Economic Panel w/ Neal Bawa (Best Ever Conference) - Part 1
In this Invest Like a Billionaire podcast episode, moderator Ben Lapides hosts an economic round‑table with economist Neal Bawa and investor Bob Fraser. The conversation opens with a debate on whether the Federal Reserve can tame inflation through higher interest rates. Fraser likens the Fed’s tool to an “amputation saw” that can only force a recession, while Bawa points to historical precedents (early‑1980s oil shock) and argues that aggressive rate hikes act as a hammer that suppresses demand and, indirectly, energy‑related inflation. They then explore how geopolitical black‑swans—such as a potential Taiwan conflict or further disruptions to lithium and micro‑chip supply—could overwhelm demand‑side policies. The panel shifts to commercial‑real‑estate dynamics, puzzling over why cap rates have barely moved despite a doubling of borrowing costs. Fraser attributes this to abundant liquidity, a “syndicator bubble,” and a growth premium that investors seek in inflation‑linked NOI. Bawa adds that cap‑rate decompression is simply delayed: current data lag behind recent rate hikes, and a noticeable unwind is expected in Q4 and into Q1. Both warn of a looming “bridge‑blowup” as many deals were financed with short‑term, high‑leverage bridge loans that will face refinancing risk when rates reset. A detailed sector‑by‑sector outlook follows. The panel ranks industrial, multifamily (especially core‑plus and Class A) and storage as the top three beneficiaries, while office, hospitality/short‑term rentals (Airbnb) and lower‑tier Class C multifamily are the most vulnerable. They discuss asset‑quality versus market‑tier, noting that Class C assets may see deep price discounts, whereas core assets could be pressured by weak office demand. Fraser highlights niche opportunities in neighborhood retail strip‑malls (9% cap rates) and even “hated” assets like oil fields (25% cap) as high‑return plays. Throughout, the speakers interweave quantitative heuristics—e.g., a 100‑basis‑point Fed hike typically adds 0.25‑0.33 points to cap rates, and a 300‑basis‑point rise may push cap rates up roughly one point—and strategic advice for passive investors navigating a volatile macro‑environment.
Chapters
Hello, future billionaires. Welcome back to another episode of Invest Like a Billionaire podcast. We've got something really fun for you today. So Bob Fraser was actually a presenter at a recent virtual conference hosted by Best Ever Conference. It was for primarily passive investors, and he was on an economic panel with Neal Bawa and Ben Lapides. And if you're not familiar with Neal Bawa, he is a really excellent economist, and he is known as the mad scientist of multifamily. He's been around in the space for a long time and is really known in kind of the speaking circuit for his economic presentations. And so him and Bob Fraser were talking about all things economics and really looking at what's going on in the market with the interest rates, with cap rates going into 2023. It was a really fascinating conversation. It was moderated by Ben Lapides, who is the CFO at Spartan, who is one of the co-founders of the Best Ever conference. And so it was really, really fun. I think you're really going to enjoy this conversation between Neal and Bob and Ben. And this is actually going to be a two-parter because the conversation was so long, it makes sense to kind of split it into two parts. So I hope you enjoy the first part today. And our friends over at Best Ever, they're actually giving us a little sweetener for our listeners. So if you are interested in going to the Best Ever Conference, uh, we will be there as Aspen. There is a link in the show notes for a 15% off coupon. This does expire November 30th. So if you're interested in going, it's going to be in Salt Lake City, Utah this year. It's going to be a really, really great event. We've been to it the past several years. It's always one of our favorite events to go to. Um, so if you're interested in going, You can find the link in the show notes, and I hope you enjoy this conversation between Neal, Bob, and Ben. This is the Invest Like a Billionaire podcast, where we uncover the alternative investments and strategies that billionaires use to grow wealth. The tools and tactics you'll learn from this podcast will make you a better investor and help you build legacy wealth. Join us as we dive into the world of alternative investments uncover strategies of the ultra-wealthy, discuss economics, and interview successful investors.
