Today we have DJ Van Keuren on the show! Are you a wealthy family trying to preserve and responsibly grow your wealth? Join DJ Van Keuren as he talks about his experience and how family offices think. As someone who has been working in this space for years, DJ reveals the unique issues that arise and how real estate can be the solution for many families looking to protect their wealth.
In this episode you will learn:
- relationships are key
- the wealth creator is many times in an entirely different industry from real estate
- statistics show that 70% of 2nd generation and 90% of 3rd generation loses wealth
Table of Contents:
- Where To Listen To The Podcast
- All About Family Offices: Insights From an Expert Advisor
- Navigating the Complexities of Investments in Family Offices
- Empowering Family Offices Through Relationships and Education
- The Three-Legged Stool in Family Offices
- Building Trust and Unlocking Opportunities
- Real Estate Cycles and Promising Asset Classes
- Identifying Market Demands
- Anticipating Debt Challenges
- How To Reach DJ Van Keuren
All About Family Offices: Insights From an Expert Advisor
Darin: DJ Van Keuren graduated from Harvard on the Dean's List. He has been working with and for family offices for years. He sheds light on what's important to family offices, how they make decisions, and how they think. At the end of the day, family offices are looking for ways to preserve their capital and grow their wealth responsibly.
So just a little bit on how we know each other. This is actually the first time I'm talking to DJ. I reached out to him via LinkedIn because he is an expert on family office real estate. And I don't really know that much in terms of dealing with family offices. Predominantly all the deals I've been involved in have been with high net-worth individuals, and so I'm very interested to pick his brain. This guy is a complete expert. He is a Dean's List graduate from Harvard, and he's got a ton of experience. So I'm very excited about this.
The first thing I typically ask is how many properties and how many units you're invested in. I know that you basically work on behalf of family offices, so maybe share the level of transactions you've been involved with.
DJ: Sure. So over the last seven years, I've worked for a number of prominent families, a billionaire here in Denver. Some people may have heard of Giorgio Perfume, Giorgio Beverly Hills, who I got headhunted by, and we came up with a boutique office brand strategy. Then did some work for one of the owners of one of the major league baseball teams. And then formed Evergreen.
Unveiling the Mindset and Priorities of Family Offices in Real Estate Investments
DJ: The first family we started working with is the Marriott family. But historically, Evergreen, myself, and my partner, we've about 50 years of experience, about 16 billion of various property types in two countries. Also experience taking a REIT from one property to about 80, selling it for 1.4 billion, and helping with that structure and sale. And then my partner also had a fully integrated real estate company where his investors were some major institutions including Apollo. From a multifamily component, we've been part of about 3,000 units, and then as I said, other various property types as well.
Darin: That's fantastic. I'd love to be a fly on the wall on some of those transactions that you've been involved in. So part of that goes to mindset, in terms of being able to be involved with these types of players. But before we get into that, maybe share a little bit. I want to try to get under the covers in terms of, how family offices think. What are they looking for in a partner? What are they looking for in an investment? And how do you bridge that divide?
DJ: There's a saying within the industry which is an old cliche, but they say, "When you've met one family office, you've met one family office." But the one thing that stays standard, and every family that I've worked for, they've said, "You have three responsibilities. One is don't lose money, don't lose money, don't lose money." And the average portfolio of a family, when you look at the overall portfolio, is about 7%. On the real estate side, it's about 12%.
The Challenges Faced by Family Offices
DJ: So if you just carve that off, but the biggest problem that families have is that 70% of families lose their wealth by the second generation. 90% lose their wealth by the third generation, which is significant. And these are families that are worth, on average, 250 million or more, over a billion, billions of dollars. And the average allocation actually is 22.5%, which goes to a real estate out of that whole portfolio.
So these families are looking for opportunities. It really depends on the type of family. They're much more like your retail investor because it is their own money. They may not have access to that type of money ever again. And so there's some that are looking strictly for income, some that are looking for growth, some that are looking at a combination. And of course, you have the great tax benefits that real estate offers. So I'm going to evangelist that real estate is the solution for wealthy families.
And that doesn't matter. Or just families in general. And the only difference is that you're adding a zero to that. Or a number of zeros to what the net worth of the family is, and it also has to do with the size of the properties many times. But many times too, they're investing into properties that somebody that might only be putting in 100,000 themselves in as well.
Darin: That's crazy. Of those stats, 70% lose their wealth in the second generation, and 90% in the third generation. So I'm sure that you have stats on why. So why do these families lose so much wealth in the second and third generations there?
Navigating Generational Wealth: Challenges and Opportunities for Family Offices
DJ: There are a couple of reasons. And a great example of what can happen is if you ever watch Succession. Succession is a fantastic show. In fact, you can see that one of the sons actually said, "Well, I'm going to buy this condo from my dad," and his stepmother was like, "Okay, 70 million bucks," he's like, "Done." Well, that's no appraisal, that's no nothing. So that one is a lack of education, and really understanding.
