Harvest Creative

I’ll bet most people don’t think about commercial real estate investing when they hear Taylor Swift sing “I knew you were trouble when you walked in,” but I do. I’m always ready for potential trouble. While some people might think that makes me a pessimist, I just think of it as being prepared.

Survival is to be paranoid about what might happen tomorrow and optimistic about what will happen in the long term. We believe in the resilience of the long-term prospects for the U.S. economy, and yet we recognize there could be short term consequences from something unknowable that catches everyone off guard or something predictable such as a recession. Our commercial real estate investments are tethered to the long-term success of the United States. On that long term journey, there will be lots of detours, lane closures and speed bumps. How do we give ourselves a margin of safety to navigate this?

We look at the world probabilistically, which means we see everything as a possibility. Every day there’s another story about the next problem coming. I can’t tell you which of those stories will be correct, but we constantly recalibrate the relative odds of which one is more likely to happen. Then we look for common themes in terms of their impact on our business and how our business is positioned to survive those common impacts.

The U.S. is coming off an all-time high in money supply growth to a substantial change in direction. But we need to look deeper to see what the liquidity will be like for any particular investment sector.

Capital goes to where there’s growth, so it’s going to be plentiful for building factories for supply chain reshoring, but I think there are some regulatory inducements encouraging people to over invest based on government policy. On the flip side, the office sector is in a difficult position. But there will be some enormous bargains for investors willing to take the binary risk to either repurpose it to recover value or to tear it down. Multifamily still has the best liquidity among the various food groups because we have Fannie, Freddie and HUD, which are all backed by the U.S. government because of the national imperative to make sure everybody has a roof over their head.

Every business and every market are different. We’re levered to the things that help us make money and insulated from the things that could hurt us. The pundits should stop making aggregate statements that every office investor is doomed and everyone building industrial plants in the Midwest and South is a winner.

Taking a long view about where we invest and how we finance our investments has always worked for us and will continue to protect us from possible trouble ahead.

Let’s start with the truth: I’m part of Gen X and I can tell you that my friends and I are not all alike. I know that’s true for every generation. There are plenty of songs about how everyone is different – from Lady Gaga’s “Born This Way” to Frank Sinatra’s “My Way,” to a long list in between to back me up, too.

So, what does that mean when we’re planning an apartment community and want to create a home that will attract the next generation of residents?

We look for some universal trends that are likely to entice a Gen Z renter to choose one of our communities instead of another apartment. Some surveys suggest that members of the Gen Z generation are less willing to come into the office. Others say they value equity over personal enrichment. Maybe some of those things are true in greater proportion than previous generations, but people are not photocopies of each other.

First and foremost, we need to peel back the layers and get to microlevels in local communities. We can divide up markets and submarkets into cohorts of people that are likely to have common needs and then serve those needs.

I saw a survey recently that suggested the top five things the youngest group of renters are looking for in an apartment are high speed internet, outdoor amenities, coworking spaces, property technology and a package room. Well, most people value all five of those features in their community, regardless of their age.

We’re installing high speed, reliable Wi-Fi through our private internet service in all our communities, internet service that will work by the pool, in a conference room, a coworking space and in someone’s apartment. The internet service connects with the rest of our property technology, which also includes package management. But we go beyond these amenities. The research we’ve read about Gen Z is that socialization within their community is extremely important, so we make sure to provide programming to make it easier for our residents to get to know each other.

We know that younger people value location over size, so we make sure to create communities with plenty of selection. We look at the apartments we own and think about which ones may appeal more to a Gen Z renter than others, then program and market them accordingly. We think reflection of society is really important, too, so we also do our best to ensure that our workforce reflects the community where they’re located.

Each generation may have its reputation for certain traits, but communities do, too. Creating communities where residents can thrive requires looking at both the forest and the trees.

Criminals are an ingenious bunch, so it’s too bad they use their creativity and determination for bad things. They’re constantly coming up with “innovations” in scams, so we need to be just as creative to invent new tools to combat them.

In the apartment industry, people try to fake their income and their employment to qualify for a rental. A couple of decades ago, you’d use a photocopy machine to try to fake a pay stub. Now, you can download the logo of an actual employer and use desktop publishing software to fake your income. You can buy fake Social Security numbers that belong to people whose identities have been compromised.

Scammers are very industrious and tend to prey on members of society who are the most marginalized. They’ll lease a two-bedroom apartment and then rent pieces of it to 10 people who are undocumented and can’t rent an apartment in the traditional manner. Or they’ll turn a $2,000 a month rental apartment into a $250 per night illegal Airbnb with no intention of paying any rent to the landlord. When the eviction notice comes in these situations, it turns out the alleged renter used false information and is nowhere to be found. The people who are hurt the most are the ones who were paying someone for the ability to sleep on the floor on a mattress. And, of course, the landlords get hurt, too. It’s horrible.

As an industry, people are constantly developing new credit reporting tools to verify identification and income to combat scammers. There are new tools that can scan a paycheck and use AI to match it against a known paycheck from the same employer to find the smallest variance and determine whether it’s fabricated or not.

Leaning into technology helps a lot. At Bonaventure, we use TransUnion Income and Employment Verification, and Checkpoint ID’s Paystub and ID verification software.

But we also participate in what I like to think of as almost a Neighborhood Watch program against scams. We stay aware of what’s going on in the apartment industry and in each of our local submarkets. If there’s an increase in fraudulent applications or some other kind of fraud, we step up our vigilance. It’s no different than if there was an increase in the number of car thefts in a neighborhood. You use deterrence. You park your car in your garage, you lock your car, you buy a club to lock the wheel.

