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Robert Brunswick:
Welcome. I’m Robert Brunswick, Chairman of Buchanan Street Partners, and I’m glad to be with you today for our real estate podcast. It’s my great pleasure to have as our resource today, my business partner, a good friend of 28 years, Tim Ballard, President and CEO of Buchanan Street Partners. Let’s get started. Hello, Tim.
Tim Ballard:
How are you doing?
Robert Brunswick:
Good, man. How long have we been working together?
Tim Ballard:
It’s actually I think 27 or 28 years now.
Robert Brunswick:
28 years?
Tim Ballard:
Yeah.
Robert Brunswick:
Wow.
Tim Ballard:
Because I used to have a lot of brown hair before, and now it’s all gray.
Robert Brunswick:
Yeah, well.
Tim Ballard:
See what you’ve done to me?
Robert Brunswick:
It still does you right and it’s a great treat to do this with you. We’ve come a long way in building our business together and today’s listenership is primarily made up of clients, their families, students, people that want to learn about real estate. So I can think of nobody better than to share with them a little bit about what we’re going to talk about today, which is really investing in real estate in a broad sense. So before we dive into some of the technicalities, let’s get to know you a little bit.
Tim Ballard:
Sure.
Robert Brunswick:
Share a little bit about your background.
Tim Ballard:
So born and raised in Anchorage, Alaska, and went to school back east at the University of Pennsylvania in Wharton and always had a passion for real estate. So moved to California here now, I guess it’s been about 32 years ago, so I’m pretty much a California native now.
Robert Brunswick:
You certainly are. Yeah. You got out of that cold weather. Now you enjoy the warm weather.
Tim Ballard:
Absolutely.
Robert Brunswick:
Understandable. So you talked a little bit about this broadly, but specifically with career. So what was your first job? What was that like and how did you evolve from there, and how did you get hooked up on an entrepreneurial road that you ultimately pursued?
Tim Ballard:
Well, my mom was an entrepreneur from the beginning and so I think I got a lot of that from her in terms of her kind of building a business and that kind being the conversation around the dining table. In terms of real estate, my career in real estate really started when I was in college. I was one of the original home flippers. I bought a home in foreclosure when I think I was a sophomore or junior in college for $10,700. And my summer job was swinging a hammer and I flipped the house for $85,000.
Robert Brunswick:
Wow.
Tim Ballard:
So it was quite a nice introduction to real estate.
Robert Brunswick:
Today that profit might pay for one year of college.
Tim Ballard:
If you’re lucky.
Robert Brunswick:
If you’re lucky. Exactly. So then where’d you go from there? I remember Mass Mutual, if I’m not mistaken.
Tim Ballard:
Yeah. So my first job out of college was working in the real estate group of Mass Mutual and as part of the thought process I knew I wanted to be in real estate. Most of my friends were going to Wall Street or management consulting. I interviewed for those jobs and ultimately the job I took paid me about half of my best job offer. But what I knew at the end of the day was I wanted to be in real estate, I wanted to learn about real estate, and I felt that was the best opportunity for it.
What I learned there, I was exposed a lot of things. So obviously I learned a lot about real estate, a lot about real estate lending. I was in a training program and that involved both kind of equity investment in real estate as well as their lending platform. But what I learned is that in many organizations, you’re paid for your tenure versus what you bring to the table. And I always knew I wanted to work hard and I wanted to continue to learn, and that’s ultimately why I left to do something a little bit more entrepreneurial.
Robert Brunswick:
And what was that next step?
Tim Ballard:
So the next step was a name from the past, it was called Coldwell Banker, which is now CBRE.
Robert Brunswick:
Oh yeah, sure.
Tim Ballard:
And so that was my second job out of college. And I worked in their—they had various names for it—but ultimately was their mortgage banking group, which was basically lending on commercial real estate assets.
Robert Brunswick:
And then what happened?
Tim Ballard:
Then you stopped by a few times and kept knocking on my door and convinced me to join you at Pacific Union. So that was, I think 1994. So quite a long time ago now.
