In a real estate market marked by uncertainty, can a multi-asset Opportunity Zone fund strategy offer investors a solution for navigating challenging market dynamics?

Chris Loeffler, CEO at Caliber, joins the show to discuss the impact of interest rate changes on real estate investments, the resurgence of hospitality, and evolving multi-asset OZ fund strategies.

Episode Highlights

• The evolution of Caliber from a lifestyle business to a scaled real estate investment platform that seeks to become the Blackstone of middle-market real estate and private lending.
• Some of the benefits of investing in a diversified multi-asset Opportunity Zone fund, compared with single-asset syndications.
• The shift in Opportunity Zone strategy from development to distressed assets.
• The decision to take Caliber public, and the impact that being a publicly traded company has had on its investors.
• Opportunities in the hospitality sector, due to reduced supply in the market following the COVID pandemic.
• Identifying opportunities in challenging market environments, and the importance of forward-looking strategies vs. trend following.

Guest: Chris Loeffler, Caliber

• Chris Loeffler on LinkedIn | Email Chris: [email protected]
• Caliber
• Caliber Funds

About The Opportunity Zones Podcast

Hosted by OpportunityDb founder Jimmy Atkinson, The Opportunity Zones Podcast features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in the Opportunity Zones industry.

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Show Transcript

Chris: The closer you are to the ground, the more likely you’re gonna see the best opportunities, and by the time everybody kind of gets it that it’s a good time to invest in real estate, that’s usually when the opportunity is about to dry up. And so, I’m seeing that happen now. I’m seeing that investors, for good reasons that I’m just gonna do, I’m gonna sit in money markets, I’m gonna sit in private lending, I’m gonna do preferred equity. I’ll make 10% to 12% on my money, take less risk, and just see what happens. That’s where all the money has gone in the last year and a half. And because of that, there’s no common equity, nobody willing to just buy a piece of property with regular equity, left in the market, or very little. And so, that’s the time, as an investor, you get it. Because if you’re the only common equity in town, that means you can do the deals at the best possible price.

Jimmy: Welcome to episode number 300 of the “Opportunity Zones Podcast.” I’m Jimmy Atkinson, and joining me today from his office in Scottsdale, Arizona is the CEO of Caliber, and longtime friend of OpportunityDb, Chris Loeffler. Chris, great to see you. Welcome to the show. How you doing?

Chris: Doing great. Honored to be here on episode 300. That’s a huge accomplishment, Jimmy. So, congratulations to you and the team, and thanks for your leadership in the space.

Jimmy: Thanks, Chris. Great to have you here, as I mentioned, and it’s an honor to have you as the guest for episode number 300. You and I go way back in the OZ industry. We met early on. And so, before we dive in, my audience of Opportunity Zone investors and advisors, they’re likely already somewhat familiar with Caliber, or they should be, at least. Your firm has been one of the leading investment firms in the Opportunity Zone space since 2018, and you’ve raised over $200 million in OZ equity across your two funds, which we’ll discuss in a moment. But just in case any of my listeners are hearing the name Caliber for the first time, can you tell them, what is Caliber, and what makes your firm unique?

Chris: Yeah. Caliber, at the end of the day, is an investor, manager, and developer of real estate. We’re heavily focused in Arizona, Colorado, and Texas, where we kind of call our backyard, but from the hospitality standpoint, we actually invest across the country and we are an expert at doing the types of projects that many investors can’t access. Maybe it’s because the project’s too big for their size, or too complex for them to execute on. And we think that gives us a competitive advantage because we can buy projects, build value in them over time, and hopefully harvest that value for a nice profit, and of course, in the world of Opportunity Zone investing, we were one of the first investors in the country to open a fund. Started in 2018. We were, I think, one of the first to successfully raise a multi-asset fund. That first fund is now deployed, and Fund II is now raising money. So, it’s been a good journey to apply the Caliber business model, which is a 15-year-old company that’s been doing real estate investing for a long time, to the Opportunity Zone space, where you’re matchmaking the strategy of building a lot of value into the real estate over time, to get a tax benefit, with what Caliber has done historically.

