WS1868 Navigating Financial Blizzards | Highlights Chris Okada

In this highlight episode , host Whitney Sewell interviews Chris Okada to delve into the profound impact of the pandemic on the real estate industry. Chris emphasizes the importance of thinking outside the box and adapting to the new challenges presented by the crisis. The conversation explores how buyers are navigating the current market and finding ways to secure financing for their real estate deals. Additionally, the episode delves into the transformation of the work landscape, with many companies embracing remote work policies.


Chris highlights the significant changes that have occurred and emphasizes their lasting impact on the real estate industry. This episode provides valuable insights into the evolving nature of the market and the need for creative solutions in these unprecedented times.


To listen to the full episodes and gain more valuable insights from our guest, click the links below to tune in . Don't miss out on the opportunity to learn and grow in the world of real estate.


https://lifebridgecapital.com/2023/09/04/unlocking-opportunities-in-commercial-real-estate-chris-okada/

https://lifebridgecapital.com/2023/09/05/how-to-navigate-real-estate-cycles-chris-okada/

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Transcript

Whitney Sewell: This is your daily real estate syndication show. I'm your host, Whitney Sewell. Today, we've packed a number of shows together to give you some highlights. I know you're going to enjoy the show. Thank you for being with us today. What I'm hearing, too, and what I love about the blizzard, like we were talking about earlier, it makes you think outside the box like you've never thought before. It makes you learn and do things and improve in ways and get creative like you've never had to before. You thought you were maximizing that before, but now it's like, man, if we'd have thought of this a long time ago, a number of these things. Speak to just from the front row of the office space. How are buyers making it happen right now? How are they getting a lending, if they are? How are they financing these deals at the moment? Or how many are being converted from office to something else? Or thoughts around some of those things.

