Subscribe
Share
Share
Embed
Current Season: First Draft Live
Between economic whiplash, shifting policies and market volatility that changes by the hour, you need industry insights that cut through the noise. That's exactly why we're launching First Draft Live, a new weekly series that breaks down what's happening, why it matters and what you need to know to do better business.
Join us live on Bisnow.com every Friday at 12:30 PM ET / 9:30AM PT for conversations with the industry's sharpest minds discussing the week's most critical stories, or catch the replay right afterwards — here on your podcast app of choice.
Okay. Welcome to First Draft Live. I'm Mark Bonner, Bisnow's editor in chief coming to you from New York City. So as we've been discussing with the program in recent weeks, $875,000,000,000 in loans come due this year. And while you've likely heard that again and again and again, I actually have some news for you on this front.
Mark Bonner:That's actually less than last year. But if you think that sounds like good news, it isn't. That's because lenders have simply stopped giving owners more time. For years, the playbook was extend and pretend. Push the maturity.
Mark Bonner:Push another quarter. Wait for rates to come back down. That playbook just ran out of runway. The wall isn't shrinking, folks. It's just finally collapsing forward.
Mark Bonner:And last week, of all weeks, the ground underneath it got harder, not softer. Kevin Walsh's Fed held rates steady, but three of his own committee members voted to hike anyway. And the bond market, it didn't buy the calm. The ten year climbed ever closer to 4.7%. The thirty year hit its highest level since 2007.
Mark Bonner:And every owner who was counting on cheaper debt to bail them out just got their answer. It's not coming. Well, as it turns out though, somebody built an entire business for exactly this moment, twice. Vic Uppal started Mavik Capital Management in the wreckage of the global financial crisis on the bet that when everyone else runs from stress, that's exactly when you should run toward it. His first fund raised $335,000,000.
Mark Bonner:His second fund nearly doubled that closing at $685,000,000 in September. Now he's raising his biggest fund yet, a billion dollars. That's billion with a b. Aimed straight at the owners who can't refi and the lenders who don't want to foreclose. That's the standoff sitting at the center of of that wall we just laid out.
Mark Bonner:Three funds, each one bigger than the last, each one launched into a market that looked a little more like today than the one before it, which either means Vic Uppal has one of the best time careers in commercial real estate or he's about to find out if the third time is different. Vic, welcome to the show.
Vik Uppal:Thanks for having me, Mark.
Mark Bonner:So, Vic, let's start there. Third fund, biggest one yet, launch into what might be the worst financing environment of your career. Is the opportunity actually bigger this time or have you gotten more comfortable writing bigger checks?
Vik Uppal:Look, definitely the opportunity set for what we do is extremely compelling and there's a couple of reasons that are really driving that factor. One is commercial real estate has gone through an incredibly challenging period over the last six years. If you just think about, there's been five major events that have happened that have really created significant amount of stress, distress, just a lot of headwinds in commercial real estate. A lot of that stress just has not still been resolved. So we see that almost on an everyday basis.
Vik Uppal:The amount of volatility and uncertainty that exists is creating entirely really choppy environment. And the environment is bifurcated because there's certain parts of the market, larger players, that there's a lot of capital that's flowing efficiently, certain types of industries. But then there's other parts market where capital is not necessarily flowing as rationally. That's what we really focus on. We have an environment today that's defined by volatility, uncertainty, extreme choppiness.
Vik Uppal:As you mentioned, rates have continued to stay extremely elevated. And I think that is counter to what a lot of the optimism and expectations were. And so that's creating an opportunity set that we think is extremely compelling.
Mark Bonner:You hear this a lot from commercial real estate. It's one of the defining features. Everything's awesome. Everything's gonna be okay. I call it sunny day real estate real estate, eternal sunshine and the spotless mind.
Mark Bonner:So even in this moment with all this uncertainty and all this volatility, right, you've got a huge part of the industry that says we're gonna figure this out. Right? And optimism wins the day. I believe that in business. But you're coming to me with a little bit something different.
Mark Bonner:Right? You're bringing a little bit of reality. So when you hear the volume get turned up on that optimism, does that get you excited for what your corner of the industry is? That maybe there's the stress under the surface that's a greater opportunity for you?
Vik Uppal:Well, think people want to believe what they want to believe. And I think as the environment is such that if you look at over the last several years, there's been optimism. Rates are going to come down, credit availability is going to improve, and that's going to be kind of the saving grace for commercial real estate. That has not happened. And so I think that a lot of that optimism has faded, I think now reality has started to set in.