Jimmy: And so, there’s a lot of different ways to start investing in Opportunity Zones as an individual investor, or as an independent RIA that’s placing investor dollars. You can start your own fund, to do your own deals, right? You can also come into a professionally-managed deal, as an LP, just a single-asset deal. But what you guys are doing, it’s not too uncommon, but it is a distinct type of OZ strategy. It’s a multi-asset fund, where not all of your deals are identified, I don’t believe, in your current fund that you’re raising for, but you have an investment thesis, and you have an overall strategy. And when someone invests into your Qualified Opportunity Zone Fund II, they’re investing in your strategy, and in your team, and in your leadership, just as much as they’re investing in the underlying assets. What is your Opportunity Zone strategy, exactly? What’s that investment thesis, and where are you investing?

Chris: Yeah. You know, you’re right. They’re relying on us to be their owner for hire. So, you’re putting your capital in the fund, and we’re going out there and finding the best possible projects to invest in with that capital, over the period of time that the fund is operating. I think the benefits of a multi-asset fund is that it takes time, in our space, to develop good deal flow, and get off-market opportunities to buy assets at a great price. And once you develop that deal flow, you wanna consistently invest into it, and into those different silos of opportunity. So, in a fund format, you can do that. You can deploy capital, and then you can deploy more capital, and you can kind of follow on your bets. It’s actually one of the ways in the venture world that people make the most money, is that they follow on on the investments that do well.

Caliber has the ability to do that vis-a-vis the real estate fund. It also creates better ability within the fund to balance capital, to attract cheaper debt, because typically, you’re a better sponsor for debt, so you’re getting hopefully better pricing. And it also allows us to cycle cap. So, if I buy an asset, build value into it over a three to five-year period, I can sell it for a profit and then reinvest the proceeds and compound the gain for the investor. And then, last but not least, and certainly not least, in a fund format, we anticipate that you’ll have a lot better exit strategy opportunities, whether that’s through a portfolio sale, or through a contribution of the portfolio to an UpREIT, which allows you to take the portfolio public, hopefully maximize your valuation, and then time your exit based on what each individual investor wants to do.

So, I think the fund format is elegant. It also spreads the cost of operating the fund across a larger pool of assets. And I think, in my humble opinion, of course, because I’m a provider of a fund, I think it’s the best way to invest in Opportunity Zone assets. And so, that’s kind of the fun piece. On the strategy side, Fund I’s strategy was more of what I would call a traditional Opportunity Zone strategy. When the program first came out, made a lot of sense to build new assets and develop projects, because we were in a development cycle. And interest rates were low, we could build things for a reasonable price, sell them with a nice spread on profit, or hold them with a nice spread between the cost of the building and the value in the market. Fast-forward till today, real estate valuations are down, in some cases significantly down, depending on the asset class. Even in the great markets like Arizona, Colorado, and Texas that we invest in, real estate values are down.

On top of that, you’ve got build costs are still relatively high. And materials costs are somewhat modulated down. If you look at a materials chart, we’re basically back on the long-term trendline for materials cost, slightly down from the highest material prices in the COVID era. But labor cost isn’t really down. And so, if you wanna build something new, there’s not a lot of valuation in that unless you have a very specific set of circumstances, like you’ve got a tenant in tow that you can kind of justify the valuation. There’s lots of other reasons for that.

The strategy today that makes the most sense is to buy existing projects that need to be finished, as an example, maybe where you can come in at a discount or a good valuation, and finish the project. And it’s really a distressed market, in my humble opinion. And so, that puts us in a position where if you don’t have the ability as an investor or a developer to move from a purely ground-up development strategy to a buy-existing-assets-and-do-workouts strategy, then you’re gonna have a harder time deploying capital into projects that could be profitable in the near term.

A lot of real estate projects can be profitable over the long term, if you wait a long enough period of time. But for Opportunity Zones to make sense for most investors, you need to be buying in a nice discount, and hopefully harvesting that discount when you sell.