Chris Okada: Very, very good question. Let's talk micro and then we'll talk macro. We'll talk New York City and then we'll talk nationwide. 100%, the workforce, how we work is changed forever. There's no question about it. I believe at the very best, depending on your point of view. At the very best, we are a four-day workweek now in the office, at the very best. 2 to 3 is a lot more common. There are firms and technology companies that are 100% remote with a 2,000 square foot small just to have a physical location. And they can have 500 employees, but just have 1,000 feet just to have a mailing address. The world has changed. The world is different forever. In the united states maybe twenty thirty years from now. There may be a massive some kind of financial problem and we as a country come together. And we all say we're going back to the office because we need to win this war of some sort but. Today it's been three and a half three and a half years since march of twenty twenty. New York City is sitting at a 50% office occupancy, meaning that a big law firm or a big accounting company may have 100,000 feet, but at the very, very, very top, the utilization of their space is 65 to 70%, and Mondays and maybe some Fridays, they're only at 25%. So New York City on average is around 50% utilization. That's one study by Castle Key Card Systems, which tracks the key cards. So this is their data and they have a weekly rating of different you know, cities around the country, we are stuck at 50%. We have been at 50%. It has not improved. But Dallas, some areas of Texas are showing a 60%. So they're just a little more motivated than the rest of the country. But places, especially tech heavy centers like San Francisco, when you hear ghost town, unfortunately, is still true. What does that mean now? What does that mean about investors? What does that mean about landlords? There's landlords that are tech-heavy and office-heavy are 100% suffering. There's no questions asked. This is not new news, though. This is obvious. You're not using the space. Your value goes down. So you mentioned multiple things. One, financing. I don't care what asset class you are in, office, multi, hotels, industrial. When you have a 3% mortgage, and because of Jerome Powell increasing and the Fed to fight inflation, 5% and now your 3% is around 8%. No matter what, you are negative leverage. There's no ifs, ands, or buts about that. The property value has come down because the debt service coverage ratio is higher now. So if you had a million dollars of cash flow coming out, and you were paying a mortgage, and everything was fine, and your mortgage is 3.5%, and nothing has changed. Your property is 100% leased, it's the darling of your portfolio, but the bank now is saying, oh, our interest rates are six and a half because we love you. I know you're paying three and a half, but what that does is that almost doubles the interest rate and the monthly interest payment. And so I'm sorry, owner, you're going to have to do a cash in refinance. We're so used to the term cash out refinance. We're now in the era of the cash in refinance. What does that mean? That means you're going to have to come out of your pocket and post another million bucks or 2 million bucks. And if you can't, you're going to have to sell some other properties to cover that. And that's sort of what we're seeing. We're seeing consolidation. Is that bad? Yes. Is that bad for everyone? No. here's why it's not bad for everyone. Let's say you have no property. Let's say you have nothing. And you are like, this is the market I've been waiting for because I have been waiting for this market. And even though we have a portfolio, um, that is pre pandemic, this is the the post-pandemic era is the most favorable if you can do two things. One, if you can get access to capital, meaning equity capital, okay? And because now the dust is settling. OK, office is still a problem. Industrial was so hot. It's now sort of correcting a little bit. Industrial is still on fire, but Amazon doesn't need as much. Apartment buildings are still doing really well. They're still doing really well. If you're a new purchaser and you're like, okay, interest rates are six and a half, maybe six, maybe seven, somewhere in this range. And you're like, that's just how it is. That's just how it is. 65% LTV based on a six and a half percent mortgage. And the cap rate has to adjust a little bit, which it will. And I can put together the balance of the 35% in equity with this new lens. You're in way better position than a guy that's just like, Oh no, we have to figure out. I'm used to interest rates being 3%. If you're able to say, this is the new environment, this is the environment I'm going to work on. I'm going to tell you, you have a great, great, great next couple of years coming up. And we're in it now. We are in it now. And I published a white paper called From Fear to Fortune, because this is a generational and maybe once in a lifetime opportunity today, 2023, where there's so much upheaval and there's so much insecurity about cash-in refis, and this is even every asset class, that if you're able to figure out a way to get access to capital, to be selective on product, to align yourself with a bank that is still lending, then this is an excellent time, excellent time for you. And we all know that United States for the past 40 years had a interest rate decline map, and then it would spike and then it will come down. Then it was like, if you can borrow today at a six and a half or 7%, and the interest rates work in your favor. And in three years, they're back to six, five and a half, heck even five. And you're used to this six and a half, 7% market. You, my friend will 2X in three to five years as a minimum on the appreciation, but your cashflow would hopefully still continue. And you're still getting your, your coupon. That's number one. Number two, if you're okay and you have access to capital. You don't need to go after large deals, go after