So education is a component. The second issue is, these aren't necessarily in order, but the second thing is that they didn't create the wealth, whereas the patriarch of the matriarch did. So they don't necessarily understand how to keep their wealth or create greater wealth. It goes along the lines of people that win the lottery. They all lose the money because they didn't know how they made it, right?
Darin: So I get that piece, but I guess I would think that the generation that built the wealth now has somebody like yourself that's helping them build.
DJ: Not necessarily.
Darin: And then the second generation, don't they use the same people?
DJ: So let's back up a little bit here too. Because 50%, let's say, of the younger family members, don't want to be involved. They're just like, "Send me a check." Sometimes there's like, "Hey, give me my portion, and then I'm going to do what I want to with it." Also, maybe that patriarch or matriarch never indoctrinated, or gave up control and helped the younger family know how to manage money and invest it.
Navigating the Complexities of Investments in Family Offices
DJ: And what's really interesting to me over all the years and all the families that I know or worked for is that they create their wealth. Let's say, in a business, they have quarterly meetings, they have goals, they have objectives, they have annual reviews. They know how they're going to allocate, they're going to hire the best people, et cetera. Well, when they get this wealth, then they have a windfall, 200 million, a billion dollars, whatever that number is.
Darin: On a sale of the business?
DJ: Yes. Let's remember they spent the last 40 years creating that wealth in chemicals, or maybe making tires, making automotive parts, maybe technology. They don't understand real estate, hedge funds, private equity, or venture capital. And there are people that, as you know, that just in real estate, they spend their whole career in real estate, but not just real estate. It might be multifamily, and it may not be just multifamily, but it might be mid-market or certain parts of the country.
So how can you expect somebody to understand all the intricacies of all these aspects. That's the first thing. So when you're making decisions, unfortunately, I've met a lot of families that will look at, for example, the deal before they look at the operator and the sponsor. Well, it doesn't matter how good a deal is if the operator or sponsor can't implement it. So that's another reason. Another thing too is that 95% of the time people fall into the family office space. That's what happened to me. I never planned, I never went looking for it, and it just happened.
Building Trust and Bridging Knowledge
DJ: And one of the reasons is because they have all this wealth, families are all about trust. So now I have all this tremendous wealth, who do I know that I trust? Well, I know my banker, I know my advisor, I know my attorney, my accountant, and maybe my next-door neighbor who used to run a business. Well, these people too, regardless of how intelligent they are, their pedigree, their experience, they're in the same boat. They don't understand real estate and hedge funds, venture capital, and private equity. And then there's subcategories of those as well.
So because of that, they don't also know where to go. And then you add on the fact that the majority of these families that created their wealth in business, don't abide by the same principles that got them there. So they don't have an investment policy statement, they don't have an investment committee, they haven't put governance in place, and family councils for making decisions. Or how to base that transition. They don't like to hire necessarily the best people. And so you're going to make more money in the private sector than you are working for a family.
And then secondly too, if it's a family member that comes in, they even make less than that industry person. So if it's real estate, that institutional person is going to be here financially, then you have the family office person, and then you have a family member. And they don't want to pay because they're like, "I'm not going to pay you because you're a family member, you should be helping the family out anyway." Even though they're spending the full amount of time.
Understanding the Complexities of Family Offices
DJ: So you have all these issues. Combine that with your typical family issues. If you have a brother, a sister, an uncle, an aunt, a father, a mother, everything's not perfect. There'll be a feud at some point in time, or disagreement or misunderstanding. Now add hundreds of millions of dollars to that.
And these are the things that people don't necessarily think. They're just like, "Write me a check. You have all this money, just write me a check and be on with it." Well, there's other issues they're dealing with that we can't even relate to. So do they find good advisors? Yes, many do find good advisors, but you'd be very surprised, I think, in a lot of ways.
Darin: I mean, you brought up a lot of things that I wasn't even thinking of. I mean, just the source of the money. There's so many different businesses that have been built, and then all of a sudden maybe they get to the age where they want to sell the business. They sell the business, they have this big windfall, and they form a family office. But as you said, they don't have experience in allocating to different asset classes and expertise in all the different areas. But in my mind, I just think the family office has big check-writing capabilities and lots of wealth. And you just assume that they have the education. But that's not the case.
DJ: And that's exactly how it happened to me. So as I said, I fell into the family office space, and I met with a very seasoned person at a conference I went to because I needed to understand.
Building Relationships in the World of Family Offices
DJ: And I said to her, "So what have you been working on?" She goes, "Well, we had 60 families in Israel." And I said, "What'd you talk about?" And she looked at me and she goes, "Oh, you know, hedge funds 101." And I'm thinking to myself, "Okay, maybe she doesn't know what she's talking about," because these people, just like you said, are very smart, talented, successful people. And you're telling me you're telling them hedge funds 101? Well, yes, that's the reality.
