Contrarian Capital with Billy Haddad

Welcome. This is the Insider's Edge to Real Estate Investing with James Nelson, the principal and head of Avison Young's U.S. Investment Sales Group, and his co-host Kim Trohler from his investment sales team. In this program, you'll learn game-changing strategies to outperform the market. James will teach you how to source, execute, and capitalize on the best real estate opportunities in New York and around the world. Now, here are your hosts.

Welcome everyone to episode number 235. This is your co-host James Nelson here along with Kim Troller. And today we are going to be speaking with Billy Haddad from Contrarian Capital. And you're going to learn about finding opportunities that often get overlooked in this episode. Billy is the managing director of PartnersPath, a private family office specializing in identifying and cultivating partnerships that align with a vision of sustainable growth and value creation.

You'll hear about evaluating political risks, structuring partnerships, and spotting markets with the potential to deliver long-term returns. Billy also shares his views on sponsor communication, value-add strategy in industrial, and the importance of patient capital. Um, honestly, James, my favorite part of our conversation with Billy was talking about how working in real estate is a lot like being on a sports team and how each player kind of brings their own value to the deal no matter what side of the table you're on.

You know, I love sports analogies, and my audience is probably sick of how often I post on water polo. Yes, all three of my sons, uh, play, including my oldest at USC, my middle at George Washington. But it's interesting, the Wall Street Journal actually wrote an article on why water polo athletes are great in business. It's because they think as a team. And I think that applies to all team sports. Can you work with people? Can you, you know, can you make quick decisions? Can you come back from hardship? And so, you know, Billy definitely speaks to that. I also just appreciate, you know, the perspective. And it's always interesting to look at the portfolios. And especially for those who own multifamily in New York, that's kind of its own animal. And then he's also, you know, they're also buying industrial across the country. So, you know, clearly very different types of investments, but still, you know, being very specific to kind of those two specific strategies. So I think our audience is gonna learn a lot from this also, kind of the benefits of not just working, you know, within the family office realm, but also, The value of networking. He talks about all his Wharton connections that Kim, I know you share as well.

Yeah, yeah, absolutely.

Perfect. So we're going to have a brief word from our sponsor and we'll get right into that interview with Billy Haddad.

Avis and Young's United States investment sales platform executes on multifamily, office, retail, development, and specialty asset transactions across top US markets. As experienced leaders in the industry, our integrated national team is here to help you make informed investment decisions. Whether advising on your current holdings or identifying new opportunities nationwide. Our one unified platform is built on unparalleled collaboration and connectivity across 120 full-service offices around the world, giving clients direct access to the deepest pools of capital. We put our clients first, delivering tailor-made strategies to achieve superior results.

Welcome everyone. We are thrilled to have with us today Billy Haddad, who is managing director of PartnersPath. We were connected with Billy through our friends at BizNow on the Ascent conference. So Billy, thanks so much for joining us today.

Yeah, great to be here.

Good. So for our audience, maybe you could just give us a little background on PartnersPath. I believe you've been there now about 10 years, but maybe give a sense of your strategy, kind of holdings in the market, just so, so everyone get a, a sense of, of what you've been up to.

Yeah, so we, we're a family office based here in New York, and I guess we have two main strategies. One is deals that we do in-house. So we have a portfolio here in New York that we own and operate, uh, in Brooklyn and Queens. And then away from that and other asset classes and geographies, we partner with sponsors. So we kind of call it our emerging sponsors program where our check sizes are usually in like that $2 to $7 million per range. Sorry, per deal range. And, uh, you know, I think there's a hole in the market in that, that spot. Like I think the, you know, if your deal is $25 million or above, there's the same 10 to 15 players that are showing up for every single deal. But when you get into that single-digit millions, right, you're too big for the, you know, the dentists or lawyers or the local players. But most of the larger players don't think it's worth their time. And so we found a little bit more alpha in that space. So we do this year a lot of industrial and prior years, a lot of multifamily. And we've been more active on the credit side as well.

Great. Yeah, I, I'm a general partner in RiverOak NYC, and we raised two funds. I mean, this goes back, you know, 10, 15 years, but our, our thesis and approach was exactly the need that you addressed, is that on one hand, 95% of the transactions are typically below $50 million in total capitalization. But when you look at the institutional equity out there, 95% of the capital is focused at $50 million plus. So there's this total mismatch where there's a lot of opportunities out there in the market but not a lot of organized capital going after it, especially in that space that you mentioned that's kind of, you know, a little bit larger than the friends and family could take, or maybe you could get there, but it would take a lot more time and effort. But maybe also kind of below some of the larger scale opportunities that are, that are, can be very competitive.

Right. Billy, what's your current balance like between multifamily and your other strategies like small bay industrial? And are there any sort of areas that you're intentionally avoiding right now, especially with multifamily, or like what's your kind of breakdown?

Yeah. I mean, I think on the multifamily used to be, call it 80% of what we do. And now it's kind of stepped back just because I think in a lot of markets, the math doesn't make sense to us. Yeah. We're still active in New York. We're one of the few people, I think, you know, I always think of it as we're always looking for the empty rooms, you know, where do investors not want to be is something that, you know, like go to a conference and someone says, oh, I would never invest in X. Then my ears perk up and I go, I need to learn more about X because there's probably an opportunity there. So like we've seen that in New York City multifamily, I think in the last 3 years we've been very active because no one else seems to want to be there. And so we're happy to kind of, you know, buy it over a 6, 6.5 cap in some cases, but then I'll call, you know, brokers in the Sunbelt and they're still at 5 and 5.25 and, you know, vacancy is growing there. There's still a bunch of supply. Yeah. So that's caused us to pull back from a lot of the quote unquote hot multifamily markets. I think small bay industrial, we've leaned into. I think that's a byproduct of also, I think the headlines have been there's tons of vacancy industrial. When you dig in beyond the headline, most of that's a million square foot and above. And so we've been playing in kind of that smaller 50 to 150,000 square foot buildings.