smaller deals, but all cash that are cash flowing, you know, like we were all like, Oh no, we all try to, I have a deal. It was a $3.2 million purchase that I bought in 2015. The next deal after that was a 15 million. The deal after that was 42 million. And the deal after that was 10 million. You know what the best behaving and most profitable deal was the small, small, no, the $3 million, the $3 million deal, the three, the smallest one. I say, wow, thank God. I, you know, because during the pandemic, It was easy. Now, I don't know if $3 million is big for you guys out there or small, but pool your money together. If you get good at pooling your money and then get good at looking for product in your backyard, and it doesn't have to be $3 million. It could be $300,000. It could be $300,000. But now, I have never, ever, ever, ever seen an 8% capitalization rate. I have not ever seen a 10% cash on cash. And people are like, no, I got too many problems. I'm not going to pay attention. A 10% cash on cash. I mean, I've never seen that. So my days are filled with working in the business. If you take a step back, turn the page, create a new, I don't know if you guys journal or whatever, but philosophically, There should be a new book, a new book, a fresh new chapter, and it should be called From Fear to Fortune. You don't have to call it that. You could call it 23 and Beyond or Once in My Lifetime, and we're here. The scariest thing, and there's fear and then there's courage, okay? Just very, very basic human emotions, fear, and then there's courage. The courage when you're young is blind. It's ambition. You want to make a million. You want to make five million. You want to be a landlord. You want to acquire property. That's wonderful. I love that. That's a wonderful place to be. I started this firm with blind ambition, no real knowledge and understanding emotionally of what it takes to be a real player. A real player in New York City is someone that is, if you're a broker, able to do several billion dollars of sales transactions, and a player has to be hundreds of millions of properties. owned. That doesn't mean you're 100 millionaire, but that means you are a player if you acquired and created a pool of 100 million, which is pretty much one building in New York City at this point. However, yeah, so every single decade, And you guys have to know the economic cycle is on average anywhere from seven to 10 years. You got to look at the peaks and the valleys of your market and of, of a United States in general. You have to know that when the market is at the peak, money is easier to access, but, and, but deals make less sense. Let me repeat that. When the market is on fire, there's a lot of money. Banks are flush. They're willing to lend. Credit cards are increasing their limits. Investors are more around, but the deals are not good deals necessarily. When the market starts crashing and it comes down and it's every decade, you have to be aware that it will come down. And that's why this market taught me because I was all the way up in the financial crisis. I had no assets. I was just a broker making deals. And, um, and from, let's just say 2010, which was kind of the bottom here in New York City and around the country in Phoenix, it was like 2013. So you have to know your micro economics as well as your macro. It was a straight shot, 10 years straight up and to the right, like you were saying. And 10 years is a long time, especially if you're young, uh, 10 years. Um, and if you, let's just say started, um, and you've experienced really upward momentum, things getting crazy, things getting expensive, and it just was a straight shot up. Um, you get used to that. That's what you think you don't understand. However, Warren Buffett, and I'm sure you all listen and watch him and learn from him, but Warren Buffett really, if you watch his moves, he was hoarding cash. through 2015, 16, 17, 18, 19, 20. And he was actually yelled at by shareholders for not reaching ROI hurdles, annual hurdles, and yelled at for not investing. Why are you holding onto our cash? Why are you not deploying it? And in 23, he had spent something like, he had spent hundreds of billions of dollars increasing holdings in Apple increasing in, um, in all of his, uh, and today has over $150 billion in cash. What does that mean? When the REITs started trading, uh, started crashing, uh, the real estate investment trusts that are publicly traded here in New York city, um, in the, during the pandemic, I really started looking at the real estate investment trust, how much cash they held, then the regional bank crisis had happened, SVB. And why is JP Morgan constantly the one bailing people out? And I realized that they have anywhere from 35 to 50, 50% of their assets in cash. Warren Buffett, $150 billion in cash. And then I looked at my real estate portfolio, and real estate owners have a very, very tough and slim level of cash holdings compared to their portfolio. If you have a real quick $100 million portfolio, of which 70% is debt and 30% is cash. You have to look at your debt obligations and you have to say, and this is all brand new, and let's say you have $70 million in debt obligations, how much of that outside of equity is held in cash? A lot of operators and a lot of real estate investment trusts that are very, very, very smart at 5%, 10% of their entire portfolio. That was a huge eye-opener where I was like, oh my God, if things were to go south, you would be wiped out very, very fast. As most of us are, we don't have necessarily a rich uncle that wrote us a $20 million check. We have to go out and syndicate deals, create pools of capital, But what we fail to also ultimately remind ourselves is that every decade you will experience this. If you're in your twenties, you're experiencing it. You're going to experience it in your thirties. You're going to experience it in your forties, your fifties and sixties and seventies. You will have a credit event every single decade of your life.