And the other thing too is that a lot of people think families are institutions. They're like the Blackstones of the world, the Goldman Sachs, they have all this money. And they're going to write a big check. The reality is that they are more like your typical private investor, a retail client that has maybe 500,000, a million dollars net worth. And the difference between the two is that on the institutional side, typically they're hired hands, they're investing money from pensions and everything else. There are zero emotions because it's not their own money
On the personal side, whether you're that retail client that's worth half a million, or you're a family that's worth half a billion, it's your personal money. You've worked hard to get there, you're not going to have another exit like that. I mean 99% of the time you never will ever again. And so it's an emotional decision. And if I don't really know, then I got to make good decisions. I still don't have that necessarily real understanding. And so because of that, they don't write checks right off the board. They're all about relationships.
Empowering Family Offices Through Relationships and Education
DJ: It is all about relationships. Because there's two things. If somebody comes to you, Darin, and they say, "Hey, nice to meet you. I got this deal going on. We need 10 million bucks." And you have it, you've got hundreds of millions of dollars, you're going to be like, "Okay." But if after six months, nine months, a year, and you're like, "Hey, we're working on a deal, you want to take a look at it?"
Which are you more apt to get serious about, somebody that just asks you today, or somebody that you've built a relationship with? They've listened to your podcast, they've watched your videos, they've gotten maybe a newsletter from you or phone calls, or you've talked to them. Where are they going to be more comfortable?
Darin: Absolutely. So, you created this family office for Institute, why did you create that, what's involved, and who does it serve?
DJ: The Family Office Real Estate Institute came by mistake.
Darin: Just like you get into the business of the family office.
DJ: That's right. It really did. And what happened was three months after I talked to that same person I told you that said, "Oh, you know, hedge funds 101," three months later, I'm like, "Okay, I get it now." I understand because of all the reasons I just told you. So I started off with a simple website that just told about market cycles and simple things. Then I wrote a book on family office real estate investing. Then I started doing podcasts, similar to what you're doing, interviewing experts, asking them what they think, et cetera.
Pioneering Family Offices Real Estate Education
DJ: And then I started the Family Office Real Estate Magazine, which is a quarterly publication we're going on, I think, our fifth year now. Started to speak at conferences everywhere as much as I could, writing articles for Forbes, writing articles for various magazines, and everything else. And then doing video interviews similar to what you're doing. Then started the largest family office real estate investing study actually in the world.
And then I had a consortium. And at the consortium, I brought in 22 families. I kicked out eight because nowadays there's a lot of people that say they're family offices, but they're not. It seems to be a big cliche now. And we had about 10 sponsors that were there. It was in Breckenridge, and we also brought in a professor to talk about cycles, and then went out to dinner at night, and went through deals in the day. And then on Friday at 11 o'clock, we finished and I booked us at the base of Breckenridge so people could go skiing together.
So it was super fun. But Glenn Mueller from the University of Denver said, "DJ, would you be interested in starting the Family Office Real Estate Institute at the University of Denver?" And I said, "Sure, let's explore this." Ended up, like many universities, just getting political, and we said we're just going to do it ourselves. So I took everything that I was doing and put it into the institute, but we also added our executive education program. So it's like any other at Harvard, Wharton, University of Chicago.
Understanding Family Offices and the Real Estate Solution
DJ: And in fact, we have professors from Harvard and Wharton, the University of Denver, the University of Chicago, University of Indiana. These are major professors, Peter Linneman, Glenn Mueller, Joe Pagliari, Head of Real Estate at the University of Chicago Business School, and my old professor from Harvard. And then we also have industry experts in the family office space. So we do that on campus, we also have online, we also have on demands where people just want to take one class, they can.
The magazine is in there, with videos, interviews, and the annual study. Glenn Mueller brought in his well-known quarterly market monitor, which tells us where we are in the cycle based on property types and location. And then we also have whitepapers, and we're starting to produce case studies. Eventually, we'll have a family office real estate index to monitor how families are investing. And then we're doing a consortium like I mentioned, and then we'll have a major conference every year at the University of Denver.
That is with, initially, it'll be 60 families, and we've got billionaires coming in, and other family members. And really it was created for family offices, multifamily offices, family members, and family office executives, but also industry professionals. And what's happened, and I mentioned this before about being an evangelist for this, speaking highly about this. Should we say, is that I believe, and there's even proof to it, that real estate can be that solution to help maintain a legacy and create and maintain generational wealth.
Knowledge and Strategies for Sustainable Wealth
Darin: Well, as you were saying all those different factors, what I was thinking was, "Look, DJ saw there was a problem. Family offices had a lot of wealth, but they didn't have the education. They didn't really know how to manage it." And so you provided a solution by helping educate not only the ones that created the wealth but also the family members that are involved.
You started looking at not only what investments should be involved, and how to look at those investments. But also just the intricacies of what happens with families that are wealthy. Some are interested in the business and some are not. And how do you manage through all that? And you provided a solution and education for that community of people.
DJ: Well, it's also one of the things we do at the executive education, and we have some of the best people that's come in and spoken. We have a couple of classes that might talk about governance, family councils, investment committees, and investment policy statements, and that's a small example. And that's for a couple of things, because it could be a family that created their wealth in real estate, and they want to understand. "Well, how do I make sure that I can transfer the business to my next family underling?"
