How Investors Can Buy Distressed Office Buildings at Today’s Value and Unlock Hidden Upside

Alberto Smeke (00:00)
Now a floor play that took 100 people full time became 20 people at a time because it would take turns. And now those 20 people at a time, which had another 30 people at home, so let’s say it 50, now it’s 10 people in the company. So you went from 100 to 10. So it’s a seismic shift in the office market.

Scott Bursey (01:51)
Welcome back to the Real Estate Pros Podcast powered by Investor Fuel. I’m your host Scott Bursey, and today we’re bringing the fire.

Our guest is an absolute titan in the capital market space, a true expert in high level real estate strategy. It’s Alberto Smeke of CSC. Alberto brings the kind of analytic fuel that separates the amateur investor from the powerhouse developer. This is going to be a deep dive into what it takes to scale today’s shifting economic climate. Buckle up because we’re about to gain some knowledge. Alberto, welcome to the show.

Alberto Smeke (02:27)
Thank you. Thank you, Scott.

Scott Bursey (02:28)
It is just excellent having you here. And for our listeners who may not be familiar with your journey, please tell us, how did your career begin and what is your focus now?

Alberto Smeke (02:38)
All right, so Scott, thank you for having me. I am honored to be in your podcast and hopefully we can shed some light on what we do and learn from you and your listeners as well. So we got started ⁓ because we love real estate. We appreciate real estate. We understand the fundamental element that shelter has in humanity and has had in humanity for hundreds of years. And the few things that

we bring to the table is that we are just specialists in value. We’re not specialists in any specific product type, asset type, or skill set around the development, investment, or real estate world. We’re just highlights, we highlight on value. So when we started, we started seeing that certain assets were trading at market prices for their current use.

when you layer on a different use, you layer on a, you know, for an office building, you start layering on what it could be, the potential, the hidden cost, you know, in investments, we call it opportunity cost. So when you trade an asset or you trade a building at a certain price per square foot, but, you know, there’s a hidden operation that you can have in there, which is different to a screw in operation, there’s an opportunity cost of that real estate. So that’s where we trade. We trade in the

opportunity cost world of seeing something trade at whether it’s a market or slightly below market price.

But we follow current trends, we follow current price movements on specific asset types. And if it works within its location or for a different use type that will end up increasing its value, that’s where we play. So that encompasses financing, encompasses development, encompasses a lot of things. However, our real value is in making that change of use.

Scott Bursey (04:26)
that was a great breakdown of what you bring to the industry. Thank you for that, Alberto. If someone’s listening to this and they’re thinking, hey, this is somebody that I like to partner with or learn from, what do you want them to know first about your business?

Alberto Smeke (05:28)
The most important thing that we like to share with our partners is that we never count other people’s money. And that’s very important for us. want anybody that partners with us, that aligns themselves with us, we want them to do very well. And we believe that business is not a zero-sum game. And if one plus one equals two, you’re in the wrong business. We should be in the one plus one equals three business. And if we’re not creating value together, then there’s no reason why

you

need to be in business together. that’s the, ⁓ you know, more or less how we see it and what we would like to share with, you know, partners that we would potentially love to partner up with in the future.

Scott Bursey (06:02)
Spot on. Thank you for that breakdown as well. And Alberto, no business is perfect. What’s one thing that you’re still figuring out or working around recently?

Alberto Smeke (06:13)
Yeah, so right now you have a massive amount of real estate owners that don’t want to own what they own. And in many markets, there’s a big…

spread on the bid and ask on these assets because so much value has been destroyed or disappeared from a lot of these assets that a lot of the holders of the real estate assets that we would like to transact on

for psychological reasons, just don’t want to let go yet. And there’s a way for people to have this wake-up call to say, this is the current value and I’m ready to transact on it. And there’s many people that are holding onto the past of what it was worth at a certain point. And I think it’s important for a little bit of that we would…

to share with people listening to this that have this large amount of holdings that are really frustrated with them because they’re not operating because they’re thinking of yesterday’s value. I think we’re in a new world. I think we’re in post-COVID, post-Zoom, post-AI. The urban centers have changed.

We like to spend more money on travel than we like to spend money on things. I think people have become more flexible. think people want experiences. And I think urban centers have become hubs of experiences and not necessarily hubs of where talent needs to be, but where talent chooses to be. And I think people have become more particular on what their real estate looks like. That if you’re not innovating today and you don’t have a reason to exist, it’s just a matter of time.

The one limitation that we see in today’s market is that they’re still a bit holding back to the past versus transacting in today’s market.

