Recession-Proof Real Estate, Downside Risk & the Power of Holding

Aviva (00:33)
Let me ask you, I know you have significant multifamily holdings as well.

Steven (00:38)
Actually, that's our main holding. We have over 3,000 apartment units in Colorado, Arizona, Washington, and California. that's much larger. Our industrial holdings are really, think, just about a million feet, which is a lot. it's much smaller than our multifamily, our apartment.

Aviva (01:02)
Is there a product type that you prefer?

Steven (01:05)
Yes, I prefer multifamily. I like industrial and we have owned retail, we have owned office, but I like multifamily because it tends to be far more recession resistant. There's no such thing as recession proof or depression proof, but it's much more recession resistant because in a recession, in a downturn,

If you're in business, you might go out of business and not need the space anymore. You might not need the office, the warehouse, the store. You might not need that anymore. You might go get a job. might move away, but you might not need the space. So the space becomes vacant. In any recession, there is no time when people do not have to every single night, put their head down on a pillow somewhere. You have to have a place to live. And if you're

Rich, you need a place to live, and if you're broke, you need a place to live. So as long as human beings need to sleep, at least once every 24 hours, they're going to need a place to sleep. so apartments don't go... There's no time when, as a result of a recession, the apartments all go vacant because people don't need to live there anymore. on the downside, apartments are better. Now...

They're much more work. They're much more management intensive. We have about 100 full-time W-2 employees in our property company who do nothing but maintenance, management, bookkeeping, and accounting to manage all these properties. We do our property management in-house as opposed to using an outside third-party property manager. And the apartments are by far more

complicated because if you have a 50,000 square foot warehouse, it might have five toilets. But if you have an apartment complex that has 50,000 square feet, and so let's say it's 50 units, you have 50 toilets. And they're all in separate units. And you don't have one tenant. You have 50 tenants. And so it's a much more intense thing.

The management is more complicated, more expensive to do. But I like it because of the downside. And I think all investments should be evaluated for downside risk. That's the main thing. And I think that's probably true of most decisions in life. But a lot of people, when you look at the first instinct is, can I make? How much will the return be? How much money will I make? How much will it go up? And you need to know that too.

always more interested in what could go wrong. What happens if the tenant moves out? How's how what's the condition of this roof? What happens with this neighborhood begins to deteriorate? I'm much more interested in downside risk because if you control if you can manage can't control it. But if you can manage downside risk for everything, for for maintenance, management, loan purposes, security purposes, cash flow purposes, if you can manage risk, you're going to make

in real estate because as you pointed out Aviva over time real estate goes up in value so you're going to make money as long as you'll get killed by the downside risk whatever it might be

Aviva (04:42)
my favorite aspects of working in the business is learning.

different strategies in terms of what they buy and hold. My family's strategy, C-Class industrial. A dear friend of mine family strategy, parking lots.

Steven (04:58)
back

and describe for both of our audiences what is C-Class Industrial.

Aviva (05:03)
Sure, when you are driving along the highways today, you are seeing these big, beautiful boxes being built. Those are what we refer to as A-Class product. These are newer warehouses built with higher ceilings to support the logistics needs that we have as a society today. C-Class warehouses

are buildings that were built maybe 20 years ago, 30 years ago, 40 years ago, they are less beautiful. However, there is certainly a need for them in our society and they tend to be smaller, lower ceiling heights, just smaller buildings in general. so it's...

It's essentially a less attractive, smaller type of warehouse, but to investors like myself, it's very attractive just because know, economically, the replacement cost of these C-class warehouses, you can't build them for what you can buy them for. And that has created an inventory issue.

both locally and nationally. So as a result, the new industrial product that is being built is only from what I'm seeing or weighs heavily into a class product. they can't, like I said, they can't build the C class product for a price that makes sense. So folks like your roofer or your HVAC contractor.

smaller local businesses, they all still need a place to keep their supplies, park their trucks at night, and we find they tend to do so in these C-Class warehouses.

Steven (06:56)
I like the idea of multiple tenants. Again, this is another reason why I like apartments because if I have an industrial building that has one tenant and then that tenant moves out, I am 100 % vacant. Where if I have a 100 unit apartment building and one tenant moves out, I am 1 % vacant. And so again, on downside risk, it's going to be safer in those cases because of that.

