Commercial Real Estate Due Diligence: Why You Must Walk the Property Before Buying

Adam Robbins (00:00)
And the biggest thing I could tell you is don’t sit behind a computer. Go out, drive the markets, talk to people, talk, talk to owners, you know, build up a pipeline of of contacts in the business. You know, try to know what’s going on. That’s where you’re gonna find your opportunities. The best opportunities you’re gonna find is owner to owner, not—you know, I mean brokers, I I respect brokers and the value they bring to the marketplace.

Cody Crabb (02:05)
Hello and welcome back to the Real Estate Pros podcast by Investor Fuel. I’m your host, Cody Crabb, and today I’ve got Adam Robbins with me. Adam is the COO of a single family office investing in commercial real estate with a focus on retail, office, and industrial assets across South and Central Florida, plus a few other markets. So thanks so much for for hopping on today, Adam. I’m excited to to chat with you. Thanks for having me. So if you could just—G, I’d love to hear a little bit about your story. Like how did you get involved in in real estate and, you know, where, how did you get to where you are today?

Adam Robbins (02:39)
Well, I started out as a—in in business school. I was recruited into a bank up in New York. Started out as a bank auditor and ’cause I was an accounting major in business school. And I did that for about six months and then they brought me into the credit side, put me into the Community Reinvestment Act department. So working on construction loans for affordable housing, mainly in the five boroughs in New York, specifically Brooklyn and the Bronx, mostly. And you know, that’s how I got into commercial real estate. That was my first job. I eventually moved into some different lending positions. My last one was with Morgan Stanley in their CMBS group underwriting conduit transactions. And I did that for about, I don’t know, you know, I I actually my first day of work there was, I think, what—nine eleven was I think a Tuesday. I think I started there on September tenth. So I started on September tenth and the next day was nine eleven. And—

Cody Crabb (04:05)
Wow. Yeah. You’re like, “Hopefully that’s not an omen.” But it doesn’t—it certainly doesn’t sound like it was. It sounds like you kind of found something that you’re—

Adam Robbins (04:13)
So I was there, I forgot when I left. I think two thousand three, I guess. So maybe it was two and a half years or something like that. And I just—I just kind of got kind of burnt out. And I had an opportunity to—for someone I used to work for, one of my prior positions, brought me down to Florida to work on an acquisition of a very large retail—they were what do they call it? Outlet. They were an outlet company, and they were a public company that we took private. And I ended up in Florida and never left. So that was back in, I guess, two thousand and three. And so then I was—sorry. Went—so I decided to stay. My brother was already down here. And I got—I—I was—I took a position with a publicly traded REIT and doing shopping center acquisitions.

Cody Crabb (05:09)
No, you’re good.

Adam Robbins (06:17)
So I did that and, you know, one thing led to another—a few different positions—and ultimately landed with—with the people I’m working for now and been here about ten years. So a lot of deals—a lot of deals done in the last twenty years.

Cody Crabb (06:40)
Yeah, you got—you got lots of—you get lots of opportunities over twenty years to kind of get some get some good and some bad in, learn some stuff. So you—something that you said before we started recording here was you mentioned that you were a straight-up deal guy. It wa—it was that right? And not something else. Can you kind of give us some—you—you info on what—I don’t—I’m not sure—

Adam Robbins (07:01)
I said that I think I said I’m an old school real estate—

Cody Crabb (07:05)
I think what you actually said was that you—it’s just—it’s something about streets instead of screens or something like that. I don’t remember what you said. Yeah, but that’s just—

Adam Robbins (07:14)
Just my way of saying that, you know, I like to really, you know, visit the assets I’m working on. I like to, you know, walk around them, go into them, up and down. I like to drive around the market that they’re in, see what, who the neighbors are, you know, see kind of like what’s happening. And I just—I don’t sit behind a screen and use CoStar to as my guiding point. I—I—I am really, you know, I walk the markets, so to speak. So—

Cody Crabb (07:47)
Well, I mean, some of—some of the things are obvious, you know, the things that you would miss if you were just behind a computer or something. Absolutely. I’d—but I’d love to hear like what are some things that someone may not realize that they’re missing just because they’re not necessarily walking a property or or doing the due diligence that you’re doing.

Adam Robbins (08:06)
Well, I, you know, it’s very important to kind of know what’s going on in the marketplace. I like to see is, you know, is there a lot of vacant land available or is, you know, something being built that could impact the property that I’m working on?