Scott Bursey (07:56)
100%. Alberto, what do you feel is your biggest opportunity right now? This could be a market shift, a new offering, or just part of your business that you’d to double down on.

Alberto Smeke (08:05)
Yeah, we’re doubling down and we see a tremendous opportunity.

in the office sector today. What happened in the office sector is there was life as we knew it, I would say pre-2018, which is everybody had their schedule, everybody left their house and went to get a bagel at 8.45 in the morning, got on the train, got their newspaper, got to their office, clocked in at nine o’clock and left at five. We had that and it was working for hundreds of years. There was a clock in, clock out.

situation. And then, know, we all got, you know, news headlines of something that we had no idea that was happening, you know, somewhere on other side of the world, telling us that we cannot do that same schedule anymore. And you have to, nine o’clock comes, you have to take your little device, you have it your pocket, you have a computer, and you have to do the same things that you were doing after your 45 minute to an hour commute, after you got your bagel, and after you got your newspaper. Now you’re doing all that at home.

And we started with babies crying in the background and the dog barking and your significant other screaming at you while you’re trying to get on a Zoom call. And little by little we became more educated. We got a quiet room. Maybe we got an office down the block, whatever it may be. But now we have like a crash course on learning for two years or a year and a half on how we don’t need an office building. And then after that, you know, our

employers comes back and says you have to come back to this office that you had a two year course on how to not come back to the office. And then after that, you know, we’re coming back, we’re trickling back. And then all of a sudden, you know, something called artificial intelligence comes into play. And a lot of the things that you needed 30 people in your office to do, now you need two people in your office to do. So now the people that came back that were 30 now are three. So both of these factors

reduced the floor plate that all these companies need and you know there’s a finite amount of companies and yeah there’s new companies starting every day but there’s a finite amount of companies and there’s a finite amount of space so when all suddenly you these two discoveries

that shift people geographically through Zoom and then shift people away from the company through AI. Now a floor play that took 100 people full time became 20 people at a time because it would take turns. And now those 20 people at a time, which had another 30 people at home, so let’s say it 50, now it’s 10 people in the company. So you went from 100 to 10. So it’s a seismic shift in the office market.

Now we’re seeing in office that we thought initially that would be the end of the cities and everybody would be in suburbs. But I think people woke up and they said, you know, no, we don’t want to be in the suburbs. We still want activity. We still want people. We still want to interact and go to the culture that the city’s built. So that’s why there’s a demand for residential.

within these cities, but does not seem office presence. So now, you know, we have these office owners that are hitting maturity walls with their lenders.

And there’s no demand to create the income stream for them to be able to service their debt. So there’s one or two options is you keep living in the past and you keep trying to survive and getting essential. You live in the present and you say, right, this is the current value, let me transact. And that’s where we come in. We’re not taking things crazy below current value, we’re buying things at today’s value. And like, that’s our thesis, we’re buying things at today’s value. And the only difference between us and the current owner

is that we’re buying at a lower value, so we have a basis reset, and we’re willing to put in the time of the capital in breathing new light or new life into this building. And that is usually by following the demand trend. So if you have a residential market with a 30, 40 % vacancy rate,

and you have a office market with a 30-40 % vacancy rate and you have a residential rental market with a 5 % vacancy rate, well, if you just put in some kitchens and bathrooms and make them really nice, then you’re going from a 30 % vacancy to a 5 % vacancy. I think it’s a good trade. And that’s what we specialize in. That’s what we focus in. So what markets do we not touch? Because when there’s no residential demand either, then what do you do with that building, right? mean, do you turn it into a data center maybe? But that’s not what we know how to do. We know how to convert it into

higher demand uses.

Scott Bursey (12:53)
I love that framing. That was an excellent breakdown. Any challenges you’re watching closely, this could be like market risk, competition, access to deals or capital, that sort of thing.

Alberto Smeke (13:05)
Yeah, of course. So you have to have an element of faith when you buy these things because although you can underwrite every single aspect of it, it’s a complicated business plan and you need to believe that you’re going to do the right thing.

At the end of the day, you’re on the right with a bunch of cushion, your construction calls, you’re on the right, you transition with a bunch of cushion and time and energy and effort. But you are doing something very complicated. You are converting a user, changing a use and…

operating a building that was not meant to be operated in a certain way by putting in a bunch of capital into doing so. So you have that. You also have, you know, legislative risk. You want to make sure that…

The local governments will understand the need that you’re filling. I think that’s not such a hard thing. think local governments today have realized that there’s a massive need for residential rentals. And the more product that comes in the market, the more affordability is created because the more supply you deliver, if you have the same amount of demand, then the price goes down.