I want to start with inflation. Not a recession, not wealth distribution. I just want to focus on inflation. In isolation and not what it means for a recession. Can increasing interest rates really bring us down in inflation over the next 12 months? Neal, I kind of heard from you that the answer is yes. Maybe not to the 2% that the Fed would like to see, but maybe the 3 to 4%, which is by cutting it more than half of where we're at today. Bob Fraser, I kind of got some differing opinions from you a little bit, and what I'd really like to focus on are the supply side elements that impact inflation. We can control demand. The Fed can control demand by making it more difficult for the average consumer to buy things. But if CPI is mostly being pushed by food and energy, and the food is being dried up because of droughts around the world, supply logistics, because you can't get boats through the Mississippi River, the Shangxi River, or what have you. And 40% of Europe's energy was cut off through sanctions because of a Russian-Ukraine war causing a global shock to energy prices. Can the Fed really stand up energy facilities? Can they just produce arable land through their policies? That's a question that I'd like to start with. I don't know who would like to go first, but can we really bring inflation down as a result of interest rates coming up in forever?
Yeah, I'll just jump in. The only way the Fed can do that is by killing demand and by generating recession. And it's, It's like a surgeon, you know, or a doctor who their only tool is an amputation saw, right? That's it. And that's all the Fed is. They, unfortunately, it's kind of lame. We need policy answers. We need, they need to work on, we need our government to produce, you know, create, you know, capital programs, investment programs in energy and start begin beginning, you know, kind of permitting and other things to spur supply. So can they, you know, in absent that, which the Fed can't control, the only thing they have is this giant amputation saw called recession. And they can't, they can't spoil demand enough to soften energy prices and inflation. But it's a tough road to hoe. Very difficult.
Yeah. I think we look at the early 1980s because the Fed had a severe issue with oil-related inflation. So right now we've got an energy inflation issue and it's a worldwide issue. It's not actually— the US is the luckiest country in the world at this point, just for the record. So we are both an oil and natural gas producer in together. If you take them together, we're the largest producer in the world. We're not the largest exporter in the world, but we are the largest producer in the world. And if you actually look at oil and gas prices today, we're pretty much the lowest in the world with the exception of Saudi Arabia. So when you look at this, when you look at, it's helpful to look at what the Fed was dealing with in 1990, in 19, late '70s and also in, in '81. And basically they used the, the interest rates as a brute force weapon. It is a hammer, it's not a scalpel, it's a hammer. And they basically hammered, they bring down every single kind of demand by slowing the economy. And that also helps with oil. I sure you could say, you know, oil has nothing to do with, with, with us at this point in time. Food, you know, is out of our control. But if you slow everything down in the economy, you slow down the amount of oil that is needed to run that economy because oil is what runs our economy. Energy is the economy. And so this brute force weapon does work, will work. And I think what's happening now is that other parts of the world are beginning to follow suit. They really don't have much of a choice. So the Bank of England, even though England is in a in a historic recession, just cut interest or increase interest rates. The ECB is following, everyone else is following as well. This works, but it really doesn't affect inflation. It affects the economy in the, and pushes it down and it's working. I mean, I'm looking at numbers right now. It's working.
So it affects demand side inflation, I think is what you're saying. And if the force of pushing demand down across the entire spectrum balances out more so than the supply side shocks that we're feeling internationally, we can get there. I think that's the argument you're making, Neal. So how susceptible is that plan to additional, let's say, higher likely black swan events in the geopolitical environment? If Taiwan is no longer able to give us more microchips, if Ecuador is not able to farm lithium for the Tesla batteries or what have you. Because China becomes a little bit more aggressive with the Taiwan situation and some other hotspot areas in the world that produce resources that Americans consume. How susceptible is this kind of hammer or this amputation that's pushing demand side of inflation in working holistically to bring inflation down to where it's supposed to be?
That's just it. It's not enough. It's not enough. And that was exactly what Goldman Sachs was saying, right? They're saying, Even, even in a negative growth impulse, it's simply not enough to reduce demand enough because we've had 7 years of basically inventory draws and there's simply not enough capacity right now. Even it's continuing to decline and it takes a massive investment, trillions and trillions in investment and many years to reverse that. So they're going to be pushing this, this, this thing uphill and it's not going to go very well.
