Setting the Record Straight: WaFd Bank CEO Brent Beardall Debunks the Misconceptions of Today's CRE Landscape

 With a "personal vendetta against Chicken Little," WaFd Bank CEO Brent Beardall debunks misconceptions about today’s CRE landscape. This episode highlights the resilience of banking relationships during economic stress, high inflation, and last year's bank upheavals. Beardall’s candid commentary, including his plane crash survival, offers insights on leadership and connectivity. Learn about economic indicators, the Fed's balancing act, and promising regions for real estate investments. Don't miss this episode!

Transcript

Banking and Real Estate Trends

Rachel Oh 0:04

Welcome to Peaks and Portfolios presented by PEG Companies , your go-to podcast for all things commercial real estate investment . I'm Rachel oh , and together we're diving into current events , trends , issues and opportunities impacting the CRE investment space , from dissecting the latest market moves to sharing insights on today's commercial real estate landscape . It's time to maximize portfolios here in the Peaks of the Mountain West and beyond . Welcome everybody from the Peaks of the Mountain West , high up here on the Wasatch Front . We are excited to talk real estate , the economy and anything else that may come about . I want to thank you all for joining us today for this week's episode of Peaks and Portfolios by PEC Companies .

Rachel Oh 0:51

As we are well into 2024 , experts predict that we are on track to remain in a challenging environment for financial markets . Continuing high inflation , escalating lending costs , tightened margins , increased regulation and cybersecurity threats all remain relevant factors in the current risk landscape . Additionally , the Silicon Valley Bank , Silvergate and First Republic collapses were defining moments in 2023 . So these events have all shined a spotlight on banks in the mainstream media , something that we haven't seen much of since the GFC , and this does bring about increased scrutiny around regulators , investors , customers all driven by a bit of fear , maybe in their investments , and so , with all of these factors in mind , we wanted to hear from someone in the banking industry that can shed some additional light , so we are delighted to have as our guest today Brent Beardall , CEO for WaFd Bank . Welcome , Brent .

Brent Beardall 1:49

Rachel , thanks so much for having me today Excited to be here . There's just a little bit we have to talk about , huh .

Rachel Oh 1:54

Just a little bit . Just a little bit . I can only imagine what it's been like for you lately . It's so good to have you . It's been a minute since you and I last met . You're where In Seattle , correct ? How is my hometown , seattle ?

Brent Beardall 2:06

You know Seattle is doing fantastic . We get through the dark days of winter and now all of a sudden it's light till eight o'clock at night and it is beautiful For my money . Literally , seattle for the next three to four months is the most beautiful place on earth .

Rachel Oh 2:19

I 1000% agree . In fact , I've always said there's no other more beautiful place than planet during those months , though rest of the time it's a little bit you pay the price the rest of the time .

Brent Beardall 2:30

No question about it you definitely do .

Rachel Oh 2:33

And , um , just on a personal note , how is your health ? I know you've had you had .

Brent Beardall 2:36

I don't want to belabor that by any stretch , but you're physically well , things are good yeah , doing , doing great , yeah , so I what about a year and a half since the plane accident Doing great , probably 90 plus percent , and just it's a phenomenal perspective . Every day I wake up grateful to be alive and really the biggest ramification for me is flying again . Right , I mean , I've been on probably a hundred plane flights since in that year and a half and everything's fine until you hit turbulence and then the PTSD sets in . But you know , in life we all have challenges and sometimes you just have to tackle those challenges .

Rachel Oh 3:15

Yeah , yeah . No , I appreciate that . In fact I've been kind of following you and I really appreciate the way you've turned you know tragedy into messages of hope and positivity and all the things that you're doing and all the goods . So kudos to you for that and the impact that you've made . So it has definitely been well received and it's not gone unnoticed . So I just wanted to kind of just thank you for all of that , because I know it's been probably challenging the last little bit .

Brent Beardall 3:40

Well , that's very nice of you to say . I appreciate it . And you know I've certainly learned a lot , and you know I've said this before and I'll say it again Everybody has a plan until you get punched in the face and I got punched in the face pretty good . But one of my key learnings was to not be shy about telling people that you love them , and it's been amazing to me , as you open up and you become vulnerable , just how people express themselves to you and you deepen relationships and friendships , and it's really cool .

Brent Beardall 4:11

And you know we're going to talk a lot about commercial real estate and I know a lot of people in commercial real estate and I have deep relationships and friendships and that matters because in the banking industry , yeah , you know , we all have the contracts , the paperwork we look after , but I really want to make sure that we partner with people that are going to be there through the good and the bad times and , uh , relationships do matter and you really , you know , as Warren Buffett famously said , you never know who's swimming naked until the tide rolls out . It sure feels like the tide's about ready to roll out , doesn't ?

