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Every Friday, join us as we dive into the latest in real estate multifamily with David Moghavem, Head of East Coast Acquisitions at Trion Properties. David invites top experts who know the ins, outs, and trends shaping the real estate multifamily market across the nation!
Whether you’re a seasoned investor or just curious about where the next big opportunity might be, Deal Flow Friday brings you the weekly inside scoop on what’s hot, what’s not, and what to watch for in today’s ever-evolving real estate scene.
David Moghavem (02:05)
All right, welcome to another episode of Deal Flow Friday. I'm your host, David Mogavam. And today we got Joe Paskov from Vental Green Oak. Joe, how you doing?
Joseph Paskov (02:06)
which is very interesting way to things.
What's up, Doing great. How are you?
David Moghavem (02:19)
I'm good, I'm good. I'm happy to have you on. ⁓ You know, I'm a little disappointed when I saw you at NMHC. You said you were thinking of moving to Miami and you're not here yet. I don't know, what's up with that? When are you coming out here?
Joseph Paskov (02:32)
It's always a consideration. There's a lot of draws there. I I spend time, I cover the market as it is, weather's great, taxes, we have an office there. It's always a consideration, so maybe someday.
David Moghavem (02:46)
Maybe someday. Well, you guys have a lot of locations. You're in New York, right? And Vental Green Oak, if you don't know, huge investment manager, 83 billion assets under management, core, core plus value add, ⁓ and many different asset classes, not just multi. And so we'll dive into all of those. Joe, if you want to give a little bit of a background, kind of what you do, what you cover, and what you're seeing out there, that'd be great.
Joseph Paskov (02:52)
Yep. Yep.
Yeah, for sure. So Joe Paskoff sitting on our investments team here at BGO, been with the company nine and a half years. ⁓ The way we're organized or delineated is by geography. So I spend a lot of my time covering the Southeast and a little bit of the Midwest, although it's less of a target geography for us. Just by virtue of my background, growing up in Wisconsin, spending time in Chicago, I cover markets across the Southeast as well, but primarily the Southeast across all of our funds and all of our products. ⁓
And yeah, I mean, happy to get into our investment vehicles and what we're focused on these days, but been very active in markets like South Florida, Central Florida, Atlanta, the Carolinas and elsewhere.
David Moghavem (03:59)
So where are you guys seeing the most opportunity right now? Let's start maybe from asset class-wise ⁓ before we go into geographies because I feel like as a multi-guy, we saw a huge rush of institutional capital during the Zerp era and then that's just kind of been on the sidelines and no matter who you talk to, groups like yourselves that say, we're looking, we're still in, we're considering, but I think.
Joseph Paskov (04:12)
Thanks.
David Moghavem (04:26)
You know, not to be rude, it's a little bit more talk than show. And so when are we gonna see that change? Why is it like that? Give, guess, the audience a little bit of perspective of what else you're seeing out there that may be a little bit sexier than multi right now.
Joseph Paskov (04:30)
Thank
Yeah. a couple of fair questions, a couple of things there. I'll start with the fact that some of our investment vehicles are sector and product type specific. And so those that aren't diversified and intermingled from a product type perspective are just beholden. Like we have a separate account with CalPERS that's totally focused on industrial acquisitions. We have a dedicated discretionary ground up cold storage development vehicle. It's obviously focused on cold storage developments by and large.
are diversified funds. we have an Odyssey index core fund ⁓ that invests across the product type spectrum. We have an open-ended evergreen diversified core plus fund, similar strategy. ⁓ And then we have a handful of separate accounts that have a variety of strategies, the diversify and a handful of closed-ended value add vehicles that are also diversified in nature. So those three funds, I think that comment
most aptly applies to them because we have the ability to invest in different sectors and, and, know, certain products, I might be more or less invoked for a variety of reasons. So putting aside the sector specific vehicles, I, you know, as a, someone who's done a lot of, a lot of multifamily transactions, both directly and via program addicts, I do miss the good old days, which I would consider to be, I don't know, September of 20 through
June of 2022 when you could get agency debt and the upper twos and cap rates were commensurately lower. And it felt like liquidity was at an all time high, but obviously that proved to be pretty short-lived and potentially not especially well-founded. And I find it somewhat ironic today because you think back to then and the overnight financing rate was next to zero. I think it was like 0.08 % at its lowest.
David Moghavem (06:28)
Mm-hmm.
