How to Raise Institutional Capital for Commercial Real Estate Deals | Dan Steinberg

Daniel Steinberg (00:00)
I can give you a great example of that that we did a little while ago, but it’s a good understanding of underwriting. But the first thing I would say is one of my mentors when I was at Blackstone said to me, “Dan, whatever decision you make in real estate, as small as what cleaning company you’re gonna hire, as big as the acquisition, the financing itself, you always have to ask yourself one question: How does this affect my exit?”

Dylan Silver (01:55)
Hey folks, welcome back to the show. Today we’re joined by Dan Steinberg, a commercial investor, fund manager, and founder of Targeted Real Estate Equities, who brings institutional experience to accredited investors across the country. Dan, thanks for joining us here today.

Daniel Steinberg (02:12)
Thanks for having me, Dylan.

Dylan Silver (02:13)
What types of deals are coming across your desk these days?

Daniel Steinberg (02:17)
It’s interesting. We’re seeing a—a kind of mixed bag ’cause it—it’s a fragmented market depending upon what geographic market you’re in, what property type you’re in, ’cause we’re starting to see a lot of the distressed sales. I—I just yesterday, I think, I got five emails from brokers on either a bankruptcy sale or a receivership sale. So I think a lot of people are seeing that, which is coming from the—the vast increase in interest rates from the 2021, ’22 period to where we are today.

And if you think about all that CMBS debt, over a trillion dollars of debt that was placed that had a five-year term, it’s all coming due in ’25, ’26, ’27. So we’re seeing a little bit of that, not as much as we thought we would see, because a lot of lenders are just working things out. So on one hand, we’re seeing a lot of kind of distressed opportunities where we can come in and buy things at a—some form of discount or, you know, recapitalize the owner and—and get a preferred return, which we like because that provides very attractive risk-adjusted returns.

And on the other hand, we’re seeing attractive deals in certain markets. We’re working on some workforce housing, which is very underserved because the math doesn’t always work. And we—you’ve probably heard this analogy a couple of times—we think we’ve created a better mousetrap to try to solve that. And we have some good folks we’re doing that with. We’ve spent a lot of time in medical office over the last four years. There’s been a huge consolidation in the medical office space

that, as you probably know from yourself, like you used to go to your urologist, would be Dr. Smith, Jones, and Cleary, and now here in Connecticut, it’s Stamford Health, right? So all the hospital groups and the private equity were buying up medical office. So we did three or four very attractive deals. One: complete renovation of a building to convert from office to medical office. It was incredibly successful for us and our investors, of course. We did a build-to-suit for

UnitedHealth Group, where for their ProHealth subsidiary here in Connecticut, where we built up from the ground up a new thirty-thousand-square-foot facility for them to consolidate all the practices they bought. And we own a similar building here in Connecticut. It was just a—a traditional office that we converted into medical office. But what—what’s interesting is medical office—and—and I’ll say that the reason our company’s called Targeted is because we try to

find anomalies or opportunities in the marketplace that might only last eighteen to twenty-four months and try to really place some money on those deals. And now what we’re seeing, where medical office was something we were very bullish about in the last few years, we’re starting to see that kind of go away. And the reason for that is the mass consolidation of private equity in the hospital groups has really slowed down. And most of it’s because of what’s going on with the government and Medicare and who gets reimbursed and who doesn’t and how that’s gonna work and what the doctor’s practice is gonna look like. So that’s really slowed down the development and expansion needs of a lot of these practices. So it’s a very changing market right now. It’s very interesting.

Dylan Silver (05:11)
You mentioned—there’s a lot to unpack there. You—you mentioned, hey,

Daniel Steinberg (05:13)
Yeah.

Dylan Silver (05:15)
there’s a lot—there’s a lot there. You mentioned these five-year notes coming due. And it feels like, from an outside perspective looking in, that there is this kind of black cloud hanging over a lot of deals because of this. And I’m a Texas Realtor; I know that we were talking in the green room, you have a connection to Austin. In Austin specifically, it kind of feels like the nexus of this.

What is it like from—from your side? Is there some level of like controlled chaos? Are people aware that this is—is—is happening in the greater landscape and that there is an opportunity there? Or is this almost like behind a cloak and dagger to some degree?