Jimmy: Good. So, Fund I, we were in a development cycle. You’re in Fund II right now, a few years later. Here we are sitting here in March of 2024 when we’re recording this, and definitely not a development cycle anymore. You said that there’s a lot of distressed assets. It’s a distressed cycle, I guess you might call it? How would you define that more…

Chris: Yeah. It’s kind of like a tale of multiple markets. It’s a very market-specific phenomenon, and asset class-specific phenomenon. So, if the first fund was primarily opportunistic development, opportunistic development is still sitting in the Fund II strategy, but that’s going to be for a specific product type, in a specific market where there is a supply and demand imbalance. For example, we’ll talk about hospitality. There’s been a major, actually, a reduction of hospitality supply, due to the fact that COVID happened, and people actually converted hotels to other uses. So, there is some, that development reason, a reason to develop new assets, and we’re doing that, strategically.

On the other side, the market that didn’t exist for us, in the era of, kind of, the 2018 to 2020 era, pre-COVID, that now exists because of the COVID mess and the interest rates, is the distress market. And the distress market is, you’ve got projects that were either overbuilt or overpaid, the debt is too high, the debt cost has more than doubled, and that’s creating a situation where the asset needs to be sold potentially for less than what it was built for. And in that scenario, you have to do things like adaptive reuse, buying an office building for a significant discount to its build cost, and turning it into apartments, or turning it into a healthcare facility. That’s gonna be a phenomenal strategy for Fund II, and for the market that we’re in today. In addition to that, you might have a development project that stalls or fails, and the bank takes over the project, and then you need to come in as a new sponsor, finish the development, finish the plans, but come in at a basis that’s profitable. I think those two strategies, adaptive reuse and fixing broken developments, is gonna be a big component of this fund.

Jimmy: Good. Well, I wanna talk more about Fund II in a moment with you. And I understand there’s a big pickleball deal in there as well. Don’t let me end this interview before we talk pickleball, Chris.

Chris: Pickleball’s amazing.

Jimmy: But I want you to give me the high-level overview of Fund I. It’s, you referred to it as opportunistic development, a build-develop strategy, because we were in a development cycle when you were raising capital and acquiring assets for that fund. But what’s in it, exactly? How many assets are in it? What stage of development are they all in, roughly, and geographic locations? Is Arizona primarily, I think?

Chris: Yeah. Primarily Arizona, and a little bit in Texas. That fund invested in roughly 18 assets, in one operating company. The operating company was revalued at a 3X increase in value from our basis recently, and just won a contract for a significant amount of money, in the tens of millions, potentially hundreds of millions of dollars, so that operating company investment will be, hopefully, quite successful for Fund I investors. The remaining investments are all in real estate. The majority of them are in Arizona. And one of them is in downtown Bryan/College Station, so, it’s the kind of sister city to College Station, where Texas A&M University is. We’re basically transforming their downtown.

Similar to that, in Mesa, Arizona, the first fund invested in approximately 10 buildings in downtown Mesa, which ends up being about 30% of the downtown. Mesa, Arizona is the third-largest city in Phoenix, right in the center of the city. And that was alongside the opening of a new ASU college campus. And so, the thesis there is 10-year investment, transform the downtown, bring in new tenants, we’ve re-tenanted most of those buildings at this point in time, and really create a fundamental change in the real estate versus what we paid for it. And then we have some workforce housing in the first fund. Also in Mesa, we have an affordable housing project in the first fund. And then we have some entertainment and mixed-use, kind of, sports and entertainment investment as well, in land development, and all of those actually are doing quite well.

We even built a school and a behavioral health hospital. So, quite eclectic, grouping, but all of them have the same theme. And the theme is, Caliber knew about something going on in the market that created an opportunity for us to do a profitable real estate deal. We had, leveraged that knowledge or information, we acquired the property or the project, typically off-market, at a good price, we’ve built value into the project, and now these projects are all starting to produce rents, and going along the path of what you would want in our first fund. So, the first fund’s doing quite well. We feel very fortunate with that. In the second fund, you know, from the perspective of where we are in the market today, provides a potential higher upside for investors because I can buy assets at a deep discount, and that didn’t exist in fund one. We bought assets at some discount, with some strategic advantage, but Fund II now has a new window, in terms of buying real estate at a discount to their replacement cost and inherent value.

Jimmy: And yeah, that Fund I, you mentioned a eclectic mix of deals. It is pretty diversified across a wide variety of different property types. Somewhat concentrated, geographically speaking, but yeah, you’re not gonna, I don’t know if you’re gonna find a more eclectic mix of different real estate property types than what you’ve got going on in Fund I.