Vik Uppal:Now why have we not seen more distress given all the factors that have happened over the six years? Well, there's a lot of gymnastics, a lot of logjam in the system that really has not allowed that distress really to come to the surface, but that doesn't mean that it's not necessarily there. While things have been moving very slowly, I do think you're going to start to see more and more pressure from lenders, from back leverage providers on lenders. And a lot of that is leading to more for selling and exiting of positions that has not happened over the last several years. And so we're starting to see it today.
Vik Uppal:We think that's going to continue.
Mark Bonner:Look, we touched on this at the top of the show, so I won't remake the case. But I do want you to sit with it for a second. The wall, it didn't get smaller because the problem went away. It got smaller because the lenders stopped pretending. So when you underwrote VS3, were you pricing in more distress showing up or distress that simply can't hide anymore?
Vik Uppal:Well, think there's a couple of things. One is about just in terms of our strategy is like we don't predict the world. I mean, the reality is the world is an incredibly unpredictable place. There's so many variables that you have to constantly be assessing, and those variables are changing all the time. And so a lot of the optimism that we were talking about, rates coming down, credit availability improving, reality is nobody knows.
Vik Uppal:And so that's why you have to invest in a way that allows you to be able to adapt as well as be able to be extremely flexible how you invest. And so that's what I think is a really important part, especially in a world like today that's obviously really evolving and changing so quickly. But that being said, is that you're right. When you look at a lot of the headline numbers, you look at default rates, you'd see an environment that feels like either things are improving or that's not as bad as actually is underneath the surface. But why is that actually happening?
Vik Uppal:Default rates have actually been kept artificially low because there's been a lot of gymnastics that have been done by both borrowers, but also by lenders. And so a lot of lenders don't want to call defaults. So instead of enforcing their rights, they're turning to something else, which is let's do all these restructurings and things that make it seem like things are a lot healthier than they actually are underneath the surface. So the problem is not necessarily going away. It's just getting pushed.
Vik Uppal:If anything, it's getting more exacerbated. And the reality is like everyone is always trying to look for like, oh, I don't see this kind of risk or I don't see this problem at the surface. You never do. And that's why I said we don't predict things because it's easy to look back and say that was obvious. But when you're actually in the moment when it's happening, it's very difficult to be able to tell.
Vik Uppal:And you know, we built an investment strategy that really allows us to be able to adapt. It allows us to be flexible and nimble, then be able to evolve and move as opportunities in the market evolves and moves.
Mark Bonner:So going back to the wall, how much of what's coming due this year do you think actually ends in a real transaction? A sale, a recap, a workout versus just quietly getting extending one more time anyway?
Vik Uppal:Look, I think that that log jam is starting to get broken. And I think a lot of it is that there's more pressure on lenders from institutional investors. There's more pressure on lenders from their back leverage providers that like this now has to stop. Whether that turns into an environment where you see the headline numbers obviously dramatically turn, that's obviously to be determined. But I do think that the need for capital is very, very significant.
Vik Uppal:The reality is there's a lot of levered players that are out there. And so I think whether you look at from real estate operators, developers, or lenders, and you see some of the challenges obviously in private credit and what that's led to. But that's also a slow moving train wreck. And so I think as that process starts to unfold, there's more pressure and for selling. You're gonna see a lot of that rise to the surface.
Mark Bonner:Your thesis is capital for the owner who can't refi and the lender who doesn't want to foreclose. That sounds super clean in a pitch deck, Vic. In practice, it's two parties staring at each other, refusing to blink first. So give me the real version, not the category. Describe for me an actual standoff.
Mark Bonner:What it looks like, who's losing the staring contest, and why it drags on so long before someone like you gets the call.
Vik Uppal:Well, I I don't think that our strategy is actually easy to define that pitch deck because our strategy is, you know, very flexible by design. So if we invest across property types, markets, securities, public, private, so it's truly a very opportunistic strategy, meaning we're searching far and wide for those opportunities that we really have high conviction. So if you contrast that to what most firms do is they set their investment strategy and they create these very rigid boxes for what that investment strategy is. And then they go out and try to find opportunities to fill that strategy. So if you just think about that for a moment, that's very backwards, especially in an environment that things are evolving so quickly.