Obviously, a lot of these cities have had, you

crazy demand that keeps increasing as supply increases. But most of the time, when you create more product, you create affordability. And you don’t have to legislate ceilings on rents, but rather if you’re creating local market dynamics and creating more product for these units or more ability for these units, you’re going to create affordability. So I think everybody wins with that. think cities get populated. I think buildings get live again. I think crime goes away because you have active buildings.

They’re not desolate. And then you also have, you know, more product for people to choose from. Today you have residential, you know, condo loans or individual loans that are much higher than they were five years ago. So for somebody to go buy a condominium, today is unaffordable.

is tremendous today versus owning. And as long as you can keep the rent at a healthy level, I people could do a lot better with their money today by putting it in the markets or investing in however they want versus buying their own condominium and leaving money stuck there. They could invest in their careers, they can invest in their futures. So I think everybody wins.

Scott Bursey (15:50)
And Alberto,

that’s what it’s all about. The win-win. Let’s touch on opportunities one more time here because I know our listeners are going to want to know this. Where is the biggest overlooked opportunity for capital deployment in commercial real estate over the next 18 months in your view?

Alberto Smeke (16:06)
I believe that in the next 18 months, you’re seeing a tremendous shift.

and a flight to quality in every asset type. As I explained to you before, want better. Building users want better. They don’t need to do anything anymore. They don’t need to go into an office. They don’t need to live in a certain location anymore. So people today, everybody that’s utilizing real estate is doing it by choice, not by need anymore. So everything’s getting upgraded. So you’re seeing in the office space, class S,

A plus office is doing incredibly well because people realize, office owners realize that if you give somebody beautiful gym in their office building and all these amenities and a beautiful building that’s lead certified and every classification that you could give it,

people are going to go to that building. So there’s a flight to quality when it gets to office, right? Which, you know, leaves the existing buildings that are not, you know, recent builds, maybe pre-1990s, pre-1980s, in its very difficult existential threat. Like, now this building was built to be an office building. When people had no choice of a better office or a worse office, there was no such thing as a better office. It was four walls and a desk. So now when you have all these amenities and

all

this better quality product, then they shift there. They’re a good office user shift there. So now the older office buildings have an existential crisis. What am I doing? What am I supposed to serve? And usually those older buildings translate well to a residential product. So you’re enabled to unlock.

⁓ this square footage and solve for somebody’s affordability crisis because right now there’s a finite amount of apartments in a given urban market. All of a if you increase the supply by 20-30%, rents are going to come down and are going to make it more affordable for the user. And that’s where we see the tremendous opportunity today.

Scott Bursey (18:00)
That is a huge distinction. Thank you for breaking that down. That was just excellent. Surgically broken down. And is there any advice, any golden nuggets you’d like to leave with our listeners today, Alberto?

Alberto Smeke (18:14)
Yeah, just chase value and ignore the smoke and mirrors and ignore everything else that gets to be put in the makeup or in the facade at the end of the day is what are you paying and what are you renting for? And if those two metrics work, everything else is solvable. There’s so many great service providers in this industry that can help you throughout the process. But the one thing they cannot help you with is if you pay too much for a building,

or if you’re renting it, know, if you’re building a bad product that you can’t rent it for the price that you expect it to. So as long as you’re buying this thing right and building it right, I think you won’t have such a, you know, a hard time selling it as long as it’s to the right location, right? If you chose the wrong location, then I can’t help you there. So like I would say, it’s to add to that trifecta, guess it’s location, basis, and product.

Scott Bursey (19:04)
That is pure fire, Alberto. Thank you for sharing that high level perspective with our pros. And for our listeners that would like to follow your journey, collaborate with you, what is the best way for them to reach you?

Alberto Smeke (19:16)
Yeah, so we’d love to speak to any partner, investor, or anybody who would be interested in. You can reach out to our website. Our website is cscre.us. We’re also live on LinkedIn and guess Instagram socials. And feel free to send us over an email as well. We’d love to have a conversation.

Scott Bursey (19:38)
Thank you so much for joining us today, Alberto.

Alberto Smeke (19:41)
Thank you, Scott. Thank you for your time.

Scott Bursey (19:43)
And to our listeners, appreciate each and every one of you. If you got value from today’s episode, please subscribe. We’ve got a lineup of exceptional guests, just like Alberto, who are making huge moves in the market. Until next time, keep your standards high and your vision clear. We’ll see you in the next episode, everyone.