Joseph Paskov (06:39)
Don't quote me on that. It's something in that range. like I mentioned before, you can get agency financing at 55 % LTV around like 285, 27 fix, depending on the time. And cap rates were three and a half ish, 375 if you're in a core market in Southeast, you're buying 15 to 20 % above replacement cost. And there was consensus that it's an incredibly intuitive time to invest.
And the rationale for it was that you could get a creative financing both on total return basis and I'm going in yield basis and therefore take the free money and that drove pricing out cap rates down. then there there in live the liquidity and the transaction volume that we were seeing. And there seemed to be uniformity amongst the investment universe that that was the right thing to do, or at least it made sense at the time. Obviously inflation ran rampant and.
Powell and the Fed started to raise rates and the market kind of came to a screeching halt around June 2022, 20 July 2022, when there was uncertainty and where things are going and heading. And then there was a series of rate hikes, obviously, to the point where we're at now, which is four and a half to 5%, which has been in that range for some time now. So you compare where the market is now over the past 12 to 18 months, it's more or less the opposite.
Debt is above the cost of the property level, the going in property level yield. can get fixed rate agency financing, you know, now to 12 months ago, you call it like mid fives, mid to upper fives, let's say. Cap rates are a five to five-ish, maybe a five, depending on the market, upper four, something along those lines. But the point is that debt is dilutive. Yeah, debt is dilutive going in. Your yield has gone up.
David Moghavem (08:25)
Mm-hmm for core core plus
Joseph Paskov (08:34)
175 basis points on a property on unlevered basis. You're buying below the cost of debt, but now you can buy for a 15 to 20 % discount to replacement cost. So if you gave me both of those options, just take three considerations. Say, where's your basis relative to replacement? What's your going in yield? And is debt accretive or dilutive? And in bucket one, you say above replacement cost, mid three cap going in, but you have accretive debt. And then the other hand,
You say the equal and opposite 15 % below replacement costs. Your yield has now gone up 175 basis point, but you just have to tolerate dilutive debt for a period of time. I'll take option B all day long. Basis I'm going to go with which is where we're at now.
David Moghavem (09:17)
Right, which is where we're at now. It's
overpaying for the real estate because of the debt or underpaying for the real estate because of the expensive debt.
Joseph Paskov (09:25)
Because of the debt. Because of the debt.
Yeah. I get, obviously we live in a structured finance leveraged world and, and, know, financial engineering has an, absolutely has an impact on values because we're driven by the returns that we can, we can promise and deliver and, you know, finite defined periods of time. So that makes total sense to me, but it does feel like at times we kind of trick ourselves into making investment decisions that are
more short-term oriented than not only long-term, but just ones that make fundamental sense. And if you look at the fundamentals, which is what I, we try to really drill down into, which is location, product, and ultimately basis, things you can't change for the most part. it does, I think, feel like a really intuitive time to buy. And then you layer on the fact that because cap rates have gone up.
The price of land hasn't really adjusted to the extent that I think it should. And hard costs and soft costs have remained, for the most part, relatively consistent over that period of time. Development yields no longer make sense. You can build like a, you you tell me, I don't know, a six and a quarter, six and a half, depending on the market, South Florida even lower. And so you say, okay, do I buy, do I build for a six to a six and a quarter or do I buy for a five and I get cashflow today?
David Moghavem (10:32)
Mm-hmm.
Joseph Paskov (10:48)
My basis is lower than if I were to build. have no duration risks, no interest rate volatility risks, no construction cost overrun risk. I should just do that. And so, and that's what groups are doing for the most part. And the impact of that is that the supply, new supply construction starts have gone down 70%, 75 % year over year, which bodes well nationwide, which bodes well for fundamentals going forward, which is all the more reason again, to buy.
David Moghavem (11:07)
Nationwide. Yeah.
Joseph Paskov (11:14)
buy today. I think option B, I think if there were more investors that had a longer term lens, I think it is an absolutely intuitive time to buy today. And I think the reasons why you're seeing that there is less liquidity than I think we'd like to see are for three main reasons I can think of. One, sellers and owners who potentially have bought in 2020 and don't want to admit defeat and they don't want to sell the basis below their cost basis.
David Moghavem (11:14)
Option B. Exactly.
