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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.
Alright. Welcome to First Draft Live. It's Wednesday, June 24. I'm Mark Bonner, Bisnow's editor in chief coming to you live from New York. So listen, for the better part of three years, commercial real estate has been a market defined by what wasn't happening.
Mark Bonner:Deals that didn't close, capital that didn't move, sellers who wouldn't budge and buyers who wouldn't stretch. The industry had a name for it. The Bid-Ask Standoff. And it became the defining feature of a cycle that seemed determined to never actually resolved. But something has shifted.
Mark Bonner:Not all at once, not cleanly, but the evidence is starting to stack up. Retake privates are accelerating. Transaction volume is climbing. Institutional capital that spent two years on the sidelines is beginning to move slowly, selectively, but it is moving. And the investors who never really stopped, the ones who kept deploying through the freeze who made their bets before the all clear signal came, they're about to look very smart.
Mark Bonner:Affinius Capital is one of them. Last month, the firm closed a $3,400,000,000 take private of various residential, one of the largest multifamily transactions since the rate cycle turned. And that came on top of active deployments across data centers and industrial and a debut data center fund that has now raised more than $900,000,000 towards a $1,000,000,000 target. This is not a firm that was waiting for certainty. This is a firm that has decided at some point that certainty wasn't company and they moved anyway.
Mark Bonner:Today, I want to understand that decision. What they saw, how they underwrote it and what their activity tells us about where this market actually is versus the industry versus where the industry keeps hoping it will be. Joining me now is Ryan Crouch, partner at Affinius Capital. Ryan, welcome to First Draft Live.
Ryan Krauch:Mark, thanks for having me.
Mark Bonner:Pleasure is all mine. So look, let's start right here. The Verisk deal closed last month, dollars 3,400,000,000, all cash, one of the largest multifamily transactions of the cycle. Most institutional investors are still warming back up to the market, but you just made one of the biggest bets in it. Ryan, take me back to the moment you decided to move.
Mark Bonner:What did the market look like from where you were sitting? And what gave you the conviction to pull the trigger when most of the industry was still waiting?
Ryan Krauch:Yeah, Mark, think you framed it really well, right? I think that there has been a shift in sentiment, right? And not major necessarily, but we'll take the small wins, if you will, after what has been the longest period of illiquidity certainly in my career. So anything that looks different than pure standstill is a win, right? And I think one of the things that we like to keep in mind is we view real estate as a long term asset class, a long term play.
Ryan Krauch:And we're trying to look forward on what do we have conviction about in various sectors at various points in the cycle. And you can't transact just with a one year view or two year view. Really have to look long term. I think Verus represented that for us, right? We've been long proponents of the housing sector more broadly.
Ryan Krauch:And I think specific to this transaction what it really represented was a shift in investor sentiment that we can certainly get into. But it presented a unique opportunity to move in a space that we have high conviction about.
Mark Bonner:So how much of this was opportunistic? I mean, was it the right asset at the right moment? Or or was it more about a thesis you were already looking to execute?
Ryan Krauch:It's a little bit of a thesis change for us. I think the industry in housing has broadly for the last ten or fifteen years been really looking at more as a trade and we were backed by cap rates compressing every single year. So it's pretty easy to do 20 plus returns in multifamily development or even acquisition for a long period of time and frankly we got spoiled as an industry doing that. But if you really look at multifamily and what it is supposed to be and probably real estate more generally it's not really intended to be that. It's not meant to be these sort of tactical opportunistic high yielding plays.
Ryan Krauch:In particular I think multifamily from its origins has really been more about income producing, downside protection, diversified income, inflation hedge, all the traditional things we think about in apartments. So for us, when we looked at Verus, this was a great opportunity to really reset that framework. And it was really guided by investors, I think, wanting those sorts of things back in the portfolio.
Mark Bonner:I mean, look, this has been a hell of a year on the capital market side of the equation. You announced in February and closed in May, right, which a lot happened between those two time periods on the economic calendar. Were you ever worried the market would move on before you got there?
Ryan Krauch:Well, you're right in that timeline, but there was actually probably a year of work that went into this before that. So I think when you look at it with a more strategic lens we were less concerned about the potential movements within a month or a quarter. Now all that being said there was financing involved in this. We put in a lot of protections to hedge against any certainly geopolitical issues that were going on. And so I think we had a very good tactical approach to that.
Ryan Krauch:But no long term our answer or our thesis at least here is really more of a five year plus view. And so with that in mind you don't have to be quite as sensitive to potential near term changes.