Rachel Oh 4:41

it ? Yeah , it sure does , it really does , which is why we have you , because we want you to , like you know , substantiate or dispel things that we're hearing . So for those of you who may not be as familiar , I just want to give them a little bit of background on you . Brent Beardall is the vice chairman , president and chief executive officer of WaFd Bank , a Washington State commercial bank headquartered in my hometown of Seattle Washington , and it is the largest bank headquartered in Washington State , with about $30 billion in assets . So congratulations , brent . I think that's gone up substantially since I last looked at this . You joined the bank in 2001 as the vice president and controller , and since then you've been CFO , chief banking officer and , of course , then awarded the title .

Brent Beardall 5:22

Okay , and Rachel , I'm going to cut you off right there . Let's get into it . I mean , I know I'm a lousy banker . I've been doing it for a long time . Hopefully I know something , but we'll let your listeners decide after they get into this right .

Rachel Oh 5:32

Yeah , no , absolutely Absolutely . So you know , as I started off , we are , you know , we've been seeing increased scrutiny from regulators . Investors and customers , you know , may be driven by some of the fears around their investments . And right now I know that you're on a bit of an education tour , combating what the general public typically hears in the media about investments , banking and commercial real estate . So tell me why this is something you're so passionate about .

Brent Beardall 5:57

Well , first of all , thanks for the opportunity . I am on a personal vendetta to kill chicken little . I am so tired of the talking heads standing up and saying the sky is falling with commercial real estate . They point to one or two outliers as examples and then people make and it's just such a foundational mistake they're making when they extrapolate something that's happening , you know , in St Louis or in San Francisco or Los Angeles and say , oh , okay , then let's look at your whole portfolio bank . Or let's look at a company like PEG and say , oh , you're in commercial real estate . It must stop the madness . Commercial real estate is such a wide and varied marketplace If you want to understand commercial real estate , especially when you want to understand commercial real estate and banks . Now let me set the record straight right , WaFd Bank has the third highest concentration in commercial real estate of any bank in the country . So to say we're long in commercial real estate would be an understatement , right ? So I have a vested interest .

Commercial Real Estate Risk Factors

Brent Beardall 6:57

But you have to understand really three things about commercial real estate . Number one you need to understand the category of it . The risk factors of an office versus stabilized multifamily , versus a car wash versus hospitality unbelievably different risk characteristics right . You can't group all those together . That's number one . You have to understand the category . Number two you have to understand the location . Everyone knows real estate . Think about your personal real estate . Location matters . How close are you to schools ? How close are you to employment ? How close are you to things that you want to do ? The location matters If you're in a shady part of St Louis or San Francisco , if you're down in the Tenderloin , you're going to have problems . If you're there on the Wasatch Fronts , just outside you name it Lehigh you're booming , you're doing phenomenally well .

Brent Beardall 7:48

So you have to understand the category of CRE . You have to understand the location and then , very importantly from a banking standpoint , you have to understand the amount of equity that your client puts in . The more skin in the game that you have with your borrowers , the more likely they are to ride out the storm with you . And we're a bank that's been around for 107 years . Think about that 107 years , think of all of these cycles that have transpired in 107 years . And when cycles happen , you have to know who's on your side and who's just in it to make the short-term profit that can can get a jump ship . And by having an alignment with the bank and your borrower . That means they have equity in the game . So on average on our commercial real estate portfolio we have about 45% equity in the game .

Brent Beardall 8:37

So people that look at our portfolio and say , oh my goodness , I am nervous about your portfolio , I'm like stop the madness . I literally don't lose sleep over our commercial real estate portfolio at all . That's not to say it's not under stress . Of course it's under stress . Look what's happened to the NOI just because of interest costs . Right , and the details matter . Specifics matter . If you've got multifamily and you've got rent control , you're going to have challenges . But let's get into those details . Let's get into the specifics and understand the portfolios and stop just blindly painting everything with a wide brush that , oh my goodness , commercial real estate's a dumpster fire .

Rachel Oh 9:14

Okay , so then let's talk about that . Then You've just mentioned three things that you look at and evaluate . Obviously , when you're looking at what you guys are going to underwrite or loan on , know , evaluate . Obviously , when you're looking at , you know what you guys are going to underwrite or loan on . So , asset classes what ? Where I mean ? Where do you ? Where does WaFd ? Where do you think banks are most keen right now ?

Brent Beardall 9:31

Well , right now , unfortunately , because of the regulatory environment , it's anywhere but commercial real estate . Right , and real estate investors are seeing that because everybody thinks commercial real estate oh my goodness , it's a scarlet letter . But stop the madness . Right . And it goes back to the great financial crisis . Because where did all the losses come from ? They came from quote unquote commercial real estate . But specifically , if you look at the segment , they came from land acquisition and development and spec construction . That's where the losses came from in the Great Recession . The losses is we're looking at it today . That's where the losses came from in the Great Recession . The losses as we're looking at it today . In all sincerity , I see losses primarily in one asset category and that's large office in large metropolitan markets , and it really is driven by the physical occupancy . If you have people coming in and using the buildings , offices are generally going to be pretty good . If you have vacant offices , that's a problem .