Or maybe they don't want to, maybe they're like, "I'm out. Get rid of the properties, et cetera, make sure that we have a plan in place." And that's not only important for the families. And you brought this up too, you said, "Well, I didn't realize" something I said, "I didn't really realize that." Well, if you're going to work with a family, you need to understand that too.
The Three-Legged Stool in Family Offices
DJ: You need to understand what are some of the issues they're dealing with. I've got many examples where that wasn't understood, and it actually caused the problem for the families because they did trust that person or whatever. And these are things that need to be brought forward. And even families that go out and say, "I'm going to bring in other outside money," well, are they registered? Are they not? What could that do to the rest of their wealth? So there's a lot of variables that you have to think about, especially with the greater wealth that you have.
So that's what we're looking to solve and provide solutions, and once again, like you said, education. And then we also have the community side because families love talking to other families because they have issues that we can't understand. And I've tried to have people write articles for me. People either know the family office space, or they understand the real estate space. But I have yet to find somebody that really understands both. There are a few, but really both, to bring those together.
And so our value-add is that you've got somebody that's actually worked for families, you also have the other side where Glenn Mueller is the academic director. So now you have the education and academic side, and we both know real estate. And that's a three-legged stool that we happened to put together for this. A lot of it comes out, and I can tell you just by family sending me deals to look at. Indirectly I've saved them millions of dollars just by questions maybe they asked or things they needed to look at differently.
Exploring the Path to Family Offices
Darin: So on this show, the listeners are mainly high net-worth individuals that are passive investors, and also syndicators looking to scale. One of the ways to scale potentially is to work with family offices that have a larger check-writing capability. You mentioned building relationships. How do you suggest these syndicators start to, one, be introduced to some of these folks, and then, two, how to go about building those relationships?
DJ: So the biggest issue of working with families is to find out where they are. If you want to go to an institution like Blackstone or Goldman, you can just google it. And if you want to look for the people that invest the real estate, you can google it and you'll find out. You're not going to know about the Jones Family Office or where they created their wealth. So that's one of the most difficult things to do. You can find some at the various conferences that are around. And all you have to do is google "family office conference" and there's a number of them that are actually really good to go to.
But what's what happened with the institute is exactly, and we do have sponsors. People want to participate as sponsors because some are like, "Well, I have access to them." But you really need to understand, which is your question of how you work with families. And it's the videos like this, doing interviews with people, it's the video interviews, the podcasts, it's writing the articles. It's providing information for them to know who you are and what you do.
Unlocking Opportunities With Family Offices
DJ: It can be as simple as email drips where you set up emails to say, "Hey, this is what's going on in the current economy, this is the way we see it." That's a value-add.
Darin: So first you have to find out who they are and how to be in contact with them. And then you could do some of this education on it.
DJ: Well, you really should be doing this with anybody, quite honestly.
DJ: You should be doing everything that I spoke about anyway.
Darin: I think that a lot of syndicators do that with what we would classify as high-net-worth individuals. They're going to invest 50,000 to 250,000 types of investments. And they're staying in contact, doing newsletters, having educational components, and meetup groups, and all those things. But whether it's rightfully so or not, I led up with it at the beginning about mindset. I think there's a little bit of an intimidation factor with dealing with family offices that, "Oh, they've got so much more money, do they really want to work with me?" Which is a limiting belief, right?
DJ: So I know probably 500 families or more now. I have tracked, I think over the last eight years, I've met two jerks. Some of the best people are these people that are worth an extreme amount of money, and that's because they've got nothing to prove. They're just like, what I'm wearing today, I have jeans on, I've just got some slip-on shoes, I have a dress shirt and a jacket. This is standard. It's not a tie, it's not a full suit.
Discovering the Human Side of Wealth
DJ: And they are the best people. I can't tell you how awesome they are. You have to realize it's just like people that are stars and people that are out there all the time, they're just normal people. I mean, you go online and you look to say, where does this person live? Or Adam Sandler, who's worth all this money, and you see he just has a normal house, a normal kitchen, doing normal things. You look at it differently. Bill Gates is, I think, on a whole different level. But it's something you shouldn't, and it's still about relationships, and they're just people, and they're really good people.
Darin: They're just people.
DJ: Which goes, one thing too is when you say where to find them, if a family office is happy with you, and they like you, they will refer you to other families. So it could be referrals from accountants or attorneys, or it could be from another family.
I hate to say this, but at the end of the day, the fundamentals always remain the same, referrals and keeping top of mind. Those are the two fundamental things. It doesn't matter if you're raising money, if you're selling pens or paper, it still comes back to that.
Darin: I agree. Look, I've interviewed, not in the family office space. But a lot of real estate investors, quite frankly, they've built up enough wealth that they could be sitting on a beach. But they love what they do. And a lot of those people are so giving in terms of wanting to help the next guy.