But when I look at an industrial building, if I can have 10 tenants in a building instead of one, then I have that same factor of safety as long as I can continue to, as long as the building is such that it is versatile so I can get a variety of tenants in it. And we have a few buildings like that.

Aviva (07:48)
and you can probably relate. In industrial space, the smaller the unit, the higher the tenant pool. The larger the unit, the smaller the tenant pool. So what we have found, you know, our bread and butter is really between 1500 to 15,000 square feet. We have, we essentially given the inventory issue,

We have a lot of options in terms of tenants and we can choose the most, sometimes, the highest and best tenant for the space. And I want to talk to you about the current real estate market. And here's an anecdote that leads into this. I talked to developers, I was talking to a developer who just built a few very large

eight class warehouses immediately south of Denver International Airport. One 200,000 square feet, one 500,000 square feet. With the new tariffs, they had a number of proposals that they were negotiating. These new tariffs have come into fruition. The numbers are reflecting that. Every deal, every prospective tenant pulled out.

Steven, what is your hot take on the commercial real estate market in 2025?

Steven (09:11)
I think you've got two major headwinds, maybe three. The first major headwind is interest rates. And you can't minimize that and you can't get around it. Even if someone is coming in to buy a building all cash, it still is going to make a difference in the market because they're going to be competing with others who won't pay as high a price.

Because they can't because of interest rates and so the cash buyer may be able to buy but they're not going to pay more In fact, they might pay less so interest rates the second headwind would be the wobbly nature of the economy right now we are Right now a lot of the statistics are still good. The inflation rate is okay. The unemployment rate is

is at least okay. But GDP seems to be falling. had one quarter of contraction. And so everybody's nervous, which brings me to the third problem, which would be tariffs in particular and unpredictability in general. So when you have people who see a tremendous amount of fluctuation and inconsistency, when we see

Policies changing sometimes by the minute and certainly every day What it does is it makes everybody nervous in the business community? I'm sure it makes others nervous for a variety of reasons and others it makes thrilled for other reasons But for a business person who says look I'm going to sign a lease or I'm gonna buy a building because I'm gonna conduct business there and I want to know what's my payroll gonna be? What's my payment gonna be? What will my?

What will my general overhead be? What will my market be? What will I be able to get goods for? services for if I'm going to be then selling those goods or services and How do I project in my business what I'm doing? And if the answer is I have no idea I don't know what my prices are gonna be. I don't know what my sales are gonna I don't know anything That person is gonna say well Maybe I should wait

before I buy this building or lease this space, maybe I should wait before I hire anybody, or maybe I have three people working for me and I should wait before I hire a fourth, or maybe I should begin to cut back because I see trouble, so maybe I should lay someone off because they're not quite busy enough. So when I look at the projection of 2025, the balance of this year, the biggest

headwind to progress is the uncertainty. So interest rates in general, interest rates to start with, general anxiety, and then the more specific problem of unpredictability led by tariffs, but followed by a hundred other things. What are regulations going to be? I suspect regulations are going to be easier, not harder, for the same political reasons.

So that'll be an advantage. But what will the side effects of that be? When you change... You know, when you have a baby and the baby's having an allergic reaction and you take the baby off of everything but rice and then the baby's okay, you don't add 16 things back into the baby's diet. You add one. And let's wait and see. Okay, that was okay. Let's add a second one because then...

When you add the third one and the baby starts having the reaction again, you say, aha, they seem to be allergic to this or having a bad reaction to this. Same thing in the economy. When you change 27 things at once, it's hard to tell what's working, what's not working. And so I think that a lot of good things are going to come from the changes that are happening in Washington right now.

And I think a lot of bad things are going to happen, are going to result. And I think there'll be other things that will be unchanged. The problem is, I can't see from here which will really be better, which will really be worse, and what the net consequences of that will be to a particular business that's trying to buy a property or start a business or run a business or lease a property. The business decision makers are having that same trouble. So.

I'm seeing a rough 2025 and probably a rough 2026 and my crystal ball gets fuzzy after that. Aviva, what do you think?

Aviva (13:54)
I am a student of the game. am sitting back and just trying to understand. It's like you said, there's so many factors at play. You can't identify, you you, said it perfectly in my experience. ⁓ it's an, it is an opportunistic time right now for buyers. And I think it will like exactly what you said. It will become more opportunistic. I, I have another COVID memory.