Rachel Oh 10:26

Yeah , now you know we've talked with a few different people along the way in different episodes , including , you know , Gensler , as Stephen Painter talked about . You know just what they're doing with . You know how they view office to multifamily example . You know because of all the vacancies and et cetera . So you've kind of mentioned you know the category . So obviously commercial real estate right now is is tough location matters to you then . So let's say you are going to lend , then there's something that you've that the bank has found , your team has found , that they really like . Are there certain areas of the country then that you focus on ? I mean , where ? Where do you guys see the best opportunities ? Where would you underwrite ? Where would you loan ? You know what kind ? I mean you mentioned maybe not the tenderloin , but like where ?

Brent Beardall 11:06

Yeah , yeah . So really we are very fortunate . We are in the nine Western states , right , we're from Washington all the way down to Texas . If you think of Texas as Western , that's where the seats we go . But nine Western states and the beauty is , for the most part , right , california has some net migration away from California . But you look at the eight other states , we have net emigration , and that's where I think you have to ask yourself location . Do people want to live there ?

Brent Beardall 11:32

It's supply and demand and we all know the barriers to bringing on more supply . Supply is really really tough . The question is , is there demand ? And you look at our eight Western states outside of California , you have more people coming into those states than ever before . And then you compound that in terms of multifamily , which is a real positive . Single-family residential housing has never been less affordable , right ? So people are going to have to look for somewhere to live . That's not in single-family housing . So that's multifamily . And I do actually have some breaking news to share with you today , and it just so happens this afternoon we're going to file an 8K , so I can tell you this without getting in trouble with the SEC .

Rachel Oh 12:11

Okay , let's not do that .

Brent Beardall 12:13

So , yeah , let's not do that . So we just announced that we have signed a definitive agreement to sell $3.2 billion of stabilized multifamily loans to Bank of America , who's the agent for PIMCO . So ultimately , pimco , the largest bond fund in the world , is the ultimate buyer . We're selling $3.2 billion of multifamily loans at $0.92 on the dollar .

Rachel Oh 12:38

Wow .

Brent Beardall 12:39

That is a home run .

Brent Beardall 12:41

The only reason we're selling it at a discount is because of interest rates . Rates have moved so fast so those rates are below market . But they have looked at the portfolio and they've said holy cow , there's really no credit risk in this at all . If you can pay us for the interest rates , then we'll do the deal . And that's exactly what's going to happen . When we announce it today , we expect it closed by the end of June . And if that does happen and it's not done until it's done Sure , but if it does happen , think about what that does for commercial real estate , not only for WaFd but for all midsize banks . Yeah , because it proves liquidity . Yeah , as soon as you get a willing buyer and a willing seller to come together at a price and 92 cents on the dollar , that's great .

Brent Beardall 13:19

Take that all day long yeah .

Rachel Oh 13:22

Yeah , yeah . No , that's amazing and I you know . Congratulations to the team for putting that together and what an amazing . You know something that you can do for your borrowers right , and your folks with deposits in the bank . So that's a huge , huge win . So congratulations . And thanks for breaking news here with us . That's amazing .

Brent Beardall 13:43

Yeah , no , it is a huge win . And , most importantly , what it does for us it allows us to go from playing defense to playing offense .

Rachel Oh 13:51

Now you can actually go back out .

Brent Beardall 13:53

We can go back out and we can redeploy those funds because , I argue today , the loans that you're underwriting today are going to be some of the best loans that I have made in my 30-year banking career , because you're going to be able to demand stricter covenants , you're going to be able to demand more capital in and you're going to be able to get the deposits with those loans . So I'm unbelievably excited . In fact , one of my biggest worries is how do we not you know how do we ferret that out over a period of several quarters , not just have it all go poof real quick ?

Rachel Oh 14:23

Yeah , yeah . Well , you'll have to be selective , right , and you can .

Brent Beardall 14:26

That's exactly right . We can , that's right .

Rachel Oh 14:29

So let's talk about that . The third piece in that you know when we kicked off and what you were saying is trying to dispel all the you know the anxiety and whatnot around commercial real estate is equity . So you mentioned about 45% . Equity is sort of what you guys are seeing . Is that going to continue ? Do you see that trend changing or holding steady ?

Brent Beardall 14:48

No , I think that continues and part of the reason people are putting so much equity in the deal is because debt service is so expensive . I know , Right Right .