Cody Crabb (08:23)
Yeah. Yeah, that’s true. You don’t always see the who’s right next door. Yeah.

Adam Robbins (08:27)
Right. You wanna know like what’s going on. Is, you know, something gonna impact me? Just, you know, that’s kind of, you know, trying to understand what are the qualitative risks that you may be involved in. And also it just—it adds to the comfort level that you know what’s going on. You don’t get that from just, you know, sitting behind a screen and looking at Google Earth. I mean, it’s, you know, are there—if I—if I buy an office building, are there, you know, any decent restaurants around that, you know, people can, you know—that are going to attract, you know, tenants into my building or—or they’re not, which, you know, a potential tenant is going to have an issue with. So it’s just a matter of, you know, getting a sense of the, you know, the market and the property. And then the other points are when I look at the buildings, you know, what did, you know, maybe an engineer or a property condition person miss? You know, I look at the roof, I look at, you know—is there any staining, water staining around, or any pest problems? I mean, those are just the things that you need to do. It’s not just—

Cody Crabb (09:41)
Some of that stuff you can catch on a picture, but it’s just not this—I mean, you’re—if it’s—if it—you do, it’s luck. And the other thing is, I mean, there’s just vibes. There’s so—there’s something about like being in a place where you kind of—you can feel if something is like, “Yeah, I would—I would work here,” or, “I would—I would rent here,” or like, you know what I mean? I—I think—I mean, do you really—

Adam Robbins (10:01)
Want somebody else to find out before you find out? Somebody that maybe you report to and says, “Didn’t you notice this?” As I’ve never—no, I never bothered to look in there or something like that. So wanna be—you don’t want to be in that position.

Cody Crabb (10:12)
Yeah, exactly. Well, and I think it says something—

Adam Robbins (10:18)
You know what’s going on, especially if it’s a substantial investment.

Cody Crabb (10:57)
For sure. And I think it really says something that, you know, it would—it seems just like off the top of your head, you’re like, “Well, yeah, I would get in trouble if I didn’t look at it.” Well, why would you get in trouble? Like, think about it, you know? I—I think some people, when we—when we talk about like walking a property, like it—they think it’s just like we, you know, you see it in person. But people like you, I mean, you—you mentioned a bunch of stuff that you’re looking for, and I bet there’s some stuff even going on in the background that you’re not even like thinking too hard about. It’s just like that’s part of looking at a property. And so I find—I find—I find this all really interesting because I feel like when you get past a certain level of experience, some of it is just not even something you know you’re doing. You know what I mean?

Adam Robbins (11:43)
Mm, I mean, yeah, I—I—I—I guess I would tend to agree with that. You just wanna have an overall, you know, you wanna have a—like, I guess you wanna try to get a sense of security that you’re not gonna get any big surprises, or you wanna know what the surprises are you—you wanna—you don’t want surprises.

Cody Crabb (12:03)
Yeah. There’s not a whole lot of positive surprises.

Adam Robbins (12:06)
Gonna have to deal with this, and I’m gonna have to deal with this, and, you know, I understand that and I’m—I’m going to, you know—that’s part of my risk assessment. So—

Cody Crabb (12:15)
And—and l—I mean, it’s not often that you get a positive surprise. Like, how often are you touring a property and you go, “And there’s a hot tub they didn’t mention”? That’s great. No, that doesn’t really happen, does it? It’s you’re—it’s always—

Adam Robbins (12:25)
Right, you’re gonna budget, right? You’re gonna put together a budget for what, you know, how you’re gonna operate the property, and you wanna plan ahead year by year, and like—well, I’m probably gonna have to replace this in the second year, and I’m probably gonna have to replace this in the third year. And so that’s important, yeah. And then you’re—man, you’re—you manage your risk that way. Really important. It’s really important to get out there and see the stuff and, you know.

Cody Crabb (12:47)
So it’s really—so something else I’d love to ask you about is, you know, the—the margin of like—the—the—the margin for error is a lot tighter because you know, in—in good markets and stuff, you can afford to kind of, s, maybe swallow a bad choice here and there or or something like that. But when things start to get tighter, when the market is not as good, or when interest rates are higher and things, you know, that margin of error is—is tighter. You need to be more careful. So, you know, are there deals that—that you would not have even—that you wouldn’t touch right now, that maybe like a few years ago that you—you think you might?