Joseph Paskov (11:44)
And so there's more, relatively speaking, more illiquidity on the sell side. That's reason number one. Reason number two is that the funds that are using leverage ⁓ that would otherwise be active buyers are really focused on going in yields and can't get their heads around the equation that we just discussed. And for that reason, they have a lot of pause. And reason number three is the core funds or Odyssey index funds or just core mandates, separate accounts,
that would have otherwise be jumping at the opportunity to buy at below replacement costs for all the reasons we mentioned have redemption cues. And so they don't have the liquidity at the fund level, much less the property level to make these investments that would otherwise be really intuitive. so I think if you... Yeah. Yeah. ⁓
David Moghavem (12:29)
Yeah, let's dive into the third part because I think that's a super important part where you see these institutions that have longer term, but at the same time, their redemption clauses
don't allow them to recycle capital. talk a little bit about how that process works and how is that hindering institutions to jumping back in at what you say is in a vacuum, once in a generation opportunity.
Joseph Paskov (12:44)
⁓ huh.
Yeah, yeah, I don't. We have an Odyssey and XCore fund. It's one of I forget, I think 41 in the Odyssey world. The vast majority of funds within that index have outstanding redemption cues for a handful of reasons. One, performance is down for obvious reasons. You're marking the market and you have
valuations and appraisals on a quarterly basis. So obviously if you have a series of however many rate cuts there were and cost of debt goes up, rates go up, values go down, performance declines. ⁓ And when performance declines, investors particularly at the pension fund level and the institutional LP level with respect to BGO, ⁓ sometimes there are duration and time constraint related reasons why you would want to pull that capital.
and potentially reinvested in what they would envision being a higher yielding vehicle, whether it's alternatives or fixed income or whatever. So there are reasons why that is one reason why an institution might pull and redeem. Another would be the denominator effect, just given the fact that these institutions are very particular about their allocations across the asset classes that I mentioned. And if the value ⁓
of public equities are dropping down, ⁓ they may need to reallocate out of real estate and into other sectors, despite the fact that that's obviously a moment in time. And for those reasons, they might be out of allocation ⁓ within their own portfolios. And so they might want to redeem for those reasons. ⁓ And ultimately, we're beholden to those investors and we're, you know, our capital, we're fiduciaries on their behalf. And so
the extent that there are redemptions and to the extent that there are constraints on our capital, despite having a core fund that has $10, $11 billion in AUM, or you mentioned we have $83 billion in AUM globally. Yes, that's our assets that are managed, but that's not our liquidity. And so if our investors are putting guardrails on that or even requesting that they be reimbursed, not only might we be in a situation where we can't invest that capital, we might even be in a situation where
David Moghavem (15:03)
Right.
Joseph Paskov (15:16)
we're being forced or encouraged to sell or make dispositions to meet those liquidity needs of our investors, ⁓ which would lead us to be net sellers versus net buyers. ⁓ It's obviously more nuanced than that, to paraphrase and put it simply, that's effectively what's happening. ⁓ And it's happening across the sector, across different investment managers. And it absolutely has an impact on liquidity. ⁓
Fundraising in of itself is down and redemption queues are up. And so when the total quantum of liquidity there is in the market goes down, that volumes go down and valuations go down as well. So that's all the more reason where I think if you have liquidity and you have cash to invest, not only do you have it, but you're not dependent on financing and you're less duration oriented as an investor, I think it is just such an intuitive time to buy today.
David Moghavem (16:12)
Of course. mean, going
back to your analogy of option A versus B, ⁓ everything you've painted on where we're at today on the fundamentals of real estate makes sense to buy now than before, except the debt. so looking long-term, you know this is a good time to buy. Now, what do you need to see or what does BGO need to see to jump back in as like, you know, a JV equity partner in the common space?
Joseph Paskov (16:27)
Yeah.
So,
David Moghavem (16:41)
Is it just simply lower rates or is it much more than that? feel like it's a little bit more than that, but you tell me.
Joseph Paskov (16:48)
Yeah,
I don't know. At NMHC, which you mentioned before, I posed this question to a handful of capital markets folks, which is, so we have option A and option B, and there has to be an option C where the point of inflection between your unleveraged yield and your cost of debt intersect. You have cost of debt cap rate, and then you have cost of debt cap rate, option B, option A.
So there's got to be a point where they intersect and like, is that? And what overnight financing rate, what treasury yield, like where is that? I don't know the answer, but it's obviously somewhere in between the two. And it feels like that level is kind of where I think we need to be to feel like we have some sort of stability in the market today, because it does not make, despite everything we said, it doesn't make intuitive sense that you can.
borrow at an interest rate higher than you're going in cost of capital. It's just that that's not intuitive, which is why people have, yeah, at least on a going in basis on your total return, you might anticipate it will be, but there's a lot of assumptions embedded within that. that it feels like that needs to revert back to a point where they're more or less in harmony with one another. And I think if and when that happens, there will be consensus across the market that this is where we're going to be.