DJ: That's right.
Building Trust and Unlocking Opportunities
Darin: And so what I'm hearing you say is it's really no different on the family office side, the people that have built the wealth. There's a lot of great people that want to help the next guy come up the ladder.
DJ: Well, and they also want people they can trust and that they feel comfortable investing with. No, you could meet somebody today that's very wealthy. It could take you three months, it could take you three years. Ot could take you five years for when they're ready, when they feel comfortable, et cetera. So it's very important to keep in touch with them, and follow up, and just say, "Okay, they said no on this deal, so I'm just going to move on." You don't want to do that.
But a couple of things, families might start with a $200,000 check or a $2 million check, but the next check could very well be 2 million or 10 million because they want to test. And that happens with your regular investors as well. If they're comfortable, they're going to tell other people. If they're comfortable, they're going to invest more. And so remember, these are not institutions.
That's the biggest thing, I think the big biggest misnomer. If you go online and you go to MetLife's real estate, there's probably going to be a one-pager that you can download or look at on their website. They're going to say, "We invest in industrial properties between 50 to 100 million in Denver and Salt Lake City and Dallas. We look for a 15% return." So you can call them and say, "Here's a deal."
Building Trust with Family Offices in the Real Estate Industry
DJ: And if it fits their box, they'll say, "I'll take a look at it." And once again, it's not their own money. Families are like every common day person, it's just adding zeros.
Darin: So what about, do family offices have gatekeepers? I would imagine that you call into corporate offices, you're calling on the Fortune 500. And you're going to have gatekeepers that are going to keep salespeople away from the executives until they can figure out a way to get in and show their value. And I would imagine that because there's more zeros involved that there's a little bit of, "Are they just interested in me for the money?"
DJ: So that happens a lot, especially when people are like, "I need 10 million," as we talked about. They think they're going to just write them a check. I can't tell you how many times I've been sent on LinkedIn and people have literally said that. And this is when I worked for a family, and I'm like, "No." Or, "Where's my checkbook, so we can write you money?"
There's five different types of real estate investors with families. The first one is the family that created their wealth in real estate. Everybody knows somebody like that. I mean, Trump's an example of a family. You look at other major families, that's where they made their money. The second are families like Bill Gates, Michael Bloomberg, a Michael Dell, who has a significant amount of money. But they hire people from these institutions like Carlisle, Goldman, and Blackstone. And that's who's making these decisions on behalf of the family.
From Direct Investments to Fund Diversification
DJ: Then you have a third type, which are families that will co-invest with sponsors, and they'll look for between five to seven that they can continue to invest in, in a property type that they do like. And incidentally, from our study for four years in a row, the largest allocation and the most interest of investment of over 70% every year is multifamily. But they'll invest, co-invest, they'll look for direct investment. 70% of families want to go direct.
You then have the fourth type, and those are families that will say, "I'm going to build out my own portfolio, and so I'm going to buy my own properties. Maybe I'll hire an internal property manager to oversee to make sure things are going well, but we own them." And then the fifth type are those that don't have the resources to do due diligence, they only go into funds, because it's easy, and it gives them diversification.
Now, at the other end of the spectrum, you do have families that are worth billions of dollars that go into funds. But that's because they have to get money out the door. So if you look at Bill Gates, Ross Perot, and Michael Bloomberg. The minimum check they're going to write is $20 million because they have so much money that they have to put out the door. Well, another alternative is going into funds because it gives them diversification, they don't have to do diligence on every single property that's available.
Establishing Direct Connections With Family Offices for Real Estate Success
DJ: And so back to your question, if it's the family that created the wealth and real estate, you could talk to them, that's not an issue. If you have a team in place, you're probably not going to talk to the patriarch, you're going to talk to that group. The family person that's investing in direct deals, you can talk directly with that person, not a problem. And it's not going to make a difference if the family just buys their own real estate properties. And then you also can talk to the other family. So I'd say 60, 70% of the time you can speak with the people at the top.
It's just a matter of picking up the phone, making the phone call. I remember one time, this was about 10, 15 years ago, I picked up the phone, I was in New York City, and I called. I think it's Kathy Huffington from Huffington Post. And she just picked up the phone. I don't know why I called her, I don't remember what it was, but she just picked up the phone, and I was like, "Holy cow." So, don't be afraid, these are regular people.
And I think that this is important to learn from families if you're a sponsor, or if you're an investor, a passive investor, the fundamentals are the same. Find somebody you like working with. If you like a property type because you understand it better, invest in that property type. If you had success with somebody, reinvest with them. Ask other people if you're looking to invest now in industrial, maybe you know some people that invest in industrial, well, who would they refer?
Balancing Preference and Relationship with Family Offices in Real Estate Deals
DJ: And then on the other side, back to the sponsor, ask if they know, "Do you know anybody else? We got to fill this up. Do you know of anybody else that might have an interest?" I think that's the biggest hurdle that a lot of sponsors have, and you just need to ask.