Vik Uppal:We see the rate of change even with technology and just the impact that that obviously can have on the world. So what we do is we actually let the opportunity set define our strategy. And so it's much more dynamic. So it's not actually easy to be able to explain in a pitch deck, but the reality is it's always evolving and changing. So it's built much more for an environment like we have today where things can evolve and change very, very quickly.
Mark Bonner:Listen, there's pain and joy everywhere in the market at all times. Right? But it seems to me that a lot of the pain is concentrated on things like office or multifamily or hospitality. Is that what you're seeing as well? I mean, you truly asset class agnostic?
Mark Bonner:You must have some focuses.
Vik Uppal:We're we're asset class agnostic. And again, the opportunity is something can change. I mean, thinking about coming out of COVID, I mean, everyone was obsessed with Sun Belt multifamily. And so you looked at a lot of those trends where you had population migration, you had a strong employment tailwinds. And so everyone's looked at the same idea, they raised capital around it.
Vik Uppal:And then what happened? That led to a lot of speculative construction, it led to asset values going up, and then now you're seeing the reversal of a lot of that. And so again, the reality is the world can change and evolve so quickly. And so the best way to outperform is really you have to have a dynamic strategy that allows you to evolve and adapt as the environment does. And so if you think about like, well, why is it that most firms don't do that?
Vik Uppal:Because the best way to outperform is to be different, And the best way to underperform is to be different. And so that's why most people, they feel comfort in the consensus and doing what everyone else is doing because that feels safe. But the reality is if you are focused on outperformance, you have to be looking in areas that other people are not. You have to be doing things that other people may not be willing to do because the perceived risk may be greater than the actual risk. And you have to be very creative.
Vik Uppal:I think a lot of times when people look at investing, they focus purely on the quantitative side. But there's another side of it that is the art of investing. And so the ability to be very creative and dynamic and think through problems and evolve and change you know, is a huge part of what we do. And I think that's where you really you know, allows you to outperform, especially over the long run.
Mark Bonner:Bisnow, take me into the room. Give me a standoff example that you see. And how does that staring contest, resolve?
Vik Uppal:Well, don't know if every situation is a staring contest. I think we view ourselves much more as a solution provider to a lot of our counterparties. And so that could be banks, it could be institutional investors, it could be real estate operators, developers. And many times what we're seeing right now is lenders. And so a lot of the challenges that you see in private credit, well, it's a very levered model.
Vik Uppal:And so it can lead to huge amount of liquidity issues. It can lead challenges overall in their portfolio. And so that's one of the areas that we've been extremely active. And so no two situations are alike. And again, that's why having this dynamic investment strategy allows us to go into every situation and figure out what's the best way to invest for that situation.
Vik Uppal:And so it's not backwards around like let's set this and then let's go hunt for the opportunities. And so that allows us to invest in the most honest, flexible way and focused on areas where we feel like are really mispriced and the return is greater than what we feel like is the perceived risk.
Mark Bonner:Look, you mentioned lenders. As I see it from my chair, if the lender is just as stuck as the owner, why doesn't the bank simply just take the keys and move on? What's actually stopping them?
Vik Uppal:Well, think it's a complicated situation, and that's one of the reasons why you see default rates have kept artificially low. It's one of the reasons why you see enforcement obviously be relatively benign. And I think a lot of that is the view that if we can just give things time, then capital markets will heal and that valuations will come back to whatever normal was. And while rates feel extremely elevated today, if you look back in history, they're not necessarily that high. Now they're high when you look at compared to obviously where things were a few years ago.
Vik Uppal:And so on a relative basis, they feel really high. And a lot of the deals that were done in 2021, 2022, those deals are obviously suffering. And so I do think that you're going to see more that come to the surface and a lot of that stress lead to, you know, a really compelling opportunity set. But you have to be patient. You have to be disciplined.
Vik Uppal:And some of this stuff, like, just takes time to unfold.
Mark Bonner:Alright. Let's let's talk about the trade you're not making. Global spending on data centers is on track to blow past a trillion dollars this year. Hyperscalers keep raising their budgets, not cutting them. And just this month, one of the spaces IPOs, C Square, priced below its range and still closed down on day one, a market that wanted the exposure but balked at the price before asking for it.
Mark Bonner:You've said VS three skips all AI adjacent assets entirely. Every other pool of capital in this market is racing toward exactly what you're walking away from, Vic. So make the case. What do you see in these valuations that a trillion dollars of hyperscaler that spending is missing or refusing to see?