Adam Robbins (13:34)
Mm, definitely, you know.

Cody Crabb (13:37)
So what factors are you looking at when it comes to risk and things right now?

Adam Robbins (13:41)
Well, I mean, there’s—I mean, capital improvements for sure. You know, if you’re gonna need a new roof, that could, you know, throw off the whole investment. True. So, you know, you have to allocate capital and, you know, like, you know, unfortunately with interest rates the way they are, a lot of deals just don’t pencil. And I don’t think you wanna buy—you know, if you’re getting yourself into a situation where nothing can go wrong for you to be profitable, then it’s just like a deal you’re not gonna do unless you can get it for the—for the price that you need to get it at. And that’s why a lot of deals aren’t penciling right now for, you know—and I’d like to be very specific. The interest rates have really affected what I would call the middle market investor—leverage buyers, and you know.

Cody Crabb (14:23)
Yeah.

Adam Robbins (14:40)
Buyers that are not leveraged—meaning they can buy a deal all cash and then decide at a later date to put a loan on it, you know, and, you know, it could be, you know, relatively low loan to value or, you know, mid-loan to value. But the middle market guys typically are people that need to borrow up to 65% of the purchase price. Uh-huh. And interest rates have really affected that class. Unfortunately, we kind of fall into that class because we use leverage to buy all our deals. If it’s—if it’s—the pricing means that nothing can go wrong, and if something goes wrong you’re not going to hit your returns, then you can’t do the deal. So it’s taken a lot of the—that cushion is no longer there. The old saying, “Low interest rates, you know, solve a lot of problems”—we’re just not there right now.

Cody Crabb (16:22)
So where do you see people kind of making the most mistakes? Is it just kind of they’re assuming that the numbers are leaving out without kind of doing the due diligence, or kind of what—what do you see the mistakes people making right now?

Adam Robbins (16:34)
They overpay. I mean, I see that all the time, and they get into trouble. And you can see that happen as, you know—if I were to like say going back to 2018. 2018 and 2019 were kind of like the—like two really good years in terms of acquisitions for us. But I know a lot of people that invested in multifamily. There were a lot of—a lot of these guys buying multifamily—syndicators, you know what that is. I mean, they’re kind of—they’re—they’re getting 30 or 40 different investors each to put in like a hundred thousand dollars to put a deal together, and they would buy C quality or B minus quality multifamily and with the hopes of fixing it up and getting the rents up. And not only would they—they would take a loan out, but then they would get, you know, financing on top of that, you know, hard money loans, mezzanine loans, preferred equity loans in order to fund the improvements. And then interest rates went up because mezzanine loans and bridge loans are—they’re not fixed rate. They’re tied to index. So when interest rates went up, all those rates went up and they weren’t cash flowing anymore and they couldn’t borrow any more money and they couldn’t fund the—the new swimming pool or the or the basketball court or the gym or any of those. I—I know quite a few people that really—you know, what term can I use?—lost their shirts. Is that fair? Yes, they lost their shirts. They had to go back to their investors and say, “I need more money,” or—

Cody Crabb (18:26)
Yeah.

Adam Robbins (18:33)
“I’m gonna have to sell the deal at a loss and you’re gonna lose your, s, you know, a good portion of your equity.” You know, I know—I would say I don’t know, half a dozen people that I know personally that got into that situation. The syndicators, yeah.

Cody Crabb (18:39)
Yeah. Gotcha. Wow. So how can people—how can people kind of avoid that? I mean, the—obviously I’m asking a question that has plagued investors forever, which is like, how do you not make a bad investment? But like what are some things that you see kind of in the distance that are like maybe red flags so that someone can kind of keep an eye out?

Adam Robbins (19:10)
Look, you know, you have to really—you have to have enough equity in the deal. Okay, because all those situations usually come about when they put the minimal equity in the deal. And when you have a lot of leverage, you don’t have much cushion if you run into a problem. You know, we’re kind of in a situation now where people are gonna have trouble refinancing, you know, loans that are coming due now. If somebody took out a loan in 2019, they might have got a fixed rate at 3.5%. They’re not gonna get that now. So if they’re over-leveraged, they’re gonna have to—there’s gonna be a capital call, right? Depending on the asset quality—like if you have a real A asset, a really truly an A asset, not gonna be an issue, but typically over-leveraged deals aren’t an asset. There is something they call “extend and pretend.” I don’t know if you’ve heard that term. That’s where—that’s where a bank says, “You know, your loan is coming due. You know, it’s not going to underwrite anymore at the existing interest rate. I need you to put another million and a half in cash in.” And the—

Cody Crabb (20:16)
I have it. Then what is that?