Well, I don't fully agree with that belief, and I'll tell you why. So that belief assumes that everyone is able to pay as prices go up. So I expect that we will see both oil and natural gas shocks in December, possibly January and February, even though I have to say the Eurozone's done better than I thought at hoarding natural gas. But I still see You know, short-term shocks. The honest answer though is America's only 18% of the world economy and we may be able to afford oil if it spikes up to $160, $170 a barrel. But I can tell you this, the world doesn't, it doesn't have the money to pay for that level of supply shock. So let's say that there's a shock and I'll go with oil first and then we'll talk about China. You'll see prices spike up, for 3, 4, 5, 6, 7, 8 weeks. And during that time, yes, you know, inflation will go right back up. But then after that, it'll crush demand. It won't just drop demand, it crushes demand. So one of the key things that I keep reading about from lots of different economists is oil at $140, $150 or natural gas equivalent basically puts the entire world economy into a recession because there's people who simply stop consuming oil. Right? We can't imagine that in our head as Americans. We're so spoiled. We're like, you know, I'll buy a car that's, you know, an electric car. I'll do something, but we're not basically going to change our lifestyles because oil goes up by $2 a gallon. But the other parts of the world, you actually see people simply not consuming other things. And those things include oil. So in the short term, I think Bob's correct. I mean, what Goldman's saying is basically we can have these supply shocks and they can You know, they've been building up over 7 years of underinvestment. I get that. But when I'm looking at the next 6 to 12 months, if the price of, the price of oil is already pretty high, so it's in between $90 and $100 a barrel. Once it starts going into the $120s, $130, $140, it just demolishes demands in other part of the world. And that part of the world is what pays for this, not the United States, because we, we get cheaper oil than the rest of the US, um, the rest of the world. Now, China though, I mean, if China chooses to attack Taiwan. I think that is a— keep in mind that Russia's attack on Ukraine is going to look like nothing because Russia's attack on Ukraine affects us obviously from an oil perspective and food perspective. Even though most of Ukraine's food goes to Africa and Europe, it still affects us in terms of inflation. It's an indirect effect. Attacking Taiwan is attacking the United States. I think from a geopolitical perspective, there is no way that we could, we could withstand that. I think that China would be extraordinarily foolish to attack Taiwan. I think that all of this stuff that they're talking about is just Chinese internal politics. Please understand, the Russians can simply drive tanks into the Ukraine. There's roads between Russia and the Ukraine. There is the Strait of Taiwan that's 100 miles wide. And if the, if the Chinese are stupid enough to actually drive ships across it, there's submarines, dozens of them that the Taiwanese have that will simply sink the Chinese fleet. An attack on Taiwan is extraordinarily difficult. You can't find today a geopolitician that will say that China will succeed at that. But assuming it happens, I think that's a far bigger event than Ukraine and anything and everything that we say about inflation at this point, anything and everything that we say about interest rates at this point is completely off the table because no one even knows what'll happen at that point.
Okay.
So here, here, here's the question. I, I, Bob Fraser, I think this is more for you. Let, let's say that inflation does not temper down. I think we're hearing maybe two different, slightly overlapping, but not quite the same opinions here. Hey, we can get the Fed down or the interest rates down to the 3 to 4% range. Not ideal, but palatable. We can, we can live in that world. And we have another opinion that's, yeah, we can probably get it down a little bit, but not quite to 3 to 4%. So Bob, if you're in Powell's head, what is the flipping point that says, you know what, it's not working. Inflation's still above 5%. This isn't working. We're just going to back off because it's causing more harm than good.
Yeah, that's not going to happen. You know, they're going to, they want to keep inflation down. I mean, it's creating a massive amount of political kind of upheaval today. And it's going to create more. They're not going to back off if inflation stays high. And I think Neil's a little optimistic about where rates will, you know, the speed at which rates will come down. I don't think they're going to be able to do it because I do think inflation is going to stay stubbornly high. And the Fed has to pay attention to that.
Okay.