You know, it must have been the second, second week of March. dear friend, property owner of mine emailed me, they told me to buy when there's blood in the streets. Is there blood in the streets?

Steven (14:34)
The thing is about blood in the streets you don't have to ask Unemployment is high You hit the earnings are low GDP is bad Bankruptcies are up foreclosures are up lawsuits are up Contracts are canceled. You don't have to ask when there's blood in the streets. There are vacancies high vacancies prices drop

there are no sales or there are only distressed sales. Nobody sells who doesn't have to Nobody has to ask when there's blood, if there's blood in the streets, when it's there, we will notice it.

Aviva (15:12)
So, so, yeah, I think back to that email, I can see it now. And I've been asking myself that question ever since. Are there, you know, is there blood in the streets yet? there blood? And I haven't been able to confidently say yes.

Steven (15:28)
No, no, there's not yet. there's not even close. There's no, no, we are, the great thing about worrying is it gives you something to do until the trouble begins. No, this is only the time to worry. This is not the time to turn on a diamond, jump out the window. This is not it.

Aviva (15:45)
Sure. So now I, like I said, when you find your crystal ball, let me know.

Steven (15:54)
ask

you on a different subject. You have over a million followers on your podcast. How in the world did that happen? know that people... How does that word spread? How does that happen? How does that go viral for you?

Aviva (16:11)
Sure. You know, it's a great question. actually, prior to my career in Marshall Real Estate, I had a music career. I was an audio engineer and I learned how to market at that time where what I found was as an up and coming artist, there were so much inventory of artists

content that the demand for our content was very, very low. Well, I decided I was better at, figured out I was much better at commercial real estate than being a musician. And what I noticed is there was virtually no supply of content online revolving around the commercial real estate space. And as a result, there was demand. So I took what I learned marketing

where nobody wanted to listen to what I had to say. And I applied it to an industry that just was holding their clothes. The commercial real estate industry has always held its cards really close to its chest. And when I found that when I started talking about it on social media, people were attracted to it. And then there was a very profound comment,

person somewhere in the world said, and they said, the comment was something along the lines of, wait, you can rent out a house and make money for it. And that hit me like a ton of bricks, because that's when I realized that I had the unbelievable fortune of sitting down at the dinner table every single day. And we talked about real estate.

That's what our family has done for generations. We know it, we love it. That's all we talk about. And so I was given the opportunity to learn about real estate, investment properties, et cetera, from a young age. And a lot of people don't have that privilege. That gave me the passion and the drive to start talking about it online. And when I found that I started sharing stories, tips,

people wanted to hear them. so that's really how it grew. I, you know, I thought I also thought it would be good for business to start marketing.

Steven (18:32)
I'll bet it was.

Aviva (18:34)
yeah, I just will always go back to the more you give the more you get. And it's been tremendous for our business. And I've just been very fortunate that way. So look, when people consume content on the internet, whether it's a talk show like this or an emailer, where people go wrong is that they want to talk about themselves and their accomplishments. And the listener,

is not interested in that. listener is interested in how they can

essentially extract value.

Steven (19:07)
Well, they're looking for something that will help them in their lives. And you can learn from somebody else's success, surely, but it has to be accessible in a way that will work. I want to go back with real estate and talk about some... We've talked about industrial and we've talked about multi-family. And I can't leave that without commenting that...

people sometimes buy condominiums or townhouses or single-family residences to rent them out. And my thought is it's extremely inefficient. The price per pound that you're paying for the house or the condominium is too large for the rent you'll get for renting it to make it make sense. And the problem

with convincing people of that is because everybody knows somebody who bought a house and then kept it and rented it out and, you know, 10 or 30 years later, it's worth a lot of money and there's cash flow from it. So it looks like it was a really good idea. But when you compare it with buying a two unit or a 10 unit or a 20 unit, it pales in comparison. And yet, if you can make plenty of money, maybe you don't need to do that.

have a bunch of units and management and managers and maybe it's easier, but it also seems easier to me if you have larger units and then you have professional management either in-house or outside, then you don't have to hassle with that work if you're managing a single-family resident. And yet, I know a lot of people who have a collection of houses, two houses, ten houses.

We have one client who has, I think, 60 houses, just kept buying houses. And, you know, he is awash in income from those, so it'd be hard to argue that it was a bad idea. It was a good idea. And if he had done that with multiple units or industrial properties, he would have much, much more wealth. But maybe he's got enough.