So, let’s talk a little bit more about Fund II. You’re buying some distressed deals. You’re buying at a steep discount. I know there’s a pickleball deal in there. Tell us a little more about pickleball, and what else is going into Fund II. And I also wanna know, just at a high level, how many of the assets have you identified so far, and how many do you anticipate you’ll still add that have not been identified yet?

Chris: Yeah. So, going back to the Fund I, the fund, kind of, concept of why investing via a fund is good, is that, not surprisingly, the first fund, we raised $180 million in that fund, deployed it into all these projects. That creates a lot of momentum in the market that brings us other opportunities. So, as Fund I has gone out and fully deployed its capital, now Fund II gets to pick up that deal flow, and invest alongside Fund I, and draft off of the success of the first fund. And so, as an example, Fund I bought an 80-acre piece of land, vis-a-vis in a land lease in Scottsdale, Arizona, that is in an Opportunity Zone. We bought it for about $11 a square foot. The land’s worth between $20 and $25 a square foot. So now, Fund I is contributing that land for vertical development in the projects that Fund II can invest in, and co-invest alongside the first fund. As an example, the pickleball deal.

So, pickleball. It’s, Pure Pickleball is the name of the project. It is designed to be the most, sort of, cutting-edge pickleball facility in the country. It’s going to house USA Pickleball, which is the national team, and the national, kind of, footprint for pickleball competition, as well as we hope or expect that it’ll house the Phoenix, the Arizona State professional team. It’s designed to be a membership facility, so, nice, distributed rents, across a large group of people. And assuming the facility does what we think it will do, it gives us a prototype to build these facilities across the next 20 or 30 major markets in the country. So, think of it as a membership-based club, kind of like a Topgolf rollout, but more similar to a higher-end gym-type facility. Phenomenal for Opportunity Zone. These are long-term investments, in high-quality, basically industrial buildings, occupied by a great tenant. And so we’re very excited about that, and the pickleball hype has been amazing. Everybody is interested in pickleball, they love the sport, they want to invest, so that’s been kind of cool.

Jimmy: You’re trying to invest in the long-term growth of a sport that’s experienced a huge level of growth over the past two or three years, I would say, right?

Chris: Yeah, you know what got me in? I did one class. Now I think I’m an expert, but I’m not. I did one class. It was fun. And it was a class where I was there, there were people half my age, there were people twice my age, and everybody was having a great time, 10 minutes into the class, the first time you tried it. And that same week, these guys approached us with the investment, and said, “Hey, it’s gonna be the next great thing. You should really invest in it.” Said, “Okay. Sure, maybe, but if we’re gonna take this risk, we may as well invest in both the real estate and the operating company,” and that’s operating company number two for Caliber to invest in. That’s in fund number two, so you own a piece of the operating business.

But the second thing I noticed was, you go on TikTok or you go on Instagram or something like that, watch videos of people watching professional pickleball. They’re having a great time. It’s a relatively wealthy crowd. They’re enjoying themselves. The looks on their faces is totally different than what you’d see at, like, a baseball game. And the engagement is so high in the community. And so, we wanted to be a part of that, we wanted to support that, and we had the perfect location for the first Pure Pickleball, which was, like, right in the heart of Scottsdale.

Jimmy: It’s incredible. I don’t think pickleball is gonna be an Olympic sport for this upcoming Olympics in Paris, but I don’t know, fingers crossed. Maybe they add it to the LA Olympics in 2028, right?

Chris: Yeah. We expect nationals to be at Pure Pickleball, in Scottsdale. So, it’ll be pretty cool. And then, you asked about the other assets in the fund. We have some investment in the downtown Mesa portfolio. We’re building 90 units of affordable housing on a half-acre parcel, over six stories, on that. And then we are doing a second phase in downtown, Bryan, which is a about 100-unit apartment complex, also kind of workforce/market rate housing. And then we have a series of hotel investments planned, and a series of behavioral health investments planned. And so, kind of drafting off the first fund, which built a DoubleTree hotel, in Fund I, and we did a behavioral health investment in Fund I. Now we’re getting into a series of those investments, which we think is, have all been successful so far.