Got it. Yeah. James Nelson and I have both sort of seen in the sort of Southeast growth markets, cap rates are still kind of low 5, even sub-5 in some cases. So there's definitely a compelling argument there for New York multifamily, despite all of the political risk. And James can speak to this more, but I, he recently came out with a white paper that talks about how real estate values are really more impacted by the macro factors like interest rates and construction costs and things like that, as opposed to whoever's in office in the local market. I'm curious to hear your take on that, given your involvement in multifamily.

Yeah, I mean, I think, I don't know, I think the, I think elections broadly have gotten very disconnected from the realities. I think it's a lot of. The conversation isn't linked directly to like the policies or even the ability to execute on those policies. I think that was the, the big story in the mayoral race was, you know, I think Mumdani ran on a lot of things that he can't unilaterally do, and we'll see if he gets the buy-in to do it, which is the huge question mark. Um, you know, we did a similar kind of white paper for our investors because when he won the primary, I think a lot of people like— we were like, we gotta get ahead of the headlines, we have to, you know, be out there, you know. And our takeaway from reading his campaign site and actually understanding the the civics of it, right? The only thing he really controls unilaterally is the Rent Stabilization Board, right? The, the annual increases, he can influence that pretty, pretty single-handedly. Everything else, he's going to need Albany or the city council. Like, he needs further buy-in. And so, you know, we were on the other side of that trade. If you think about where the headlines and where the sentiment was, we thought it was overblown, and so we took the other side.

So if you, uh, would consider yourself a contrarian investor, right, you talk about looking for the rooms that are empty, but I would imagine, I mean, clearly at some point that room has to fill back up. So, I mean, part of that has to do with, with holding, period, right? So do you have— now, I know some of these deals you invest directly, and if it's on, I, I would assume you would tell me that if it's a direct investment, maybe there is no time horizon, maybe this is for, you know, generational type investment, whereas a co-GP, typically there's a defined timeline, and at some point there has to be a capital event or a way to kind of crystallize the promote. So If you're talking about New York multifamily, for example, and I agree, I mean, long-term seems like a great bet, but I think it'd be difficult to try to capitalize on that if you said, hey, we're going to get in and try to reposition this in 2 to 3 years. So it's probably a longer type investment thesis. So timelines based on whether you're investing directly on behalf of the family or as an LP.

Well, I think locally, I think this year we just sold it. Deal in September to, to a very large player who's active in the outer boroughs. And so, you know, I think if it's right for the deal, we'll sell, right? We're not, we're not wed to that. I think we've, we've done transactions where 18 months in, someone, you know, made us kind of the godfather offer and we said, please, we'll sell. In other cases, we'll refi out our money and say, you know, why take the tax hit? We like the deal still. And, you know, we don't have somewhere else to put it. Uh, but I think to the point of, you know, you with the local trade, you have to be confident in New York. And I think New York's kind of undefeated. And if I'm wrong on that, I guess I'll, I'll look like an idiot. But I think over many time periods in the past, people have said New York is dead. And I think we've seen otherwise. And I just, I, I actually just don't think that the, we'll see. I don't think the new administration will be as revolutionarily different from prior administrations we've had.

Uh, and obviously that's going to depend on Albany's buy-in and everything else, but I just, so, so if you're making an LP investment, I mean, what's the typical hold period then? Is it— are you giving kind of a 5-year period to execute on the business plan? Can that get pushed out to 7 years? I, I would think that maybe if you're making this New York bet, that maybe the time to capitalize on that might, might be, you know, under a few, you know, future administration.

Yeah. Or, you know, at a certain point, you know, we, we bought some deals in 2020, we put 7-year debt on it, right? It was a 7-year kind of— now we're coming up to the point where we'll reassess. Do we want to refi? Do we want to sell? So, you know, and we don't do any kind of straight LP investing. So in all of our deals, we build in some kind of negative control rights so we control refi and sale decisions.

Uh, and so can you talk about, just for our audience, because I, I think that that's really an important concept when you're taking on investments. So when you say negative control rights, can you just kind of explain to everyone what that means and, and kind of how you could effectuate, you know, whether the decision is sell or refinance a major capital event without actually having sitting in that, that GP position?

Yeah. So typically, right, so sponsor will find a deal, they really like the deal, they don't have the capital for the deal, they come to a group like us to raise the capital. And, you know, we'll negotiate with them to say, look, we'll put, you know, X into the deal. But if you want to do any of this list of things, whether it's sale, refi, major decisions, you have to come to us for our consent. And that's important to us because during the Financial crisis, some people worked for, right, were in real estate deals where they saw that the incentives can be misaligned in a downside case, right? A sponsor says, I'm never going to hit my promote, fire sale it, and doesn't do right by investors. So we build those in to protect ourselves in that situation. As I always tell sponsors, we don't have the headcount to like do your job for you. So we don't view it as we're going to step in and, and, you know, take over. We just have it there as a protection mechanism against the Downside scenario.

But what, just to dig a little bit deeper on that, because what if it is the opportune time to sell and you're kind of unreasonably withholding that ability? Or what if you said, okay, maybe the market value for the property is $20 million, but you say, hey, we're going to only sell and get $25 million. So what protections are in place then for your operating partner to know that they still have the ability to capitalize?

So in some cases we'll build in, right, that like the, you know, the consent isn't needed if the sales price is above a certain level, right? And so beforehand we'll build that into the docs so that they have that comfort.

Okay. So who are your main investors? Is it high net worth individuals?

Yes, we work for mainly two individuals. They sold a business called 25 Years Ago. And so we cover the kind of their real estate investment portfolio.

Okay. And you brought up a really interesting point earlier, which is investor communication. What is your general strategy towards communicating things like political shifts, economic shifts? Are you just very stringent with your reporting? Do you have a personal relationship with your investors? How do you kind of communicate what's, what's going on internally and with your strategy?