All right. So then let's talk about another hot topic. Let's kind of move away from inflation and how affects how interest rates affect cap rates. I think one of the most surprising things for everyone in our space is how little movement there has been in cap rates despite interest rates doubling, being in a negative leverage environment, being in essentially a negative spread environment. If you were to take the broad strokes kind of nationwide averages in any asset class at this point, maybe not multifamily, but almost any other asset class, you would have to pay to be a sponsor in today's environment on average, just using market conditions, right? As opposed to, you know, be paid for the work that you do. So let's talk about cap rates. Why haven't they come, why haven't they expanded yet to the extent that they have?
I'll jump in there and give my opinion. I know Neal has more on this, but to go to Neal's point on his original presentation, the economy is on fire and it has been, there's a ton of liquidity out there and that liquidity is still in play. And so that's primarily driving, there's just a lot of capital and we kind of had, you know, if there was a bubble, it was a syndicator bubble, right? I don't know how, where these syndicators came from buying these multifamily assets. It's like, it's throw a couple guys together, go talk to friends and family, go buy multifamily. And so I think that's driven it some, but I think there's another element. And if I'm right and inflation is going to march forward, the unicorn investment, the one place you must be is commercial real estate because you get high leverage and you get access to inflating NOI. So you get the double whammy of inflation. So I think it has a growth component just like, you know, back in the dot-com era, PEs went out the window, right? Price-to-earnings ratio. Went out the window and people start talking about price earnings to growth ratio. If you have high growth, you get a premium. So I would argue that investors with a longer-term view who are looking to place 10-year and 20-year capital are saying, I don't care, I want to get into this. And because of the chart I showed, this showed, hey, at 8% inflation in 10 years, your price is double. And, and, you know, so I think that long-term investors are also stepping up. So I think it's the growth premium and longer-term investors.
I have to say, I completely agree and completely disagree. So the part that I agree upon is the fact that there is astonishing amounts of capitals on the sideline, and it seems that there's more capital now flooding into the US. It seems to be coming from the Eurozone. So I'm seeing that capital come in and saying, yeah, a significant portion of that'll go in real estate because they're worried about the stock market being, you know, where it is. So I'm seeing that impact. So I agree, and I also agree that even if inflation comes down, I don't expect it to come down to 2%, right? I expect it to come down to 3 or 4%, and the Fed basically at some point will make their peace with that. So we get this inflationary long-term benefit where values go up based on that. But my answer to you on why cap rates have not decompressed is actually much simpler. The answer is it's too early. Cap rates are about to decompress. In Q4, you will see cap rates finally decompress. In Q1, you will see an astonishing decompression. The reason for that is data. So, you know, let's say Colliers is gathering data or CoStar is gathering data. The problem is there's so many states that basically don't disclose the sales price that it takes a long time for CoStar or everyone else to actually figure out what prices properties are selling for because they're not disclosing those, right? So, and more of the transactions are now happening in non-disclosure states like Texas. So that's where the money is, right? And they're not disclosing, so it takes a while to figure it out. So here's my argument. Cap rates have already decompressed. If you talk with the people that are on the front lines, the brokers, right? The brokers that are selling 10 assets a quarter, every single one of them will tell you cap rates have decompressed, but it's not showing up in the data. It's not in the CoStar data, it's not in the RD Matrix data. The reason for that is it takes time. Also, keep in mind how ridiculously quick this has happened, right? The Fed started raising rates in March, but that was just a quarter point. Who cares, right? But then the 0.75 hammers, 3 successive 0.75 hammers have just happened in the last 4 months. Well, how much property can you actually sell in the last 4 months? Almost, almost, almost everything that is in the cap rate data that we are looking at today was in, was in contract before the 3 big 0.75 hammers. I would argue that the cap rate data that you are able to see today does not contain any impact from the 3 big hammers. That data could only start to be visible in Q4, and then it'll be highly visible in Q1. So you're gonna see decompression happen in Q4, and then you're gonna see massive decompression happen in Q1. As people figure out what properties are selling for, there's already cap decompression happening.