Daniel Steinberg (06:41)
Yeah, it’s—it’s—it’s interesting because there’s a very large difference between a supply-generated softening of the marketplace and a demand-generated softening of the marketplace. And they’re vastly different. You know, supply is what we saw in the ’70s, ’80s, and early ’90s when banks were just giving out money and developers were building spec buildings with barely any money themselves, especially in Texas. And I started my career working as a consultant and

doing workouts with the RTC selling bad loans from the S&L crisis. And what—as we’ve moved towards this—and that was a supply-generated demand issue. As we move to this, what’s happened post, I’d say, the late ’90s and when CMBS came involved, there aren’t the local banks providing those eighty percent LTV with no recourse.

And they’re not doing it on spec. You need to have a tenant, you need to have good financials, you have to have somebody sign on the carve-outs. So because of that, we’re in what we call a demand-generated softening. And that’s much easier to stomach because if you have a building and you’re eighty-five percent occupied and you’re looking to lease that last fifteen percent, you don’t have to worry that somebody’s gonna build a new building across the street and undercut you on their rents because they’re in lease-up mode. And that way you’d—and that forces you

to lower your rents or lose a tenant. On the demand side, it’s just harder to potentially find new tenants if you have some vacancy. So it’s not as bad as I think everybody wants it to be. I think because the fundamentals on the supply side have been in check, what we’re seeing now is it—it—it’s good operators and good quality assets are doing very well. And it’s really a tale of two cities, where like in New York City, the Triple A new buildings are getting over two hundred dollars a foot in rent, and there’s a

whole swath of B buildings that are virtually empty and looking to be converted. So it’s really a tale of two cities.

Dylan Silver (08:30)
You mentioned also the lenders and the—the—the banks working things out with the investors. Now, of course, if—if folks are in a situation where they can’t make their lender whole, then they, of course, want to work things out. But this becomes a little bit of a dance, right? And this is where people can sort of avoid having to be foreclosed on or avoiding a—a—a bankruptcy.

So when these investors and these syndicators are in this position, is this something that they’re trying to avoid like up till the last minute? Or is this like a years-long, maybe even longer than that, dance to try to extend or alter the terms?

Daniel Steinberg (09:11)
Interesting. I’m gonna answer that in two ways. The first part is one of the benefits of being in the real estate market, direct ownership of real estate, is we don’t have dynamic pricing. So in order to sell an asset, at the best, it’s gonna take three to six months to decide you wanna sell it, put a package together, potentially hire a broker, have them run a process, select a buyer, have the buyer go through their diligence and close. It’s at least six months. And so because of that,

people should have an ability to forecast this. And they should because, what we say is that real estate lags the general economy by 18 to 24 months. Yeah. And the best example of that is, let’s say you have an office building and you have a tenant—any public company you want to name, let’s say Pepsi. And Pepsi takes fifty thousand square feet, and it’s 2008, the world’s kind of blowing up. But Pepsi is still a huge international company; they’re doing fine.

So their stock price might go down, but that shouldn’t affect your real estate. Six months later, maybe Pepsi starts doing layoffs, right? So then you’re wondering, are they laying off people in my building? And maybe they are, maybe they aren’t, but they’re probably still keeping the lease, right? And they’re not going out of business. And then maybe another year goes by and they’re still depressed and they decide they have to sublet or they have to move or do something. But the good news is, as an owner, you have twelve to eighteen months to figure that out because,

one, they have a long-term lease, and two, if there’s a problem, you’ll probably work something out with them. So that’s one part of it. The—the second part of it is what we’re seeing today is very different than what happened in 2008. So in 2008, we thought there was just going to be another RTC crisis, another, you know, bloodbath in the real estate world. But what most of the—what I guess what they learned, what the lenders learned from the past, the RTC days,

was that it’s better to kind of blend and extend or work with borrowers to try to work it out and not take back assets and not take the loss or have to sell or do anything like that. So in 2008, when the world blew up, we didn’t—we thought there’d be a lot of opportunity to buy distressed assets or—or notes, but we didn’t see as much as that. The difference is that when—when the lender went to a borrower to work out their loans, interest rates were still low. So there wasn’t a big issue.

The—the issue today for a lot of borrowers is if, yeah, if you took a loan in 2021 and you were at three and a half, four and a half percent, and then in a year it went up two hundred basis points, and now it’s probably six, six and a half percent. So when I said earlier it’s a tale of two cities, what we’re seeing is the well-capitalized borrowers are able to stomach the refinance. So imagine you have a twenty-million-dollar loan on a

$30 million building, so you have $10 million of equity in it yourself, and you had a $20 million loan at four and a half percent. It comes due in 2026, and the rate’s six and a half. And—and they—so because of that, the value has gone down. It’s almost like buying a house. You can—where interest rates tell you what you can afford. Maybe they come back to you and say—another bank says, “We can refinance it,” or the lender can redo the existing note, but they say, “We can only give you sixteen million in proceeds because of what’s happened in the marketplace.”