Yeah, I mean, I think it's both, right? I think you need that constant communication. So like, we have that personal relationship where like, if there's something important, you pick up the phone and you call. You know, I think for something that probably requires more thought and more depth Right. We'll put together a write-up or put together something else to, to, you know, give that insight that's necessary that you can't just have a 5-minute phone call to discuss.

Right. You also mentioned your real estate emerging manager program. Can you tell us about what that is, how it's structured, kind of how it came about, and generally what qualities you look for in, in sponsors that you partner with?

Yeah. So, you know, the groups that we tend to work with are one of two types. So one is It's a group that they've found a niche. They've done a few deals. They've gone through, like, as you were talking about before, raising those small checks to get the deal across the line. But what they realize is that if they want to do more deals or bigger deals, the investor relations aspect of it's going to get very cumbersome. And so what we can do is use kind of, you know, our check size to streamline that process for them. So they could say, you know, we don't want them to lose their other investors, right? I think that's an important part of any growth for sponsors to Anyone who's interested in your deals, you should continue to keep around, but use our capital to help grow them more efficiently. Sorry. So I said one group is that the kind of, they found their niche. They've done a few deals. The other is someone's working at a big shop, you know, either the, the carry isn't going to be valued at what it used to be because of whatever. They don't see a path forward. They say, I'm going to start my own firm. In those cases, a lot of times they have the deal flow and the know-how, they don't have the capital. And so, you know, we've kind of come in and backed a few people who have left kind of larger firms, you know, as they've launched a new one.

And are these single asset syndications or are they more of a fund strategy?

So usually we're creating a, like a programmatic joint venture so we can go and, and do a series of deals. We kind of leave it to the sponsor. Some sponsors are like, I'm only ever gonna do deal by deal. Others are, how quickly can I raise an institutional fund? You know, I think that's kind of, you know, I have my views on that, but I, but we typically leave it to the sponsor to determine what they think the best path forward is. Got it.

So, how do you decide if you want to approach a deal directly or as a JV? It might just be, you know, how the deal comes in. So, obviously, if you have interest in a certain strategy, you know, you buy it direct or you wait till the JV partner to bring it to you, or how do you kind of figure out what path? And then maybe we could even go into a little bit about the considerations of kind of the benefits of being a direct investor as opposed to being a co-GP, which sounds like that's the way that oftentimes you approach your joint ventures?

Yeah. So, you know, to date, the direct has just been local in New York, right? It's where we think we have an advantage, where we have resources, where we can focus. I think right now we're actually exploring where do we expand that, right? Whether it's other parts of New York City, whether it's, you know, nearby markets. So like markets that we find interesting that are kind of proximate are the Northern New Jersey area, the Lehigh Valley. We've looked throughout kind of upstate New York. There's some interesting pockets as you go into New England. Right. So what we're trying to do is where are there opportunities for us to grow? Where can we build kind of a beachhead that makes it worth growing there and doing it ourselves? I think the JV investments tend to be things that we don't necessarily have the in-house capabilities to do it. And we're better off, you know, working with somebody who can, you know, tend to it day in and day out.

I mean, it's interesting because multifamily investing in New York is probably one of the most hands-on type of investments. I mean, not only— and I don't know if you use third-party manage, but even if you do, I mean, it's very nuanced, very technical understanding, you know, everything about rent regulation and the way things are filed. So, I mean, it doesn't seem like it's a question of how much, how management-intensive an asset is, as you will. Yeah, I mean, it's not a matter of, you know, we want to be passive in some areas and direct on others. It's just where you feel like you actually have expertise as opposed to maybe going into something like you said that you don't have knowledge of.

Yeah, because so for example, our portfolio in New York, we, we do all the private lending in-house. We know all the filings. We are dialed in. And what we don't want to have is, you know, someone tells us on a deal in Charleston, South Carolina that we don't know like anything about. We're not there. If there's an issue, we have to get on a plane, right? And so in those cases, we want to have a trusted partner who's on the ground. You know, the last 10 years I've been pitched endlessly by somebody who's like, you should really do a deal in, you know, insert market here. And I'm like, oh, where do you live in that market? And they're like, oh no, our office is like 2 blocks from you in Manhattan. Right? And I'm not sure what benefit we're getting as an investor from somebody who's, you know, not living and breathing a market day in and day out.

Oh, that's super interesting, especially, you know, we have a lot of listeners to the show that are, you know, either aspiring investors or they've done a couple deals but thinking about where they can gain that advantage, the credibility. If you're physically located in the market, you know, again, you're seeing things, you're immersed in that market. So that's You know, that's pretty telling unless if you have the, you know, the track record and demonstrate that you've already transacted there. And even then, I would imagine you have some boots on the ground to assist with something like that. What about the economic considerations? So obviously if you go direct, there's no promote structure, whereas if you bring in a partner, especially if they're gonna be doing the day-to-day, they're promoting you. But if you looked at, and this is interesting 'cause I don't think we've ever talked about this on the show, but kind of how your time is best spent, right? A direct investment, no promote, but a lot of hours go towards running that investment. Whereas that, you know, that JV, again, you're giving up that promote, but are you spending 1/10 the amount of time on that investment? And when you look at the returns at the end of the day, and where is your time best spent? I mean, do you all ever think of that? Does that go into calculus?

