Reed (25:30.646)
That makes a lot of sense. Matt, are you ready for the best of our lightning round?

Matt Drouin (25:34.558)
Absolutely, I'm ready.

Slocomb Reed (25:36.214)
What is the best ever book that you recently read?

Matt Drouin (25:40.705)
Best ever book that I most recently read was, Am I Being Too Subtle by the late Sam Zell.

Slocomb Reed (25:46.594)
Sam Zell. Yeah, that's a great one. What is your best ever way to give back?

Matt Drouin (25:54.205)
I volunteer as president for a local real estate investors association. Um, that takes up a lot of my time, about 20 to 30 hours a month. And so that's a volunteer, uh, position that I do. And I find that the way I love to give back is through how I can leverage my experience to bring value to others and give, and give that, uh, because our community, I've seen what real estate investing has done for myself and my family and our trajectory. And I want to be able to spread the word and be evangelical about it and also give the community and resources for other people to do that as well.

Slocomb Reed (26:33.494)
Matt, on properties that you have acquired, what is the biggest mistake you've made and the best ever lesson that resulted from it?

Matt Drouin (26:43.873)
So I'd say the biggest, most painful mistake that I've made recently, because I make mistakes all the time, I think is when I bought a apartment deal, I didn't know what I was doing in terms of multifamily underwriting. I didn't understand commercial appraisals at that time. And so I bought an 11 unit deal and I didn't underwrite it right. And it resulted in me having to write a six figure check at closing in order to take my hard money lender out.

So that was definitely very painful and at that point in time I decided to get serious about understanding commercial appraisals So I became a geek and I talked to every commercial appraiser in town that I could that I could you know Get my hands on getting in contact to build a relationship with so that I would never have to repeat that mistake again

Slocomb Reed (27:34.186)
And what is your best ever advice?

Matt Drouin (27:39.221)
My best ever advice is, you know, I know a lot of people say, get, you know, uh, get started sooner. Um, I'd say that, you know, being a real estate investor can be very lonely. So surround yourself with people that are actively doing it, whether you're an experienced investor or whether you're a newbie, um, and surround yourself with the people that are doing things that you want to be doing or going, or a couple of chapters ahead of you.

Um, so if you want to get into larger commercial multifamily, hang out with those people, get obsessed with that, that aspiration for yourself. Because the more you surround yourself with it, the more you listen to shows like this, for instance, it just becomes a lot more real and you feel a lot less lonely. And just through the law of averages, you will achieve that if you set your mind to it and take intentional and consistent action to achieve those things.

Slocomb Reed (28:28.618)
Last question, where can people get in touch with you?

Matt Drouin (28:45.617)
People can get in touch with me. I do a podcast as well. I got inspired to do a podcast by Joe Fairless and your team. It's called the Go Big Live Real Estate Investors Podcast. This is one where I interview active real estate investors and how exactly they did their first big commercial real estate deal in excruciating detail. And also I have a live Q&A with my guests in the podcast as well.

So that's probably the best way to stay in touch with me is to look me up on Facebook. I'd be happy to share that and get access to our live Q&A sessions with the real estate titans out there so people can raise their thermostat and raise the bar for themselves if they want to go into the larger deal space.

Slocomb Reed (29:33.134)
Nice. Those links are in the show notes. Matt, thank you. Best ever listeners. Thank you as well for tuning in. If you've gained value from this episode, please do subscribe to our show. Leave us a five star review and share this episode with a friend. Thank you and have a best ever day.

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