654: Smaller Deals Equal Greater Returns

I grew up without a father figure in my life. My mother worked long hours in downtown Chicago. I was raised primarily by my grandmother who was tough as nails, 4 foot 9, 4 foot 10, never learned how to drive, taught me the streets of the south side of Chicago, taught me how to use the mass transit system, taught me loyalty, dedication, hard work. And it's everything that my grandmother taught me from a very young age that I still hold near and dear to my heart today. And that's what I bring to every relationship that we.

Welcome to Street Smart Success, the show for cash flow investors. This is Roger Becker, your host. Whether you're investing in real estate, private equity, private credit or other alternative investments, this is the show for you. We have with us a gentleman who has a lengthy, varied, deep experience across several of the key commercial real estate food groups. So has a very valuable multi decade perspective of late specializing in raising for medical office and specifically also class B office. So this is going to be an interesting conversation with the CEO of the Streamline Companies, Mr. David Rezak. David, welcome to Street Smart Success.

Thank you very much for having me. Roger, how are you today?

I'm fantastic. I got, I got no complaints. And it's a gorgeous day here in Northern California. So David, where did your why and where did your real estate experience begin?

Well, I've been in the real estate industry for 29 years right now. So it started on in Chicago. I had come out to Arizona for a finance degree, went to Arizona State many, many years ago, last century, went back to Chicago, had a job in the financial markets, but that only lasted about a year. And I knew I was a people person and needed to be out meeting with people. So I started as a commercial real estate salesperson and property management company that we worked in. We would sell small investments to high net worth individuals that wanted to diversify their portfolio. So from that point I knew I was hooked in real estate. And ultimately as we've grown into developers, investors, our own construction company and our own property management company as well.

Who is the our when you say our own?

Yeah. So the umbrella of the streamlined companies falls into three entities. Streamline Capital Group, which is our capital raising company and investment company. Streamlined Development is our licensed general contracting company. And then Streamlined asset management is our in house property management program. So from day one when we identify a property, it stays under one umbrella through the whole cycle of ownership. And I have in house legal, my partner is an attorney, he's our chief legal officer, Scott Roney. And we're also a family based Company as well. My oldest daughter Maggie is our operations manager. So we keep things very close, very communicative with our investors who we call family. And that's the we in the streamlined companies.

Okay, and so apart from what you're doing with Medical Office and class B office, when you say development, what does that pertain to currently? So where asset class, how would you describe it?

So I have done developments for my own portfolio in every asset class there is. Currently in my own business philosophy, it's cheaper to buy than to build. So we're acquiring more existing buildings that are value add. However, we do do work for third party clients and I've been fortunate enough to work with a local firm here that is a privately owned furniture store. We built two or three of their facilities over 200,000 square feet. And later this year we have another 49,000 square foot warehouse coming up for them. But what's exciting on our development team is we're participating in the development of a venture called the Knox Nox that's going to be a 2,000 person indoor music venue here in Mesa, Arizona. So we're super excited to kick that off later this year.

So you guys do a lot of different things and that sounds like an exciting project in 200,000 square foot furniture. Are these stores or warehouses for the furniture client?

Well, each building was 100,000 and there's about 70,000 of retail and 30,000 of warehouse inventory.

Warehouse things that you're acquiring now because like you said for it makes sense to buy now generally versus develop for yourself. Are you, are you buying medical office for yourself or is this primarily raising for others? What is that? How does that get parsed out?

So we're the general partners in all of the deals that we put together. We do raise capital from limited partners and their risk is exactly that, their risk is limited. We take on the debt, all the responsibility of the day to day management. So yes, we are out there actively acquiring medical office buildings and class B office buildings, which are the smaller businesses of America that didn't send people home during the pandemic that had to work through it. It's your insurance agent, your doctor, your dentist, your attorney, your wealth manager, all those types of tenants are the tenants we deal with. Nobody on our rent rolls typically occupies more than 10 to maybe 15% of the building. So we're very well diversified.