So that’s causing a lot more problems for borrowers. So we’re trying to help that on both sides. One is we could go in and buy the note if the lender will do that. The second is we’d like to work with good-quality operators and say, “Hey, maybe we’ll come in, provide that three million of equity, four million of equity to help you get there on a preferred basis.” And then we’re looking at really attractive risk-adjusted returns. So it’s kind of, like I said, the tale of two cities.

Dylan Silver (12:40)
It certainly is a good backstop when you have cash on hand and you can stomach a higher interest rate. These variable-rate notes that people took out really seemed to hurt a lot of people, and they—they hadn’t had in recent memory a time where that had hurt them. If you look from like 2012 to 2020, you could be buying deals wrong, variable-rate debt wasn’t hurting anybody, and then all of a sudden rates double,

surplus increases, and then you have a moratorium on rents with COVID. It was like all these things happening at once. It—it can certainly create a lot of distress for folks. I do want to actually pivot to another asset class. You—you mentioned working with hospital groups and building out space for them and—and converting office space into—to medical space or medical office space.

What does that type of rehab look—look like, and what all goes into that?

Daniel Steinberg (13:34)
Yeah, it’s—it’s interesting. And—and to be honest with you, before—before the last five or six years, I did very little in the medical office space. But like I said, we’re called Targeted because we look to—you have a shotgun and to where we see opportunities or anomalies in the marketplace. And it’s—it’s a lot more complicated, but medical tenants are really the best tenants to have because the amount of money you have to put into the space to build out their

offices—just think about when you go to the doctor. And I’m not even talking about hospitals or surgery centers; I’m just talking about regular medical office where they treat patients and maybe do small procedures. But every one, it doesn’t only have to be approved by the building department, it has—the plans have to be approved by the state health authority because they’re seeing people, so that creates a whole ‘nother level of approvals and delays sometimes. And developers who don’t understand that could think, “Okay,

I’m gonna buy the building, I got this tenant, I’ll get them in, we’ll start construction in six months,” and they find out they’re not starting construction for eighteen months, and that can really throw a wrench into your underwriting. And then there’s little things like, when you—a lot of folks have MRI or X-ray machines or some form of that. And when—in those rooms, you have to have lead-lined drywall, so it brings up the cost. You know, just—and every—if you think about when you go to the doctor, every exam room has

a gas line, a sink, just a lot more plumbing and—and gas lines and all that kind of stuff. So it’s more complicated. It’s a more difficult process to get done. But the good news is, when you complete it, they’re the best tenants to have once they’re in, because the—for example, in a typical office, we use a seventy percent—across the industry, I think most people use a seventy percent retention ratio on when leases roll, if they renew or move out.

And for medical office, it’s much higher because the cost for them to move is so much higher. Because a landlord puts so much money into the space—I’ve put sixty-five dollars a foot into an office space, and I’ve put two hundred dollars—two hundred dollars a foot into medical office space and more. And, you know, the—and that’s—that’s just our contribution. The groups we work with are putting up to six hundred dollars a foot, including our contribution, into—into building out their space. And because of that, we have to layer

and amortize that across our rent, so the rents go up. So for an owner of medical office, it’s very exciting, because you have a higher rent than you normally would in a regular office and you have a stickier client, because they’re gonna stay because they don’t want to have to go to the next building, have the tenant—the landlord put out a lot of money, and then charge them even more rent. So there’s the good and bad. It’s just kind of, really like everything else in real estate, you really need to know where you are and what you’re doing, so you can really execute well.

Dylan Silver (16:04)
Now, there’s two sides to this deal that—that make it tricky, right? So first, you have, of course, converting from office space to medical office space. And you mentioned all the intricacies there with permitting, for instance, and approvals. But then you also have the relationship with the—the hospital group, right? And that’s a—something that’s gonna be outside of the—the wheelhouse of—of most real estate investors, and that’s not the—the area that they work in. And so the type of

operators that do build these—the medical office space—historically, are these folks that have had long-term relationships with these hospital groups, or is it many folks, maybe similar to—to yourself, who are seeing an opportunity here?