Jimmy: Good. I wanna talk about hotels and hospitality in a few minutes, because it might be poised for a pretty impressive turnaround since the pandemic. We’ll touch on that in a minute. But I understand that you guys went public last year. You’re a publicly-traded company now. You’re on the NASDAQ. Talk to me more about that, and what went into your decision to want to go public? What were you seeing in the market that made you wanna do that, and what changes have occurred since going public?

Chris: Yeah, I think… I’ll talk to my colleagues in the real estate investment industry first, and then I’ll talk to investors second. So, for those of you who are in the real estate GP business, or real estate asset management business, fund managers, they call us all these different names, but in the reality is, is it’s let’s just call it a general partner, or a GP. In this space, as you guys know, it starts as a lifestyle business. You can do quite well in the lifestyle format, with a small group of investors doing one or two deals every year. And that’s a great existence. And for those of us who did that, I did that 15 years ago, when we first started the business, it was a great way to build a company. At some point in time along that journey, you have a decision to make, is, am I gonna build a real business with, like, lots of employees, and, you know, be able to serve many investors, or am I gonna stay in this lifestyle company format?

And, for Caliber, that was always never much of a choice. We always just decided we wanna build a real business in this space. We wanna grow and scale a platform that can meet investors once, build trust with them, invest with them year after year, decade after decade, and hopefully generation after generation. So, we see an opportunity in the real estate GP space for, like, a middle-market Blackstone, if Blackstone only did real estate and private lending, where the fund sizes are a couple hundred million dollars in size, the investments are $20 to $50-million projects, and we kind of become regional experts in scale, in a thoughtful way, over time.

At the time, when I was building my business, in the first five years or so, there was nobody that I could partner with buy me out, anything like that. And we also see an opportunity, so sort of answers the question that Jimmy’s asking, which is, “Why go public?” We have a public platform, with public stock that’s tradable, that actually creates an opportunity for liquidity, we think that there’s a lot of GPs out there that would wanna sell without selling. So, sell to Caliber, become part of the platform, become our regional expert or regional president, or maybe you’re an expert in value-added multifamily, or you’re an expert in a particular asset class, and lead that asset class on behalf of Caliber, but be part of a bigger whole.

So, solve the problem of creating an institutional investment management platform, with an entrepreneurial deal and execution component to it. We think that’s the way to go. And from a shareholder standpoint, investors invest in our funds, they invest in our real estate strategies, but they never really had an opportunity to invest in our operating business. There’s a benefit to that. There’s some upside to that that’s different than a real estate deal. And, in addition to that, we never were able to take capital from anybody other than an accredited investor. So, for the first time in the history of the company, anybody can buy our stock, and participate in Caliber’s story.

And I think that there’s two components to that story that matter right now. One is, there is an opportunity in the market, long-term opportunity, to consistently provide real estate investment opportunities as a stable partner for investors, and that is kind of the shift from the 60/40 model of stocks and bonds to what we call the 40/30/30 now, where people wanna put 40% of their money in stocks and 30% of their money in bonds and 30% of their money in alternatives. Best, most successful alternatives we think are real estate, and so we think there’s a long-term opportunity to provide real estate investments to investors, and that platform can grow over time. So, that’s opportunity A. Opportunity B is, we think there’s a lot of distress in the market. We think there’s a lot of real estate projects that are gonna need help, rescue capital, GPs that need help, etc. And we think that Caliber presents an opportunity to take advantage of that market right now.

So, those are the two components, both on the GP side and the LP side. Ultimately, what I wanna do, I wanna build a great business, and I wanna own it for a long time. And I wanna be a part of that with a lot of shareholders that benefit along the way. So, we think that this is the best way to do it.

Jimmy: Well, congrats to you on getting it done, and IPO’ing late last year. I know it was several years in the making, and glad you got there. So, congrats there, and onward and upward for Caliber now. What’s the stock ticker? Is it…you tell me.

Chris: It’s CWD, Caliber Wealth Development. And we’re listed on the NASDAQ. You know, there’s really two kinds of IPOs. There’s big IPOs, for, you know, large, multi-billion dollar companies, that are often kind of seen as an exit strategy for the early capital, and ability to provide liquidity for the company. And then there’s small IPOs. We did a relatively small IPO. Think of it more as, like, public venture capital. You raise a small round, you get listed, and the difference is, instead of continuing to be a private company, you’re a listed public company, and you can build a much broader shareholder base. And so, we did a micro-cap IPO. We came public in May of 2023, and we’re just getting started.