Okay, that clarifies it. So when you say capital raise, that could have a different connotation that you're raising for others. Like, you know, guys that just capital raise But. But that you raise money for your own deals is what I'm hearing that you also participate in?

Yeah, we are the owner operators.

All right, and so where are you buying and what are the size of these projects and approximately what's average price tag?

So we are strictly focused on the Arizona market and even more hyper focused on the Phoenix Valley. And Phoenix is the fifth largest city in America. Not a lot of people realize that. We've got a great international airport. We have many corporations investing billions of dollars to move to Arizona. So our typical price tag is anywhere from 3 to 10 million dollars. And that's probably a 15,000 square foot to 75,000 square foot building.

Boy, your clarity is refreshing. And what is it like? And then if you were to. How long have you been specializing in these two specific asset classes?

It's going to be coming up on three years in December.

Okay, and how competitive is it and who are you competing with? Are these clearly not institutional. Institutional buyers, but are these all local guys like you that you're rubbing, you're bumping elbows with or is it local or in it? What is the competition today compared to a few years ago, et cetera?

So the competition has increased. However, it is still not that great. Everybody hears bad news about the office asset class in the media. Well, what they're talking about is really the class a buildings, your 100 to 200 to 300,000 square foot buildings that are in larger cities. Chicago, New York, San Francisco. A lot of those class A buildings suffered greatly. So people are really turned off of office buildings. However, when we educate our limited partners on the actual class B and the smaller medical buildings, we can prove to them that we have better occupancy rates and even increasing rents over the past few years coming out of the pandemic. So while competition is not yet great, we see great opportunities to be buying.

Okay, what percentage would you say, David, in the last three years have you acquired Medical office? Compared to class B office, it's probably.

A 60, 40 split. Medical versus general office.

Is there a reason for that?

Some of the buildings that we acquire are mixed in terms of tenancy that we acquire. Some have maybe 50% occupancy with medical and then some general office uses aside as complementary tenants. We are negotiating one deal right now that is a 75,000 foot building, 100% medical. So we just look at each deal individually. Our parameters, because we're so hands on, don't have to be as stringent as a lot of the larger companies.

Do you have a viewpoint as to single asset, I mean you're obviously doing single asset, but have you ever considered doing a fund? And why, why not?

So yes, we do have a fund open right now. I have been very successful with my single asset syndications. We do have a fund open right now. I will say that the fund model is a lot tougher in today's industry than the single asset syndications. Funds were very popular for many years and now they're just having trouble getting legs back underneath them as a lot of them suffered over the past three or four years. So we do both things. Single assets indications and a nice fund that we have open.

So why are funds harder?

We see a lot more hesitancy in investors just going into a blind fund and not knowing exactly what's going to be put into that. They would rather go deal by deal with a lot of the larger check writers. That's what we're seeing from right now.

And why would there be a greater hesitance blind fund risk today versus at any other time?

I think just because the competition has increased, some people got hurt through the multifamily investing over the past few years that were in some funds. So I think they just want to be hyper focused on where their money is going right now. And realistically, with the new tax bill that's in place and the 100% bonus depreciation that's available for investors stock market at all time highs. It's a great time to be investing into real estate. Pull some money off the table, play with house money, put it into some real estate, get the tax benefits that go along with it. And I think you can really diversify your portfolio in a good way currently.

Yeah. Well, no argument. How do you determine when you acquire an asset what goes into a fund, your fund versus ran as a single asset?

It's just based on the amount of money we have available in the fund. If there's a larger property out there, that's what we kind of tend to gear towards for the fund or the upper echelon of the price tag, I told you. And then utilize the smaller purchase properties for our single asset syndications. That way I've got such a great group of friends and family and network that I can utilize a 506B SEC regulation and do the single asset syndications.

When you buy either of these assets or one you choose. I'm really thinking more office in my brain this would apply to. But I could be wrong. Are you buying value add in terms of low occupancy, you going in with A half occupied building. Or is it, or is it? They're occupied and it's just, you know, management, value add or. And again you said each deal is different and I understand that, but I was just curious.