Whitney Sewell: It's kind of crazy how surprised we are when it happens.

Chris Okada: We're always surprised. So here's a really tough thing to create for yourself. 12 to 24 months, every single mortgage that you have, you can carry it for 12 to 24 months with zero income. That is what JP Morgan and Warren Buffett essentially do. the distributions for us were very, we were like, all right, you know, three to, we would have three to six months of just in case rainy day, um, you know, all the more, you know, of mortgages and all the things. And, but three months is as we learned can go very quick. If, uh, you know, if, if, if it gets, if it gets bad, I never understood that I have mentors in their seventies. that told me, Chris, you have to time it, be careful. We don't know about the pandemic, blah, blah, blah. But I went in head first, and I'm still learning to listen to the elders that are much wiser and wealthier than me. Because you have to listen. But what we do when we're young, and I still do in my 40s, is, oh, no, yeah, I hear you. I hear the risk. I hear it. OK, Warren Buffett, great. Be fearful when everyone's greedy, greedy when everyone's fearful. Great, great. Wonderful. Let me buy some Bitcoin. It's on fire. I'm going to 10X. So it's really, really, really challenging to hack your mentality to be on the conservative side at the same time, want to grow aggressively. It's very hard to do that. But here are the ratios. 25 to 50%, depending on how conservative you want to be. And it's very challenging to do this, and this is why it's hard. Liquid, cash. If you're like, I'm worth 10 million bucks, but you only have half a million dollars liquid, you gotta do whatever it takes to get that to 3 million bucks liquid.

Whitney Sewell: So you're saying your overall, your portfolio as an operator, you mean personally, or how do you see?

Chris Okada: Your world, your world, your person, Whitney's world, I'm worth 10 million bucks, here's how I got, I don't know, I'm just making the, I don't know if you're worth 10 million bucks, but let's say you're worth 10 million bucks, 100 million bucks. How much of that is sitting in the, in, in, in treasuries, um, in a liquefiable, uh, IRA in the stock market, because what we real estate people do is we, we, we tend to go all illiquid. Yeah. Now here, all of a sudden, you know, we, you know, we had a personal event. Now we need, you know, half a million bucks, a hundred grand, 250 grand, whatever it may be surgery, all of a sudden, bam, 50 grand. Now, our cash position is slashed in half or a third because we didn't realize, wow, I need to increase all holdings significantly. The liquid portion of all of my assets, you may not hit your IRR hurdles that you promised, but guess what? We have cash. And what Warren Buffett does and what JPMorgan does is they wait for credit events. And so JPMorgan Chase, 35% cash. You can go online, JPM, that's the stock ticker. Look at their balance sheet. I think it was something like 35% or 40% cash or liquefiable assets. They purchased 150, was it 100? They purchased First Republic Bank deposits for 5 cents on the dollar. A 95% discount. I think $150 billion they paid something like $10 billion for. Warren Buffett, Apple crashed last year, doubled up. Now, it's your wait, wait, wait, make a move. Wait, wait, wait, make a move, but all in the long time, you got to keep humming and churning. Now, JP Morgan was also at risk of going under an O9. They, you know, SVB, uh, you know, their, their portfolio is, is around, uh, everyone's dumping these, uh, pools of, of commercial mortgages that are under underwater. So it's hard to do because we don't have a trillion dollars in assets. Okay. But we don't, let's say you, you know, let's say you have, you want to get to a million dollars of net worth. Okay. Um, you only have a hundred grand fine, but you gotta be able to build, build, build, build, build, build these cash streams. And, and I don't know how you do that for us. It's we sell and lease commercial, uh, commercial real estate. You can, we're, we're real estate agents get really freaking good at that. And then hoard. you know, get to a certain amount, a million bucks, half a million, you know, my numbers are a little skewed because Manhattan real estate is, is different, but you got it, you know, better to have a hundred, a hundred, uh, uh, better have a million bucks liquid and be a two millionaire, uh, than a 10 millionaire with, uh, a deck a millionaire with a million dollars liquid.

Whitney Sewell: That makes a ton of sense. It's being disciplined, isn't it? You know, like having a plan and being disciplined, it is so hard. It is so hard. And I think back, man, if I could have thought through some of this 15 years ago, I would have been disciplined enough, you know, to have even done some of the things you're talking about. But like you even mentioned too, looking at those, like you called our elders, right, you know, even even looking at what people like, you know, Warren Buffett or JP Morgan are doing, you know, it's like, they're, it's not like they're brand new to this. You know, this is not their first market cycle, right. And so, you know, not many of us, It is our first blizzard, right? And so we don't think that way yet, right? And it's unfortunate. It seems sometimes it takes a blizzard to help us to be disciplined for the next one.