This is like a constant conversation in-house, right? Is, you know, I think of it as where, where do the overhead costs sit, right? So, so for our local portfolio, right, everything is on our P&L, right? So we have a property management person, we have people who are pursuing deals, right? And so because we're going direct, we internalize that cost. When we work with JV partners, right, it's infinitely more efficient from our overhead perspective, right? Because the overhead's on someone else's P&L. They basically go out, they chase deals, they synthesize the deals, They vet them and we get kind of the best of the best from, from their work, but we're not necessarily paying for that work, right? Until we go and we execute on a deal. And so to some extent, I don't mind having a partner who promotes off of our capital because it's a, it's an upside expense, right? I'm not increasing my overhead at all. And they're only getting paid if, if we've done well on a deal. So, you know, in those cases we don't, To your earlier point about if you have negative control rights, how do sponsors get comfortable? And like, we had a partner, the deal that we sold 18 months in, he came to us kind of, you know, not sheepishly, but, you know, it was like, hey, we got this bid, you know, would you be willing to sell? You know, and I think he was nervous. I think a lot of partners would've been like, wow, he's gonna get a huge promote. Like, let's hold it. And we said, no, you did your job. You found us an investment. We made a lot of money. You should get paid off of that. And I think that too often people get lost in, in what are the fees that I'm paying and not what is the net return that I'm getting, right? Because that's, that's the business that we're in. It's how do I generate high net returns? And sometimes you have to pay for that, right? I think, you know, you see it in any, you know, you go buy a new jacket at the store, right? You might have to pay a little more for a jacket that's actually going to last 10, 15 years or however long you want your jacket to last, right? You know, if you are cheaper with kind of how you pay your people, right? Sometimes you're not gonna get the best people. And so from our perspective, right, if we, we think our partners need to, need to succeed just as we do.

Right.

To bring the conversation back to New York, because I, I love the optimism and you clearly have the, the boots on the ground knowledge and belief in the city. What aspects of the New York multifamily market do you think are the most resilient regardless of who's in office? And where do you see the, the biggest long-term opportunity in New York multifamily despite these political shifts?

Yeah, I mean, the biggest— I think the biggest thing you're seeing, if you look at all the markets across the US right now, supply is the biggest question mark in all of them, right? And New York, right? I mean, we've seen it administration after administration. It's very difficult to build new units in New York to match the demand. And I think going forward, that's the thing. I think if there's a feature of the market that is most in its kind of win column, it's that We own a bunch of stuff out in Bushwick and Ridgewood. It's a neighborhood that's just lined with these 6 and 8-family buildings. There's never going to be thousands of units overnight out there. And I think that is the insulating factor. I think if you go back, so I first started in this job, let's call it 10 years ago, then you had massive dispersion in cap rates. If you went to Jacksonville, Florida, you were buying deals at an 8 cap.. And if you're in New York, this is before the rent law, you're buying things at a 3 cap or, you know, 1 cap, you know, if it was rent stabilized, right? And you had this massive dispersion of markets. And the trade then was that those were going to kind of come together, right? Everyone's borrowing from the same lenders at the end of the day, right? Fannie, Freddie, like, right? The borrowing cost is the same. So the asset pricing should have been more similar than the massive spread you had. Now they've all come together. Well, now that doesn't actually make sense because you go to certain markets and they've built, you know, 15% of the unit count in the last 3 years. Rents aren't going to hold, right? Expenses have gone through the roof, especially depending geographically if you have insurance issues. And so now you're going to see that dispersion happen again. It hasn't happened yet. I think lenders have been very friendly to ownership, but like, I just don't, you know, there are a lot of markets in this country that are having supply issues and you're seeing vacancy. Is ticking up. And at that point, right, the question then becomes what NOI are you using when you quote a cap rate, right? Are you using an in-place NOI or using what kind of a stabilized fully leased NOI is? But I think from a New York perspective, you still have, right, people want to be here. You can't build that many units and that math is going to lead to increasing rents.

Right. So you mentioned about the investment philosophy of being a contrarian, and I definitely get that for multifamily in New York. Industrial, and I don't know if that's— I know you have holdings across the country. You know, industrial would not seem as much of an outlier strategy. I mean, sure, well, maybe now in some markets with new construction, you know, talking about supply, same way with multifamily, we're certainly seeing supply, whether we're talking about Phoenix or the Inland Empire, all of a sudden it's like too much of a good thing. So how— just getting your thoughts on the industrial market and where to play, because we hear a lot about this, you know, shallow, you know, shallow bays now. And what is it about that that maybe is more attractive than maybe some of these big bombers that have the credit attached to them?

Yeah, I think the shallow bay, you haven't seen the same increase in supply, right? So I think the big bombers— I think everybody, right? I mean, think about it. If I was an industrial developer, right, I could go build a million-plus square feet, take the fees off of a million-plus square feet, and chase a credit tenant of Walmart and Amazon, right? The big, the big players. Or I could go develop, you know, a 150,000-square-foot space where I'm not going to get the same credit in my tenant, I'm not gonna be able to take the fees off the same square footage, right? Like, it makes sense why one is oversupplied and one isn't seeing the same supply bump. And so we've been playing kind of in that, that smaller Bay. I think, you know, it's like the old joke, if your taxi driver's telling you about an investment, right, that's the time to sell it. You know, I think it is getting very kind of in vogue. And so now the question becomes, what's, what's the next thing to keep your eye on, right? I think we've been pitched on, you know, and I think we might do our first industrial outdoor storage deal. It's like the new, you know, small bay, shallow bay industrial, you know. And I think, you know, I think that there are pockets where, you know, the zoning has gotten difficult, where there's a ton of demand for that product. That, that's interesting. I come from originally a credit background, like the other part of me says it's a parking lot. Your barriers to entry are somewhat limited. At the end of the day, it's a land banking play almost.

So from a geography standpoint, how do you get comfortable? And again, you made the whole point that you want that partner who has boots on the ground. Okay, so that's part of it. But how do you feel comfortable that there is that demand? And whether that's in Shallow Bay or multifamily, I mean, how are you tracking what the, you know, the new supply or competition looks like?

Yeah, I mean, it's, you know, probably the same data sources that everyone in real estate uses, but it is kind of a multi-piece puzzle, right? It's like we want to find a market that we think has compelling dynamics, we want to find a partner we trust and has know-how, right? All those things have to kind of align. So in a lot of cases You know, there are, there are trades or investment ideas that we like. We just haven't found kind of the way in yet. And so that's also part of the job is to kind of find that, that fit.