Brent Beardall 14:56

To be able to hit your debt service coverage ratios , you've got to put a lot of equity in the deal . So until interest rates start subsiding a little bit , I do think people are going to continue to put a lot of equity in the deals , which is great for us as banks and not so great for investors . But again , the investors that are in our sweet spot they say , okay , how much do we need to put in ? Let's make it work , let's make sure a pencil's for everybody and putting that much equity is what it requires . And we , again , we we find more demand than there is supply for those good loans .

Rachel Oh 15:28

Yeah , well , I will say , if you can make a deal , pencil with that much equity , that's a strong I mean that's a strong profile right there .

Brent Beardall 15:35

So that is a phenomenal , phenomenal loan , no question .

Rachel Oh 15:38

Yeah , okay , okay . So you guys are going to . I'll have my team call you , but I'm just going to , okay . So we've talked about asset class , we talked about location , we talked about equity . Let's just then shift a little bit to just specifically your as a banker . You have a unique perspective and probably unique data on what is really going on right now with the consumers , right . So you know we're seeing the Fed is holding . You know they're not going to be lowering their rates . The economy is , you know , unemployment is still low , inflation is ticking up a bit . But I'm just curious , like , at the consumer level , you know , what are you seeing ? Is there any worry in the future ? Are we ? Do you think people are doing well , like , I'm just curious , if all the data is , is , you know , proving out ?

Brent Beardall 16:24

Yeah , so I really think we kind of have a bifurcated consumer segment , if you will . The vast majority of consumers are struggling , and struggling mightily , I think . If you look back to about 2020 and think about the cumulative impact of inflation , the cumulative impact in the last four to five years of inflation is like 25% increase in costs , right , and we all see it . When we go to the grocery market , when we go to buy gas , everything is more expensive . We're all seeing it right now in insurance . That is stressing the average consumer , right . I mean , what is the stat ? Like you know , 60% of Americans are living paycheck to paycheck , right ? It's stunning , right . So those are the consumers that are being stretched . There is no question about it .

Brent Beardall 17:14

Now , on the other hand , you've got those that have savings , that have stock . They're doing very , very well and it's a great irony of increasing interest rates the people that have deposits , that are getting paid more for it . They're doing very well . They can withstand the inflation . It's everyone else the net spenders , the net payers of interest that are being incredibly stressed , and so I think that's really kind of where we're at is . You can look out there and you might not get a full set of data by going to the airport , looking at the airport , going to restaurants and saying , oh my goodness , look how busy it is . You're not seeing everybody . That is literally , you know , pinching their pennies and just stretching their dollar as far as they can to make ends meet , which is the vast majority of Americans right now .

Rachel Oh 18:01

Yeah , now that's I would say that's , a very true statement . Again , all the data , not the data , but the you know the rhetoric we're hearing , especially with unemployment and just all the creation of jobs . You think everything is going great , but yeah , I think that the real underlying story is that it's not always the case . What do you think it's going to take ?

Brent Beardall 18:17

And let me follow up on that too the creation of jobs . What jobs are being created and at what pay rate ? Right ? So I mean just looking at the number of jobs .

Brent Beardall 18:30

That's one indicator , but it's just like when I talk to my teams , it's the quality of jobs and what they pay , right ? Don't just look at a bank and say loan originations Fantastic , we can originate all the loans we want . At what kind of spread were you able to originate those loans ? Right ? So you've got to ask the next question and in today's day and age , right , we're a USA Today society . We just want the headline . Stop the madness . You've got to go beyond the headline . Stop the madness . You've got to go beyond the headline . You have to understand , because not all jobs are created equal .

Rachel Oh 19:00

Yeah , that's true . That is true . We can totally see that . Okay . So then , my follow-up to that , then , is what needs to change ? What do you think needs to happen in order for this to sort of right ? You know how do we write the ship , like what needs to be done .

Brent Beardall 19:14

Well , first of all , how much does the ship need to be righted ? I really don't think we're on this precipice of terrible things happening . I think that the consumers as we mentioned , there's a lot of consumers that are really , really stretched , but I don't think we're on the precipice of having this major decline in values on commercial real estate .

Discussing Economic Trends and Opportunities

Brent Beardall 19:36

And one of the things that has shocked me the most , if somebody had said to me in 20 , whatever 2022 , hey , we are going to increase mortgage rates by three and a half to 4% . What's going to happen to the value of single family housing ?

Brent Beardall 19:54

Typically , the rule of thumb , if you look back through the cycles , is every one percent increase in mortgage rates , you should have a 10 percent decline in the value of single family homes . That simply has not happened right , and that is why affordability is in an all-time low and I don't see it happening . I don't see a huge adjustment coming in single family housing . I don't see a huge adjustment coming in multifamily . Right , there certainly could be an office , but where are we really risky right now ? I see the biggest risks , quite frankly , is just how overinflated it seems the equity markets are . You look at some of these PEs but you ask yourself why is that ? And that's because there has been so much cheap and easy money flowing for so long right and they're chasing for yields .