David Moghavem (17:53)
Yeah, not a creative to the deal. Yeah.
Joseph Paskov (18:15)
for the foreseeable future. And I honestly think it's less a function of what the numbers are versus a function of people believing that this is the landscape. And I think people just don't know that and don't believe that this is the landscape today. And if you think that the landscape might change tomorrow or the day after, it's in no one's best interest to do anything because you might look foolish. But if everyone can agree that this is the field, the landscape for the next whatever.
period of time, then I people will react to that and make the best decisions that they can based on the information available to them. And so I think having at least a feeling that we can rely on and depend on what tomorrow is going to look like, I think that's going to open up the markets quite a bit. ⁓ I'll start with that. ⁓ Obviously, if we can convince ourselves to buy at a lever going in and the low fours, we can convince ourselves to do so in the low fives.
Um, you know, and your exit, you know, your exit cap rate and your appreciation is, a big part of your total return. So you can, you can get your head around it. So I'll start there. Um, beyond that specific to BGO, there are more nuanced reasons why we're maybe a little less inclined towards housing today. One is some just portfolio level allocations that are a result of our, our act, the activity that we've benefited from.
in the multi-series in the housing, particularly the multi-space over the past four years and our core plus fund specifically that, you know, for those kinds of diversification reasons, we're a little bit more inclined towards commercial investments, investments generally. ⁓ There's nothing prohibitive about us, know, JV or co-investing with a group like yourselves, ⁓ but it's just a higher bar today. And then, you know,
Like I said before, we have a core fund that's experiencing some of those challenges. So to the extent that those ultimately reverse, I think we'll be a net buyer and we will continue to be focused on multifamily within that fund. ⁓ So as far as I see it right now, there's really four distinct vehicles that we have, our value add vehicle, our core plus vehicle, our Odyssey index core fund and a separate account we have ⁓ with a large insurance, global insurance ⁓ company that
are all currently and will continue to be focused on multifamily. But I think for those are the reasons or those are the things that I think would need to have to evolve to some extent for us to feel like we're going to be chasing those deals with more conviction. Maybe not with as much conviction as we did three or four years ago, but more so than we are currently.
David Moghavem (21:00)
Yeah, there was a lot to unpack there. think
one of the things I want to touch back on was how you're saying the people aren't really getting on board with what the new normal is. think what you're seeing in the first half of this year is people are starting to accept this as the new reality. They're not expecting rates to drop precipitously. You're probably seeing the five and 10 year treasuries jumping around here and there, but it's nothing.
as volatile to what you saw the past couple of years. you know, putting liberation day aside, you're not seeing as much volatility. So I think people are understanding that this is the new normal. You're quoting core core plus cap rates pretty confidently at this point. You know what core core plus deals trade nationwide, low five to a sub five potentially. Everyone kind of knows has the data points and they have
Joseph Paskov (21:35)
So, I hope you have a great day.
David Moghavem (21:55)
the information to make a sound decision moving forward of where things need to trade at. So I do feel like that stability is now going to create a little bit more liquidity to come back in because people are accepting taking deals at a loss and or break even and ready to put that money to work on something that could potentially be outsized returns.
Joseph Paskov (21:57)
So, I just think that's we want now.
then, as they look at how they're to do it, they're going to well, we might have a problem. We might have a problem. But that is a very simple problem.
Yeah. Yeah, I agree. mean, it's certainly, you know, it's funny, like in any given moment, it might feel unstable, but then you string in enough days of stability. You can't help but remark that it has been relatively stable over the past, I don't know, 12, 18 months. It feels like cap rates haven't deviated too much despite us feeling like it having any given moment it might.
And I can't help but continue to think that it still might. mean, I don't, you know, Powell, I don't know how many cuts are coming or how many of the market is priced in. Expect at least one more this year, but who knows? I Powell's- Yeah. Yup. For sure. Yeah. And then Powell's term is up next year and then who knows who the new appointee is. And so that may play a factor.
David Moghavem (23:02)
We had a cool CPI report the other day, so that helps a little. We're still tracking those, so yeah.
Joseph Paskov (23:16)
Yeah. And then who knows with the current administration, like what levers they might pull. So those are all unknowns. But I do agree with you. If you look back, like again, the past 12, 18 months, it has been relatively stable from a pricing perspective. So at a certain point, you'd expect the market to just kind of come to terms with the fact that this is the landscape. then, like I said, I think that'll open up capital markets quite a bit.