Aviva (21:21)
What is enough? Have you figured that out yet?

Steven (21:24)
Yeah, yeah, it's interesting. I always wanted to have money and it was something that I arranged for, worked for, kept firmly in mind. And yet I was never driven by money. long, long, long ago I had enough, but I keep doing it because it's fun. I really enjoy it. And I get the feeling you enjoy your commercial.

real estate practice and what you're doing for your family's properties as well.

Aviva (21:55)
I feel like the luckiest person in the world. You couldn't convince me otherwise. think, you know, to love your family business is the odds of that are so low that I am just grateful that I love my family business. I also find a big part of my edge is timing and my intersection of our business and this new digital landscape that we reside in.

a lot, I've seen a lot of my success as a result of that. So I just consider, myself very lucky, but it's like you said, and as a result, right. If you like what you do, first off, it's very obvious, right? Authenticity is it's, it's clear if somebody is not actually doing something for the right reasons or authentically. It's just, it's not authentic to them. So I, I just feel lucky that.

I was born to do this business. a lifer in the business and I was taught by the best as far as I'm concerned.

Steven (22:55)
Yeah,

father and a grandfather. I wanted to talk about flipping. It sounds like you and your family follow the same philosophy that John and I do, which is you buy and hold. And sometimes you'll sell something if you have a reason to sell it, if a property isn't performing or if an area is changing or if a few other reasons you might sell a property. But otherwise, you don't buy a

unless you plan to keep it for a long time, maybe forever. And I think that's what your family is doing as well. Is that right? So I want to...

Aviva (23:35)
Correct.

Our family motto was buy, hold, never sell. Party on the profit.

Steven (23:43)
reflection of how we look at it as well. So then the question is flipping, and that's another one where I have trouble talking people out of it because they'll be the first to explain to me that they make so much more money on their money than I do by flipping, by buying, fixing, and flipping, by what they'll call creating value.

And that's legitimate and it can be done and it can be done properly, but it is so high risk because typically the financing is short term. Typically the capital necessary is large. Typically they're dependent on third parties for the physical work for the material and labor's labor. And typically it involves market timing because if you buy, for example, if somebody who bought

last year and who will finish their fix this year is going to sell a loss in most cases unless they really created so much value they can overcome it. But then I don't know that it's going to be worth the risk. And again, I'm back to risk. it would be something that I would tell someone if you're trying, you know, there's a saying if you want to go fast, go alone. And if you want to go far,

go with others, right, for teamwork. And in investment, I would say, if you want to make a great deal of money with the risk of losing it all, then do something short term. But if you are focused on the long range big picture, instead of getting rich fast, you'll get really rich slowly. And I'd rather take two steps forward.

I'd rather take a half a step forward and no steps back than to take two steps forward and one step back.

Aviva (25:33)
Something I have seen in my experience and that I am taken aback by is how time and actually just the act of doing nothing at all with a property. I'm not saying being a slumlord, but I'm saying buy it, hold it. Pays, dividends, so much more than like you're saying that short, get rich quick situation.

Time is unbelievably powerful in real estate. We always say rule number one, don't do a dumb deal. Assuming you follow rule number one, don't do a dumb deal, you bought the property right. The most powerful thing you can do is take care of the property, take care of the tenants, extract the value, and just let it sit. I'll give a quick story because I know we're close to time. I was just

My grandmother passed a year ago. was just in her house. Thank you. Looking, she was an unbelievable person, but going through her house, looking at her documents, I found a settlement statement from a property they bought in the 50s. It was a duplex for $6,250.

Steven (26:48)
Be hard to buy a good used car for that now.

Aviva (26:54)
I know, I'm trying to imagine, my gosh, my expenses. Anyway, just the impact of time on a property and, you know, flipping is a lot of work. Whereas to buy and hold and just let the prop, you take care of the property, the property takes care of you is extremely powerful.

Steven (27:19)
Aviva Sonenreich, I want to say thank you so much for joining me here today on TalkRadio1.com. And I want to thank you for letting me join you on your system. And I'm going to talk about how to find that in a moment. But thank you so much for joining me today. I really appreciate it.

Aviva (27:38)
Thank you, Steven. I really look up to what you've done and I appreciate your time.