Chris Okada: Yeah, I'm telling you, I have so many lessons. I created a document about all the lessons I've learned during this monetary tightening market. And let me share some of them with you. Yeah. And these these could be very, very commonsensical. But when you when the market's hot and when, you know, when it goes out the window at that time, right? It really does. It really does. OK, number one, here we go. Think about acquisition criteria thoroughly about how the world is looking and working. Don't just jump into saying, I want to own apartments. Don't just jump in and say, I want to own a hotel. Don't just do things because you want to. Have a real acquisition criteria. and use data, the internet, chat GPT, Google, to create an acquisition criteria based on reason.

Whitney Sewell: Helping you keep emotion out of it, right?

Chris Okada: It's a reason. It's an investment thesis. When I was young, I just said, I want to own a building. I want to own a building. Why? I don't know. I just want to. Okay. That's fine. That's blind ambition. That is but create an acquisition criteria based on how the world is looking and working. If you're going to go and be a contrarian investor and saying, I'm going to go the opposite way, I'm going to go into office. You better have real data on why, not just that's what I want to do. Number two, during times of monetary tightening, everything gets expensive. Liquidity is drained. And if you're on the wrong side of this, you will suffer and potentially lose everything. Keyword, everything in that sentence. Now there's a saying that if you haven't lost a game, you haven't been in the game. LeBron James, Michael Jordan, everyone you lose. Okay. There are people that go unscathed. However, Warren Buffett says never lose money. Right? So you just got to be smart about that. And key here is monetary tightening. Pay attention. We all knew that Jerome Powell in March of 22 and the Fed, we knew it was coming. Did we take immediate action? Did we learn about monetary tightening? We heard about it. We read it. We learned about it. We went on Google. Maybe we did slight studies, but we have to be aware. So now I know in times of monetary easing, Things, it's a great time to buy and, you know, or assets will go up in price. But if you're on the wrong side of this, everything gets expensive. Number three, construction will take 25% more money and 25% more time at best. At best, that's for sure. at best. How does it look if you're in a two-year project and now you're in year three and a half? Oh no. If you want to continue the project, still do it. Raise 100% of the money for those cost and time overruns. Sensitivity studies are important, meaning What if the apartments don't rent for $5,000 a month? What if it's $4,000? What if it's $3,000? Sensitivity studies. What if the market requires a 6.5%? All of my projections from 2010 on the exit were a 4% exit on the capitalization rate. Now the market is requiring a 6% minimum in prime Manhattan. That's a 50% increase in what investors are looking for, for them to part with a million dollars today. Debt is the killer, literally the killer of all businesses. Use it very, very cautiously. Use it very wisely. When times go, oh, 70% LTV, let me take a senior loan, a bridge loan, Mez loan, but debt is the killer. Better you have one property that's a million dollars with 50% leverage at today's high rates, and you're clipping a coupon and it's boring versus $10 million in property at 80% LTV with low rates. You'll win. invest in businesses and properties that have a moat. So in New York City, we specialize in class C and class B offices, not the shiny, gleamy glass towers. The properties that are just like one, two, three, West 22nd Street, you know, no one knows about them. It doesn't matter. They're just, you know, millions and millions of square feet. truly think about going after higher quality assets. They may be a little bit more expensive. They may be a little bit newer. The ROI potential, the equity multiple potential may be less, but in this market, in this lesson, the well-positioned properties remained well. They really did. Um, let me think. I have other things.