Daniel Steinberg (16:46)
Well, it’s interesting. You have to have a little of both, actually. So one of the deals we mentioned to you is we did a transaction with UnitedHealth Group, and—and that was a ground-up development. And we were able to get that deal because we had just completed a deal with Connecticut Children’s Medical Center, which is another hospital group here in Connecticut. So when UnitedHealth Group, which is a great Top 5 Fortune company and one of the best credits in the country—so when they were doing their RFPs,

part of what got us the deal was that we had very recent experience just building out space for medical developers—so medical use. So it definitely is a big issue, because the hospital groups are looking for someone who understands, like I said, the—what the permitting process is like and what it’s like dealing with them. And I’m sure they would all not like to say this out loud, but they’d all tell you that hospital groups are insanely bureaucratic and their processes take forever to get things done.

The good news is that once you’ve done it with one group, they want to go back to you, because they don’t want to recreate the wheel all the time. So there’s a lot—I think very few people can kind of jump in and jump out of medical. We were very fortunate that we had some partners who were very deep into that space. But I—I—I wouldn’t suggest it for anybody else, because it’s very easy to just get way out over your skis.

Dylan Silver (18:03)
And have you done ground-up medical office space?

Daniel Steinberg (18:07)
Yeah, the UnitedHealth Group deal we met was raw land, and we—that—we actually signed a lease with them before we even had plans for the building. It was just an agreement that we would X amount of rent and we would build X space, and they gave us the plans for their interior and some concepts of what they wanted for the building. We—they got approval over that, and then we just hired our build-to-suit architect/contractor and took it out of the ground.

Dylan Silver (18:28)
What does site selection look like for—for a deal like that? I imagine this is wildly different underwriting than—than other types of deals.

Daniel Steinberg (18:36)
Well, it’s interesting. So the hospital groups, they go through, they hire consultants, they have internal economic and demographic, you know, analysts. And for this, it was pretty simple because UnitedHealth Group has a subsidiary called ProHealth Physicians. And they had recently bought, I think it was four or five individual practices, and they needed a place to consolidate them. So they really just drew a circle around where those five practices were and then said, “Okay, we need something within this circle or as close to it as we can get.”

So that was—the site selection part is pretty easy—not easy ’cause you can’t always find things that are zoned for that use. The other thing that is very difficult about medical office is, depending on the municipality, it takes—it has a much higher parking requirement than regular office. So for example, here in Connecticut, I can tell you in—in Westport, where we—where I’m sitting today, for general office it’s three or four per thousand, depending on what zone you’re in.

For medical office, it’s five per thousand. In one of the communities just up the road, it’s six per thousand. And that’s a very large limiting factor on, you know, how big your building could be, because it’s—it’s expensive. Either you’re gonna have to go below ground, build a deck, or you have to have a really large space. And those really large spaces aren’t where the people want to go see their doctor, right? If—if the area is undeveloped and you have enough room to build that big surface parking lot, it’s probably not where the hospital group wants to be.

Dylan Silver (19:56)
For—for folks who are looking at alternative asset classes to develop, I’ve talked with a lot of syndicators and fund managers who are doing some really interesting things in self-storage and small bay industrial, but that’s certainly not medical—medical office space. There—there is sometimes a mentality with those asset classes that like, if you build it, they will come. But with medical office space, it—it does sound like you have to have a tenant identified prior to development. Is that accurate?

Daniel Steinberg (20:23)
Yeah, it is, because imagine if, you know, medical also includes dental, it could include psychiatry, it could—it could include different types of therapies: physical therapy, occupational therapy. A lot of times, like the—the space we did in Westport for Connecticut Children’s recently, that had everything under one roof. The—the idea was, we’re gonna put every specialist we can in this thirty-thousand-square-foot, two-floor facility, so they have oncology next to physical therapy.

And—and it’s really been a great thing for the community, because now, instead of having to drive to Stamford or Greenwich or one of the other, you know, half hour away, you—it’s all in our community, all the specialists you might need to go to. So it’s, yeah, it’s just a—it’s just a different world. That’s the best way to put it.

Dylan Silver (21:04)
I want to pivot to—to multifamily or—or pivot back to multifamily. One of the trends that I’ve seen is that there are people now that are looking—and maybe this is just me becoming more aware of it, but people are looking more and more into these tertiary markets that may be in the urban sprawl of a city. And it feels like these niche markets that people may have only been investing in previously if it was their backyard, now everyone’s investing in. But you also have a lot of, over the last couple of years,

folks who’ve also gotten burned or seen deals go south. And so it’s—it’s trickier to sometimes invest where you don’t personally have boots on—on the ground. When you’re looking at this from your—your institutional lens and experience, what do folks really need to get right when they are investing, especially at scale, in areas where it’s not their backyard, where they don’t have boots on the ground, and this is new to them?