That's absolutely right. And what people may not be aware of, and as being active in the market as we are right now, cap rates are below interest rates and that just can't— so it means leverage doesn't even make sense anymore. And if you can't leverage, well, you're not buying anything. So that's, it's kind of nuts. And we are going to see things happen. We're personally looking out, you know, we saw this in this bubble that we've seen in the, in the last couple years, it's completely bridge debt driven. And I think we're going to see what I call a bridge blowup. And I think when interest rates reset, when they, you know, these, they typically bought with 3-year caps kind of thing. When those caps are lifted, which is coming up in the next 18 months, say 12 to 18 months, you're obviously going to see refinance risk where these guys can't refinance and then they don't cash flow at the new rates. And if you can't cash flow, guess what? You can't refi. If you can't refi, you have to fire sale. And if cap rates have risen at all, it's actually a negative equity event and you lose money. And so I think depending on how, if it's slightly severe, if it's just slightly high cap rates and/or interest rates, you're going to see a massive flood of the, you know, the syndicator bubble is going to, they're going to all do a collective face plant. And honestly, great time to buy. Great time to buy.
So, so that's great commentary and it kind of transitions into by how much, right? So like I've already seen 10 to 15%, you know, driving acquisitions for Spartan. I've seen 10 to 15% price adjustments already. That's not the same as 100% rate increase, right? Not only have we gone from 0 to 3 to 4 benchmarks for SOFR, but we're seeing spreads increase from 200 to 400%. I saw somebody post on LinkedIn, expect something as high as 800% spreads. On SOFR, which would be a 12% interest rate. I guess that would be probably more for the high-risk bridge stuff. So if rates are where they are today, you can assume 6.5% to 8.5%, depending on what you're doing and how you're doing it. I mean, that is more than double what we were experiencing, especially multifamily, 9 months ago. So by how much will cap rates expand, do we think, knowing that they've only kind of expanded in my experience so far, 10% to 15% halfway into Q4?
I love that 10 to 15% number. I think that's what I'm seeing in the marketplace. I'll give you my rule of thumb and I actually want Bob Fraser Fraser's kind of feel on this. So there's this myth that, you know, if interest rates go up by 1%, cap rates will go up by 1%. There's actually no data to ever support that. What I usually use as a rule of thumb, and this time it may be different, is if you see a 100 basis point or 1% increase in the Fed funds rate, I'm not talking about mortgage rates, the Fed funds rate, cap rates will decompress by at least 0.25 to 0.33. So what that means is if Fed, the Fed funds rate's basically gone up by 300 basis points at this point, that's 0.75 increase in the cap rate minimum. It could be higher than that. So when the Fed goes all the way to where they're threatening to go, which is, you know, basically 4.75 cap, and keep in mind that didn't quite start at zero. I mean, and, and the, the that cap rate deep compression doesn't start for the first 100 basis points simply because that's too low. And so once the Fed got to a Fed funds rate of 1, you started seeing that cap decompression starts to occur. So if they get to 5, that's 400 basis points, which is basically a 1 cap difference. So if they, but they won't stay at 5. My argument is they cannot stay at 5. They will not stay at 5. I feel like, you know, Bob Fraser is thinking a little bit differently because he thinks inflation's very sticky. So I, but if they stay at 5, let's assume for a moment they stay at 5, cap rates have to change by 1 cap. That's my math. Quarter point cap rate to 100 basis points.
And before, but Bob, before you jump in, what is the theory behind that correlation from how you've assessed this in the past? Because that still gives you a 3-point negative spread and commercial real estate typically has had about a 3-point spread between cap rates and interest rates.
3 points. Yep.
So how is, is it, is that kind of what it is? It's like that works up until you've eliminated your spread down to zero and then maybe it doesn't work so much. Is, is that the thought process or how do you come up with a, a quarter point to one point relationship or a third of a point to one point relationship? Neil, sorry, that was a, that was a, that was a follow-up question for you.
For me?
Yeah.