Vik Uppal:Well, I would say a couple of things. One, we're not saying we absolutely will not do that, but we are saying that we're obviously not seeing the right type of opportunities that we think are truly investable for the things that we're looking for. And now I would distinguish that there's two things. One is the technology and AI and the potential that that could be transformational. The second is, is it a good investment and at what price?
Vik Uppal:And those things are actually very different. And the thing that we really focus on is investing in situations that have durable, predictable value over the long term. And when you look at right now in data centers, the reality is that everybody is so focused on energy, energy, energy. Power, power, power is a thing that everybody and I think most of your guests, that's what they always talk about. And so you do also see how manias get created because everyone keeps on saying the exact same thing.
Vik Uppal:But the reality is you have a backdrop right now where you have these hyperscalers. So Meta, Google, they're borrowing billions of dollars and they're doing all sorts of head spinning type of financings on how they're actually funding some of these data centers. And a lot of it is you have to do that in order to be able to keep up and justify obviously the pace of growth. And while definitely the demand and utilization is going to go up over time, I think there's no question about that. And you look at with the internet, that's obviously a good example of what happened.
Vik Uppal:But the whole thing on the power and energy, what that misses is the fact that the technology could become dramatically more efficient over time. And so that's really missing the fact that you don't know exactly what these data centers are going to look like. You don't know what the power usage is going to be. And there is going to be some massive technological breakthrough that it's going to come. And so I'm not saying that every single one of those opportunities don't make sense at all, but it's very difficult to be able to figure out over the medium and long term what those valuations are.
Vik Uppal:And so then you have to ask yourself, is there enough return that you're being compensated for the risk? And so when you look at the risk of functional obsolescence, you look at the risk of massive technological changes, to me that doesn't make sense. And so that's why we're focused on investing in situations where it's much easier to figure out the long term fundamental value. And you're investing in a way where you have real downside protection and margin of safety. Because the one thing you realize, especially after investing throughout cycles, is the fact the world is an incredibly unpredictable place.
Vik Uppal:And there's all these variables and things that are changing all the time. And so you have to invest in a way that you build in enough buffer for the known risk, but also the unknown risk. And so when you go into any situation, you have to have that type of margin of safety because the reality is the world can change. You could be wrong about something. And so that's why having that downside protection and everything that we do is such a critical part of how we invest.
Mark Bonner:So you're skeptical of where the herd has gone on this?
Vik Uppal:I'm very skeptical of it because everyone seems to be an expert about this now. And you see everyone kind of keep on saying the same narrative. And I'm not saying everyone is 100% wrong, but I think there's reason why you should be cautious when you see a narrative that gets spread all over the place. And the reality is there's just not enough time to be able to assess. Is that correct?
Vik Uppal:So if you look at the Internet as an example, everyone had bet on the fact that Internet traffic would explode. That was correct. Demand utilization obviously went up exponentially. But then if you look at with fiber as an example, that was the hype and everyone was saying fiber, fiber, fiber. Well, what happened?
Vik Uppal:Dark fiber was sold for pennies on the dollar because it was massively overbuilt. Obviously, was technological breakthroughs that dramatically changed that. And so when you look back at those situations, type you have to be very cautious that we're in a period of time when things are evolving and changing so much. And so just being focused on obviously all the upside and the hype and what gets headlines to me is very misguided versus are you focused on the downside and understanding that we're in a period that things are evolving and changing so quickly. And so you have to be focused on that downside and making sure that over the medium longer term that you're investing in situations that have more predictable valuations.
Mark Bonner:Look, Wall Street is skeptical as well. But within the last forty eight hours of this taping, and it's July 31, Microsoft came out with its earnings report, talked a lot about its AI expansions, its data center footprint, and Wall Street rewarded it with the greatest growth of its market capitalization, I believe, in history, adding a $500,000,000,000 to its market cap. How did you take that news?
Vik Uppal:Look. You can't you can't look at what things are on such a short term basis. Right? Whether we live in a world where everyone is so focused on, things you on a short term basis, whether it's day to day, month to month, quarter to quarter, like, the reality is that's impossible to be able to predict. And again, things can change and evolve so quickly.
Vik Uppal:And so, yes, there's some players who are being rewarded like today. And obviously, in the short term, they look like they're right. And they may be right on certain things over the long run. But again, like, it's very difficult to be able to say with a high level of confidence that this is exactly what it's gonna be. And so when you're going through these types of periods where you have massive technological transformation, I think it just pays to be cautious and be careful because it's hard to be able to know over the medium or long term what that actually looks like.