Daniel Steinberg (21:59)
Yeah, well, I can give you a great example of that that we did a little while ago, but it’s a good understanding of underwriting. But the first thing I would say is one of my mentors as I was—when I was at Blackstone said to me, “Dan, what—whatever decision you make in real estate, as—as small as what cleaning company you’re gonna hire, as big as the acquisition, the financing itself, you always have to ask yourself one question: How does this affect my exit?”

And I think most syndicators or—or let’s say smaller operators that are more mom-and-pop and don’t have that kind of institutional ingrained in their thinking and the way they learned, that’s a big pitfall for them. So they go into a new market and they say, “Wow, I can sign this rent. It’s—it’s three dollars above market, but it’s flat for five years,” and then they realize they—they think they’ve leased up their building, they go to sell it, and the buyer comes in and says, “There’s no growth here in the first—and I’m gonna pay you a lot less for that.”

So that’s the number one issue. The—the second issue, I’m gonna give you an example of a live deal that we did ten, fifteen years ago. We—we were introduced to a—by an operator we had a good relationship with, and they had the opportunity to buy a portfolio of ten brand-new garden apartments, all institutional quality, all three to four hundred units per property, which is exactly what institutions—typically won’t buy things below two hundred units.

The issue—and at the time we could buy it at a seven cap rate, where—and I’ll explain why, where the hot Sunbelt markets, that were Dallas, Atlanta, Charlotte, Tampa, those markets, things were trading in four and five caps. And the reason was because these were in tertiary markets, like you mentioned. It was all through Louisiana and Texas—it was Louisiana and the Houston, kind of Port Arthur part of Texas that was all petrochemical-driven.

Yeah, and then it was on the Valley in Texas: Harlingen, McAllen, and that area, right on the border of Mexico, and that was driven by NAFTA at the time. So you have this concept of what’s called maquiladoras, which are the companies that have manufacturing plants in Mexico. The managers are all American, but—and they don’t want to live in Mexico, so they live right on the border, and they basically commute over to—to manage the—and then they come back at night. So

we looked at this, and the other thing that I think people that aren’t institutionally bred don’t think about is the—not just the real estate statistics, like absorption, rental rate, vacancy, all those things—they lose on the economic and demographic drivers. Why are people in this market? What is—what—what is driving jobs, population growth, the economy? So we looked at this and said, “All right, this looks awesome. We’re gonna have great returns, but who are we gonna sell it to?” Because these are big assets; they’re too big to sell

to the local developer, and they’re too small and they’re in third—tertiary, as you said, tertiary markets, and most institutions don’t go there. But so we were a little ahead of the curve. But then what happened was, we looked at the petrochemical business at the time, and two of the markets were—and they were building new liquefied natural gas facilities. Those—that’s like a 10-year process to build those things. So we’re like, “All right, the—the demand’s definitely there.”

And then there was the NAFTA on the assets in the Valley. And we knew that as time went on and people started to see these areas growing, that we would sell, and we were lucky to sell to a very well-known institution five years later.

Dylan Silver (25:17)
You—you mentioned several times this lens, this perspective of—of the institutional investor and being bred in that environment versus another path, which is wholesaler to single-family investor, then you’re buying some small multifamily, larger multifamily, then you may be syndicating, but at—at the end, you—you end up occupying the same space. So I wanna ask you, from the—the institutional lens,

you mentioned several ways where the underwriting is different and the perspective is different. One of the ways where I—I think a lot of folks miss when they are—are—are scaling to a certain point is they feel like they—they need institutional capital or—or they need those relationships to open additional sources of financing for their deals. These days, how do—how—how do institutions at large approach

new relationships and where they should deploy their—their capital, maybe in—in emerging markets? Is this, again, the type of thing that’s behind a cloak and dagger, or is there a—a more procedural way, if you will, to—to get in front of institutional capital?