Jimmy: Right on. All right. Well, it wasn’t late last year. It was May, it was almost a year ago. Seems more recent than that. My mistake.

Chris: Yeah. It’s amazing how quickly time flies.

Jimmy: It does, it does. Well, let’s turn our attention to a topic that we first mentioned a few minutes ago, hotels. Hospitality, right? Got hammered during the coronavirus pandemic of 2020. About four years ago now. Yeah, it was about four years ago, everything was starting to shut down. And boy, people stopped traveling. Hotels got hammered, hotel valuations went way down. But now, maybe it’s coming back, right? People are traveling again. We’re four years removed from those early days of the pandemic, where we shut down. And you’re working on bringing hospitality into your portfolio. What are you doing exactly? And how does it relate to your strategy in Opportunity Zones?

Chris: Yeah. It’s funny. Two weeks before COVID kind of became ubiquitous across the country, Caliber closed on the sale. It wasn’t our deal. Our hotel manager that was running our 10 hotels sold themselves to Highgate, which is one of the largest hotel management companies in the country. And so, we’re all excited to start working with our new management team and transform the existing 10-hotel portfolio, and continue to drive profitability into the assets, because 2019 was our best year ever. And then two weeks later, we’re trying to figure out how to run a hotel, shut it down. You know, it was crazy. So, we all remember it. I’m sure we all went through it. But I wanna put you into the, you know, let’s kind of zoom out first, and then we’ll zoom in on what Caliber’s doing.

So, if you zoom out first, hotels were screaming in 2018 and 2019, and really had a good run. That was following a really high level of investment in more traditional real estate asset classes, like multifamily and industrial. And all of those multifamily, industrial, you name it, asset classes were starting to get kind of overplayed. They were hitting all-time highs in valuations, it was getting really hard to do any deals in that space. And what happens in every real estate cycle is that when the easy deals get hard, the money starts moving towards the harder deals, like specialty medical, or student housing, or, you know, hospitality is an example. And so, we started to see a big bubble happening in kind of 2018, 2019, of people wanting to build hotels. So, Caliber’s plan was to sell all of our hotels in 2020 and 2021. We were gonna sell half the portfolio in 2020, the other half in 2021.

Because of COVID, we shelved all those plans, and immediately turned our attention towards sheltering our hotels, and making sure that we didn’t miss loan payments, and we didn’t lose our assets to the bank and all the things that you worry about when you can’t generate revenue. That had two benefits to us, and to the industry. One is, a lot of those hotels that were gonna get built, didn’t. And so there was never an oversupply to the industry that happened. And the second thing that happened in our industry was a lot of hotel owners didn’t make it, or they had to maybe change their hotel from a hotel to an apartment complex, or they had to change their hotel to an assisted living facility or something like that. So there was never an oversupply in hotels. And then, the existing stock was reduced, which, in my real estate career, I’ve actually never seen that happen. And so, I think it might happen in office, right now, but I’ve never seen that happen before.

So, coming into 2024, what do you wanna own? You wanna own an asset class where demand has recovered and now exceeds 2019-era demand. But the supply is constrained. And so, that’s where we see development opportunities to build new hotels in the right places. Caliber is finalizing, essentially, a development agreement to build up to 30 Hyatt Studio hotels across the country, because Hyatt created a new extended stay hotel brand, that is designed, kind of, in the post-COVID era, to operate more efficiently, be more profitable, be cheaper to build, and carry the Hyatt flag associated with it into markets that Hyatt is not already over-seeded in. And so, we are signing a deal to build these. We’ve got the first five locations. Many of them are in Opportunity Zones, and existing sites that we already own that our Opportunity Zone fund’s gonna participate in. And these are relatively inexpensive to build, highly profitable hotels that we’re excited to roll out on the platform. So, that’s why we’re building hotels in that space, because of what happened in the macro environment. And in a different space, like multifamily or office, we would only buy existing, because the over-building did occur, and we have a supply issue.

Jimmy: Great strategy. And yeah, I think it is coming back, and that’s really interesting for you to point out that the stock has been reduced over the last few years. That’s fascinating. So, sounds like you’re in the right place at the right time with hotels.