David Moghavem (23:42)
Yeah, definitely. So I guess moving a little bit geography wise from the limited amount of deals that you guys have been jumping in and you this could be, it doesn't have to be LP or common equity. could be pref or other parts of the stack. Where geographically do you have conviction in from any part of the stack right now? I know you're specifically covering the Southeast, but I guess maybe you could talk.
used specifically in the Southeast and then maybe even from a broader lens of what BGO has been able to do in multi.
Joseph Paskov (24:16)
I think it totally depends on our strategy. Like just going down the risk spectrum or the risk curve. mean, our core fund is not active on the buy side right now, but I think we'll be focused on top 20, 25 geographies nationally. It's a more risk-off vehicle. And so those, you know, we'll be focusing on.
demand drivers and employment centers and, you know, high, high demand. MSA is, ⁓ in general. So I'll, I'll, I'll put, put a pin in that cause there's, there's more to that. So I would say, you know, more risk off from a geography perspective. Our core plus fund is kind of along those lines in multi potentially could be a little bit more pioneering or open-minded, ⁓ but tend to gravitate more towards kind of proven.
proven Metro areas. think our value add fund is where we feel like we have the most flexibility and perhaps are the most open-minded in terms of those opportunities. And part of that is just part and parcel with what the fund is, which is a more risk oriented, higher yielding kind of upper teens, low 20 net IRR vehicle. ⁓ So we know that we have to take some risks in order to get to those returns. And I think we're open-minded in terms of what those risks are. one of those
risks is going to be location, geography, market and sub market. So I think within that fund, we're the most open minded and we're willing to understand the story more so than saying like we need to invest in X market or we won't invest in Y market. So we'll start there. Beyond that, I'll give a huge shout out to my
coworker and friend, Chris Ledke, who's leading our data science and kind of AI driven research function. Which we now we have a built out team globally that works under Chris and is, you know, the they're working on a number of work streams at the moment. But one of them is, is focusing on basically a market of what effectively boils down to like a market ranking system. That's based on tens of thousands of inputs that we put into this.
model that's a bit of a black box to me at least, ⁓ runs a model and comes up with ⁓ effectively market rankings that are based on the likelihood and probability of us either outperforming or underperforming ⁓ rent growth projections. So it's really predicated on our belief and understanding that performance is largely dependent on getting the location right.
⁓ which manifests itself in rent growth and that rent growth represents an outsized portion of your total return as far as investments go, particularly in the multifamily space, given the fact that you can.
David Moghavem (27:10)
What are, yeah, I know you said it's a black box, but like, are some of these inputs that are being factored, like inbound migration, affordability,
you know, just.
Joseph Paskov (27:21)
At
any weather, ⁓ tax rates, income tax rates, real estate, insurance, risk of natural disaster, think literally 20,000 inputs. So anything you could think of and even things that you think might not be related, we're trying to assess some sort of ⁓ a correlation between those things and people moving to a geography, supply and demand, how difficult is it to build, number of permits approved and so on.
So obviously, you know, it is, if you had to think about it in an ideal world, that is what you would do. Cause everyone has a strategy and you're like, I want to invest in South Florida. Why? It's like, well, because South Florida has no state income taxes and it's a lovely place to live and the climate's great. Okay. I agree on those things, but what about insurance? It's like, okay, maybe that, like, how do I, how do I weight that relative to other things? And then maybe you get to a point where you take
David Moghavem (27:58)
Mm-hmm.
Joseph Paskov (28:19)
seven things and you determine that it's a good place to invest. It's like, all right, well, what is, where is it pricing? You might like investing in a market, but what if it's selling at a four cap versus a five cap elsewhere? And so the way I think about it is what are areas that we believe in and have conviction in, which we, you know, I have heavily rely on Chris and the team to, show us what the numbers look like and how ultimately how the BGO model.
David Moghavem (28:28)
At what price? Exactly.
Joseph Paskov (28:47)
And if we believe that there is a discrepancy, particularly in markets where Green Street and CoStar, ⁓ well, you can look at it on both ends, but if Green Street and CoStar think they're the 100th best model or 100th best market and our model thinks it's the sixth, then you look at where it's pricing. And if it's pricing in line with the 100th best market,
And we think it should perform like the six. You'd like to think that you have an edge there and you should, have some degree of likelihood that you're going to outperform, ⁓ from a rank growth perspective, which we've again proven that is that represents an outsized portion of, your total, your total return. So I say that to say that there is a, an overlay of that function internally, where we liaise with our research team pretty frequently.