Mm-hmm.

So with, with New York, 'cause you're, like we said before, your boots on the ground, you're living here, you're, you're very confident in, in the city and the city's growth with your shallow bay strategy, which is kind of all over the country. I, I read on your website that your, your strategy focuses more on, on markets with limited new competition. So what kind of gives you an angle there when you're not boots on the ground in these markets?

Yes. I mean, in some cases we're relying on the partner, right? So, you know, so like that's kind of our way to tap into, okay, what, what are the best, best ways of thinking about this market? So in a lot of cases, it's like an infill location, right? So right now we're developing a building in Tempe, Arizona, right? So it's not far from the airport. It's, you know, fully built around it, right? We found this nice piece of dirt. We're building a small industrial building. It's already two-thirds leased. We're doing a similar deal up in Glendale in Phoenix. And so in those cases, right, it's a market where the headline would tell you Phoenix, tons of industrial supply, right? And when you pull like the CoStar, right, it shows this massive vacancy rate and you get really nervous. And then you back out the million square footers and you're like, oh, actually the vacancy rate's in the low single digits for this type of asset. And in both cases, we've de-risked it because it's two-thirds leased. And so the other third is speculative, right? We'll see, you know, If we hit a massive recession, right, we'll have a 1/3 vacant building. More confident, even based on just the traction we've gotten post, you know, putting a shovel in the ground, that we'll fill that space.

You know, it's a great point when you're looking at what is the competition in the market. And when you're looking at these vacancy rates, you know, just looking at the percentage on its own doesn't break out, you know, again, the direct competition to your point. Made me think about here, the apartment sale market. So if you look at the available condos in the market right now, which is at a 10-year low, but here in Manhattan, there's 3,000 units, but over a third of those units are in 6 projects, right? So, you start looking and that's why, you know, if you're selling a piece of land on the Upper East Side for luxury development, I mean, if you looked at just the availability in that submarket, even for that kind of product, it's probably, you know, a matter of maybe a dozen or 2 units, right? So, I think that's a great piece of advice for our listeners to really just, don't just look at that kind of top-line vacancy number, but really figure out where is that coming from and doing your homework.

Yeah, I'm a baseball fan, so I always think of it as like the Moneyball of it, right? Like, there's the, there's the headline, right? Like, there's, hey, this guy has X stats, right? But you got to go that level or two below to say, well, what's the real story? What's— what, where's the data at? And is the headline actually communicating what the data is telling you? Because in a lot of cases, there's a large spread there.

How much of the data do you think, you know, whether it's your competition or other investors— I mean, today Do you think most people are just kind of going with their gut feeling and what, you know, looks good in a market, or they're really intensely studying the data? Like, how much of your investment philosophy is really driven by the data analytics?

I think it's just weird. You can't be too reliant on it and you can't ignore it, right? Because I think, like, was it Zillow or some, some of the home buildings, they had an algorithm go and buy stuff up and it didn't work, right?

Right.

And then I think, you know, on the other side, I think that in some cases people follow kind of where's the investor capital going, right? And I think sometimes that leads them astray, right? So it's like, oh, people really want X. And it's like, okay, well, at the point at which people really want X, is the trade still there or did you miss it? And now you're just coming in late to the party. And so I think it's always kind of just like, you know, not getting too caught up in whatever the story of the day is, can also be a real, real benefit.

Billy, what is your approach to adding value with your industrial strategy? Is it more centered around leasing? Like maybe you get in at a below-market lease and wait for the lease to expire and then bump the rents up to market, or is it more capital intensive? Like how do you view the sort of value-add play there with your industrial strategy?

A lot of it's just been on the leasing side. And part of that's that where We're still new-ish to, you know, like we've obviously done industrial deals, but we're by no means, you know, prologist or an expert, right? Like, and so we've kind of taken two approaches. One is more of the leasing play of, hey, you know, rents are at $12 a foot, market $16 a foot. And we like that too, because I think our patient capital opens that door. Whereas, you know, there are certain opportunities that a typical fund, right? It doesn't really, that story doesn't play for their investors or their timeframe in the same way.

How do you know? Because I think it'd be rare if you're buying something from an owner who, you know, they've got vacant space and they don't, you know, have a credible leasing team. I mean, that probably does happen occasionally where they just have the wrong team. Maybe it's a friend or relative, but they just don't know how to lease the space. But, you know, other times it's more, you know, maybe it's kind of the where they are with, with with their capital stack. I mean, I know we're selling a deal right now where the owner, there's plenty of leases that could be done, but they're not willing to fund TIs. Yeah, right. And that's something. So, I mean, I, maybe I'm answering my own question of trying to dig in and find out why whatever leasing program is not working. But how do you know it's not just a weak market and it's the leasing demand's just not there because it's not there?

Yeah, no, I think, well, the, the deals like the one you mentioned where you have the leases and not the TI cap, those are the deals you want to be doing. Right. Because it's just a capital problem. It's not a, right. Like from where I sit that, you know, you're trying to put capital to work, capital solves that problem and you're going to get outsized returns. That's, that's a good trade. Usually what we're doing is we're relying on, they have similar assets in the market, right? So we can see that, no, we just signed this lease at this number. You know, in some cases, you know, you're buying from a seller who isn't as savvy. Maybe they've been in the asset for a long time. Right. And they haven't actually been in the leasing market. Right. 10 years ago, they put everyone on a 10-year lease. They, you know, went and they played golf, and now they've come back, and now, oh, we're gonna have vacancy, just sell it, right? I don't want the headache of it. And so it's just finding those kind of one-off opportunities, which like, the crazy thing is real estate's the one asset class where that still really exists, right? It doesn't exist like, you know, in public markets. Like, it's so monitored in most cases that you don't have just like a, hey, you know, I just inherited this, I don't want it anymore. I'll sell it at a price. You know, in real estate, you have those, those opportunities, not, you know, common, but you know, they do pop up and you know, you want to be there to be the buyer in that case.