Chris: I think this, I don’t know this statistic is perfect, but I think about 20% to 25% of all hotels in New York were taken out of the system permanently. And if you’ve ever tried to build a hotel in New York, that’s a really hard thing to do. So, if the supply has been constrained, rebuilding a new hotel in New York is going to be nearly impossible. That makes the remaining assets worth more.

Jimmy: The last few minutes of the episode here today, Chris, our last few minutes of our conversation today, I wanna talk about the larger macro picture, and trends you’re keeping an eye on, and opportunities that you see out there going forward. Obviously, we’ve been in a challenging environment the last year and a half, two years or so here, with the higher interest rate environment. Stock market’s way up, right? But real estate’s been a little bit of a different story. You know, in addition to some of the topics you’ve already brought up, where else are you finding opportunities in this challenging environment? How would you characterize the environment today?

Chris: Yeah. Great question, Jimmy. I think that I’ve made all of my money, and generated what success I have generated, through trying to be in front of where things are going versus where they are today. And so, I’m, try to be as forward-looking as possible, try to see around corners on behalf of our investors and our customers. And what I see is the following. Taking a step back into the 2008 to 2012 era, we built our business in a distressed environment. We bought auction properties, bankruptcies, foreclosures, etc. So this is coming from a place of some experience and knowledge. It’s not me just pontificating here. I think that the rise in interest rates caused a reduction in value in real estate. It also caused a situation where hotels, you know, office, retail, certain types of asset classes, face more distress than others, but all real estate is under pressure in one way, shape, or form.

Because of that, you’ve got interest rates and debt costs that have soared, and all the ratios don’t work. So, if the math doesn’t work, eventually what’s gonna happen is work-outs, foreclosures, etc. It’s just, it’s an inevitability. And it’s, how long can that can be kicked down the road? What I saw in 2008, and 2009, 2010, was that most people did not get in in the beginning, in the best possible time. The vast majority of the capital we actually competed with came in in 2012. That’s when the big players, like Blackstone and Invitation Homes and everybody else, came in and started buying all the real estate. But we had already been operating in that environment, doing well, for three years.

So, I think the closer you are to the ground, the more likely you’re gonna see the best opportunities. And by the time everybody kind of gets it, that it’s a good time to invest in real estate, that’s usually when the opportunity is about to dry up. And so, I’m seeing that happen now. I’m seeing that investors, for good reason, said, “I’m just gonna do…I’m gonna sit in money markets, I’m gonna sit in private lending, I’m gonna do preferred equity. I’ll make 10% to 12% on my money, take less risk, and just see what happens.” That’s where all the money has gone in the last year and a half. And because of that, there’s no common equity, nobody willing to just buy a piece of property with regular equity, left in the market, or very little.

And so, that’s the time, as an investor, you get in. Because if you’re the only common equity in town, that means you can do the deals at the best possible price. As an example, we’re working on a project that will go into Fund II, where we’re buying two existing office buildings and vacant land, converting it all to multifamily, and building build-for-rent on the ground floor. All in, we’d be buying this project, if we execute according to plan, for about one-sixth of the cost to build the two buildings and the two parking garages we’re buying, if we got the land for free. Those deals are the types of deals that will come in this environment, but investors have to recognize that that’s where we’re at. They have to pick great GPs, that know how to access these types of opportunities, and they’ve gotta make these investments.

So, if, to go back to your framing, the market’s way up. Great. Take the win, harvest the capital gain, and go start making bets on real estate-related funds that can access this type of environment. Not everybody can. Quite a few investors in real estate are just developers. They build one product type. Or they build one strategy. So, you gotta find someone who actually does more of an eclectic group of strategies, but at the end of the day, I think that’s the big opportunity in 2024 and 2025, is, when everyone else is saying real estate is going down, you start investing equity into funds that are free and clear from the past, and ready to move forward.