So the value add checkboxes are occupancy, lease rates, slash, property management, and then capital improvements. If we can check all three of those boxes, we know it's going to be a great product for us because that's where our sweet spot is. We own our own construction company so we're able to go in there, do all the capital improvements, tenant improvements on an existing building with any vacancy and then our property management program because we own these buildings, we're so hands on with our property management from day one. We walk around into every building we buy, introduce ourselves to the tenants so they know there's not only a property manager that's ready to help them, but it's actually the owner that wants to help them and take care of it. So because we're more responsive, our tenants tend to stay longer because they feel comfortable in the buildings that they're occupying. So occupancy, property management headaches and capital improvements are the three main things we look for.

I'm going to be devil's advocate on something and not to be, not for the purpose of being devil's advocate, but it's just, it's a genuine question is in your, you, you cited other markets. I'm going to talk about class B office right now. And you cited, you know, San Francisco, Chicago, new, the class you know they're talking about, that's where class A is hit. Everything I've read is that, and this is, I guess there's a range in class A too but, but basically your newest and the most expensive lavish amenities are actually doing the best is what I've read. So the white shoe law firms, the, the big finance houses, you know, Morgan Stanley, Goldman Sachs, this kind of thing are taking the creme de la creme and that's actually doing fairly well. This isn't necessarily Phoenix, but is my understanding is class B. And my perspective is probably largely from a San Francisco perspective because where I live that that stuff is really hard and that there's a functional obsolescence and those ones are tougher. How do you speak to that in terms of your market and what you're buying?

So I love that term functional obsolescence. In Phoenix we see a lot of class B buildings, either A being knocked down or if possible converted to multifamily. So when those two things happen it actually decreases the supply of quality class B offices. Now small businesses of America, they can't afford to go into class A building. So if your company grows from your home office to three people, then five people and maybe 10 people, you're still going to be in those class B buildings. And the most important thing for a small business owner is cash flow. So if they don't really need the amenities of a high rise building, they're going to be looking for the class B buildings. So if buildings are getting knocked down or converted and supply is dwindling and we're offering some of the better quality, quality class B buildings out there, we're going to do well with our occupancy.

Speaking of which, approximately how many class B office do you own roughly? And what is occupancy across the portfolio?

So we have three buildings in our portfolio right now and our average occupancy across the board is probably 90%. We have two buildings that are 100% occupied and one that is now at around 81% that we picked up at a 50% occupancy, invested money into it, and we've been increasing occupancy, increasing income by turning them into triple net leases and then ultimately pushing the market on the per square foot base rent amount.

You know, I understand it, I mean I get it, because you're right, not everybody could afford class A highly amenitized building. Not everybody's a, a large corporate law firm. And so I, I, I can see it. And, and it's compelling because you're so hands on, like legitimately vertically integrated down to the construction and high touch with tenants. I, I, I buy it, it makes sense.

We've, we've taken the single family fix and flip model that I started out with 24 years ago maybe and then just slowly built it into larger projects. So instead of a fix and flip, we're actually fix and hold investors because if we can increase the cash flow, we can have a capitalization event in two or three years after stabilization interest rates are going to be coming down. I didn't have a problem buying at higher interest rates because if we can make a deal, work at the higher interest rates, they're only going to be better in a couple of years after we do the streamline process and interest rates come down.

Do you, David, intend on holding long term or what's, what's your view? Long versus shorter hold term periods?

We are long term holder long term owners. I've owned one building now for 16 years that is just a cash cow. We bought it as a value add opportunity in 2009, got it to 100% occupancy in 2010 and it's still 100% occupied. And that's a building that's 100% medical. Still back in the Chicago market where.

I came from, I see. Are class B office more or less competitive in the acquisition process than medical office or the other way around?