Robert Brunswick:
And what did that experience provide for you?
Tim Ballard:
Well, that was definitely much more entrepreneurial. As a young man at Coldwell Banker, I had a relatively easy job in terms of, hey, you’d go to real estate owners and say, “Would you like to borrow some money cheaply?” And they would generally say, “Yes, I’d like to do that.” Pacific Union was a much more entrepreneurial firm and you had some skin in the game and it was a lot of fun, a lot of learning about different kinds of things outside of lending.
Much of what we did, as you know, Robert, was worked in the equity part of the capital stack. And definitely you had to understand the real estate and the operator much better than you did as a lender.
Robert Brunswick:
So as we kind of fast forward from Pacific Union, obviously we had a couple of other stops along the way where we sold that business and then worked for Public Company and then left there. And then we started Buchanan Street, now almost 22, 23 years ago. So how would you describe to our audience today, Buchanan Street Partners as you see it?
Tim Ballard:
Well, today we’re an investment management firm and so we take care of the assets of high-net-worth families, both on a direct basis as well as through their registered investment advisors. And at the other end of the spectrum, we take care of ultimately public employees through their retirement plans for various big public pension plans.
Robert Brunswick:
Exactly. And you’re investing in what?
Tim Ballard:
We invest in a variety of things. So on the equity side of the equation, we are making investments in multifamily housing, self-storage assets, and office assets and typically focus today in the medical office and life science areas of office.
Robert Brunswick:
Interesting. So you’re doing some lending too?
Tim Ballard:
Yes. We have a debt program where we make bridge loans and construction loans typically in the $10-$50 million range to local entrepreneurs, local developers who are looking to create value in their real estate.
Robert Brunswick:
So, as an asset class, we know with what’s going on with diversification and alternative investments, why historically has real estate is more recently garnering such a significant amount of the investible asset class base within alternatives? What is it about real estate that is appealing to that capital flow?
Tim Ballard:
Well, what I’d start first with is if you go back to when we started our careers in real estate, it really wasn’t an option of investing with a sophisticated manager. It was very hard to access investments in real estate unless you did it yourself or you invested with your friend down the street who was at the country club trying to syndicate a deal. Very hard for the high net worth investor to invest. And even the pension funds, because it was a bit of the wild, wild west when we started our careers.
Today, I think people have recognized the importance of alternative assets and specifically real estate in their portfolio in terms of providing a significant level of diversification to the kind of risk they have in their portfolio. Real estate is a cash generator; many assets are not. Some types of real estate are very favorable for inflation protection. So there’s a variety of reasons today that as you grow a portfolio, it’s important to include real estate as one of the assets.
Robert Brunswick:
So you talked a little bit about inflation hedge, cash flow, other attributes or benefits to investing in real estate. It’s obviously non-correlated to equities and bonds. Anything else that comes to mind?
Tim Ballard:
Well, it’s not necessarily completely uncorrelated, but it’s less correlated to the public markets. Certainly there are avenues of investing in the public REITs that own real estate and those are correlated to the public markets. So private real estate is a little bit different than public markets. And then for the high-net-worth investor or the taxable investor, there’s significant tax benefits available to investing in commercial real estate.
Robert Brunswick:
So Buchanan Street as a business has evolved from predominantly institutional investors to high net worths, family offices, registered investment advisors. Is that really just a byproduct of those investors now showing up in the marketplace and they’re much more active? Or is that a purposeful shift for the company as they’ve really expanded the platform?
Tim Ballard:
Well I think it’s really both things. Over the last, I’d say 10 years, in the industry, alternative assets have become a more important part of the strategy that high-net-worth investors deploy their capital with. And what you’ve seen is a number of registered investment advisors have been formed basically coming out of a need. So what investors recognize is maybe they weren’t being served well for their goals by the big brokerage houses. And so you have had a lot of these registered investment advisors form to really address the needs of very wealthy families. And so with that, those families, those investment advisors have been able to focus on strategies like ours that are probably a little bit more boutique in nature.