Daniel Steinberg (26:25)
Yeah, it—it’s interesting. There’s a traditional operator/equity partner relationship in most deals, as you said. You might have an operator in—in—in Austin, Texas, who’s done a bunch of deals, and now they’re gonna step up and do a little bit larger deal, so they need to bring it to a “big brother” partner, for lack of a better term, to provide the balance of the equity. And instead of putting in the equity themselves, maybe they put in five or ten percent of the equity, and they go

to TPG or Carlyle or one of those groups, and they put in 90 or 95% of the—of the equity. But it—it is a little bit of a cloak, to some extent, because it all depends on who you—who your relationship’s with. Because at large—a lot of these big firms, there might be, let me say, 10 guys on the acquisition side, and you might go—you might, through a relationship, get to one guy. So I go to Dylan,

and, you know what, I just don’t like that market, or I don’t like that property type. And you think, “All right, that institution said no to me.” But if I had gone to Dan, maybe Dan’s like, “I—I just did a deal there. I really like that.” And that institution might come to you. So the problem is, it—it’s—it’s really a networking thing. Like, how do you get to the groups? But thankfully for most smaller operators that want to migrate into that space, there’s lots of very reputable firms you can hire to introduce you to the right capital.

You—the Cushman & Wakefields, the CBREs, Eastdils, they all work with a lot of—if you have a good track record and you have a good project, they can get you in front of the right capital, and then it’s on you and your ability to close.

Dylan Silver (27:50)
This—this is a really interesting topic. I—I wanna pause here and—and unpack this a little bit. People talk about where to find deals, right? But people sometimes miss—and we haven’t talked about it on this show, it’s the first time: Where do you find institutional capital? And—and sometimes, oftentimes, commercial investors don’t wanna have to deal with brokers. They’d rather go direct-to-seller and then kind of involve the broker

as an afterthought, because they’re trying to—to—to limit the—the—the commissions that they’re paying, really, right? But—but when you are limited by your—your ability to finance a project, then you do need—you mentioned like Cushman & Wakefield—you—you—you need a broker relationship in—in place. Can you expand a little bit on—on that and really how those brokers, a good broker, can facilitate a deal beyond just getting something sold or listed?

Daniel Steinberg (28:40)
Right. Right. So remember, most people think of brokers as it relates to leasing and sales, right? You have leasing brokers and you have investment sales brokers. But there’s capital markets brokers. And capital markets brokers work both on the debt and equity side. So, and I can say in my career, I’ve been fortunate that I’ve been on both sides of the equity/operator relationship. So I know how frustrating it can be as an operator trying to raise money from one of these institutions, and I can know how—what it feels like being at the institution

and having that difficult investment committee meeting where people say to you, “Why are we doing this deal?” So it’s a very interesting perspective. But I—I think what people have to realize is, if you have a strong deal and you have a good track record, like the Eastdils of the world or the CBREs or Cushmans, they all have good capital markets groups in every market, and you can go to them, and usually it’s not an upfront fee; it’s some type of points on the closing, and that’s when you pay them.

And it’s rolled into the cost of the deal. So it’s not, as an outlay personally to send it, it might be difficult, but when it’s rolled into the cost of the deal, it’s almost a rounding error to get the deal done. Yeah. So it’s really about just reaching out if—if you think you have the right deal, which is the biggest thing about it. And you could—I always joke that raising money comes down to three things. It’s, the number one is they have to like you, right? They have to think, “I like this guy; he seems like a good guy.”

Number two is they have to like the—whether it’s the deal, the strategy, the business plan, wherever you are. And number three is they have to think that you’re the guy who can execute it. If you can do those three things, money is out there. These big institutions, I mean, Blackstone right now is up to what, 20 billion on their most recent real estate fund. So they’re not doing the things they were doing when I was there in the late ’90s. But they can’t put out all that money without a big network of operators who are

bringing them transactions or brokers bringing them transactions. So most of the institutions are open to forming relationships because they have big, you know, they have a lot of dry powder, and they’re being cautious now, so it’s even harder to put money out sometimes. So if you have a good transaction, there’s a lot of opportunity to find the right partner.

Dylan Silver (30:44)
This is very interesting also from the brokerage perspective. If I put on my—my Realtor hat, the—it almost feels like it’s a totally different world in the commercial space, because if you go from residential and you even try to get into commercial, I’ve experienced this without naming names—I’ve experienced brokers will—will say, “Well, you’re—you’re a residential agent. We understand you have this person that wants to sell this property, like you can’t be involved in this process at all, basically.” And—and I think

this is in many ways because people have a reputation to guard, but—but also because there is a little bit of gamesmanship here. There is a little bit of, “I have these connections, I have this relationship, I’m cornering off the market for myself, and I don’t just want to give away all of the—the—the game, so to speak.” These are the—the things that I’ve learned through experience. I do think, though, that the more we have conversations like this and the more we see

syndicators realizing that capital is their bottleneck and it’s not finding the deal, it’s the capital, that we may start to see kind of a demographic shift at who is a commercial investor and what is the type of deal that institutional capital might look at. I don’t—I’m just spitballing here.