Yeah.

And to add one more thing, also, no law that you have to sell the property for the highest price. I mean, it's not, you know, by definition, it's, it's not a public, you know, offering. So again, whether or not the seller even does a good job, do they choose the right broker to do a proper marketing campaign? Do you buy it off market? So I mean, there's so many opportunities where you can gain that advantage.

Well, nowadays you also have sellers who don't want to advertise that they're selling, right? You know, they have people who have, oh, I have a debt problem here. I really got to get rid of this asset, but I don't want it known to the market that I'm selling this because I have all of this over here.

Yeah, see that, the reasoning there, I mean, yes, maybe at the time, but after it sells, everybody knows anyways. So But, but yes, you totally get owners who say, I don't want to advertise, you know, my issues. But Billy, I was going to ask you, how do you find for your JV investments, how do you get most of that deal flow? How do you get most of those sponsor introductions?

Yeah, I always joke in the randomest of ways, you know, I think, you know, sometimes it's just, you know, a friend of a friend. You know, I know we were both at Ascent, right? Attending events like that, just being out there. In the market, you know, just trying to meet as many people as possible. And, you know, and also like just kind of continuing conversations, right? It takes us a long time to get comfortable with somebody, right? So it's also like, you know, having check-in calls with people once a quarter who, you know, we haven't done a deal with, we might not do a deal with them this year. But, you know, maybe next year as, you know, they build out their track record as they become more established. And as we get more comfortable with the asset class or the geography that they're playing in.

And how do you just again, for our listeners who are trying to raise capital, What is it, you know, beyond their, their track record and what they've done when they come to you? Is it a deck to say, is it a nice fancy website? What, what is it that they can kind of put themselves in the best light so you can see that they're, they're credible and it has the information that you need to, to determine whether or not they're the kind of sponsor who you would back?

Yeah, I mean, I think you got to have like an Excel model that you can send to us. Like, I feel like it's I always find it weird. A lot of groups are like very proprietary about their Excel. Like everyone's using the same, like, you know, like they make you sign a bunch of NDAs and I'm like, it's not, you know, it's not a state secret. Um, you know, I think that's like that and a deck or some kind of write-up or some, something about the, the, the investment you kind of need to have. Um, right. Like I've had meetings with people who are like, they keep talking about the deal and I'm like, well, just send me the materials and we can have more educated conversation about it. So yeah, so I guess those are, I think—

Do you want them to have control over the deal? Because that's always, you know, it's kind of that chicken or the egg where I'm, as the sponsor, trying to decide, do I sign this up? I don't know if I have the capital. You don't wanna waste your time chasing something that's not a live opportunity. So are most of these sponsors bringing, you know, live deals to you where they're saying, hey, I'm thinking of bidding on this, are you on board?

It's a mix.

And I'm sure that NDA piece, if you don't have deal control, you know, I'm gonna let them know and then, you know, suddenly it's going to be out in the market and I'm going to lose it, right?

Yeah. Well, I mean, we would never— someone sent us a deal, we would never then go do it. I just think that's too slimy.

Yes.

But I think— sorry, what was the—

well, just when, when do you like to come into a deal? Is it, is it okay if they say, hey, we're bidding on this deal Or do you want to actually have it under control where—

I don't, I don't think having it under control is as important. I know a lot of people tell sponsors that, that like, until— and I think, look, I think if I was at, you know, Bulls-Racket name brand PE firm, I tell them go get under control because I know the other 3 guys bidding on it, and I can only work with the person who gets it under control, right? So I don't want to know about it until it's under control, and then I'll underwrite it that one time with that group. But I think for us it's more of building a conversation over time with different groups. And so if they're out chasing a deal and they say, hey, look, we bid 15, you know, it wound up going for 16.5, right? Like, I guess one, I know that they're kind of on the conservative end of things. They're not like leaning in too far. So that, that can be a good data point at the same token, right? Even though that, you know, it was wasted time because they didn't get the deal.

And are you ever putting up deposit money alongside them or guarantees?

We, we have not. You know, I think we'll, we'll participate, I guess, if we've worked with someone before, right? And you get to like that fifth, sixth deal and like we know we're going to do it, then like we might start participating in, in deposits, but definitely not on like a first deal with somebody.

Got it, that makes sense.

Billy, I would love for you to talk about your experience at Barclays in credit risk and public finance and how that sort of led you to the family office world with what you're doing with part partners path today?

Yeah. Yeah. So I started at Barclays. We did— I was rotational program. So it was leveraged finance, real estate, and public finance or municipals. I did a couple years in that and then mostly did public finance. So like we covered transportation names, like airports and Puerto Rico was our big, like our big— so in like 2013, we did like a $3.5 billion restructuring for Puerto Rico, which was definitely a busy and fun experience. But I think I did investment banking long enough to realize that I didn't want to do it forever. Yeah, and then, and then was connected to, to my current shop, and it's, yeah, 10 years, so it's, it's been, been good.

I always— I think it's so amazing with real estate how people come from such diverse backgrounds and end up in this space. How has your experience in the, the banking world shaped your, your perspective on real estate and your strategy?

Well, I think it just like broadens kind of like my perspective. So for example, like, you know, as cap rates got super low Right. From like fixed income investing, you know, that the present value of a basis point gets massive when interest rates get low. And so like to put that into plain English, like the lower your cap rate is, the more you win, the more you can lose by a very small move in interest rates. And so I think what people missed is, is how risky it was to invest at very low cap rates, which I think that like when you come from a broader finance background, you've seen this in fixed income. Whereas I think in real estate, people sometimes don't, don't have that broader lens. Because I mean, right. In a lot of cases, real estate, it's right. It's so linked to interest rates. Right. But if you inverse it, right, you could take it as a multiple play. Right. So like if something's trading at a 4 cap, it's really trading at 25 times earnings, right. Put into like more of an equities parlance. And so the question is, right, if the S&P is trading at 1P multiple, I think you have to think about your portfolio more broadly, whereas I think people in real estate just get trapped at like, it's an X cap, and they don't dig into like, on what NOI, on what assumptions. And I think that your KPIs can mislead you at times if you don't dig into it.

