All Forum Posts by: Jonathan Twombly

This is a good thread to bring back to everyone's attention today and see how their thoughts have changed.

I didn't think it was worth doing deals at all three months ago.  There was way too much risk in the market.  That's why I sold everything last year - the risk was almost all to the downside, not losing the upside.

Now, my curiosity is piqued again.  I will be getting more and more interested the further things fall.

It's just so early.  We don't know where we are; that's the problem.  There are always going to be buyers who think that the beginning of a great crash is just a dip they need to buy.  I'm not saying it IS going to be a great crash.  But the point is maybe we don't know.  Maybe the guys buying at 5.5% caps are going to look super smart in a year.  Maybe the guys only offering 6% caps are going to look hyper-aggressive in retrospect.

Since we just don't know yet, I think that causes caution in the marketplace. And caution leads to lower prices all by itself.

For what it's worth, Green Street Advisers are already saying that Multifamily is down more than 10% from a couple of months ago.  That would mean 5.5% is accurate.  But who knows where we land?  That's the problem. 

Hey Ben! Basically, I am reinvigorating all of my lender, broker, manager, and investor contacts and letting them know what I am looking for.  You're right that, if a deal works, it works.  However, I am putting a lot of bumpers on the deals, underwriting in a lot more uncertainty and margin of safety, so that I know the deal can withstand bad times.  Basically, being very cautious.  But also getting ready for when things stabilize and I can predict what the next couple of years look like with more accuracy.  Whereas, I was on on the sidelines before, now I am no longer on the sidelines.  Don't know if I will buy yet, but I am getting ready for the opportunities that I think are coming.

Well, if unemployment persists when it runs out, it certainly won’t help the economy! 

My honest answer is that you should study the markets and do nothing right now.  Because bargains are coming for those who are patient.

We're in a period of great flux, where no one really knows where things are headed and everyone is taking a cautious approach, including lenders.  That won't end just because the economy opens up again, because what we're going to see is that economic activity is still depressed - from a combination of the businesses that have already failed and the remaining caution about going into crowded places.  The only question is the degree of lost economic activity, not that economic activity will be lost.

Right now, we are in a situation where no one can accurately forecast, meaning everyone imagines the worst-case scenario.  As a prudent investor, you basically have to imagine that at this stage, because we lack adequate information.  This alone will cause prices to drop.  And it's already happened.  Green Street Advisors already notes that prices on its Commercial Property Price Index have dropped 10% across the board.

So, the point is - wait and see.  We are very early in this yet.  Three months into the Great Financial Crisis, most people were denying there was anything wrong with the economy at all, and to the extent there was, there would be a quick bounce-back.  It's always human nature to think so.  And it's always in the government's interest to tell you everything is going to be okay.

This is a good point, too.  I have specifically asked brokers this question - what's the best way for newbies to approach you.  They want to help, but they don't want to have their time wasted.  So you have to be respectful of their time.  And you have to understand the market.  You can't go into their office saying you want to look at B properties trading at an 8% cap rate when the market cap rate is 4% for those deals.

Just from a human psychology perspective, it's always great to give someone the chance to be the expert and teach you.  But you have to be willing to listen to what they say, and you have to know enough going in to grasp the significance of what they are telling you.  It's best to go in with as much knowledge as possible and then let them teach you the nuggets only they can teach you, rather than attempting to make them your ground-up coaches.  That won't go over well.  You at least need to know the basic vocabulary and concepts, and have an idea about this market, before you reach out to brokers.

And don't forget to research the brokers too.  Everyone's favorite topic of conversation is themself, and when you can go in and talk about the deals they have done or what they have listed now, it will help establish a connection.

I'm a multifamily investor rather than an office investor, so take this with a huge grain of salt.

I think it's really too early to know what the long-term looks like, what the trend really is.

In the short-term, though, I think office takes a substantial hit in price - mostly because of fears of it taking a price hit.  It's the reverse of FOMO - fear of missing out.  It's FOCAFK - fear of catching a falling knife. No one knows what will happen, but everyone can imagine the worst-case scenario, and that causes prices to drop.

I think that, long-term, there will be an effect for sure, but the question is how big?  Companies are now set up for more people to work remotely, and many have lost their fear of letting their employees work remotely. Some companies may move to hot-desk plans where you just have a desk at the office when you need to be there. That will have some effect on demand for office space for sure. 

On the other hand, not everyone actually likes working remotely.  People like to meet their colleagues and not everyone wants to be at home or has a comfortable workplace at home.  Cynically, I also think that the most ambitious employees will want to be in the office where they can cozy up to the powers-that-be and brown-nose more effectively.

And, to the extent that people want to be in the office, Covid may be the moment when people realize that the open-plan office is a great failure and a destroyer of productivity, not to mention a spreader of germs.  We will see a move back to cubicles and even offices, which take up more square footage than open-plan.

So, we could see fewer people in the office but more square footage per employee, and who knows how that cuts?

You need to establish a "blocker" - a US entity - through which you invest. The withholding of 30% takes place at the revenue level, so you want to make sure that you reduce the revenue. You would purchase the property inside some kind of LLC, which is owned by the Blocker LLC. Then the profits of the property LLC would be sent to the Blocker LLC, meaning the revenue of the Blocker LLC is only profits of the property, not the top-line revenue of the property.

In any event, if you are looking to get debt financing in the US it will be very difficult, if not impossible, without a US entity, so you need to do this anyway.

Before you ever reach out to a broker, you need to get some credibility first. And the very first thing you need to do is learn how to underwrite multifamily properties.  Without understanding how these deals work and how they are valued, it is useless to talk to brokers.  Even if they pay attention to you, you're likely to do a bad deal and start on the wrong foot.

I'd start by learning to underwrite.  Then figure out where you want to invest, what kind of property you want to invest in, and what size property you are actually capable of closing on. Then invest in some credibility markers, like a simple website, business cards, etc.  Start talking with people in your market, especially the professionals other than brokers, like lawyers, accountants, mortgage brokers, and especially property managers.  Once you've done all that, then ask your network for introductions to the brokers. Actually talking with brokers should be the last step you take, after you've done all your prep work.  It will go much, much smoother for you then.