Darin: That's perfect. What about, because they're writing larger checks, are the family offices typically looking to get preferential treatment into a deal? Say pref equity type of a relationship versus coming in at the pari passu with other limited partners?
DJ: It depends on the family. It depends on how big the check is. Now, we have a family office real estate consortium that we invest on behalf of families, but we invest in operators. So we don't deal with the day-to-day, we invest into the sponsors. Any time that somebody invests with us, my partner's like, "Look, if they want to negotiate because of the size check, we should." My belief is, "No, you're going to pay the same thing everybody else is." You can make a case to say, "Well, if they write a $10 million check, and everybody's writing a 500,000, million dollars, $2 million check, that they have that type of leverage."
But I think it depends on if you're comfortable and if you want that money or you want that relationship. You have to feel that out because they may want some decision-making capabilities, they may want some controls. Now that's where a large family can be like an institution if they have the level of sophistication. They have the ability to step in and replace you as an operator with somebody else.
Real Estate Cycles and Promising Asset Classes
DJ: Then they may try to negotiate certain terms and controls, which is what an institution will do when they're bringing in 90% of the money.
Darin: That makes sense. So you mentioned that you also looked at cycles in the real estate cycle. So we just had a huge increase in interest rates, can you talk about where you think real estate is in the cycle? And then in real estate, there's a lot of different asset classes. This show is mainly focused on multifamily, but there are a lot of other asset classes. There are office, retail, self-storage, RV parks, mobile home parks, and whatnot. So what do you like in today's environment? So talk about the cycles, and then what do you like in today's environment?
DJ: For the last three, four years, I've gone on record at conferences, on interviews like this, where I'm like, "We're not going to see a recession, on the real estate side." It was '27, '28, I say '28, '29 now.
DJ: We were in a black hole with Covid, so it pushed us back a year. And I say this for a couple of reasons. When you look at the four phases, this comes directly from Glenn Mueller. With the Mueller Market Monitor, you have phase one your recovery phase. Phase two's your expansion, you then have hyper supply and recession. Well, if you look at rents that are rapidly going toward new construction levels, high rent growth which is happening in some cities, et cetera. But you don't have necessarily rent growth that's declining. Now when you look at multifamily, there's still a huge demand for another five years.
Exploring Opportunities in Housing for Family Offices
DJ: And because you have the cost of housing here in Denver, there's a shortage of housing. People are already saying it's too expensive to move here, but where are people moving? From California, this is not expensive for them to come here, or New York, because you have cost of living, quality of life, you have jobs. And when you have that, people are going to move to those areas. With the housing on the apartment side, if there's no housing to buy, and it's too expensive to buy. You have the younger generation, which is just a huge amount of debt because of college, well, they can't afford to buy.
So you have this demand. Now, one of the places that I've been saying for a long time where you can shoot the gap is senior housing. My parents went to sell their house after 40 years, they have so much stuff. Do you think they're going to want to move again? They're not going to. And if they go into an apartment, then they're not moving. They're getting social security, and a pension, or whatever, so you know it's sticky money. And that age demographic continues to grow. So we're not below inflation. We don't have negative rent growth.
When you look at the history of what we've done, you can go back 250 years in the US, the UK, and Australia, and real estate runs in 18-year cycles. And the issue you have is, we do the same thing over and over again. Well, first off, we have too much building, and then we come out of it.
Meeting the Demand Gap Through Family Offices
DJ: Banks are not necessarily wanting to lend because they're worried, people necessarily aren't building because they're like, "We've got too much inventory. What are we going to do?" That starts burning off, and then all of a sudden banks start loosening lending. You get more development that's happening, people are feeling better so they're investing more. All of a sudden now from a 65% loan to value going up to a 75% loan to value, and then developers make money by developing. And they continue to develop, and banks are lending, and people are investing. We have too much supply.
And then the whole thing, we go into a recession. We've got too much supply, and we're hanging out, and banks are like, "Oh my gosh, I'm worried." They stop lending, they pull back. And then the whole thing starts all over again, and it happens over and over and over again. So we still have a huge demand. You look at property types too, industrial cold storage. There's 200 million needed globally, and there's only 50 million in the pipeline. And this was really accentuated by COVID, and what happened with people ordering stuff.
You look at workforce housing, true workforce housing where the people are working 15 to $25 an hour jobs and they're going through, and they need a place to stay. There's an eight million deficit of units that are needed. If you look at Houston alone, there's a 200,000 deficit, which is a $48 billion opportunity. If you build 2,000 units, which is one of the things we're doing, in five years, with no growth, we're only going to take care of 1% of that demand. These are continuing.
Assessing Demand, Supply, and the Role of Family Offices
DJ: People still need places to live. They still have issues. And so it's just a matter of what's going to happen. You mentioned rising interest rates, well, and loans came down, loan to values came down, so that's going to slow things up. And it is going to cause a lot of stress and issues in the multifamily market for sure. However, there's still that demand that's there.