Combatting fraud takes more than a one-time software purchase. We experiment with new tools to stay ahead of the scammers and their new approaches. We’re attentive to news about potential scams in our industry and in the communities we serve to protect our residents, our community and ourselves.

When I say there’s a 100% chance of a recession, I’m not saying there’s 100% chance tomorrow or even a year from now, but there’s going to be a recession. Everyone focuses on guessing when it will be versus acknowledging that there will be one at some point in the future. But here’s what’s obvious: we have an economic cycle and that means we have booms, and we have recessions.

I think if people take the perspective of building a sustainable business that can survive a recession, they would be much less focused on whether that’s going to happen this month, next month, next quarter, the beginning of next year or two years from now. But we’re in a world where a lot of people get paid to give opinions and have to come up with supporting details.

Right now, we’ve got a mixed bag of data, some of which indicates we’re about to fall off a cliff. We have political turmoil in the U.S., wars going on in Europe and the Middle East, the UAW strike and rising auto loan delinquencies. We’re about to have about a couple of billion dollars sucked out of the economy when people start to pay their student loans for the first time in three years.

All of this adds up, but it’s against the backdrop of companies never having had more cash on their balance sheet and households having lowered the cost of their mortgages and put away a ton of money. We’ve also got positive employment reports and indications that the economy is still expanding.

While some problems appear to be growing in magnitude, I don’t think they’re yet at the point that they outweigh the strong parts of the economy. Still, at some point in the future we’ll have negative GDP for a couple of quarters and that will qualify as a recession.

It seems very rational and normal to me that some of these negative things are starting to grow in importance or in size, which eventually will be self-fulfilling, and we’ll have a contraction. The negatives will get to the point that they overpower the positives, and we’ll end up with a recession.

Frankly, I think it would be very healthy because we have had so much expansion and inflation.

It’s what you need in order to have a sustainable economy. You have to give back some of the excesses that grew during the expansion periods, just like you need balance in all aspects of your personal life. The economy needs balance too.

Before I write anything else, I have to get one thing out of the way: I mean, this is a dream scenario for me. After being wrong for 22 years, I’m finally right. I always said we need fixed rate loans because one day rates will go higher.

Seriously, though, we built our business around making sure we would survive when interest rates went against us. That’s why our core portfolio is in very good shape. We have very few loan maturities, very little floating rate debt exposure, and our long-term fixed-rate loans are at 2% to 4%.

Sadly, for people who built their business around maximizing near term profits, this could be a wipeout event.

Higher interest rates are not all bad, though, depending on which side of the coin you’re on. Banks are just not competitive when you compare it to the higher risk-free rate you can get from the federal government.

But that creates massive ripple effects. Banks are getting squeezed by depositors and borrowers. Their customers are fleeing to no-risk investments that pay a better rate, plus their cost of funding is up. Banks thought they were smart to avoid interest rate risk by offering floating rates to borrowers, but now suddenly they have credit risk associated with those loans.

Here’s the problem: Asset values are going to deteriorate some in the coming quarters. Worse, there needs to be a cash injection into a lot of deals to roll a loan into new financing with that same bank or a different lender.

Higher interest rates are also bad for development. Between the cost of construction and the cost of capital, deals are not penciling. It’s a double whammy: Not only have the returns on equity investments been compressed, but you’re benchmarking against cash earning good returns in high yield savings or money market accounts.

Development deals are going to be dead for a while. That’s bad for our business and bad for everyone. But since we have largely operated in a “land-light” position, we’re not really imperiled by that.

On the positive side, there are opportunities. We’re in the business of solving complex problems. We can help solve those problems for people either by acquiring their assets or having them do a 721 exchange into some of the vehicles we manage. We can bail them out and get them into a larger diversified pool, or we can provide them with some capital to fill a hole in their capital stack.

Every economic scenario offers an opportunity for problem solvers.

At Bonaventure, we’ve always leaned into technology. We don’t want to be on the bleeding edge, but we’d like to be on the leading edge. We work to identify ways to enhance the experience of our customers, improve our operations and improve the work environment for our associates.

While virtually everyone talks about the glories of using AI for everything, our priority is data integrity and protection. After all, our clients and residents have entrusted us with their personal information.

Beyond that, we want to create a set of tools that will empower our team to figure out how to start using AI and generative AI to accelerate and improve the quality of our services. We’re looking into how to use AI to provide real time engagement with our residents and prospective residents. We want to provide the right answers to their questions and needs with instantaneous and unlimited information, whether that’s on the phone, online through the website or through an app, with a backstop of human beings when the chatbot reaches the limits of what it can provide to our customers.

Right now, we have a chatbot with text. We’re moving towards one with a voice application that’s available in any format. So, if someone wants to pick up the phone, they can call us and get an instant answer through AI. They can talk or type through the website or the app to get an immediate response.

I’m not oblivious to the fact that there’s a lot of concern and pushback about AI. Some people worry about whether AI will have a negative impact on employees or even residents who prefer human interaction. We’ll always have plenty of people around to provide the best possible experience for our residents.

Innovations and technology always get pushback. When London first introduced electricity to their streets, the people that lit the lamps on the streets every night were distressed that they were going to lose their jobs. And sure, AI could affect some people in the short term. For a few specific people, their jobs or the amount of work they have may be reduced or eliminated.

But from a broader perspective, all those lamplighters were freed up to do other things like participate in the industrial revolution. With AI, sure there will be certain functions that change, but what we really see with all technology is that it eventually makes labor more valuable. When you introduce technology and look at the aggregate impact, it raises the standard of living for society as everyone begins to benefit from more infrastructure and technology. Used carefully, AI can become one more tool to improve people’s lives and work experiences.