Key Factors In Market Selection, With Dan Rosenbloom

Market selection can make or break any commercial real estate investment, in any sector. But when should technology drive the decision, versus expert insight and experience?

Dan Rosenbloom, head of investments at Cadre, joins the show to discuss Cadre’s “MVP” approach to market selection, and why it’s a core part of the company’s investment strategy.

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Episode Highlights

  • The history of Cadre, and how the company partners with local operators to invest in real estate projects nationwide.
  • Details on Cadre’s “MVPs”, and the company’s unique market selection strategy.
  • Why the Cadre team analyzes such a high volume of projects to find the potential “diamonds in the rough.”
  • How data scientists and financial professionals work together at Cadre to identify promising investment opportunities.
  • Why investors should look at the “micro” picture as well as the macro picture to determine if a particular sector in a given MSA is likely to outperform expectations.
  • How price inefficiency can exist even in competitive and liquid commercial real estate markets.

Today’s Guest: Dan Rosenbloom, Cadre

About The Alternative Investment Podcast

The Alternative Investment Podcast is a leading voice in the alternatives industry, covering private equity, venture capital, and real estate. Host Andy Hagans interviews asset managers, family offices, and industry thought leaders, as they discuss the most effective strategies to grow generational wealth.

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Show Transcript

Andy: Welcome to “The Alternative Investment Podcast.” I’m your host, Andy Hagans. And, today, we’re talking about a very important topic for LPs who are investing in multi-family and industrial. Really in any sector, and that is market selection. Because as we all know, market selection can make or break any real estate investment, right? And joining me, I have Dan Rosenbloom, who is head of investments at Cadre. And Cadre has a very unique approach to market selection that we’re gonna dive into. Dan, welcome to the show.

Dan: Thanks, Andy. Great to be here. Appreciate it.

Andy: You know, and before we dive into the nitty gritty of market selection, could you tell us a little bit more about Cadre and about your role there?

Dan: Sure, yeah. So, Cadre was founded about eight years ago. You know, the original mission of Cadre was really to provide more individuals the opportunity to invest in institutional quality real estate, which has traditionally been inaccessible, opaque, and an illiquid asset class. So, being able to bring on investors, who typically don’t have that ability, and do it, you know, in what we believe is the best-curated portfolio, with the best operators throughout the country. So, we look across all asset classes, we look across, you know, all the U.S. domicile, you know, states here, and we find what we believe to be, and curate the best opportunities within the marketplace at that time. So, you know, really, it’s just all about giving people access to an asset class that’s been much more institutionalized in the past.

Andy: So, is Cadre more like an allocator then versus being an operator of sticks and bricks, you know, real estate products?

Dan: Correct, yeah. So, you know, we are an allocator who… What we’ll do is we are fiduciary for our investors, and we typically are 90% to 95% of the equity. Our operator or development partners tend to be, you know, the 5%, 10%. But, traditionally, within these structures, these operators and developers are incentivized to drive value, and typically get what’s called a promote. So, they’ll get a little bit more, you know, of the profit on the back end when they succeed. So, we try to align, you know, the interest with the investor as well as the operator, so that our investors can generate the best returns possible.

That said, you know, we are still a steward, we’re still actively asset managing these assets. So, what does that mean? You know, typically speaking. In every deal we do, you know, we’re gonna form a joint venture with our operator development partners. And the major decisions always fall within Cadre’s realm, so we’re actively asset managing it. We’re augmenting the boots on the ground, so to speak. Whether it’s a development deal or whether it’s a local operating partner, you know, we’re gonna be working with them to create as much output the asset as we possibly can. But we’re actively working with those operators to push the top line, and also minimize the bottom line.

Andy: That’s interesting, you know.

Dan: By the way the bottom line, I mean the expenses, not the actual income. So, I, kind of, misspoke there, but the reality is we’re trying to obviously optimize the top line and have the best margins possible for our investors.

Andy: Absolutely. You know, and the interesting thing there, so you all are finding attractive opportunities, right? Not only attractive markets, but then within those opportunities, and aligning partnering with operators and developers. So, with that kind of model, the market selection becomes so, so important, right? Like, going through that haystack or finding the diamond in the rough. I guess I’m mixing metaphors here. But one thing I thought was interesting, I was going through Cadre’s website, and some of your research and materials, so let’s talk about the Cadre MVPs. And I think it’s really cool when a company like Cadre publishes so much detail on your approach, and it’s, kind of… I think some people might think like, “Why are you detailing your secret sauce, you know? Why are you giving away the keys to the kingdom?” Because, you know, you really go into quite a bit of depth with even potential investors about how exactly the process works.