Brent Beardall 20:42

So , really , what needs to change ? From my mind , we need to see a proper slope to the yield curve right , and that can happen in two ways . We're going to have 21 consecutive months of an inverted yield curve , never before in our lifetimes .

Rachel Oh 20:56

Rachel , have we seen 21 ?

Brent Beardall 20:56

months of an inverted yield curve . Never before in our lifetimes , Rachel , have we seen 21 months of an inverted yield curve . Typically , the inverted yield curve says , hey , a recession is coming .

Brent Beardall 21:05

And we haven't had one we haven't , and my prediction is we're not going to have one , because here's what's nuts . You look at the way our government is spending money . We're spending money like a drunken sailor . We have our government spending money like we're trying to get out of a recession . Yeah , If you think about it , it's like somebody driving their 911 down the freeway in you know six gear , going 110 miles an hour , slammed on the gas and at the same time slamming on the brakes .

Rachel Oh 21:34

Yeah .

Brent Beardall 21:35

Right , you've got the government spending money like crazy and , by the way , you go back to jobs . So many of their jobs are coming from the government sector , so you've got all these jobs coming . You've got the government spending money by the way , not spending our own money , spending borrowed money and then you've got the Fed trying to slow things down . So we're driving with two feet right now right , one foot on the gas , one foot on the brake . So I don't see a recession being imminent . But what needs to happen ? We need to get back to a normal slope on the yield curve , and that either happens from the long end going up , which is what I think probably should happen I think the long end is artificially low or you have got to get the short end to go down , which would only happen through Fed cuts .

Rachel Oh 22:21

And we've already heard that they're not going to so , or at least anywhere in the near term . So it looks like then the long end needs to go up . Tell me so help our listeners understand . What do you mean by that , then the long end going up ?

Brent Beardall 22:35

The 10-year right Right .

Brent Beardall 22:39

If we're saying , hey , the short end is here , around 5% , and we're going to stay here that is higher for longer , then why in the world would the 10-year be below that ? It shouldn't be . The 10-year should be above that , right . So I don't know what the rate on the 10-year should be , but I think it should be above the Fed funds rate . So take it to 5.5% , 6% on the 10-year , but then what does that do to mortgage rates ? That would take mortgage rates from 7% up to 8% or 9% , which probably needs to happen , because then that would take some juice out of the housing market .

Rachel Oh 23:11

Yeah , my mother always likes to remind me that she financed during a double digit , so I don't know why you guys are always , so you know , complaining , because I think I don't remember when , but when they were in a double digit environment .

Brent Beardall 23:25

Okay , Rachel , I'm going to be your favorite podcast host because I'm going to tell you what you can retort to your mom about .

Rachel Oh 23:31

Yeah , tell me .

Brent Beardall 23:33

That's fantastic . It was double digits . How much did you pay for your house ?

Rachel Oh 23:36

I know and let's inflation .

Brent Beardall 23:37

Adjust that now right , I know . Oh , you know , I bought my house for $45,000 .

Rachel Oh 23:42

I know I think it was $30,000 .

Brent Beardall 23:43

You can afford 11% interest at $30,000, . Right yeah , try doing that for a $700,000 house .

Rachel Oh 23:50

Right ? No , for sure , for sure . Bring up the point that if interest rates need to go up in order for our economy to settle down and to kind of get back to a more normal situation , that we might have to take that in the . You know , take that bite for a bit in order to kind of right things right , like we do need to be willing to kind of endorse some of those changes and I think sometimes we're not willing to , or there's a lot of rhetoric out there that we won't be able to sustain that .

Brent Beardall 24:16

If we really want a long-term sustainable economy , we've got to sometimes take the pain , and right now we haven't taken the pain quite frankly , yeah , no , we haven't , we really haven't , and I think that it's .

Rachel Oh 24:30

I think we're starting to see it , though , a bit right , like I think people are starting to become less worried . I mean just , we were drunken with , you know , 0% Fed funds rate for so long , and now we're in this environment where it's a little higher , and I think people are finally starting to kind of get accustomed to it . So maybe that's how you do it right . You just kind of inch them up , and we had the huge escalation . It shocked everyone . But now we're kind of at a new normal . Maybe just do it little by little and maybe we can get there . I mean , something's got to happen because we can't .

Brent Beardall 25:02

Something's got to happen , and one of the mistakes I think the Fed has made is this attempt at transparency . No one can predict the future . J-pal and the Fed governors have an incredibly tough job , but it's made tougher by the fact that they , at every other meeting , they have to put out their dot plots and they have to say , hey , this is where we think rates are going for the rest of this year and the next two years . How can you know ? Because then they follow that right up with saying it's going to be data dependent and so the data is going to dictate it . So why even pretend to say we know where rates are going , because they don't ?

Rachel Oh 25:35

Yeah , no one knows .

