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