And seek their counsel and say, sometimes it starts at the market. Other times it starts with the opportunity or the partner. ⁓ and then we cross reference and say, Hey, like, what, what do we think? And we've, we've even gotten this down to the sub market and zip code level where we can, we, think delineate between. Really, really precise, you know, micro locations, ⁓ and distinguish them between one, one another. ⁓ so it, there's no like.
set process for us internally. It's not as if we have to follow steps A through G and then go about it. Sometimes we might go start with D and then go back to A and then to E and so on. ⁓ But that's kind of how we think about it and our approach, generally speaking. And then we try to stay within the frameworks of the funds, understanding that as we go along the risk curve, we become increasingly open-minded in terms of what those geographies are.
David Moghavem (30:37)
Yeah, I mean, you're you're getting paid and incentivized to take risk adjusted returns. And this is taking risk adjusted returns to as quantitative and as meticulous as you can get right where in your head, you're already compensating for some of these adjustments, you know, insurance versus fundamentals. Now you're putting it and you're looking at price and you're factoring all these factors in an objective standpoint in order to come up with what the true risk adjusted return is on.
Joseph Paskov (30:37)
That's my block. So you can have a good time.
Mm-hmm.
David Moghavem (31:07)
on a particular deal. I'm honestly curious, like, is there a trend within your guys' internal algorithm of which markets are priced appropriately given the risk that you're like, wow, this is really standing out?
Joseph Paskov (31:22)
Um, I, I'm sure there are, it feels like every market is kind of stands on its own. And we do back testing by the way, to, to make sure that we're keeping ourselves honest. And if we were like, say, Hey, in 2022, we thought this market would outperform, or this would be the 11th best market. And then we, look back over the past three years, like, was it, or wasn't it how, how far off were we? Exactly. Yeah. And then from there, you kind of.
David Moghavem (31:33)
Yeah, what do you mean by that?
Mm-hmm.
And why did it deviate? Yeah.
Joseph Paskov (31:51)
you know, self correct the model and make refinements. But no, I mean, it's, we, we have it for different sectors. So industrial might behave differently than multifamily and, and, and, and, and otherwise. So I don't know that there's like an overarching trend, but it is really interesting and telling. And, know, we can also drill into the model to the extent that, you know, you see, let's say you have a huge discrepancy between.
Green Street, Coast R, and BGO in either direction, you might want to understand why. And you can go into the inputs and figure out exactly what's driving it. What has more of an outsize impact on those returns ⁓ to try to make sense of it, because some of the rankings might not be as intuitive as you think. ⁓ But the evidence and the rationale for it is all there. So it's been a great tool for us. And at a minimum, it's been pretty thought provoking and has challenged us to
you know, to lean into those convictions and believe in that. It's still relatively early, but I think, you know, all indications point to it being a pretty competitive advantage for us.
David Moghavem (33:01)
That's great. mean, that's a good approach. You want to make sure
as an allocator, you're having the right edge when you're looking at deals and not just buying it for the sake of buying, but having conviction. And that's a good way to, as you said, keep yourself honest in buying the deals that fit the criteria risk adjusted. So it makes, it makes a lot of sense. What, I guess the next six to 12 months,
Joseph Paskov (33:24)
Right. Right, right.
David Moghavem (33:30)
What do you see your deal activity looking like? And I guess maybe even more down the horizon. Is it going to be more of the same? Do you think things are going to pick back up? I know we were just talking about how cool CPI report and ⁓ maybe a different ⁓ Fed chair getting changed in 2026. Do you see that as kind of potential tailwinds for you guys?
Joseph Paskov (33:55)
Yeah, think potentially, I think you can probably safely assume that whoever the new Fed chair is, is probably going to be ⁓ pro-business and maybe ⁓ a little less dovish or whatever. ⁓ But I don't think we're banking on that.
David Moghavem (34:17)
business. Yeah. ⁓
Joseph Paskov (34:25)
I think it's going to depend a lot on how our investors are behaving both with respect to capital raising, at least on our behalf and their behalf investing into discretionary funds, A, and how they're viewing redemption cues and their best use of that capital. ⁓ Obviously, we'll be as discerning as ever in terms of, we're not afraid to say that just because we have discretionary capital, we're not.
We're not money, we're not investment allocators, we're not capital allocators. And so just because we have discretionary capital, we're just not going to blindly invest it. ⁓ But it starts with the availability of that capital. So you need that to be able to make that decision as to whether or not you should. So I think a lot of it will come down to capital raising and really investor appetite and is that investor appetite focused on diversified funds. ⁓
David Moghavem (35:02)
Mm-hmm.