Adam Robbins (20:33)
The ownership says, “I don’t have it.” Now, the bank can then foreclose on it, take back the asset. They don’t really want to do that, especially a commercial bank or a fed—federally regulated bank, because when you do that, number one, it has three effects. It affects the bank’s P&L, it affects their balance sheet because they have to write off the loan, and requires them now to increase their reserves with the Federal Reserve based on, you know, when you write off a loan. So now they have to block off a certain amount of their deposit base and commit that to reserves. So it—it’s not good for the bank. So what they do is they find a way to extend the loan, and there’s a lot of that going on. Potentially, banks can sell a loan, if they can sell it at the note value or the, you know, or the principal par value, as they say. I don’t see a lot of that and, t, typically those can be good opportunities, but they tend to go to the best customers of the bank—you know, the companies that have a lot of—a lot of deposits and do a lot of deals. So—

Cody Crabb (21:51)
Yeah.

Adam Robbins (21:52)
Be—the—you know, the people that most people read about a lot in the papers get to see those first. People like us don’t—don’t often get to see that, but, you know, have—the, you know, underwriting is really important, and you shouldn’t be over-leveraged, and, you know, a reserve is not a bad thing to have in certain cases—

Cody Crabb (22:02)
Yeah.

Adam Robbins (22:20)
You know, we’re actually okay with reserves—reserves for certain capital improvements. You know, going into a deal where, you know, you find a lender that waives all the reserves, I mean, that sounds good up front, but the problem is, does your organization has—have the discipline to put that money aside on its own to make sure that money’s there when you do have the new elevator needs to be installed or you have a bad storm and it does certain damage? So, you know, underwriting’s really important. You should never be in a situation where I know one big problem can really, you know, hurt you and hurt your asset.

Cody Crabb (23:02)
That’s a r—that right there is a really great soundbite. I think that’s—that sounds so simple, but really, I mean, if what—if—if a one thing can take you out, then holy cow, like, that is not a good position to be in. Right. You mentioned earlier—

Adam Robbins (23:16)
That’s the mistake that a lot of people do when they’re first getting into their first equity position, that they, you know—they want to do the deal and they’re looking for a way to make it work. So, but yeah, that underwriting’s real important.

Cody Crabb (23:35)
Yeah. I—I’d be curious, you mentioned earlier that you’re kind of, you know, it’s—it’s been harder to make some of these kind of traditional, you know, office, retail, industrial type deals work. So you kind of said that you—you’ve been looking at some more creative situations. I mean, can you—can you tell us—tell us a little bit about what you’ve look—been looking at and why? Yeah.

Adam Robbins (23:57)
Yeah, well, you know, like I said, we—we are—our space is the retail, office, and industrial space. That’s where we like to invest. Retail, especially grocery-anchored retail, has become super competitive. A lot of people used to frown on retail, but it’s kind of been—been become kind of a darling asset class, especially because with AI, I—I think people are always going to, you know, go to the supermarket. They’re always gonna, you know, buy meat and potatoes and cheese and eggs and milk, and so that—

Cody Crabb (24:36)
Yeah.

Adam Robbins (24:39)
No, pizza, Chinese food, the dry cleaner—those kind of like basic necessity type things. So you know, the—you know, the really the super liquid players have really been drawn to that sector. So that’s really beaten down cap rates, made those kind of deals really expensive. Very hard to get into.

Cody Crabb (24:43)
Yeah.

Adam Robbins (25:09)
And to try to get into one of those deals, you have to have a really, really aggressive offer and the terms have to be very good. So without getting into a lot of detail, I mean, if you’re buying—you’re in Utah, but like what—what is in Utah? Like a Kroger or something, I don’t if they have that, or Ralph’s, or one of those places. Super Cooper or whatever they call it out—I forgot what they—what’s the big—

Cody Crabb (25:29)
Yeah, huh. We got—ours is Smith’s.