Vik Uppal:And the thing is, as a value investor, you have to be comfortable also being wrong in the short term. Because things can change and you can look like you were wrong in the short term. But if you're investing in a way that is very much focused on the downside, it's very much patient, disciplined, wait for the right type of opportunities, you have to just be waiting, waiting, waiting. And sometimes in the short term, obviously, you could be wrong. But over the long term, things prove out to be correct.
Mark Bonner:I don't want to put words in your mouth, Vik, but it sounds like you may be someone who is worrying about a potential AI bubble forming in the greater economy.
Vik Uppal:Look, there's no question there's an AI bubble. Right? And that doesn't mean that there's not transformational technology and that there's not going to be so many different great things that are going to come out of this period of time. But again, you have to be able to separate the technology and an investment and at what price. And I think right now, in the name of AI, you see all this capital that's rushing into all of these opportunities where some of them are obviously going to be fantastic and they're going to be life changing for people and they're going to be transformational, but then there's other ones that are going to die.
Vik Uppal:And so we just don't know what those winners and losers are going to be. And I think when you look at the valuations right now, it's very difficult to make any sense of them. I think a lot of it is that you're going to grow into the valuation. In our type of investment philosophy, that's not what we do. We're focused on finding value, things that we can underwrite with an eye towards downside protection.
Vik Uppal:And how do we make sure we're building in a buffer for both the known and the unknown, including what happens if things change or the environment all of a sudden is very different than what it looks like today.
Mark Bonner:Okay. Let's move on. Vic, you might have heard three Manhattan office to resi conversions have run into real trouble in the past few weeks, starting with the old Pfizer HQ in Midtown Manhattan, where columns buckled and floors sagged badly enough to evacuate the block. Two more towers have since been partially shut down by the city over structural issues. This isn't a theoretical risk now.
Mark Bonner:It's the exact asset class you've built part of your track record on. A lot of people may not know this, but one of your prior funds backed what's now DC's Washington DC's largest office to residential conversion. And so looking at these events in the last couple of weeks, Vic, I wanted to ask you, what did underwriting that deal teach you about the structural risk in New York is dealing with right now on this front?
Vik Uppal:Yeah. So I I started my career as a real estate operator developer, and so have a lot of experience building, managing, leasing real estate, both from a ground up perspective, but then also dealing with renovations and historical buildings. I think the one thing that I learned from that experience is that when you're going into any sort of older building, it's like performing surgery on a 100 year old patient. And so you could do all the checks upfront, all the diagnostics, all the diligence, everything, and it seem like it passed the test. But once you actually open the patient up, there's so many things that you obviously don't know.
Vik Uppal:And that patient that's 100 years old is not going to have the resiliency or the flexibility to be able to recover the same way as a 20 year old is going to be able to do. It's just the reality of life. And so we've looked at probably 50 plus office to residential conversions. And it's a very hot topic because you have these older office buildings. Many of them feel like they're functionally obsolete.
Vik Uppal:And then there's especially parts of the country that you have much needed housing. And so it seems like it would make a lot of sense to take these old office buildings and let's convert them to much needed housing. Well, the reality is most buildings do not work for conversions, whether it's the way that they lay out their elevator, their systems. And so even the entry price, which may seem like it's attractive when you factor in all of these unknowns and you can factor in structural construction, all these other potential issues, well, that can lead to a lot of value traps. And so I think most of the deals that we've seen, it's been very difficult for us to be able to build it and not buffer that we feel comfortable that have we accounted for the unknown risks.
Vik Uppal:Now, the project that we did in Washington DC, very well located building in the DuPont submarket, very, very good real estate operator developer that we've had great experience with and specializes in both ground up but also conversions. And they had owned this building for a number of years before we came into it. And so they knew a lot of the both structural as well as the overall issue, any potential issues with the building before obviously we came into it. What we liked about this one is it was a great location. The building lays out incredibly well for residential.
Vik Uppal:We felt very comfortable with the structural features and things that we felt like could potentially create some sort of headwinds and issues because they own the building and that gave us comfort in that. And so it was one of those unique projects that both from a building layout perspective, but then also from a capital structure perspective that I think was pretty unique because besides our first mortgage, this was one of the largest C PACE financings ever done in history. And so that allowed the borrower to have a lower cost of capital that ultimately made the project more economically feasible. That was also part of the driver of it.