Joseph Paskov (35:24)
Are they looking for exposure into more sector and product type specific vehicles? ⁓ Where do they think that there is arbitrage from a risk return perspective? Is it more in the core plus space? it core? Is it credit? it, know, prefect equity somewhere between equity and credit? Is it, it's not a common equity side? ⁓ I think a lot of that will govern where we end up.
spending your time and where we invest. It's some combination of our intuition and really listening to our investors. And I do think that rates dropping to the point where we hit that inflection point between cap rates and cost of debt, think that will open up markets as well and perhaps give us more conviction for what we said before that the landscape is a landscape and now we can kind of operate knowing what it's going to look like.
David Moghavem (36:20)
Yeah, I think it's funny when you say that inflection point, there's, you know, the way that I understand real estate from when we've been in, I've never really seen core core plus deals trade, you know, at neutral leverage so much, where you're where you're getting that yield, it's kind of like you have to glean in for those good deals. And so it'll be interesting to kind of see if the goalpost is going to move right as
Joseph Paskov (36:21)
is that I'm a man who has a lot of experience in the world of sports, and I'm a around time. I'm a man who's been around for long time. I'm a long I'm man who's a long time. I'm man who's been around time. I'm a man who's time. I'm a been around for long time. I'm a man who's a long
time. I'm long time. I'm a man around time.
David Moghavem (36:47)
some of the rates go down. I do see what
you're saying, but at the same time, I could see the goalpost kind of moving as we come into a rate cut cycle.
Joseph Paskov (36:51)
Yeah.
Yeah. And who knows what will happen. I just know there was a point in time where we went from this to this. And it feels like that's where we should have had for some level of stability. I mean, the market is a living organism. It evolves constantly. And these fundamentals don't always apply equally across markets. I there are absolutely markets where you can buy for, you can invest with a cost of debt that's below your going in cap rate.
And you think of it from, we have a debt fund ⁓ here in the credit business in the U S and so we have insights into how we might think of it from the credit side. And obviously we talk to lenders all the time and it's really interesting. might like on the industrial side, you might be looking at a core industrial acquisition in a Midwestern market, like a Columbus or in Indianapolis where your basis might be safely below a hundred dollars a foot.
your cap rate is, I'm making this up, something like a six or something like that. And your cost of debt is not only accretive, but it's actually lower on an absolute basis because your yield is better, which means your coverage is better and your basis is so low. So you feel like you have less of a basis risk and lenders are actually more willing to lean in. And because they feel like that landscape is actually a little bit safer and by virtue of everything safer, they're willing to take on a lower return.
And so it's not always as intuitive or as uniform across markets as we'd like to feel like it is. So yeah, all that is to say is I agree. don't know if there's a one size fits all description of what's happening, but generally speaking, that's my best read, at least from where I sit.
David Moghavem (38:41)
Yeah,
and by the way, you're not really making those numbers up. Like I think in Columbus, you are kind of finding a six cap that's affordable. And so you get agency debt that puts mission financing and leans in on it and ⁓ those and for well below replacement costs. So like, that's all checking out as you're saying.
Joseph Paskov (38:59)
Yeah, those quotes were for an industrial building, yeah, think it's pretty like yield wise and pretty similar.
David Moghavem (39:04)
Yeah.
Okay, so I guess last question kind of wrapping it up. ⁓ In this down cycle, obviously, it's been really tough to form new relationships from a JV perspective. You know, you want to stick to your existing ⁓ operators and partners. ⁓ But as we you know, approach maybe a new rate cut, or even in this moment, what are some advice you can give different operators and
and JV Partners as a sponsor to form those relationships with institutional groups and get them on board and for people that don't have as much experience with institutional cap.
Joseph Paskov (39:47)
Yeah, I think, I mean, I can speak for myself and I can try to give an answer I think is more universal and I'll speak for myself specifically. would say the more universal answer is what differentiates you as a group? if you're invested, if you have a partner that's giving you, that brings to your desk a really quality industrial opportunity that you wouldn't have otherwise seen.