Mark Bonner:So Affinius published a house view earlier this year that said the market is transitioning. And I'm quoting here, Ryan, from gridlock toward normalization and that much of the repricing has already occurred. That's a strong statement. A lot of people in this industry have been saying versions of that for two years and they've been wrong. What makes you confident this time is different?
Ryan Krauch:Well, think we're actually seeing it in the numbers now, right? So year over year you're definitely seeing a lot more transaction volume broadly across the board. You're certainly seeing the financing markets be fairly wide open. And so you're actually starting to see the gridlock break up. Now again it's not full steam ahead at all but relative to the previous three years there's no doubt there is traction and there is some movement.
Mark Bonner:So where are you still seeing gaps? Like sectors or markets where you think values haven't fully reset yet?
Ryan Krauch:Well, think there's two ways of looking at that. One is sort of have appraised values reset which has been a long term challenge in particular in this cycle and then you have real values reset. That really takes a more nuanced view of each of these market segments. Just rattling through it I think appraisals and it's not necessarily their fault because there have been no trades, right? Virtually no trades over the last four years on a relative scale.
Ryan Krauch:And so it's very hard for appraisers to find comps, right? So they've got to go through a different exercise. That being said, clearly when interest rates reset, real values change dramatically in that moment of time, but appraisals didn't. And so we've seen this sort of slow three or four year bleed off of those appraisal shifting. And that's been painful, right?
Ryan Krauch:And hard for the industry to absorb because you just can't get transaction volume moving until you have that reset of pricing. I think now we've bled off most of that in most sectors. Perhaps the one outlier to that is industrial. I don't think the appraisers have really come full circle on that asset class. But broadly speaking, we've had good movement across the rest of the portfolio asset types.
Mark Bonner:Look, mentioned the rate environment. So look, walk me through how you structured $3,400,000,000 right now, because there are operators right now who can't refi loans a fraction of that size. You closed a $2,100,000,000 bridge loan. What do you think that says about where lenders actually are versus where the narrative might say they are right now?
Ryan Krauch:Yeah, I think the lending market is open when you have good quality assets. Mean, I think that's even in office, right, we're seeing a tale of two cities where most people won't touch office except for the very good quality or highest quality assets out there. And I think that applies broadly certainly in the lending market. Lending is very readily available for high quality assets with good business plans. And I think Verus represented just that, Very high quality assets, very well located, good story, good fundamentals.
Ryan Krauch:And there were plenty of people who were willing to step up and do not only that bridge financing but just in the last week we've now replaced all that bridge financing with CMBS financing.
Mark Bonner:Now you're saying lenders are open for business but I wonder do you think that's true across the market or only for operators at your scale and with your track record?
Ryan Krauch:Yeah, I do think again, of two cities to a certain extent. If you have high quality assets, high quality borrowers, fairly wide open, right? If it's lower quality assets in particular, like office or low quality borrower, I think you're going have a lot more challenging time finding capital.
Mark Bonner:What do you make of private credit and everything that's going on on that front these days?
Ryan Krauch:You know we've got a big private real estate credit business ourselves and I think we've really only seen the benefits of that if you will. Think the money that may be scared off a little bit of corporate credit is perhaps moving more towards real estate credit and trying to find a safer home for that. So I think it's a net benefit for real estate credit, but certainly has provided some challenges for investors on their corporate credit side.
Mark Bonner:I think the open question here is, is private credit going to be a structural permanent feature of the market moving forward or is it a cyclical stop gap until banks fully return? Do you have a view on that?
Ryan Krauch:You know, I believe it's a long term shift. I was fortunate to be very early in the real estate credit development twenty years ago at a previous firm. And we've seen this evolution of real estate private credit over those two decades. We're now seeing it reach into Europe, right, where the same kind of activity that we saw twenty years ago here in The US and transition away from the banks is happening in Europe right. So I think this is going to be a long term shift where investors you know CIOs love real estate credit because it provides current income, downside protection, and relatively good yields.
Ryan Krauch:So, I would think it represent a nice permanent, place in their allocation going forward.
Mark Bonner:So you you said something last year that I haven't been able to shake. I I went and did some research last couple of days in anticipation, of our meeting. And you said every metric you'd normally use to predict macroeconomic trends in real estate has been, and I'm quoting you here, dead wrong or so confusing and muddled that it's impossible to piece out what's going to happen next. It's not the kind of thing you hear from investors who feel good about a market. So what changed?