Robert Brunswick:
Tim, we should probably cover, obviously there’s a lot of attributes to investing in real estate, but what are the risks? What should people be thinking about as they think about risk?
Tim Ballard:
It depends really on the kind of real estate assets that they’re looking to invest in. So there are risks at one end of the spectrum that are fairly significant. So if you buy into land or development assets, you may be taking entitlement risks. So in some areas like Texas, that’s fairly limited. In places like California, entitlement risk is a massive risk that’s very unpredictable in terms of the timing and what the result might actually be.
As we’ve seen during the pandemic, we’ve had a lot of inflation, and that’s been due to both commodities price inflation as well as supply chain issues. And so with that, construction costs on some types of assets have gone up 50% or more. We’ve also seen the challenges with labor. So you might have expected that you would develop an industrial property in nine months from the start of construction. Sometimes those are taking 12 to 18 months today just because of the lack of labor and your inability to get certain commodity products like steel products. And that’s really challenged people’s underwriting as it relates to interest carry and the development costs. So there’s a variety of different kinds of risks that you have in real estate.
At the other end of the spectrum, if you buy a brand-new class A apartment complex in an urban location, you’re not going to have those same kinds of entitlement challenges, construction cost challenges, or leasing challenges. In those situations, you’re going to have different kinds of risks, which will be market risks, what’s going on in the overall general economy, what’s going on in the local economy, things like that.
Robert Brunswick:
So as you’re talking about risk, do you really view liquidity, access to liquidity, as a risk or just a kind of reality of private investing?
Tim Ballard:
Well, it depends on the investor. So if you’re a large pension plan or you’re a very wealthy family, you’re not seeking to make investments in private investments to use as a liquidity tool. So I don’t view the risk of liquidity for that investor to be a significant risk for them. But having said that, there’s a big range of liquidity opportunities and challenges in that you can own, again, you own an apartment complex here in coastal California and you want to sell that thing, you’re going to very predictably sell that with a long list of buyers because the market is so deep for that kind of asset.
Having said that, if you own a piece of land in some tertiary market, that might take you two years to sell. It might take you five years, you just don’t know. And so it’s certainly something that you should address and make sure that it is consistent with the liquidity you might need in that investment vehicle for your investors.
Robert Brunswick:
Tim, our business has evolved tremendously. If you think about back to when you started to today and in reflecting on that, what’s most different today than when you originally got into the business?
Tim Ballard:
Well, the business was really the wild, wild west. There was very little transparency of information. There was no predictable good flows of data. I remember in starting my first job, if you wanted to figure out what rents were or vacancies, you’d get on the phone and call people. You’d call an owner or you’d call a leasing broker. “Well, what do you think rents are?” And so you might end up with 10 data points. Well, today it’s just night and day in terms of your access to information about markets, about new supply, about rents, about the economy. And so what it has really done is made real estate a much safer asset class to invest in because you just have a lot more knowledge about whatever you’re about to do.
Robert Brunswick:
So tell everybody about what is your job, what’s your day-to-day job? What do you do?
Tim Ballard:
Well, I get to do all sorts of different things. So as an entrepreneur in the kind of business we have, I get to look at investments, I’ve got to look at design, we look at construction, we look at how we mitigate risk. We look at how do we build culture in our company. There’s a lot of things that you get to do in a small company that you might not necessarily get to do in a larger organization. So that’s something that really feeds me. I like having a different day every day.
Robert Brunswick:
So you prompted me to my kind of next ask, which I think I know you well enough, but I think it would be fun for everybody to hear. What do you like most about your job? If there’s something you could do more of, what are you passionate about?
Tim Ballard:
Well, I’m passionate about learning, so I like to figure things out. And so the real estate industry gives me an opportunity to learn something new every day. And that’s one of the things I try to tell our young people is as you grow older, what you learn is how little you really know. And if you approach it from that standpoint, I think you’re much less likely to make a mistake and your investment decisions can be better founded in what is the truth at the end of the day, because you’ve really learned what are the nuts and bolts of how you do this versus it being just data on an Excel spreadsheet. Well, really how do you build this? How long does it take? What’s it cost? Who are the people that need to be involved? What’s the best way of doing it? How do you bring a product to market that’s interesting to the tenants in that market? How does that office space result in a company being able to attract and retain employees? So there’s lot of things that you need to learn about to be any good at this job.