Daniel Steinberg (31:56)
No, no, I—I—I agree. I think, well, think about it: let’s say you’re an operator. So what’s your—what’s your daily job, right? You have to find deals, you have to manage the deals you have, you have to manage your capital, your investors, you have to report to them, you have to operate the deals you have. So you’re—you have a busy day. Then think about a capital markets broker: what are they doing all day? They’re forming relationships with debt—debt sources and equity sources, and they’re trying to cultivate deals. So you get a person who spends their day

creating that network. And that’s a valuable tool, because they’re gonna get you to people you’ve never heard of. The second thing is, as it relates to residential versus commercial brokers, the—the best way I can put it is, and it’s a big difference, residential brokers deal with people who are living in their homes, and they have a passion that’s different than people whose job is to put out money and buy a deal. And that’s a very different—I mean, most residential brokers are

half psychiatrist, half broker, right? Because, “You—we didn’t get that deal,” or “I really—my wife really wanted that house.” So you’re dealing with stuff that most commercial brokers—obviously there are issues, but they’re not personal issues, they’re business issues. And that’s a difference.

Dylan Silver (33:07)
I want to ask, pivoting here to something we haven’t talked about: workforce housing, affordable housing. You’re in—you’re in Connecticut, right, East Coast. I’m currently in North Jersey, East Coast. And we put—when people talk about the parentheses, right, California and then the East Coast, we—we look at affordable housing. What—what do we do? Is there anything that can be done? I—I don’t honestly know at this point, because it feels like if you have a home, you’re gonna be riding in the wave of inflation; if you don’t have a home, it’s just gonna be

tougher and tougher to—to get in. And I know even rents where we’re at are more than $2,000 a month for—for something that is very, very modest. Do—do you see there being a solution set to affordable housing? If we—if we just look at the—the East Coast, is there a solution set here?

Daniel Steinberg (33:53)
Yeah. Well, it’s interesting. I clearly don’t want to get into politics—that’s never a good thing. But one of the things that’s happened in New York City is as they put in this rent freeze, the average rent in place is higher than it’s ever been, ’cause the answer—when there’s a lack of pizza, the answer isn’t to lower the price of pizza, it’s to make more pizza. And unfortunately, with rent control, it makes it harder to do that because if you’re building a new building and there’s an affordable requirement, you’re not getting as much rent. But

so what’s happened is I think in the overall housing market is you—let’s segment into the three groups. So you have affordable housing, as you said, workforce housing, and then let’s just call it Class A housing apartments on the rental side. So the two poles or the two ends are being handled. So the government really focuses on affordable housing and making sure that they can incentivize developers or put things in place. In a lot of communities, it’s if you’re building a new building, you have to make

10% of the apartments, 20% of the apartments affordable. In Florida, for example, there’s a thing called Live Local, where if you have, I think it’s 30% of your residents are below a certain income level and the rent that—that they set is below a certain level, then you have a tax abatement for that year. So there’s lots of incentives on the affordable housing side. On the Class A

typical garden apartment, whether it’s in Tampa, Austin, wherever it might be, the—the private markets are doing very well at that. Because, right, you probably see a lot of cranes in Austin. Because the—and the main reason for that is the rents that they receive are high enough to justify new construction. So they’re adding more product, and that’s what’s taking care of itself. And because of what you and I talked about earlier, where the—the lenders have much more conservative underwriting now,

where they’re gonna make sure you have thirty percent equity and not ten percent, and things like that, the supply has been kept to some degree in check. The problem is—is the middle, is that workforce housing. It’s the young student, it’s the new nurse, it’s a policeman, maybe a landscaper, whatever it might be—good, hardworking people have jobs, but they just can’t afford to pay the rents in these cities. And the prob—and it’s a double-edged sword, because the problem is developers can’t justify building new workforce housing because

the rents don’t justify the return and you never get your money back. So what we’ve been doing—and we—we think we created an interesting little mousetrap here: we have a partner, an operating partner we worked with, who’s done five or six of these. And what he’s done is he’s found older limited-service hotels that can be converted into workforce housing. So we had a transaction that we were working on and we’re trying to continue with in Orlando, where it was a hundred-and-ten-unit

limited-service hotel, like two miles outside of dead-center Orlando, and the bricks and mortar are in great shape. And why that makes sense is because the—the ability to convert it into residential housing didn’t require ground-up construction. It really just required adding a kitchen. You had the bathroom, you had the plumbing, and maybe a little paint and carpet. So the cost to reposition those assets is much less, thereby allowing you to justify that renovation, as opposed to

not being able to create something that these—these workforce housing or middle-income people need.