Jimmy: Yeah, there’s a huge opportunity here, if you’re right, right? Which is, stock market’s got a huge run-up, take some gains out of the stock market. Bitcoin too, by the way. Take a look at the Bitcoin chart lately. Well, we’re recording this late March of 2024. I don’t know where Bitcoin might be when we release this episode in a week or two. It’s quite volatile. But anyways, suffice it to say, there are some asset classes that have shown large gains recently. You can divest from there, take a little bit off the table, and reinvest those gains into real estate, private equity real estate we’re talking about today. Could be a good opportunity there. I mean, Warren Buffett said…what’s his quote? “Be fearful when others are greedy, and be greedy when others are fearful.” And right now, real estate’s under pressure. A lot of people are fearful of getting involved in the real estate market, so…

Chris: That’s right. And plenty of investors will offer you preferred equity, or a mezz loan. Everybody wants to do those deals. But if nobody’s willing to write the common equity check, nothing gets done. And so, at the end of the day, the best opportunity is on the common equity side, which is investing in a fund, going long-term, really buying assets, and not just, you know, trying to lend your money on a short-term basis.

Jimmy: Well, Chris, this has been great catching up with you. I mean, just to zoom out a little bit more before we conclude today’s episode, given your expertise and your position in the private equity real estate industry, continue with this line of thought. What are some important trends that you see, not just across Opportunity Zones, but the broader private equity real estate market, that you’re keeping an eye on, that you think investors should keep their eye on moving forward here?

Chris: I think there’s gonna be a trend to consolidation in the industry. And what’s driving that is an increased desire, both by regulators and some investors, to see more of a public company-esque level of investment management around real estate funds. And that’s gonna be difficult for a lot of people in our industry, because providing that level of financial reporting and transparency and regular reporting to investors, etc. is a challenge. It’s a lot of work, and it costs money. And so I think that will drive a trend of consolidation in the real estate investment provider industry.

There’s also just too many deals and too many funds for too few investors. There’s a very big trend going on in the investment advisory space, that the traditional kind of broker-dealer model has more moved to the fee-based advisor, the fee-based advisor is taking a fee to manage all of your wealth across the platform, and all wealthy individuals want access to alternative investments in real estate. And so, the advisors are being driven towards finding something beyond just the typical top five funds that everyone knows of and has heard of, finding unique real estate investment opportunities, and yet there is a massive chasm between the people who actually provide those opportunities and the type of infrastructure and due diligence necessary to access them. So I think that’s a big, big trend, and in companies that can solve for that trend, and create the infrastructure necessary for the advisor to do their annual diligence and place capital into these real estate related investments is gonna be a big opportunity.

And then, I think you’re gonna be seeing some really interesting and really creative conversions of office buildings. You know, the office buildings that are being converted are located in phenomenal places for residential, for hospitality, for assisted living. But how do you get an office building to work like an apartment complex? We’re doing a couple, and it is a fascinating process to get through. So, I think, pay attention to the conversion trend. I think it’ll be a good one.

Jimmy: It must be a challenge converting those office buildings into residential.

Chris: Yeah. You know, they didn’t build it to be home-like. So, making it feel like a home is the most important challenge.

Jimmy: Absolutely. Well, maybe that’s another topic for another episode, but for today, we’re out of time. Chris, thanks again for sharing your insights today. This has been awesome catching up with you. Where can our audience of Opportunity Zone investors and advisors go to learn more about you and Caliber?

Chris: Yeah. So, easy different couple of paths for you. You can go to caliberco.com. That’s our website. You can go to investwithcaliber.com. That’ll bring you into the various forms of investments with us. And you can always find me directly. It’s [email protected]. Not hard to find. It is me who actually answers the email, and I will engage with you if you’re a investor or a general partner. If you’re in the industry, if there’s something that you’re seeing out there, and of course, if you have great Opportunity Zone deals in Arizona, Colorado, and Texas, please reach out. Thank you.

Jimmy: Terrific. And whether you’re watching this episode on YouTube or you’re listening to it on Apple Podcasts, Spotify, or some other podcast listening app, I will have show notes for today’s episode available at opportunitydb.com/podcast, and there, I’ll have links to all of the resources that Chris and I discussed on today’s show, and I’ll make sure to link to his contact information on that page as well. Please be sure to also subscribe to us on YouTube, or your favorite podcast listening platform, to always get the latest episodes. Chris, again, it’s been a pleasure. Thanks so much for joining me today.

Chris: Thank you, Jimmy. Episode 300, in the bag.

Jimmy: We did it.