Yeah. There's so many things that if the cap rate is ultimately what you're going to use to solve for value, I mean, there's so many subjective factors that go into that that can impact it.

When I see it from my end, where sponsors will say, well, what, what returns are you solving to? And like, I think a lot of people quote IRRs and it's like, well, IRR doesn't mean anything unless you tell me what your exit cap rate assumption is.

Right, right.

Because I can play games on my exit cap rate assumption all day to make the IRR whatever you want it to be. Yeah. And I think that's another game that like, I think there's a lot of sponsors who, they go, they underwrite the deal and then they change the exit cap rate to get to the IRR they think the deal needs to have. And I think that's like a red flag of like, hey, like no one's selling this at a 4 cap, you know?

Yeah.

Like, let's just be realistic.

Yeah. I would think a stabilized yield on cost. I mean, what are you really solving for? I mean, it's hard to, you know, again, kind of artificially—

It's the truest metric.

Yes. So I was gonna ask both of you coming outta Wharton, how much, you know, again, so many incredible real estate professionals that have come outta Wharton. I mean, how, you know, to our listeners out there and, We've got some students out there too. I mean, how important is that network, right? I mean, is it— maybe it was— I'm sure it was helpful in getting your first job out of school, but how much do you continue to lean on that network and how much is there?

Billy, you go ahead first.

Yeah, I mean, I think, look, I think going to a school like Wharton, right, like one, it makes like getting out of school that first job much easier, right? Because the employers come to campus. Right. Like I think that's like, you know, my mom kind of advises people on applying to colleges and people have all these different reasons why they picked their colleges. Like I think like understanding where do employers want to go to get like employees is like never on anyone's list, but it's arguably the most important. So it's, it's an invaluable asset kind of having that also just having it on your resume, right? Every, you know, every resume you submit after that, you have it. But yeah, I mean, the network's unbelievable, especially in New York. I feel like everyone graduates from Wharton, comes straight to New York. And so this is, even though Wharton's obviously in Philadelphia, like New York is where the alumni base is. And so like I'm involved with the Wharton Club of New York, um, right? It's a great way to kind of stay in front of people and meet new people.

Yeah, I mean, Penn had a lot of real estate mentorship programs in place when I, when I was there for undergrad. And like, it's, it's up to you if you want to continue those relationships. I, I've kept mine, you know, since graduation, but there are a lot of networking groups that, that exist. And that, again, it's like you get as— you get out of it as much as you're willing to put in. And that's— that goes for, for any networking group. Like, I know, James, you're very involved with ULI, and if you're on a product council or something like that and you get very involved, like, that's how you really reap the benefits. And I think the same goes— rings true for thinking about your alumni network.

Yeah.

Yeah. The advice I would have for our listeners, and obviously when you have a specialized degree and Wharton has such incredible real estate programs. But, but even if you're— so I went to Colgate, liberal arts education, English major. We didn't even have real estate classes there. But I will tell you that our Colgate Real Estate Council that we have— and again, small school— but we'll have once a quarter, we'll have 30 or 40 people show up to a breakfast, and it's a pretty high-powered group, you know. So the point is, regardless of what you're, you know, where you went to school, lean into that, that network, because generally, you know, you have that shared experience to start with, and typically alums are going to kind of look out for, for others. So So that's definitely something to think about.

So I think it's also, you know, it's not rocket science, right? That's the other thing about real estate, right? Is that, you know, I think that, you know, like when I was at Barclays, right, you graduate from college and then I think it was June or July, you show up, you spend the summer going through this like financial boot camp because they have English majors and kids from who didn't study business undergrad. And, you know, in 6 to 8 weeks, they kind of get them up to where you are, right? You have more depth probably, but, you know, it's, you know, it's not, it's not becoming a doctor, right? Like, this is something that anyone, you're right, like, like, it doesn't take that long to learn the basics of real estate and actually have an edge. And half of it's hustle and hard work, right? I mean, you know, the people who can, you know, I always say that, like, the people who in a lot of cases would be the most successful on the real estate investing side are the brokers, right? They know the people, they know the deals, they know the tenants, right? And like, right, they're just, they're in a different role, but if you put capital behind them right? They would have the best deal flow and know all the players, right? And so, you know, I think you don't need to have this tailored background to go into real estate or really most other professions.

Yeah, it's interesting that you mentioned, you know, brokers are so well positioned to go on to the investing side. And a lot of them, including myself, I would say most of the way we're doing that investment is kind of on the LP side, say, hey, we're, we're busy, we're, you know, and also I think You want to be aware of not creating that conflict where if you're brokering but you're, you know, also a buyer in the market, and how does that work? But I think it's also, you know, once you're a successful broker and you're doing transactions, it's hard to kind of stop that machine. Where— okay, whereas when you're going to do an investment, I mean, it could be a couple years before you find— you see any economic benefit. And not that a brokerage deal doesn't take 6 to 9 months maybe from start to finish, but It is surprising that you don't see more, more brokers get, get involved and going full-fledged under the—

I get it, because, because we just sold a deal and the broker who sold it gets a nice check. And, you know, me and my colleague had been, you know, in the deal for 10 years, right? And, you know, that's the first time we'd seen anything from it. And, you know, so it's, you know, you know, everybody has their own kind of incentive structure, right?

Right. I also think you bring up an interesting point about coming from a social science background. I think people who come from more, I guess, non-business backgrounds do bring a really unique perspective. And if you're very in tune with policy and zoning and things like public-private partnerships and incentives, like all of these factors are kind of coming together to make these deals happen. And if you just have like a cookie-cutter finance understanding and aren't thinking about the bigger picture, I think it can be limiting for, for some people.