Mark Bonner:And specifically, Ryan, has Extend and Pretend kept an enormous amount of stress off the surface of these markets for the last three years?
Ryan Krauch:Yeah, to be honest, I'm not sure a lot has changed. I still believe that a lot of the traditional metrics that we look at and I speak with our research team regularly on this. It is still not clear, right? There's still a lot of mixed signals out there. Perhaps right now the most mix we're seeing is on the one hand you've got inflationary pressures and interest rates going higher.
Ryan Krauch:On the other hand you're seeing mass productivity gains and AI implications and all that. So those two competing forces that are providing some fairly confusing job market numbers and inflation numbers and rate cuts and all of that. So this period is very unique right. I mean you layer in COVID which is a once in a generation impact to the market and everything that flowed downstream for that plus a four year period of illiquidity. And then an economy that appears sort of in a K shaped type recovery.
Ryan Krauch:The numbers are just very unusual. And so it's hard to kind of find those directions. Now I do as we talk about at the top of this I do think we're starting to see some clarity in some of these places in particular as it relates to some of the real estate asset classes but that's a slow transition.
Mark Bonner:I mean there's a lot of philosophizing that's been going on about uncertainty the last two years or so. But at some point you have to make a decision with incomplete information. Brian, how do you know when you have enough these days?
Ryan Krauch:Yeah, I mean it's a great question. I think that we battle with this in investment committee all the time. Where we view it as what's the signal through the noise. What part of all of this is just pure static and noise and as I think one of the big investment banking CEOs said recently the rest of my career is going to be spent living from crisis to crisis. I think that's partially true.
Ryan Krauch:But you've got to separate out what some of that, whether it's political or geopolitical noise or economic noise in the numbers there from just what's going on on the ground level right? What are we seeing at the fundamental level? And as a you know I think real estate actually has performed quite well certainly relative to the GFC where we were probably more part of the problem. I think we're more part of the solution to all of this And when you start dialing into the specifics of an asset or a market, you can find that signal and make investment decisions based on that data.
Mark Bonner:Well, right. I mean, to your point, transaction volume is up. Lending is up. Sentiment is improving all across commercial real estate coast to coast in The United States. But there's a version of this recovery that's genuine.
Mark Bonner:And I think there's a version that's just a market slowly repricing itself into a permanently more expensive world, where the old math probably never comes back. Which one are we actually in right now?
Ryan Krauch:Yeah. It's a little bit of both, to be honest. I mean, I think, a, yes, the market needed to see values come back so you could drive liquidity back into the space and you're seeing that. Plus not to mention I mean the real estate returns relative to the other returns in the market whether it's in equities or private equity. We just haven't been as attractive relative to some of the other asset classes right.
Ryan Krauch:So a lot of that capital moved away for a while while real estate kind of figured out okay where's our pricing going to be at? Where do we think interest rates are going to play long term? A lot of that has I think moved in the right direction to resolve. So now the question is and you're absolutely right. Again this industry has been spoiled for ten plus years of just declining interest rates and cap rates.
Ryan Krauch:And I think that's allowed a lot of participants to be successful perhaps without having the fundamentals and the basis they need. So now what you're seeing is as the tide goes out who really has the operational capabilities, who has the scale, who has the traits necessary to be successful when cap rates just aren't falling all the time. And to do that again you've got to have long term conviction that's built around both data but also just long term experience in this space and how do you operate in an environment where cap rates aren't going to bail you out.
Mark Bonner:What sectors are in a genuine recovery and which are still repricing? And where do you think multifamily falls on that equation?
Ryan Krauch:Well, think a couple of things. So as liquidity comes back and you see more interest in this space that's clearly good for the industry and we're seeing the net positives of that. And then the question is, you're absolutely right. So now where do you play within that space? What's really interesting is some of the fundamentals around, let's put industrial and multifamily in the same bucket for now because what we've seen trend wise is that construction is way off, right?
Ryan Krauch:Demand is recovering and it's market specific but you're definitely seeing increasing demand. And so that's a great intersection of data points, right? Combine that with the fact that historically over the last several decades whenever we see the kinds of declines we've seen in values over the last few years the next three to four years tend to be some of the most successful and productive returns for investors. So all of this is kind of converging at the right time and I think which is what makes me more optimistic today than I certainly have been in the last five years about where the market's going, where these opportunities are.