Darin: It's really interesting. So if I heard you correctly, the two things that you look for before going into a real estate recession would be negative rent growth and too much supply.
Darin: And what you're saying is we don't have that. Rent growth has slowed, but it's not going negative. And we definitely don't have too much supply. We do have a lot of units that are in the development stage that need to be absorbed over the next year or two, but there's a huge deficit. So there's the demand for those units coming available.
DJ: Yes, and also a big question that you have to ask too is, is it cheaper to build or is it cheaper to buy? Because if it's cheaper to buy, there's no reason to build. If it's cheaper to build, then there's no reason to buy existing. So, that's another factor as well.
Darin: And where do you say we're at right now, cheaper to build or cheaper to buy?
DJ: Well, it depends on the market, because you do have that locality perspective. that's the biggest thing in some markets, you can build less currently, but you can still build less.
Identifying Market Demands
Darin: So let me ask another question. So that's the real estate recession. There's so much talk about, we're going to have a major recession coming. It was talked about that it was going to come at the beginning of this year. Now it's talked about that it's going to be coming at the end of this year. So can you have an economic recession without having a real estate recession?
DJ: I'll tell you, I'm not one of those people who are going to say, "Oh, you know, fake news, all that other stuff," but you do have conflicting messages. If you look at it, we have the best job growth, the lowest unemployment rates are one thing that you're hearing. But then have these interest rates, because they were trying to slow everything up. But a recession, the definition of a recession is two months of low GDP. Two months is nothing. It really isn't.
So I think that back to your question, stocks run on a different cycle as well, it usually all comes together. And I think that there's families have been fearing recessions for three years now. There's been conversations about recessions for so long. But it all comes back to the fundamentals.
Is there demand? Everybody knows of a piece of real estate in their market that they could go to and say, "Oh my gosh, we really need a hotel here." Or, "That's a great location for a property." Or, "There needs to be an apartment building here because there's nowhere to go." And you can make money in any market, upmarket, downmarket.
Uncovering Profitable Opportunities for Family Offices in Real Estate
DJ: So I think that, as long as you stay true to the fundamentals of a deal, looking at the locations, and especially if you really dig into market demand analysis. You truly can quantify where there's a need for an apartment or there's going to be oversupply.
Darin: So I'm actually surprised at your response because before we hit record, DJ was telling me, "Hey, I don't have the same perspective that a lot of people have." And so I was thinking you were going to say you're not bullish on multifamily.
DJ: Well, no, here's the thing. We know that there's a demand, but what I also know is that if you couldn't make money, and you were an apartment investor. Then you shouldn't even be in real estate because anybody could have made money since 2012 by buying apartments. And in fact, everybody goes to the money, and apartments made a lot of people money. And we haven't bought anything in apartments for three years or so.
If somebody comes to me with a development deal, or they come to me with an existing property, I'm like, "Well, wait a second, why?" Because I believe in, one of my professors said one time, "You buy at a high cap, you sell at a low cap." So if somebody brings me a five-cap deal, or a four-and-a-half-cap apartment deal when I can invest into this modular for rent for an 11-cap or industrial cold storage for an eight-cap. Why would I want to buy at a four-and-a-half cap?
Navigating Cap Rates and Loan Challenges
DJ: You then also have the issue where a lot of people would say, "Oh, we're buying at a five cap, and we're going to sell it at a four-and-a-half cap." Now, always, when we underwrite and we stress test the deal, we always add 20 bips, like an institution, for every year of hold. So if they say they're going to sell it at four and a half cap, we're going to say, "Well, you're buying at five, let's take 20 basis points over five years. What happens if you sell it to six?" So you have all these people that are doing interest only at 4.5%. Cap rates, what's happened to cap rates? Have they gone up or down?
Darin: They're going up now, with interest rates.
DJ: So they're going up, which means the value's going to come down. So you have interest only, and you're about to lock into a new loan. Let's say you can get a loan for five and a quarter through Fannie or Freddie, and you bought it at a five cap, are you negative or are you positive?
Darin: You've got a negative spread against your loan.
DJ: You have negative. So if they have a negative, what's going to happen? Are they going to be able to continue to make those payments? They're going to have problems.
Darin: It all depends on the business plan and how much value-add they're going to.
DJ: Yes, but here's the thing. We're expecting a growth rate of 10%, we're expecting an occupancy rate of 95%. And so you have all these people and you said how they planned.
Seizing Opportunities and Safeguarding Investments
DJ: Well, a lot of people that have gotten into this space over the last 10 years, they've never been through a recession, they've never been through a downturn. Everything's been pie in the sky, they've been great, so they don't necessarily know how to protect their downside. So because of that, they were interest only, they're expecting to come out of four and a half percent interest rate for permanent debt. It's now at six and a quarter. Your numbers are blown. And so because of that, that's going to create opportunity.
So I'm bullish on multifamily because of the demand, but I'm equally bullish on the opportunities that'll be coming up. And through the institute, somebody was sitting on the board, and also I was talking to Glenn the other day because we know the head of real estate at the Fed. What he was saying is that banks could shut off the spigot because they still remember the recession.