So the, the answer is by doing Excel math, right? I've been simply doing Excel math of what the market will take. So for every increase in interest rate, there's people that are now basically willing to come into the marketplace because they are looking at the long-term asset. One of the key things is if you just look at that one-to-one relationship, you're saying, yeah, well there's still, you know, a negative correlation. I get that. But people are making bets on holding an asset for 5 to 10 years And they're also making a bet that during some of those years, this correlation is not going to be as terrible as it is today. And so they, when they make that correlation, they, they make assumptions that the interest rate correlation will improve in their favor over a substantial amount of time. They're also going to make a correlation that if, well, if, if, you know, if interest rates are this high, then inflation must be high. Well, if inflation is high, rent's highly correlated to that, so rents are going to be high. So I'm going to make money on that. So if you actually model out a property over 5 or 10 years, you'll notice that you never end up in a situation where 100 basis point increase in interest rates increases cap rates by 100 basis point. Because if you do that, model that out over another 100 basis point, another basis, 100 basis point, you are either going to end up in a situation where no one in the world will ever buy multifamily or everyone in the world will buy multifamily based on your assumptions. So neither one of those is possible. So I think that there has to be some correlation. So I basically modeled this out to the point where it's like, yeah, quarter point decompression appears to occur every time 100 basis points go up in interest rates.
That was my intuition on what you were going to say, but I just wanted to hear you say it. So thanks, Neal. Bob, do you have a difference of opinion on, or the same opinion on where cap rates are going to go over the next 6 to 9 months?
I would probably agree with Neal, but I would say there's going to be a difference in the classes. So I do believe this current market climate favors core and core plus. Class A, if you will. And this is to get Brian Spears' question on the chat as well. I think it's very favorable. So from a couple perspectives, you know, so we're seeing the Class Cs have the greatest kind of cap rate movement right now. And this is because on the value-add component, inflation has killed it, right? All of a sudden your budgets are blown out the window, your rehab budgets are blown out as well as the lower end of the market is greater impacted by inflation. So the wealthier, the higher income folks have less inflationary impact. So they're less going to be, you know, are hurt by rent increases. So I do believe that Class A and Core Plus, Core, Core Plus are going to be out, you know, have outsized kind of safety factors in this market.
Well, one slight tweak to that, right? So firstly, I 100% agree Class C is going to be hurt the most. Class A is going to be the most protected. 100% agree on that. I'm worried about core assets. The reason I'm worried about core assets is I'm not seeing employees come back to their jobs. I mean, I'm seeing still we're at 46, 47% swipe rate. You know, those key swipes that people swipe when they go into offices, that's an extremely low rate. Pandemic's gone. And I'm worried about the number of people that want to pay extremely high rents in core assets. So I'm actually, A little more bullish on assets that are a little bit further away from the core, but still looking at Class A assets. I think this is inversely correlated for anyone to be buying Class C at this point. Wait for a while. You're about to get lots of great deals on Class C, so just be patient. Just be patient.
And my comments were for multifamily. I'm staying utterly away from office. I mean, it's, there's, we don't know what's going to happen with office, but the pain has not yet begun because of the long-term, the leases are so long. The leases. The leases have not expired and and it's going to be a lot of pain in the office area.
So that's—
But Bob, my argument is if offices don't bring all of the jobs back, then the multifamily assets in that area are going to see, not going to see rent increases. They're probably not going to see rent drops. Obviously this is core, right? But they may not see the rent increases that they're historically used to seeing.
And so just for the folks who are listening, when we're talking about Class A, Class B, Class C, Are we talking about markets or asset quality right now? Secondary, tertiary markets, we're talking about asset quality of a building.
I'm talking about asset quality.
I'm talking, yeah, asset quality. A little bit about markets, but I think predominantly asset quality.
Awesome. Okay, so let's start taking some of the questions from the chat box here. And again, folks, if you are listening, you have a question, I'm looking at the chat, but it would be highly effective if you slap that question into the Q&A box. There are two different components on the bottom of your Zoom screen. One is a Q&A. One is a chat. The Q&A has two little message bubbles. If you'd like to ask a question, slap it into that Q&A box. So one of the questions that we have, I also from Brian, is which real estate sectors will get hurt or benefit from the interest rate increases the most, let's say. So let's maybe say what's our top 3 real estate sectors that will be positively impacted and what are our top 3 real estate sectors that will be negatively impacted?
My number one is industrial for all the reasons that I gave in my presentation. I think my number two would be multifamily again, because they're just, it's just underbuilt. And my number three is probably storage, which seems to just be resilient no matter what. And everything else I'm actually staying away from.