Dylan Silver (37:02)
Yeah, I mean, you mentioned, right, working professionals where you—you can’t afford to live in a city that—that you work in, right? And then you’re having to commute from outside. And what—what does that look like? And repositioning a—a hotel as workforce housing is a—is a great way, I think, for—for folks to be able to create—create opportunity as an investor, but also really serve the community.

And I, as someone, I consider myself part of this group, right? You—you look at, well, who’s becoming homeowners? Where are people buying? What are people paying for rents? And there—there is sometimes, I think, a lot of people who feel like, gosh, it’s just an uphill battle. So we—I hope we have more real estate conversations like—like this where folks are trying to find ways to—to solve for this, even if it is tricky and even if it feels like it’s just a drop in a bucket here.

But we are coming up on time here. Dan, any new projects or activities that you’re working on? Also, anything you’d like to mention directly to our audience?

Daniel Steinberg (38:41)
Yeah, no, definitely. I appreciate that, and I’ve enjoyed talking to you, and hopefully we can do it again soon. Yeah, what—what we’ve done is we’ve taken a little bit of a different tack. We have, like we’ve said, an institutional background, but we’re—what I spent some time at at UBS where I ran Real Estate Advisory for the Americas for the private bank. And what I learned there, I learned two things: one, that most high-net-worth individuals—not the ultra-high-net-worth family office folks, because those are basically institutions,

and not the retail folks that aren’t accredited investors because the check size is too small, but that middle group of doctors, lawyers, widget manufacturers, whatever it might be, between a million dollars of investable assets to, let’s call it, 30 or 40 million investable assets before you really have some scale—if they look at a traditional portfolio model and say, “I look at CalPERS, the largest pension fund in—in the United States,”

and they typically have somewhere between eight and twelve percent allocated to real estate. And the main reason is just because it’s a non-correlated asset. When stocks and bonds go up or down, like we talked about that 18- or 24-month drag earlier, it doesn’t affect your real estate right away. So it’s a really good non-correlated asset to add to your portfolio. But when that widget manufacturer goes to his financial advisor and said, “Hey, I’d like to put ten percent in real estate,” the advisor looks and says,

“Well, you have $5 million in my account, so that’s $500,000. What can we do with that?” And it really comes down to one of three options. One is, the most common is, they put it in REIT shares, right? Because there’s REIT ETFs, and they say, “It’s diversified and the best way to access real estate.” But you’re not access—accessing direct real estate ownership. You really, instead of diversifying 10% of your portfolio out of, let’s call it, equities and going to real estate,

you’ve just increased your equities portfolio by ten percent. It just happens that those stocks own real estate. So that’s not a good diversifying product. The second is there’s a lot of private REITs that are non-traded, and they raise money all over the country, twenty-five—twenty-five-thousand-dollar minimum investment. But the fee structure on those is really, really steep, sometimes up to as much as thirteen percent. And in a compounding business like real estate, if you’re only getting eighty-seven cents on the dollar that’s earning

in return, that’s gonna be really hard to get you the returns you want. And they also have a limited shelf life, so a lot of them have had very difficult exits because they have to liquidate at the end of five, seven years. And even the best at it still have redemption issues. And then the third that a lot of people do is they have a—they have a buddy who’s a syndicator or a developer at their club or at their church or school, whatever it might be,

and he said, “I’m developing a Walgreens on Route 9. Why don’t you give me two hundred grand? I’ll put it in it, and I’ll call you in like two and a half years when we sell it, and we’ll see what you get.” And that’s not an institution—you wouldn’t do that in any other asset class. So what we’re working on and we’re really proud of, and we’re gonna come out with in the fourth quarter, is we think we created a better mousetrap to allow the—the—the groups we just defined to get access to a, let me call it, a five-hundred-million-dollar portfolio of twelve to fifteen assets

at a minimum investment of two hundred thousand. So we think it’s gonna be a very attractive product. We think it’s gonna allow individual investors to be treated the same way institutional investors are treated on all fronts: on the institutional-quality assets, institutional fee loads, which is really important, institutional reporting and management, and a diversified portfolio that doesn’t exist with most syndicators. So we’re really excited about that.

Dylan Silver (42:08)
Dan, thank you so much for joining us today. Thanks for your time.

Daniel Steinberg (42:12)
Thank you, appreciate it.