I would say medical would probably be a little bit more competitive. The word is getting out about medical buildings. There are some great medical operators that I know in the industry that just they love to scoop them up and a lot of them scoop up single tenant medical, triple net lease buildings. I'm not a single tenant guy. I like the diversification of a multi tenant rent role.

And I asked this earlier and you answered but I'm going to ask it again because I don't remember the answer and I want is this as I'm getting older. Are you competing with mostly local buyers or all local buyers for these two asset classes or some variation of that?

Yeah, there's no institutional buyers in the price level that we're competing in. So we are competing with individual investors, some private funds just like ours. And there has been some out of state investors coming into Arizona recently because the word is getting out about how good the business market is here.

You know, as I told you before we started the recording, I was just in Phoenix over the weekend and I frankly I was there like six months ago. So it's not like it was the first time, but it is really amazing because I started going there 25 years ago for business and that town. It is just amazing how much booming, how booming it is. And I've heard it referred to as Baja Silicon Valley. So there's a lot of technology telling you what you know better than me. Booming market.

Every day I drive home, I have to go past the Google campus, a Meta campus, an Apple campus. Yeah, it's crazy what's going on out.

Here right now and is there enough, is there going to be actually enough water?

Yeah, that's a misnomer that I'm glad it got out there. So it scared some people away from coming here. But Arizona has been great as far as requiring developers to make sure what they are building is good for the environment and good for our water system. And yes, I'm confident in our officials here in the state with the long term plan they have for the water with medical office.

And I don't follow this closely so therefore I'm unknowledgeable But with insurance issues and current administration and I guess, well, Medicaid. Well, sure, even Medicaid, I don't know with Medicare. But the insurance industry, the medical industry is tied to the insurance business. Are there any concerns that changes with insurance embarrassments could impact the category? And also recognizing that medical office is vast too eyes, it's dental, I mean, all kinds of. It's a, it's a wide variety. I get that.

Absolutely. So the current administration does have clamped down on a lot of healthcare spending currently. The conversations I've had and the articles that I've read, there's always going to be challenges in any business and the medical industry is not going away. So they're going to learn how to deal with the current restrictions that are in place. And, and if they, if there's a way they have to pivot their business, they will. But medical is not going to go.

Out of business now. It's going to, I mean, the amount of people turning 65 and 75. So it'll, it'll just adapt. Huh. Very, very interesting. Do you have your eyes on a third asset class?

You know what? I love the small businesses of America because I came from the south side of Chicago with no money and I struggled throughout my life to figure out where I wanted to be, what I wanted to do do. And all small business owners do the same thing. My other class that I would jump into right now is small bay industrial, helping those smaller businesses that don't necessarily need full retail or full warehouse. We were very successful with the development we did back in Chicago with 2,000 square foot light industrial bay units, little storefront glass and office in the front, overhead door, truck level, dock in the back. It helps a lot of companies that are getting into the trades, getting into the supply houses and overall they're very successful for small businesses.

Those are competitive too. Probably more, my guess would be more competitive than the two that you're in currently. They are, yeah. How do you generally find deals?

I have a great broker network. People bring me deals every day of the week. There's something in my inbox to read and analyze. And we'll probably look at over 200 deals a year and maybe only buy one or two of those deals.

Gosh. I was going to ask you something else. What do you see is mistakes that other sponsors, other operators make.

Oh boy. Reserves and the potential for capital calls. And we very conservatively underwrite all of our deals so that we don't ever have to do a capital call for any of our investments. Now we do have a provision in there. If unfortunately we had to, we could call up to 10% of their initial investment, but we've never had to because of our good budgeting and structuring from day one. So I think a lot of people forget to be conservative and make sure you have those reserves available to protect your investors. If my numbers can work out for an investor with the amount of reserves we have put in place and we outperform those numbers over time, they're going to be happier for that situation, for that underwriting. And a lot of my investors have been repeat clients over the 20 years we've been doing this.

How many investors do you think you have currently?

We're just a little bit over 50 currently.

Tight, tight knit group of people.