I don't know that I really care what your management capabilities are. Cause at that point you're kind of, you're, you're effectively an intermediary. You're a sourcing mechanism, not to dehumanize it, but like you're, you're bringing a deal to us that we wouldn't have otherwise seen. You should get compensated for that, but we don't really need you to be an expert at managing it. It's very, it's pretty straightforward to manage. And we have a very capable in-house management team on top of getting a property manager. And so from that perspective,
Your differentiation does, it means nothing to me. What matters is what is, what is the opportunity and does the opportunity make, make sense? ⁓ and that's specific to certain, to certain product types in the multifamily space. is highly, as you know, highly operationally intensive and highly management reliant. And so your abilities and your capabilities and to the extent that you can drive return alpha by way of your management expertise, it makes.
all the difference on top of just having there being less risk of there being something catastrophic that happens, which is its own consideration. And so when I'm spending time with a new operator, new operator, us, an operator with whom we don't have experience, I'm trying to ascertain what, what is, what is the thing that differentiates them from other groups? How can they return?
you know, generate a return alpha. Like what is it about that group that is either different or exceptional? ⁓ And that's a hard thing to do at times when there are a lot of operators out there. But I can tell you that not every operator has an answer to that question. And I'm not like putting them on the hot seat, but you can kind of gather through your discussions. And if groups are kind of out there just trying to allocate capital for the sake of generating fees, or if they
really feel like they have ⁓ a predetermined, well-thought through approach to managing real estate. And ⁓ that goes a really, really long way because it is always easier to go with the thing that you know in order to go to a new product and this applies beyond real estate. You have to feel like that new thing is so much better than the old thing such that you're willing to take the risks of taking on the relationship that has.
more unknowns than the thing with which you have experience. And so that goes a long way. That isn't the entire picture, obviously, but the opportunity has a ton to do with it as well. So if you don't bring interesting deals, then you're not going to do those deals. so from a sourcing perspective, the capital markets folks out there do such a good job canvassing the market. And these days are more off-market deals than in prior years.
You know, we'll still absolutely look at broadly marketed deals with partners, but we have a pretty good investment scene from a coverage perspective. So more than likely if it's marketed, we've seen it. We've at least screened it at a high level. So we should absolutely have those conversations, but I think the groups that can uncover deals that are not broadly marketed A and competitively bid B, I think the likelihood of us doing those deals to the extent they're interesting, Excuse me.
is just higher ⁓ for those reasons. And so the more such deals that these groups can bring, I think the higher likelihood of us transacting. And then that's my universal answer. And then my personal answer is just relationships and having a level of comfort and trust and just like, you people that I like and want to spend time with and that I trust? you want to, as they say, get in bed with.
It's just, I place a high emphasis on that personally and others obviously do as well. So having those relationships, having that connectivity with the team and the people matters a lot to me.
David Moghavem (44:18)
For sure. mean, I think out of all the podcasts that I've done, at one point, everyone just mentions how this is a relationship business and it's just so important and life's too short to do deals with people that you don't want to do business with. So there's so many deals and opportunities out there, but you want to do with the people that you trust and you connect with. It's a really important point. And I would say, I guess,
Joseph Paskov (44:26)
Yeah.
Yeah.
David Moghavem (44:47)
stepping back a bit, what your universal answer was, you need to have an edge, right? And you kind of put it into two buckets. You put it into an edge on the opportunity itself, like finding the deal and like, how are you gonna, you know, what's the story? But then you're also talking about who you are as an operator, what your edge is. And so, you know, in multifamily, it's a very management intensive business. So we have in-house property management that's...
Joseph Paskov (44:53)
Thank you.
David Moghavem (45:16)
That's one of our edges, right? But then from a deal perspective, how are you sourcing deals? How are, what's your thesis in investing? Just bidding on an on market deal and winning it market. It's just not enough for the cost of capital that we have and what you guys deploy as well. You need alpha. You need an edge to what typical returns are in real estate. want to generate excess returns and that's what we do as well. So.
Joseph Paskov (45:18)
Mm-hmm.
Yeah. ⁓
David Moghavem (45:45)
Having that edge, whether it's you as an operator or the deal itself with the edges on that particular investment, I think that's the universal theme. And if you can generate both, I think that's how you really break into forming those relationships and attracting equity and investors.
Joseph Paskov (46:03)
Yeah, I totally agree. Perfectly said.
David Moghavem (46:06)
Yeah, well, Joe, it was awesome having you. Hopefully we could do this ⁓ in person in Miami next time when you eventually decide to come to the dark side, come to the south side. So until then, keep talking and really appreciate you hopping on.
Joseph Paskov (46:13)
Yeah. Yeah. Yeah.
Yeah, absolutely man. Thanks for having me. This was fun.
David Moghavem (46:25)
Yeah, thanks.