Robert Brunswick:
So with that knowledge and experience, you obviously have an investment philosophy at Buchanan Street; we have a investment philosophy. What is Buchanan doing today? Can you color an example of some types of things that they invest in and maybe why?
Tim Ballard:
Sure, yeah, so as we were talking about it a little earlier, we make apartment investments, self-storage investments. We make loans. We make kind of niche investments in the office space. One of the things that we’ve been doing here very successfully over the last couple of years is making apartment investments where we’ve been buying them just coming out of the pandemic as they were just finishing lease up. And so these are class A apartment assets in high-growth markets that, what we were able to see, is a confluence of a couple of factors, is replacement costs going up dramatically and so the prices that we’re able to buy these assets are less than the cost to replace them. So that’s a thing that’s a bedrock of our investment philosophy is try to buy things right and for less than it costs to reproduce them. That’s really a hedge against future development in terms of if you are to build more supply, that basically means you need to have higher rents, so we like higher rents in what we do.
The other thing that we saw in the pandemic is there was a bit of softening in different kinds of assets. There was a lot of people, younger people maybe, moved home with their parents, maybe they moved out of the urban locations. And so some of the leasing of these apartments was, I wouldn’t say challenging, but was not robust. And so we’re able to underwrite rents based on what had been going on over the past 12 months versus what really transpired over the months thereafter. And so post-pandemic or toward the end of the pandemic, people started realizing this wasn’t the end of the world and moved back to these apartments and we’ve had tremendous rent growth in our assets. And there continues to be fairly rapid rises in construction costs. So we feel that we have very defensive positions that have been able to take advantage of this kind of growth in rents.
Robert Brunswick:
So we’ve been in the storage business, you and I, for a long time, really as a lender, as an intermediary. So more recently we’ve gotten into the self-storage ownership business. So maybe you can share with folks what really prompted that and where do you see an opportunity? Because what you hear is lots of money coming to storage and maybe it’s an overbid or over sought after asset class. So share a little bit about what prompted that start to that business line.
Tim Ballard:
Yeah. Well, so a thing that we realized along the way in kind of building our business is that the most important resource that we have as a business is our people. And so I had spent a couple of years with a young man who was in the self-storage business working for one of the larger operators here on the West Coast. And just over time as I got to know him and mentor him, I just figured he’d be a great fit for our business. I liked what he was doing and it really gave us the opportunity to support a rising superstar in the business.
And so what we’ve seen so far out of that is one of the things that we try to deploy at Buchanan that helps us generate returns is find things on an off-market basis. And so actually every self-storage asset we’ve bought so far has been on an off-market basis. And given the very kind of fragmented nature of that business, we think we’ve been able to make some very good buys without the marketing process.
Robert Brunswick:
And the strategy has been more to buy brand-new, kind of not yet completely leased or leased at all investments. And do you view that as an undue risk? Or tell me how you see that as you kind of look at the investment opportunity.
Tim Ballard:
Well, the reason we identified these pre-stabilized assets is we thought there would be a nice kind of arbitrage between the ultimate value when they’re leased and the value that we could buy them from. Because basically we’re buying these from merchant builders whose plan is to sell the asset as soon as they can to generate the highest IRR. And so the builder has taken out much of the risk by developing the asset, getting it completed, and then starting to lease it. And you can then see what the rates are for that particular asset.
And so what we are basically bridging is the difference between the opportunistic returns of doing a development transaction and the returns of a more stabilized asset. So we believe we’re getting paid very handsomely for the risks we’re taking. We think the lease up velocity, the levels of rents are very predictable in the locations that we’re in because these are urban locations with lots of other assets within two to five miles that you can look to to understand what people are willing to pay and the demand for the space.
Robert Brunswick:
So despite its vacancy risk going in, it’s got great predictability to its ultimate lease up and stabilization.