Brent Beardall 25:38

And the other thing is it has been so difficult to try to get inflation to come down and we're celebrating with what ? Three and a quarter inflation . That's fantastic , that's real progress . However , that's still over 50% higher than the goal , and they have a dual mandate exactly 2% or below , and they have a dual mandate full employment , check the box , low inflation we're not there yet . It's been a lot easier for them to get inflation down to 3% than it will be to go from 3% to 2% .

Rachel Oh 26:09

It's always that last mile right , that last little stretch .

Brent Beardall 26:14

It is and everybody says , well , the Fed's going to overshoot it , which is a fair question . Are they going to overshoot it ? Because we all know the lag effect of what happens after you raise rates . But the question is , what happens if we're undershooting it ? What happens if we don't kill inflation ? And Volcker and the team learned in the 80s you've got to get in front of inflation .

Rachel Oh 26:36

No , I think it's good . I think it's good to hold steady . I mean it's obviously not great for my underwriting teams , but we need to . I mean , we kind of take a little bit of pain for now .

Brent Beardall 26:43

That's exactly right and , as everyone knows , right . Sometimes working through the tough times , that's what provides opportunities .

Rachel Oh 26:51

Yeah , yeah , so opportunities .

Brent Beardall 26:54

Then let's see where do you feel the greatest opportunities lie right now , as you look at things , I mean , if somebody can figure out how to convert office into multifamily , that's to me the biggest opportunity out there , right ? Because you have all of this office space that's going unused and we have this huge need for housing . So if you can figure out how to do that and obviously those are all case-specific , circumstance-specific , but if somebody could be great at that I see that as a potential double-to-home run , Solid , single , still Multifamily . I mean you have to love the diversification of the cash flow that comes from a multifamily project . Then you have to look at it from a macro perspective .

Brent Beardall 27:43

People need places to live . We have this housing short run and ever since the Great Recession we have been undersupplying lots . So that means we're going to have to be denser in terms of our housing . So I see multifamily . I'm incredibly bullish on multifamily . Over the long term , we may not see the rent increases we saw over the last several years , but that's a good thing . The rent increases we saw the last several years have been unsustainable , right right Now .

Rachel Oh 28:09

You know that's . You know , at PEG we , you know , half our portfolio is multifamily and we've definitely since seen that . You know rents slow down a bit but we also see good occupancy . Right , it's still solid occupancy . We're a little overbuilt in some of our markets , including downtown Salt Lake , but you know , everything indicates that in the next couple of years that'll come back right back up . So I definitely think multifamily is a great place and , to your point , if we can solve for this , all these vacancies in offices , and figure out a way .

Rachel Oh 28:41

It was interesting when the when we spoke with Gensler , he did point out a few different things . It's not always so easy and I think some of the regulators need to ease up right , cause there's it's the way and I can't remember how he said a floor plates or something and this much distance from the elevator , and because of that you can't have this . And so it was really interesting talking to him about that , because I think that's on everyone's mind . Right , how can we , what can we do with this asset class that has just been decimated by the effects of COVID and we have a huge housing shortage ? Can we marry the two ? But I think it's going to take a minute to figure that out , can you right ?

Brent Beardall 29:08

And what's the old saying ? That necessity drives innovation . Yeah , right , and so as and we're starting to see that in Seattle we now have a complete turnover of the city council and the mayor is very , very pro business , the mayor , what can we do to help reinvigorate downtown ? And that's what we need to see at some of these . You know code requirements in terms of multifamily and some of these things that could make it actually feasible and cost effective to turn office into some multifamily

Bank Expansion and Real Estate Trends

Brent Beardall 29:38

.

Rachel Oh 29:38

Yeah , no , I just on a side note . I was in Seattle recently and I noticed that whole corridor there , like the old Navy and the Banana Republic and the Gap they're all gone .

Brent Beardall 29:50

Fifth Avenue , the Banana Republic . That's right across the street all gone .

Rachel Oh 29:52

Fifth Avenue , yeah , fifth Avenue , the Banana .

Brent Beardall 29:53

Republic . That's right across the street from us . Yes , yeah , it's right across the street from our headquarters . So that's a perfect example that building , the Banana Republic building where Banana Republic used to be is called the Old Coliseum Building in Seattle . Sorry , to go off on a tangent .

Rachel Oh 30:08

No no .

Brent Beardall 30:09

But that was bought , I think 12 years ago for $8 million and I think it's like 18,000 square feet of retail on the corner of fifth and pipe . That's going to market . They're going to put it out for auction for 2 million bucks .

Brent Beardall 30:24

And I look at that , I'm like $2 million Now you cannot . You know you can't go up . You've got it's a historic landmark , so it would have to be . You'd have to put in some seismic retrofit , so forth . But $2 million for prime real estate in downtown Seattle and you will see buyers come out of the woodwork because there's so much money waiting on the sidelines . So I think that's what's going to happen . Is you're going to find the floor ? Is buyer say wait a second , even if I have to buy and I have to wait four or five seven years I'll do it , because it's going to come back .