It's a tight knit group people. And I know every person individually. I know when their kids birthdays are, I know when their anniversary is. And as I mentioned earlier, they're family. So we go out to dinner, we, we meet with them on regular basis. And we also have something interesting we call investor days and kick the bricks. So we'll invite our investors that may own a particular property with us out to that building a couple times a year. Let's have a cup of coffee on a Saturday. Let's walk the property. Let me tell you what we've been, how we've been managing the property where we've invested capital improvement dollars and it's an opportunity for an owner to actually feel the pride in where their investment is. If you buy stock in Coca Cola, they're not going to invite you to the bottling plant to see where the secret sauce is made. But here with real estate, you have an opportunity to feel it, touch it and live it.

I'm going to take a half a step back and it's a personal question. It's just piqued my interest as you say that, you know, you, you coming out of south side Chicago, you kind of struggled to figure out what you wanted to do. Those aren't the exact words, but the word struggle, you did use that word. Give me the specifics on what that was exactly.

Yeah. So I grew up without a father figure in my life. My mother worked long hours in downtown Chicago. I was raised primarily by my grandmother, who was tough as nails, 4 foot 9, 4 foot 10. Never learned how to drive. Taught me the streets of the south side Chicago, taught me how to use the mass transit system, taught me loyalty, dedication, hard work. And it's everything that my grandmother taught me from a very young age. That I still hold near and dear to my heart today, and that's what I bring to every relationship that we have. So it was a struggle not having somebody there as a mentor from male point of view. But it was also a blessing for having my grandmother and my mother in my life to make sure I stayed straight.

Had your dad passed away or did he. Or he just. He and your mom weren't together?

Yeah, it was a strained relationship, and then he ultimately passed away when I.

Was in high school. Very in. Very. I'm glad I asked. It's a very interesting. You have siblings.

I do. So I'm almost like an only child because my youngest sibling is 10 years older than I am. So that was another point of view of growing up. I didn't have anybody around. By the time I was 5 years old, they were 15 and 18 years old, practically out of the house.

I understand. And 10 years is like a hundred years when you're that age. Absolutely.

Yeah.

Well, very, very, very interesting. What would you say are key lessons that you've learned in the real estate business? Biggest mistakes maybe you've made.

Oh, boy. The biggest mistakes I've made are also the biggest lessons I've learned from. It's in the partners that you choose. So over the course of 29 years in the industry, 24 years now investing into real estate, I've had other CO GPs that we've worked with that have not been the greatest mentors. Again, growing up without that mentor in my life, I always searched for somebody to learn from, and sometimes I chose the wrong people. And it's being able to quickly identify the problem, situations like that, correct those situations and redirect your course is I think what has been the biggest lesson I've learned. So I say that as I ask limited partners to trust me. And anytime I meet a potential new client, there's not one word of selling in my vocabulary. I don't pitch anything. I build relationships. And that's why I came out of retirement back in late 2022, because I missed the opportunity of teaching people, helping people, building those relationships. So that's what we're 100% focused on right now. And over the past three years, I've had opportunity to sit down with NFL legends that, being from the south side of Chicago, never thought I'd have the opportunity to meet, let alone discuss business with, but discuss life with. And it's great to learn people's different point of views. And that's what we're all about, is relationships.

Very good. I'm really glad that you and I met. David, if somebody wants to invest, pick your brain, learn more, what's the best way for them to get in contact with you?

Email me. I answer all of my own emails. It's djhestreamline companies.com. i'm also on LinkedIn and very active in responding and communicating. I think I've got about 20 phone calls to make today to current and future clients just to keep building relationships.

Very good. Well, I'm impressed, you know, and I love the Phoenix market, and I love those asset classes and I love the vertical integration. So I hope to do this again with you maybe sometime in 2026.

Yeah, I'd love that, Roger. Let's keep in touch and revisit this conversation. See where life takes us.

Exactly. All right, David, thanks so much.

Thank you. Have a great day.