Mark Bonner:Let's talk data centers. So Affinius has raised more than $900,000,000 for its debut data center fund and just closed $975,000,000 in financing for a Northern Virginia campus project. You've said data centers are the headline for the foreseeable future, but this is also a sector running into serious friction, power constraints, community pushback, state level moratoriums all across the country. Where do you think the opportunity is still real and where is the market getting ahead of itself?
Ryan Krauch:Yes, you're right on all those fronts. And as they say, if it were easy, everybody would do it. So there's definitely a lot of more I would say headline headwinds but everything else is really tailwinds in terms of what we're seeing on the data center side, right. I mean you look at vacancy of less than percent. You see that every bit of the supply that's out there for the next two years 90 plus percent of it is already spoken for in terms of pre leasing.
Ryan Krauch:We don't have to put a shovel in the ground on what we're building without having a lease in place that's fifteen years to some of the top tenants in the world. So all of those tailwinds are really significant. Stepping back one level we view what we do in real estate as supporting the economy, right? And at a certain point that was office, That's where the global economy took place and then later that became industrial where e commerce became the center of what's going on. And now we're seeing data centers as the new location for where the digital economy is going and where the economy is going be driven.
Ryan Krauch:So we want to be the suppliers if you will the Levi's of the gold rush right. We don't have to be super smart on exactly where the technology is headed but we do want to provide the real estate infrastructure to make that happen. So we try to do that a very thoughtful way you're absolutely right there's certainly political implications that have to be factored in there's power constraints which you know net net is good right you want some constraints in real estate product type and there are plenty of them here. And so really it comes down to execution. Do you have the right team?
Ryan Krauch:Do you have the right connections and relationships to find the opportunities that get you those outsized returns?
Mark Bonner:I mean, you mentioned strong tailwinds. Let me bring in the strong headwinds, right? That 14 state moratorium conversation has real legs, right? And it's growing and it's been growing for the last year and a half. How are you thinking about that kind of regulatory risk as a long term feature of the sector?
Ryan Krauch:So look, I think we're driving into locations where we don't have those headwinds, right? And I think there will be winners and losers in how this all plays out both at a state level, at a regulatory level, and then also in terms of the tenants themselves. So we don't necessarily have to bet on those but we do have to go make some decisions about okay well where is their power? Where is their support? And can we deliver what the hyperscalers need in those particular locations?
Ryan Krauch:And you're obviously right. Not just that issue but certain states have very limited power. And so you can't operate in places. Would think the obvious choice in absent anything else would be, hey, we be building data centers around Silicon Valley, but there's just no power and there's a lot of regulatory challenges in California. So we've just not pursued anything in that state.
Ryan Krauch:We're seeing a lot more activity in places like Ohio, right? Pennsylvania, places where there's abundant power and and still support for for what's going on.
Mark Bonner:I mean, listen, Affinius has $15,000,000,000 of development pipeline right now on this front alone. But every major institutional investor is also chasing data centers right now, Ryan? How do you avoid overpaying into a crowded trade like this? So we're,
Ryan Krauch:I mean, we've taken a specific approach where we want to only develop the newest and best data centers. So we're not in an acquisition mode and we're not lending against them. So there's lot of different ways to play in data centers just like any other asset class. For sure there's a lot of capital but it's chasing a lot of different segments of how people are participating in that. And even goes above and beyond real estate.
Ryan Krauch:You're seeing a lot of CIOs are approaching this. How do I get involved in the power and the infrastructure behind all that? So there's a lot of different ways to play in it. We really want to focus on developing the newest, the best, the state of the art assets, build them, lease them, and sell them. So there's surprisingly very few groups that have the capability to do that at the scale and the size that we're doing it.
Ryan Krauch:Because again we're focused on sort of the largest developments that are hyperscale gigawatt type campuses. And it just takes an enormous amount of capital and enormous amount of body manpower to go out and build these things.
Mark Bonner:I mean, Affinius is deploying across multifamily, data centers and industrial simultaneously. Those are three very different demand stories right now. I wonder if there's a single macro thesis that connects them or are these separate bets that just happen to be running at the same time?
Ryan Krauch:I think you can bucket industrial and data centers perhaps together and that we view that as sort of the intersection of real estate and technology. We had that view fifteen years ago in industrial where we knew that this was back when Amazon really wasn't a thing and we were able to be an early backer of what they were doing not knowing exactly what Amazon will become but we knew we could play real estate could play an important role in how that was shifting. I think we see the exact same thesis here with data centers where we all don't know exactly where AI is headed and where all this is going but we know the direction and we know that real estate can play a really important part of that. There'll be multiple phases to this just like there was an industrial right. Industrial started with just some big boxes and then you've got different type of robotic sort facilities and cross docks.