Whitney Sewell: Well, I, I just, you know, even the, what you said there about debt is a killer of all businesses. And I just think back about, man, how debt, how it is. I mean, it's even, it's biblical, right? the borrower will be servant to the lender and I mean it is so true and especially in our market right now where lenders are calling right and man you know loans that I mean I know so many operators who you know bought bought deals over the last, say, 18 months, 12 to 18 months, and don't even have a cap, you know, on a floating rate debt. And it's like, they're, man, they're in trouble, right? Massive, massive trouble. And that debt is, it's going to kill them, right? It's going to kill their business, ultimately. And so I just think it's so wise, man, handle it with caution, right? And so much of our business is done with debt, but Man, you got to be got to be cautious. I think it even goes back to the you know, you're talking about, you know, having what you say, you said be able to carry the mortgage for 12 to 24 months. And would you say have 25% 25 to 50% I think you said of your net worth right in cash. It's very hard to do.

Chris Okada: Yeah, it is. In order for us to grow, we need leverage, right? We need those wins where we bought a property, we put down, you know, 2 million bucks, we borrowed 8 million. And it grew to 12 million bucks, now you have a 2x versus buying and putting up $2 million, buying a $4 million property. And, you know, it maybe grew to 4.8. You know, yeah. And so, But the boring, slow stuff in a market like this is what survives. It's wild. And then the other things are things that I did right. and other things like your operating. Now, are most of your listeners, are they, they're syndicators, they raise capital, are they growing? I'm gonna assume that a lot of them need to raise money somehow, some way.

Whitney Sewell: They are, there's many operators that listen who are, they're all syndicating, they're raising money. Many passive investors listen as well, who are the investors, you know, on the other side of that.

Chris Okada: Yep, so the operating agreement, don't go cheap on that. Don't go online. You're gonna have to spend five, 10 grand on a good attorney that will be like, oh, this may be a pitfall now, both for LPs and GPs, you know, passive investors and the general partners. Don't go cheap on that. Next, your reporting. Your reports should be on par with your bank reports. You get a bank statement notification from Bank of America that your statement's ready, so should your reports. Be on par. All of these things are not necessarily easy, but they are things that you should strive for. When you sign up a Bank of America document for a new checking account, You know, it's accessible. You get your monthly statements. These are just some basic things that we need to improve. Okay. Things that we did, right. Marketing, um, go viral. It's, it's the same thing. It's the same. How can we get the word out? That's something we did, right. It takes a long time, you know, post after post. 1,600 podcasts, 1,700 podcasts, 1,800. There's a beauty in that, and that's discipline. And all of a sudden, in podcast number 1,825, some guy in Saudi Arabia saw that you did something that they'd liked, and they happened to be in the area. And now they want to just have a meeting with you. Um, I don't know, but we, we did something. Uh, we hired a PR agent and we, this was last year in 22 and we had 800 million impressions on a piece of content that just went viral. Um, and it started with a New York times article. Okay. You got to think about getting the word out when you get to that level.

Whitney Sewell: Um, That's impressive that you all hired a PR firm and it was that successful. That's incredible.

Chris Okada: You've hired many PR companies just to do deal reporting and we closed this deal. Congratulate us, pat on the back, get me on this, get me in this newspaper. A lot of times it's, you know, a couple thousand views, maybe 10,000, 20,000 views. Our social media ranges from, you know, a few hundred views to hundreds of thousands. We've never gone really truly viral. We've gone viral for like capturing crime, putting it on people like crime, celebrity, you know, stuff like that. And, you know, crime TV stuff. But never, you know, real estate, it doesn't really get, you know, it doesn't really go out there unless there's an angle. But yeah, I mean, we hit it with this PR team, but we've never hit those numbers ever again. You know, we're back to the, you know, thousands of impressions, you know, not hundreds of millions.

Whitney Sewell: Thank you for being with us again today. I hope that you have learned a lot from the show. Don't forget to like and subscribe. I hope you're telling your friends about the Real Estate Syndication Show and how they can also build wealth in real estate. You can also go to lifebridgecapital.com and start investing today.