Well, if that happens, not only are you paying more for interest. But you're going to have a lower loan-to-value, which was never anticipated in any of these projections by these apartment people saying, "Oh, we'll be at 75%." Well, it's 65, guess what? You need to come up with more cash for that. If you're going to do that and you have a higher interest rate, you need to make your payments now. And rent growth maybe isn't happening at the same rate. So all it can do is cause problems.
Anticipating Debt Challenges
DJ: And in fact, I've heard that there are people, similar to what I just said. Head of the Fed for real estate, that think that we're going to see a worse situation than the recession when it comes to debt. Now, do I think that's the case? Probably not. But when you look at the forward yield curve, I mean, we've been modeling out a deal we're working on it nine and a quarter interest rate, and does the deal still work or not?
And that just comes from the experience because we've been through recessions. We've been through COVID, been through all of that stuff. So that's where we come from. But these are the things that people don't realize that they can't make their payments. What are you going to do?
Darin: So there's two factors. One is, can't make your payment, just pure cash flow. And the second piece is the duration of the loan.
DJ: Or just the assumptions. The other piece is the assumptions that were made because they're like, "We got interest only at three and a quarter, we're going to refinance at four and a half." Well, somebody has to refinance right now to get a permanent because they built the property, they're not coming out at a four-and-a-half percent interest rate. They're getting five and a half percent, five and a quarter, or six, whatever the number is. Their numbers are all whacked out.
Darin: So that was the third piece is, interest only, now all of a sudden in year four, having to pay P&I and it impacts negative cash flow.
Ensuring Resilience in Real Estate Investments
DJ: And if they purchased at a four and a half, five cap, not only are they getting less loan, now they have a permanent loan, which is a bigger payment. And they have negative leverage, and that is going to cause problems.
Darin: But if somebody has long-term fixed, and they have a long duration, seven years or 10 years, they most likely can ride it out as long as the cash flow is there.
DJ: Look, if you have positive cash flow, it doesn't matter if the value goes down to zero, it doesn't. As long as you can wait it out, you're fine. It's not going anywhere.
Darin: Positive cashflow is the key.
DJ: Positive cash flow is the key. And we do what's called stress testing, so we'll say, "Well, let's assume that you didn't sell it at a five cap and you sold it at a six cap. What happens if when they refinance, they have to pay six and a half instead of four and a half with what they projected? What happens if they only can get a 65% loan to value rather than the estimated 75%?" So you just start putting these different variables in there to see what happens. And then you need to ask yourself as an investor, "In the worst-case scenario, am I still okay? And am I happy with that return?"
Darin: That's so true. So now I think I saw that you are going to Harvard for some kind of new role.
Darin: Talk to that. What's next on the plate for you?
Building Networks and Supporting Education
DJ: So I was asked to come in and be the President of the Harvard Real Estate Alumni organization. I actually was one of the three founders back in 2008 and asked to come back in. And so that's created for alumni that have an interest in real estate, and so we're putting together some happy hours throughout the world. Also, we'll have some events where we bring in a speaker or something like that, we may put together an annual conference.
And it's really to support alumni that have an interest in the various schools at the university. And we also have a subgroup that they focus on providing monies to students. Whether it's graduate students, doing their dissertations, or want to go to events for different types of competitions. So that recently came back, a couple of months ago, and so to keep me busy outside of Evergreen, which is my first area of commitment, and the institute, now I've thrown that on as well.
Darin: That's awesome. Well, I really appreciate you coming on the show. If people want to get to know you better, what's the best way for them to learn more about you?
DJ: So they can go to djvankeuren.com, and there they can get some more information about myself. Also, there should be an email on there where they can email me if they want to get in contact with me as well. And that's probably the best way to do that.
Darin: Fantastic. And then who is the best candidate for you to grow your business? If they are listening? Who would you want to talk to if they were listening today?
Education for Investors and Family Offices
DJ: There's two, actually. One are sponsors that are looking for investment partners because we're constantly looking for opportunities. Right now we've been focused on industrial cold storage, industrial small bay, and modular for rent. That's where our current focus has been. Secondly, we're about to roll out a proprietary real estate fund structure that doesn't exist in the market. So if people have a 1031 exchange coming up, then you're definitely going to want to learn more about that because it'll outperform anything you see in the market.
And then third would be people that might have an interest in investing next to families, some of the very well-known wealthy families. And then fourth, people that want additional family office real estate education, and they can just go to fore.institute, not .com, but .institute. So those would be the areas and there's a lot of great education on there as well. But first and foremost, I think that investors and staff need to talk to you about the great things you're doing and that you're providing.
Darin: I appreciate that. I appreciate you educating me because this is a whole new land of opportunity and a different space. And it seems like it really has unique features that have to be considered. And it's interesting how you just fell into space and you became an expert. I appreciate you taking the time, to educate myself, and also the listeners. Listeners. I hope that you enjoyed that one. Until next week, signing off.