Mark Bonner:Does what's happening in New York change how you might underwrite the next one?
Vik Uppal:Look, think political uncertainty right now is obviously something both at the federal level, but also at city and state level that I think everyone has to factor in. And I think it's something that we talk about and we think about because again, changing and evolving and what's the impact of that potentially going to be on valuations. And while our strategy is very much bottoms up, we're looking at everything on an individual merit basis. And so we're not top down macro type of investors. But I do think you have to factor that into your thinking and equation in every single deal that you go into.
Mark Bonner:Have to factor in local politics? I think
Vik Uppal:you have to because things can change. And so obviously, what's the impact of that potentially going to be on valuations? What's the impact of that going to be any sort of demand drivers that you think that exists or potential employment drivers that could obviously change? And so we're in a world right now that is extremely unusual. There's a lot of variables that are changing and evolving so quickly.
Vik Uppal:And that's why as, you know, active investors, you have to be factoring in all of these risks, you know, into the equation.
Mark Bonner:But some people might be listening to this and think, wait, he's talking about Zoran Mavik. Right? Which who's seven or eight months into, his mayorship here in New York. Do you is that a factor now? I mean, on office to resi conversions and how you underwrite?
Vik Uppal:Well, don't know if there's a just office to residential conversions specifically, but I think that, again, whether it's, you know, in New York City or whether it's in other parts of the country, it's something that you have to be thinking about. In our investment committees, it's something that we're talking about all the time. And what's the impact potentially of some of the policies that are being proposed? And how could that impact demand drivers? How could that impact valuations?
Vik Uppal:And are those situations that we feel comfortable that there's enough buffer that we've built in for the unknown? So I definitely think that it's something that we're talking about and considering, but I think every investment committee has to be assessing that risk.
Mark Bonner:I have to imagine, just to close the loop here on office to resi conversions, I have to imagine that these three incidents in New York have made an industry that has been doing these even more cautious than they already were. Right? These are complicated projects. They're expensive. It's a close call between whether you actually go forward with it or you knock the building down and rebuild.
Mark Bonner:A lot of people have made either decision coast to coast. And then you've got this complexity, right, of the last three weeks with the inspections and some of these spectacular public failings, here in here in Manhattan. Given all that complexity and then the layer in the political uncertainty that you're layering in here, Vic, why do it at all if even the Finnish ones can fail this publicly?
Vik Uppal:Well, I think we've we've done one out of 50 plus that we've looked at. So, like, they are really hard. And as you said, like, there's so many variables that have to work. The reality is the development business is a very tough business. Even just ground up is incredibly complicated.
Vik Uppal:You have an idea today and you're building something that's going to be delivered in two years from now. Well, who knows what the environment is going be when actually those projects open. And so then you layer on top of it buildings that are old and they have older systems and they could have structural issues. And again, you could do all the diligence going in, but then once you start to actually start construction and renovation, obviously things can change. And so the three examples now, I'm sure they did the proper diligence and they had all of their structural and mechanical and every single factor that they looked into.
Vik Uppal:But once they started construction, obviously something changed. And so that obviously has led this kind of being brought to the headlines of these office to residential conversions, especially for older buildings, just have a lot of embedded risk because there's so much that's unknown.
Mark Bonner:Look. You built Mavik, in the wreckage of the global financial crisis. A lot of people who lived through that decided to stress real estate was too dangerous to touch again. You decided quite clearly the opposite, that it was the whole business plan. What did you see back then that convinced you of that?
Mark Bonner:And be honest, is what we're looking at right now actually the same animal as 2008?
Vik Uppal:I would I'd ask the second question first. I think it's a different animal. So it's definitely not the same kind of animal as what you had there and a lot of the factors that led to the financial crisis. And I think that's what a lot of times when people look at pattern recognition, they look for the exact type of patterns. But the reality is things evolve and change.
Vik Uppal:And so the world that we're living in today is very different. And so one of the things you always hear people talk about is banks are much more healthier than they were before the financial crisis and regulatory change. And a lot of those things are true. But then you have other areas that that risk and a lot of those issues can evolve to. And so I think private credit is a good example of that, where it really has not been tested.