Okay. Is there a same, same exact ranking for all three?
Same exact rate. Okay, so I know you're both going to say office is the worst. What about second worst?
For me, it's Airbnb. Stay away from Airbnb. Those assets are insanely priced for today's marketplace. You're about to see, I mean, it was, they were so ridiculously marginal when, you know, people bought them in the last 2 or 3 years. People have been buying these properties for, you know, $2 million, you know, $2,000 a square foot. I think Airbnb is going to collapse. I mean, And not Airbnb the company, I think they're doing fine, but the people that were basically doing short-term rentals, when you look at today's interest rates and what they were paying for short-term rentals in the last 18 months, it makes zero sense. So anything in the short-term rental market, I think you are going to see incredible fire sales and they will start quicker than fire sales that you might see in, you know, Class C assets because of what Bob Fraser was mentioning. SDR, I think you'll see plenty of bargains in the marketplace in Q1, Q2 next year.
Yeah. And I would extend that to all hospitality. I think we saw a post-COVID boom and we really don't know what the normalized world looks like post-COVID. We really do not. What is hospitality appetites and consumption look like? We have no clue. So I'm 100% staying away from all hospitality and I include STR in that.
Yep.
Let's just throw retail out there for a time because retail has been that one that, you know, is it going to do okay? Is it going to bounce back? So I know that none of the three of us really invest that highly into retail, but what are you guys seeing out there in the retail space?
All right. I do. I do. And I actually love, I actually love, I should have put that on my list. So somehow, you know, I'm older than you guys and, you know, the hard drive doesn't always spin up as fast as—
Right. I got you. I'm here for the good questions.
Though we love neighborhood retail, so the cap rates we're buying, so neighborhood retail is a little teeny, teeny strip malls, okay? With the dog groomer, the bar, the nail salon, right? That stuff soared through COVID and the cap rates are running in the 9% range. Explain that to me, you know? And so we're backing up the truck and buying as much as we can of that stuff. You know, it's very difficult to scale, but But we, we love it. The non-anchored, non-grocery anchored. So grocery is being e-commerce and it's, we think it's at risk, you know? And so we, we don't like the big retail.
We like the little teeny retail, local boutique services. How, how much elbow grease does that require? Because that, that's, that's not really so much going to your institutional leasing companies as a partner, which creates the inefficiency, right?
Yeah.
That's, yeah.
It's not the big REITs are not buying the stuff, which was why you're getting a 9 cap. And I'll tell you what our value-add strategy is, the heavy-lift value strategy. It's raising leases, raising rents when the leases expire.
Yeah.
Yeah.
It's a good deal.
I'm going to basically send a spy to kind of hack Bob's computer and figure out where he's getting 9-cap strip malls because boy, I would buy as many as I possibly could knowing what I know about interest rates and inflation.
Send a check, Neil.
Just send a check. Check doesn't fund. But that's the next thing I was going to say. I've been investing in other people's strip mall type projects and they're all, they've all done really, really well at this point in time. Now they can't sell them at this point because of 9 cap, right? But the cash flow is pretty strong. I mean, because of what happened in the last 18 months so that they're all like, you know what, I'm cash flowing at 18%. Why the heck would I sell? I'll just wait for cap rates to adjust whenever they do. But for somebody to buy today at 9 cap, I mean, you cannot beat that. I don't think anybody, anything in multifamily would ever beat an 8.5 or 9 cap purchase in strip mall retail. It's amazing, right?
I'm happy.
I, it's nuts. And this is my thesis of the insanity of the markets, right? Warren Buffett said, if markets were efficient, I would be broke. And markets are manic and stupid and not completely inefficient. And you just have to find the most hated assets and buy them. You guess, guess what? I just bought an oil field. You know what my cap rate is in an oil field? 25. Oh, 25.
Yeah.
Yeah. And value add, by the way, you know, so value add plays, today's cap rate is 25, you know, so yeah. And that's sandbag, that's conservative numbers.
Wow.
Wow.
And why is that? Because it's hated asset class. It's out of favor, right? That's when you want to buy.
Come on!