Adam Robbins (25:41)
Smiths, whatever it is. So a deal like that, you know, that could probably be a six cap or a sub-six cap. There’s very little pop in a deal like that, because if you buy a seventy thousand foot retail center where the grocer is forty-five thousand square feet, and then you have the kind of in-line tenants, the smaller tenants that pay the higher rents because they have the grocer as the anchor bringing everyone in—you know, maybe you’re getting so what, you’re getting five and a half percent, six percent on your equity dollar? And, you know, those grocers are locked in at a low rent over a long period of time. So there’s very little what they call pop in a deal like that. So what do you do? You look for another opportunity. Where do I think those opportunities—I think some like maybe non-traditional things like RV storage or industrial outdoor storage, where the the rents are, you know, not that bad, and the—the, you know—

Cody Crabb (26:34)
It’s all—

Adam Robbins (26:49)
Operating costs per square foot are pretty low.

Cody Crabb (26:52)
And it still fits your definition of the—of this kind of, you know, the—yeah.

Adam Robbins (26:56)
It’s still cash flowing, you know, and the cap rate, you know—you know, stabilized cap rate on something like that, maybe that’s seven and a half, something like that, or like a seven and a half cap, maybe even an eight cap. And not a lot of headache to operate something like that, because they’re—they’re kinda like storage properties. I mean, somebody stores something there and they go home. And you know, just not really a lot of—you know, the services you’re providing is storage. So—

Cody Crabb (27:28)
Yeah. Yeah.

Adam Robbins (27:33)
Check and go, as they say, you know, you get your check every month and leave me alone. So those I think are opportunities. I mean, a lot of people have been talking about, you know, data—data centers. I don’t, you know—not in that space. I don’t know, it’s—it’s a—it’s a completely different animal.

Cody Crabb (27:55)
You certainly do hear a lot about it, yeah.

Adam Robbins (27:57)
Hear a lot about it, but you—what I’m—I’m afraid it’s gonna be up in space in five years, so—

Cody Crabb (28:02)
Yeah.

Adam Robbins (28:05)
Invest a lot of money, data center, and then the lease starts coming due and they tell me, “We’re not gonna renew because we’re launching it into space,” then, you know, that—that’s—

Cody Crabb (28:13)
It’s gonna be that. So good. Well, thank you so much for all that you’ve told us today. Just as one last thing, for someone that’s kind of newer in commercial real estate, what’s some—what’s kind of the biggest lesson you’d want them to take away from how you approach your deals?

Adam Robbins (28:30)
And the biggest thing I could tell you is don’t sit behind a computer. Go out, drive the markets, talk to people, talk, talk to owners, you know, build up a pipeline of of contacts in the business. You know, try to know what’s going on. That’s where you’re gonna find your opportunities. The best opportunities you’re gonna find is owner to owner, not—you know, I mean brokers, I I respect brokers and the value they bring to the marketplace. And, you know, they—they—they generate interest and they—they in many cases create markets for certain assets, but there’s no substitute to building face-to-face relationships because this is a relationship business. If—if—

Cody Crabb (29:23)
Yeah.

Adam Robbins (29:25)
You know, if I have a relationship with somebody that may be selling a property, I’m gonna have an advantage over somebody that this person doesn’t know. For sure. And if somebody—even if somebody says, “I’m not, you know, I’m not looking to sell anything,” and some situation changes in six months from now and I had had a conversation with them and they know that I’m looking for something, they may call me up. So, you know, kinda reminds me of that scene from Godfather Two where Hyman Roth says, you know, “You got your health.” I don’t know if you ever saw that movie, but movie The Godfather Two, your health—most important thing. In real estate, relationships—most important thing.

Cody Crabb (30:02)
I did, I—most important thing. Yeah, well, I think that’s a—that’s a great way to leave it. Adam, thank you so much for all the stuff you’ve shared today. We definitely got a lot out of this one. And thank you, listeners, for joining us as well. If you got something out of today’s episode, please give us a like, subscribe, comment, follow, all those things. And don’t forget to pop out from behind that screen once in a while, like Adam said, and check out—check out the—the real, yeah—do the drive—

Adam Robbins (30:35)
Don’t get into an accident. Like, I’ve—I’ve come to—very close to getting into accidents ’cause I’m always looking at real estate when I’m driving. So don’t—

Cody Crabb (30:43)
Do what I do. Yeah, and get good at U-turns. Yeah. Well, thank you so much for for all this again and we’ll see you next time. Bye, Adam.