Mm-hmm.

Yeah.

So, Billy, as we start to wrap, and it was funny, and you kind of mentioned the Moneyball aspect. I saw, I don't know if it was at Wharton, you were part of a sports, was it kind of almost like a fantasy football kind of thing or was it more sports management? What was the, I thought there was some attachment to sports analysis. And I'm just trying to think about kind of the gamification of this and like the metrics. And so I don't know, I mean, I just, parallels that you see and kind of takeaways from that experience and kind of how you look at maybe, you know, sports and the numbers and where you see the opportunities in real estate.

Yeah, yeah, I guess I forget what would have been on there. I played— I think, did your son play water polo? Is that right?

Yes.

Yeah, I played, I played club water polo. Okay, so I remember seeing that on your posts. Yeah, I think, I think actually, like, you know, I think we're kind of talking about it, whether it's like English major or multidisciplinary kind of background, right? Like things like sports or other interests can, right, like that analysis or that thought process right, can be really helpful in real estate or any other endeavor, right? And so I think it's important to always kind of, you know, not just get lost in kind of— but I think like there's certain people who like all they do is real estate, and I think it has benefits, right, like to be that locked in. But I think it— you can do other things that will bring in insights and understanding that you wouldn't have if you're just kind of staying in your lane of, you know, real estate focus.

I think there are a lot of parallels too between sports and real estate, especially in brokerage. It really does feel like you're practicing with your team, you're getting ready for the game, And you have the pitch and it's like the, the rush and all of the, the things that you experience from being a competitive athlete, I think are, are kind of channeled in, in real estate as, as an industry. And that it makes it very like fulfilling for a little bit.

Because a real estate deal is a team sport, right? Right. You need, you need the equity to come in, you need the debt to come in, you need the broker, you need the buyer. Like all these people need to work together to actually get to the closing table and get the, you know, to get the job done as it were. And one of my takeaways from Ascent was that right now, the equity capital seems to be the part of the team that's not really performing in the way that the rest of the players in the market want it to. I think the debt capital player is playing at 120% right now. And I think that the market's trying to synthesize, OK, we have all of this debt capital coming in, whether it's private capital, whatever. The equity capital is more conservative right now. And how do we rework capital structures and deals such that the generous debt proceeds we're getting can kind of lump in with the GP and whether it's an LP or, you know, now I feel like everyone, you know, no one wants to be just a regular LP, right? Everyone wants kind of special treatment. And that's a result of the fact that equity's harder to find. And so I think that, you know, bringing creativity, right? Bringing those kinds of other skills to say, okay, well, The GP's putting X in. What if the quote-unquote LP comes in as preferred equity? I think is a more common structure we're seeing. How do we recut kind of the upside splits so that the sponsor feels like they're getting rewarded, but the, you know, LP or the investor feels like in a downside scenario they're getting better protected? Because effectively both of them can benefit from the fact that now, you know, you can get construction financing in the low 2s, right? And, you know, you know, that's something that equity should be benefiting from. That was kind of my takeaway was like Should we be looking at more development? Like, it sounds crazy to say with all the supply kind of concerns, but you know, it, it's cheaper now to get capital for development than it used to be. And if everyone thinks you're nuts to go on the ground today, maybe, maybe you're not so nuts.

Yeah, going back to that, that empty room comment, I mean, when, when it was asked in front of a room full of investors, how many of you are putting out debt for residential construction? And like 100 hands went up. And how many are you doing equity? It was 1, maybe 1.5. And then when really pressed on it was, well, you know, unless if everything's perfect.

Yeah.

So, well, Billy, this has been awesome. Just one last piece of advice for the audience. I mean, your decision to be— and maybe it's the best of both worlds because you're getting the chance to invest direct but also as an equity participant. And any thoughts of, you know, our listeners who are looking to get into investing kind of, is it better to go kind of work with an operator that's doing deals direct, you know, kind of working on that equity side where you get a lot of exposure to a lot of different kinds of deals? And any thoughts on, on the best path?

Yeah, I think the older I get, the more I come back to there is no best path, right? There's just get on a path, you know, and then keep working hard and moving down that path. Like I always joke, you know, when I'm one of 6 kids, and so I'm the oldest. So when I was younger, my dad always told me, you should, you know, learn Chinese, right? And then it became, you gotta learn to code and you gotta, right? And like, and I think the hard thing is that at the time that was the right advice. Now, right? Like I can pull out my phone and my phone will speak Chinese, right? Or right now it's like coding jobs are gonna take over by AI. And so like, it's, it's so hard to know where the puck is going.

Mm-hmm.

And so I think that instead of like sitting there overanalyzing what the next step is, just take a step. Step, right? And just keep, you know, like, the, the harder you work, the luckier you get, you know? And just keep, keep, you know, showing up every day. That's, you know, 95% of success is just like working as hard as you can. And there's no, you know, in 2007, the guy who got staffed on the restructuring desk at his firm thought he got like the worst position ever because there had been no restructurings in forever. And now 2008 comes and he's sitting in the pole position, right? Right. So you never know what the future is going to bring, and I think you just gotta trust that hard work will move forward.

Awesome. Well, Billy, this was fantastic. Thank you so much for coming and sharing your story. And we want to thank all of our listeners. And, and as we always say with this show, really the best thing you can do, assuming you got as much value to this episode as we did, is to share it with a friend. So forward this on. I do that all the time. And you can go to jamesnelson.com. The site is not about me. It was for you. And so that's where you can find the show notes, how to connect with Billy. There's a lot of other helpful resources. We're going to be launching a course in the new year based on The Insider's Edge to Real Estate Investing, so keep a lookout for that. That'll be on the Investors in Commercial Real Estate platform. And as always, thanks again for joining. Until next week.

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