Ryan Krauch:Then you've got some last mile facilities. We're going to see a lot of that play out in data centers as well. So in many ways this movie has already been the scripts already been written for this movie. Site gives us a little bit advantage. Multifamily is a slightly different category.
Ryan Krauch:It's really more just a very traditional real estate play driven by the fact that we clearly have a housing issue in this country.
Mark Bonner:Right.
Ryan Krauch:And in Europe for that matter. And we want to help support the solution to that long term.
Mark Bonner:Yeah. I mean, listen, multifamily deliveries are peaking at the moment and industrial has seen vacancy expand. Are you more focused on the supply story or the demand story in each?
Ryan Krauch:Definitely a little bit of each. And again, it's a very bifurcated story. So, I mean, in certain markets, you've seen industrial demand really skyrocket and deliveries have dropped off considerably. But you're right in other markets that hasn't been the case and same with multi family right. A lot of the sun belts you saw an oversupply there.
Ryan Krauch:And even though demand has been fairly strong it just was outpaced by that delivery. But again that intersection is crossing over in many of these markets and I think it's a continuing trend as this plays out as the supply demand rebalances over time. So when you look at a transaction whether it's Verus or anything else, if you have a five year horizon, we feel really good about where the supply demand fundamentals are heading over the next two, three, four, five years.
Mark Bonner:Okay, so last question. You've deployed across three sectors while most of the market was sitting out. You've done the biggest multifamily deal of the cycle. What is the market still getting wrong right now? The thing that two years from now will look obvious.
Ryan Krauch:Yeah. You know, it's funny. I talked to I travel the globe, talked to a lot of different investors and gotten some bizarre comments about how well, know, stock market's up a lot. So I really want to just push more money into the stock market and less into real estate. And of course as an investor you look at that and say okay well it seems like the opposite right?
Ryan Krauch:You want to invest when the markets are bottoming places not necessarily where they're peaking. And so I think that there's been a lot of capital flows away from real estate rightfully so over the last four years. But I think if you're still taking that posture today you'll probably regret that three or four years from now just again given where these supply demand fundamentals are shifting. So I think that's the biggest thing and that's not unusual I mean especially institutional capital world there tends to be that lag if you will and so our job is to help drive investors to conviction about what we're seeing and why we're seeing it and where we're going with that. And we think transaction like Verus helps make a market statement and when it's backed by some of the largest investors in the world seeing that same thing and recognizing that, I think that's good for the industry as a whole.
Mark Bonner:Well, fair enough. But I don't know. What's the thing you believe, Ryan, that most of your peers don't at this moment? Is there something there?
Ryan Krauch:Well, it's funny. Think just like we talked about earlier, there's so many divergent data points in the economy. I'm seeing that with competitors as well. Was actually I was just at a conference yesterday pulling together some of the top operators from around the country. And in all the conversations I had everybody had very different views.
Ryan Krauch:There was no sort of consensus around where that conviction lies. So I think that in itself is somewhat telling. I think again if this industry had become so tactically oriented and so bailed out by just compressing cap rates that when you remove all of that the market is finding it hard to find conviction. If you can't have conviction as an investor it's really hard to find success. So again I think we rely heavily on active research.
Ryan Krauch:Were kind of using machine learning seven or eight years ago before it was a thing. We use a lot of technology but also just a lot of experience with people that have twenty, thirty, forty years in this industry. You have to drive a conviction and you have to have a long term lens on that and that's something we spend a lot of time talking about and thinking about and I think when you have kind of the scale that we do and the depth across all these asset types you're able to turn up and turn down the dials in different places and that in a self convenient advantage. So I don't think that we're necessarily smarter than every other investor out there. I think we just have real conviction about what's going on.
Ryan Krauch:It's backed by a lot of data, a lot of experience. And perhaps in times like this, that gives us a bit of an inch.
Mark Bonner:Okay. That's all the time we have today. Ryan, thank you so much for joining us.
Ryan Krauch:Mark, it was great to, be with you. Appreciate you having me.
Mark Bonner:Alright. We'll be back soon with another episode of First Draft Live. You can also find today's episode and all of our past conversations on your favorite podcast app. This is First Draft Live.