Rachel Oh 30:53

Well , it is a phenomenal location . I have so many good memories from when I was young and shopping down there and I went geez , I can't remember , it was just a few months ago and I was shocked . It was just hard to see . But you know , we're seeing that everywhere , it's not just Seattle , I was in San Francisco too , and that's market streets just dead .

Brent Beardall 31:14

Oh , macy's is leaving Union Square in San Francisco . Yeah , no , I mean we do . We do use terms like see it everywhere . No , we see it in some of the large metropolitan areas . What's crazy is you go 15 miles east of Seattle to Bellevue they are killing it . Bellevue still leads the nation in sales per square feet .

Rachel Oh 31:30

Really , I did not know that . That's amazing .

Brent Beardall 31:32

Right , so it's . It's all about safety in access .

Rachel Oh 31:37

Oh , and you have a new Din Tai Fung , don't you ? In Bell Square ?

Brent Beardall 31:41

too . Yes , we do Okay .

Rachel Oh 31:44

I'm obsessed , okay . So anyway , again another tangent , but just this is my . You know you're in my hometown and , uh , you know I'm dating myself . But you know , back before when Microsoft first started , I can't believe . I just said that . But Seattle has just changed over the years and it's so fun to see . And then going recently and just seeing some of the changes was hard . But you're right , there's opportunity and I and I do think you know , give it a few more years and I think they'll . Things will turn around and I love hearing that the whole city council has kind of changed . I think that'll make a huge difference . We have a big asset there . We've got the old Homewood Suites down right by the , on Pike Street , over by the Convention Center . That one actually , we bought as a hotel and we're converting into apartments which has been quite successful .

Brent Beardall 32:26

Yeah , that's actually been quite successful .

Rachel Oh 32:27

I'm sure it will be , and it's workforce housing , so it's not luxury class A , it's solid class B . I think it's to service , kind of that , you know , the workforce and to service Pill Hill , right there just up the street . So I think that'll be a phenomenal .

Brent Beardall 32:43

And that's what we need in all of our markets . Right , we don't need a whole bunch more of class A , we need solid class B and the Luther portfolio that we're selling the $3 billion portfolio we're selling it's class C and class B , it's true . I mean , the average loan size , I think , is $1.5 million . $1.5 million average loan size in California . These are duplexes , these are fourplexes , they are workforce housing and that's what we need more of and it's an incredibly resilient asset class .

Rachel Oh 33:19

Yeah , no , it's so true , it's so true . Okay , so you know we've talked a few different things about what you're seeing and whatnot . Let's just talk about kind of your passion to your bank and I've seen you grow the bank in deposits and just in preeminence and also expansion into California . So you just completed I mean I don't know how recent it was , but it's a substantial bank acquisition in California . Now you're in that state . Tell me what that means then for Wafed , and are we going national ? Are we going to continue expanding ? Tell me what your plans are . What's your world domination plan ?

Brent Beardall 33:50

Yeah , my world domination plan is not to dominate the world and to stick with what we know , and we know very little . So on February 29th we completed the acquisition of Luther Burbank . On Thursday , the 29th of February we closed the deal . Then , starting the next day , Friday March 1st , we started the conversion . The conversion was done Sunday night , Wow .

Brent Beardall 34:12

We are literally the fastest closed to conversion in . The conversion was done Sunday night . We are literally the fastest close to conversion in the history of US banking . I'm so proud of the team because what really matters is when are you on the same system ? We're on the same system now and since conversion , we've only lost 1% of their deposits , which is a huge , huge win for us .

Brent Beardall 34:30

And to be able to get us in California and you might say , why in the world does WaFd want to go into California ? Well , it turns out there's $3.5 trillion of deposits in California and I'm incredibly competitive and California has every bank known to man there . But the reality is we believe we've got something better right . We really do . We believe we're kind of the sweet spot where we're big enough to be relevant , small enough to be nimble and get things done and , at the end of the day , people want technology , they want access to their money , but , most importantly , they want a relationship . They want to be able to speak to a decision maker and find out what's happening with the deal . We really think we're in this really , really sweet spot . And if you think about the mid-sized banks that have gone away out of the California market you mentioned too right at the get-go Silicon Valley Bank , first Republic poof gone .

Rachel Oh 35:23

Yeah , crazy , crazy . I can't believe it .

Brent Beardall 35:27

Then you think Union Bank just went away . They got acquired by US Bank about two years ago . Then Pacific West and Bank of California came together . So there's been so much disruption in the midsize bank space and for a good , solid bank like WAPE to be able to come to California , we're incredibly excited at the potential . Now so we're in nine Western states . Do we want to expand and go everywhere ? No , no .