Tim Ballard:
So whether it’s 12 months or 24 months, that’s not going to make a material difference in terms of the ultimate results if we’re buying assets that we’re hoping to hold for 10+ years.
Robert Brunswick:
Tim, you started in the lending business. You and I have been involved in lending in different ways. So I understand Buchanan’s platform of equity and direct ownership, which was kind of an evolution for the entrepreneur away from being an asset allocator with other operating partners. But it looks like you’re quite active in the lending business today, or we are, I should say. So tell me a little bit about why lending today and what’s that a proxy to, and why do you like having that business line as part and parcel of your real estate ownership?
Tim Ballard:
Part of the reason we really like lending is much of the lending universe is capitalized by highly regulated institutions, i.e., banks. And so if you’re a bank, it takes a long time to get a loan done. You have a fairly bureaucratic process generally for making those loans. And so a borrower may have an expectation of applying for a loan after they’ve went to the market and tried to figure out who they want to borrow from. That might take them two or three months to get that loan. And they’re not really sure if they’re going to get the loan as they applied for it at the end of the day because they don’t know the people that are the decision makers.
And so as you know in the lending space, we’ve really found a niche where we can do things where speed of execution is very important. It’s very important in the terms of the types of loans we make. We make construction loans and bridge loans. So there’s some reasonable level of execution risk in the type of loans that we make. And if you’re a highly regulated lender, it’s much more difficult for those types of organizations to figure out what that risk is.
So the way they do that is they lend a lot less, don’t lend at all, do it through recourse. And then given that we’re an operator of real estate, we know how to build much of this stuff, we know how to lease this stuff, we know how to execute on it. We’re very able to understand that risk and find the right situations where we can make those loans. And when we do, we get paid fairly well for doing so.
Robert Brunswick:
It sounds like your investors have enjoyed the evolution with that leg of your investment platform because it kind of gives them almost a proxy to a fixed income-like investment return, which is diversified away from their equity risk.
Tim Ballard:
Yeah. And it has a lot less volatility. In a equity investment, if the market rents go up or down, that’s going to significantly impact your returns. If cap rates go up or down due to capital flows, that’ll significantly impact, positively or negatively, your returns. And when we make a loan, we’re going to have 25% to 35% equity subordination from our borrower. And so it is a much more predictable outcome in terms of the yields that we earn on those loans than you would in an equity investment.
Robert Brunswick:
You and I have been doing this a long time. We’ve been recruiting young people, training them, mentoring them. We enjoy that. I enjoyed my time teaching at UCI. So as you think about our viewership today, I think it would be fun to hear if you were to message to young people that are thinking about real estate as a career, what might you tell them about this as an opportunity?
Tim Ballard:
I think it’s a fabulous opportunity, but it’s for the right people in terms of what we do. Real estate is a very broad industry, so I mean there’s a home for almost everyone, whether you’re the analyst, whether you’re the marketing person, whether you’re the entrepreneur. And so it’s become a very, very big industry. I was talking about this a little bit earlier, which is when I started my career, the entirety of the REIT industry was $600 million. Today the entirety of the REIT industry is over $1 trillion and there are REITs that are almost $100 billion in size alone.
And so it’s become a very different industry, but I think there’s a lot of opportunity yet still in it. I mean in real estate on the investment side, the development side, there’s the ability to shape communities, there’s the ability to shape how people work. There’s a lot of things that you can do to influence your community and it’s very important. Certainly it’s a big user of energy and there’s ways of thinking about how to bring efficiency and making our world a better place. So there’s just lots of things. There are many, many things that depending on how you’re built, how you’re wired, that is a great opportunity.
Robert Brunswick:
Well, thank you for the time today. I know everybody’s enjoyed it. I have. It’s fun. As much as our offices are next door to one another, we talk all the time, it was fun to do this podcast together. I hope everybody has enjoyed the podcast today. It’s a treat for me to have Tim as part of our resource group and we’ll look forward to seeing you next month with our next guest. Thank you very much.