Vik Uppal:And so now you're starting to see some of that being tested and some of the issues and headwinds in that. But what's the medium and long term impact, obviously, of higher rates, having a very levered model, and what's that potentially going to lead to? And so I think that obviously the environment is different today, but I do think it's a different type of financial crisis. And we see that happening specifically in commercial real estate, which is a lot slower moving than you would expect given a lot of challenges and things that have happened over the last few years. But I do think you're going to see a much tougher environment going forward.
Vik Uppal:The reality is that when you have periods, whether it's the financial crisis or COVID or regional banking crisis, it is very difficult in a period like that to be able to move forward. And it feels obviously the world is melting down. There's all of these things around you that are obviously happening that feel uncontrollable. But the reality is that's when you find the best type of opportunities. And so I think when you see when capital is scarce and people are nervous, that's the time to obviously be greedy because that's when you can find the best type of opportunities.
Vik Uppal:But it's very difficult to be able to pull the trigger in an environment like that. And I think you see that even somewhat today when you look at real estate performance over the last five years, it's not been good. And so I think we hear this from a lot of institutional investors that real estate performance has been dramatically underperformed, especially when you look at compared to other asset classes. And so what that's led to is fundraising challenges and headwinds for a lot of firms. But that's precisely the reason why the investment environment is so good.
Vik Uppal:Because when capital is going to be more scarce, the fundraising environment is going to be much harder, that's when you're going to find the best opportunity is not the opposite. So if you look at a period like 2021, when capital was much more abundant, well, it's going to be much tougher to find those bargains and those differentiated deals that provide you a lot of downside protection, yet you're able to generate attractive and appropriate levels of returns. But it's an environment like now when things are much more choppy, capital is much more scarce. There feels like there's a lot of uncertainty and a lot of headwinds, but that's when you're able to find the best opportunities.
Mark Bonner:Is there a specific lesson from the GFC that you're now applying to VS3?
Vik Uppal:Well, I would say the biggest lesson out of the GFC was that the world is such an unpredictable place and things can change so quickly and so unexpectedly and when you go into any deal, like you obviously do your underwriting, your diligence, and you try to figure out ways to box the risks that you know. And so that's why I don't spend a lot of time trying to predict what's going to happen with interest rates or credit markets or geopolitical risks. You don't know some of these things. And the reality is things are evolving and changing so quickly. So I think you have to always invest with an eye towards the downside.
Vik Uppal:You have to invest with a huge amount of margin of safety that really allows you to account for those known risks, but then also for the unknown risks. And some of those unknown risks could also be, you could be wrong. And so again, going back to your data centers and AI, well, if you're building a speculative data center that has power and it feels like, well, that's a really great opportunity. But what happens if there's no demand? What happens if the power requirements change?
Vik Uppal:And what happens if there's technological breakthroughs that now all of a sudden you don't need the same type of power as what you thought today? So I think that the biggest lesson that I learned is just the fact the world is so incredibly unpredictable and things are changing and evolving so quickly, and none of us have a crystal ball. And so that's why you have to invest with a huge amount of humility. You have to invest in a way where you're accounting for both the the known risk, but then also the unknown risk.
Mark Bonner:We opened the show asking whether the third time is different for you. So here's the answer I actually want. Three years from now, when v s three is fully deployed, what's the one deal you point to and say, that's the one that proved it was?
Vik Uppal:That's difficult to say because, you know, that, again, we given the fact that we have such a flexible mandate, we're searching far and wide for all different type of opportunities. And so again, if you contrast that to what most firms do, they set these very rigid guidelines. We invest in one property type, one market, one type of security. And so I think when you have that type of strategy, it's easy to be bullish and say, look, this is where we think the best opportunities are. And so you're really using one tool in your in versus we use every tool in our toolbox and that's always changing, whether it's a hammer or a wrench or a screwdriver.
Vik Uppal:And so what I could tell you today could be very different than what it's going to be six or twelve months from now. And that's why having flexibility in what you do is so helpful. And it's such an important part of how you outperform. And so sometimes we're looking at really attractive opportunities in private markets. We'll also see really attractive opportunities in public markets, an area that we've been extremely active.
Vik Uppal:And we find things that could be mispriced a lot of times for superficial reasons. And so it's all these different factors that obviously allow us to evolve and change our thinking. That is a big part of how we outperform.
Mark Bonner:Vic, good luck putting this fund to work and thanks so much again for coming on First Draft Live.
Vik Uppal:Thank you for having me.
Mark Bonner:To everyone catching this on social, on their podcast feed, or on the commute, thank you for listening. This is First Draft Live. We'll see you next time y'all.