Brent Beardall 35:52

Not at all . I mean , if you think about the banking landscape , there's really two kind of lines of demarcation . As a bank grows , the $10 billion threshold . At $10 billion you lose half of your interchange revenue and you get compliance regulation by the CFPB . So that is incredibly painful . And then the next big threshold is $100 billion .

Brent Beardall 36:16

And we've all heard recently about New York Community Bank and they just went over that $100 billion threshold and having all kinds of problems . In fact they had to put in a billion dollars of new capital to be able to just make it survive . The rumor on the street is it will cost $100 million per year of incremental operating expenses to go from $99 billion to $100 billion . That's nuts , that's crazy . And so there's this overhang on banks that are under $100 billion . What do they do next ? And those banks nationally would be First Horizon Bank on the East Coast , zion's Bank in your neck of the woods they trade at discounts because of it .

Brent Beardall 36:59

Everybody says what can they do ? The biggest banks can't acquire them because unless something's going to fail , they're not going to allow the biggest banks to acquire . How do you grow and do it profitably when you've got this huge bullet of $100 million of incremental operating expenses coming at you . So if you think about it , WaFd at $30 billion . We've got all this runway in front of us and I'm incredibly excited at our potential , what we can do just through organic growth , and we've had this track record . We've been so blessed and so fortunate . We went public in 1982 and our total shareholder returns since going public in 1982 is 30,000% . Rachel .

Rachel Oh 37:35

Oh my gosh 30,000% .

Brent Beardall 37:38

Now , that's not like PEG , right , because you're only talking about 8% to 12% per year , but 8% to 12% compounded over 40-some-odd years , that delivers a 30,000% return . And that's exactly who we want to be . We want to be slow and steady . Reliable Banking should be boring . We should be there for our customers . We should be there for our shareholders , and that's why I'm excited about doing what we're doing .

Rachel Oh 38:02

Banking should be boring . I'm going to quote you on that . But you're right , you don't want your banks to fail . You want your banks to be solid . You want them to be there all the time . You don't want to lose sleep about your bank , right ?

Rachel Oh 38:19

No , no , not at all , not . All that you can do in the public markets , we do that enough , so not in my bank , okay , well , you know , brent , we're going to have had such an amazing time talking with you . I kind of wanted to just kind of close with you've seen it a lot , you've seen it all , probably as much as anyone can . And so what is your best advice to commercial real estate investors right now , given the challenges , given how even regulators are making it difficult for banks to learn ? Like , just tell us what do you , what would you tell you know our commercial real estate investors right now ?

Brent Beardall 38:47

Yeah , my biggest piece of advice is stay in it for the longterm right . Look and say I always . I always tell young people this run to where everybody else is running away , right , Run towards the fire , Right . So and and look to create opportunities , and I know Cameron , the founder of PEG , does exactly that . I mean he loves to be told you can't do that .

Rachel Oh 39:11

He does all the time Game on .

Brent Beardall 39:12

Okay , Let me show you how we can do that Right . So so that would be my advice to investors is say , hey , where is everybody , you know fire selling things to try to get out ? And then where's the opportunity in that for you ? And so that's kind of my perspective is hey , you know , just because everybody else thinks it may not make sense , look further , dig deeper and understand it . That's where opportunities are created . John Maynard Keyes once said the market can stay irrational longer than you can stay solvent . Sometimes the market can be irrational . That's true in equities , that's true in commercial real estate , that's everything . So build yourself a balance sheet so you can stay solvent longer than the market can stay irrational , and that provides the real opportunities .

Rachel Oh 39:57

Yeah , you got to have the money there so you can pounce on the opportunities when they come . No , absolutely .

Brent Beardall 40:04

Better than that . You've got to have the money at WaFd Bank .

Rachel Oh 40:07

Awesome , okay , okay

Exploring Real Estate Opportunities With Brent

Rachel Oh 40:09

. I grew up with WaFd . I had friends parents that were . They probably are people that you know , but I know WaFd has always held a special place just because it was all over Seattle , so absolutely .

Brent Beardall 40:22

Well , hey , thanks for this opportunity . I enjoy it and I sincerely appreciate our relationship with Peg , and there are opportunities to be had , but it just requires work .

Rachel Oh 40:31

Yeah , no , no , absolutely , and I know you've been working hard . So thank you so much , brent , for joining us this week . Your thoughts have been incredibly insightful and we're grateful for your friendship too , and for your support . So thank you so much for joining us today . So , in the meantime , thank you to all who have joined us . I know that it's been a challenging environment , but I think I'm hearing folks like Brent and whatnot that we're learning how we can make the best of these situations . So , from the peaks of the Mountain West , I am Rachel Oh , your host for Peaks and Portfolios by PEG Companies as we continue to dig into all things real estate . Have a wonderful day , everybody .