And if I may, I’m just gonna read a short excerpt because I don’t wanna cross any signals. So, “We use proprietary technology to, number one, analyze millions of points of historical data. Number two, generate forward-looking forecasts. Number three, factor in liquidity to supplement our investment team’s expertise. And so, our process digs deeply into three specific property types, which are multi-family office and industrial in each metro area as we pursue strong risk-adjusted returns to help more investors grow their wealth with us.” So, a three-step process with market selection. You know, when did Cadre start using this process? Was this something that you, kind of, did without having a name, and then, you branded it later, or, you know, how did it begin?

Dan: Yeah. No, it started from the very beginning when our founder, you know, kind of, had a little bit more of a technology background. So, you know, look. If you think about investing in like, you know, a hedge fund or, you know, these private equity funds, a lot of them are using algorithms for many, many years to generate alpha, so why not do that within the commercial real estate world? And so we’ve been working on this. I’ve been here for six years. As you said, I run the investment program.

You asked me what my role is. So, I oversee acquisitions as well as the asset management, so, you know, I really oversee all the investing side of our business. And when you think about it, you know, when I first joined six years ago now, this was something that, you know, we were discussing and utilizing already when I was there, so about two years into the founding of Cadre. Over the years, we’ve refined it, we’ve, you know, kind of, gone back and forth over, you know, what those thousand variables are. So, we like to combine the data science with the experience that we have from our institutional real estate team, right?

So, one thing that’s really, really important and, I think, a distinguisher for Cadre is we’re not putting out $5 billion, $10 billion every year, right, like some of the big funds. So, what does that mean? You know, the macro is important, but not as important as it is for those big funds, who have to take macro bets, right? We have the ability to not only look at the macro, which we’ll talk about a little bit more on the Cadre MVP but also the micro.

So, just because Charlotte or Nashville kind of ring true to a lot of people in terms of, hey, what is a good macroenvironment compared to other markets throughout the country, which I think is key. You know, what we’re trying to find is the 15 best markets that we think will outperform not only, you know, on an absolute basis but on a relative basis, right? And it’s also outperform what? It’s outperforms what the broader market thinks, right? So, this isn’t just saying, “Hey, everyone thinks Nashville is going up, I’m just gonna make this up 5%, you know, over the next 12 to 24 months.” We look at this data and say, “Do we think it’ll outperform that 5% or underperform?” Because, generally speaking, these assets will get priced as though, you know, what the broader market thinks in terms of the growth.

So, if we think it’s gonna be 4%, let’s say, it might not be as compelling on a macro basis to have conviction in that market. But you have to dig, you know, deeper. You have to dig into the micro, and really understand, kind of, not just, kind of, okay, is Nashville a good market, but what are the submarkets that are better? Where are the jobs going? And what kinds of jobs and incomes match the type of real estate you’re looking at, whether it’s office industrial or multifamily? Kind of, what you had mentioned, Andy.

So, there’s a lot of nuances to it. This has been a labor of love, and it will continue to, you know, be redefined and reshaped over, hopefully, many, many years as we, you know, get more and more of a track record at Cadre. And what you’ll know if you, kind of, came behind the curtain is there’s a lot of, like, our data scientists really, kind of, meeting with the investments team, understanding what are factors you look at when you look at investments that make a market compelling. You know, is it infrastructure spending? Is it job growth? Is it a certain type of job growth? Is it, you know, population growth? Is it the airport has been expanded, so we think that now you can have bigger planes, so there’s gonna be more international business? Those are, you know, a lot of the things that we think about, you know, and make sense to you and I, but, like, the data needs to back it up.

And so, what’s behind there really gives us a level of conviction on the investment team’s side to be able to go to a market and say, “Hey, look. You know, we think, you know, from a…” I call it my educated gut because I’ve been in the real estate business, you know, since 1996 and been investing for, you know, 20 years now. And so, when you look at it, I say, “I think I have a good gut.” It’s an educated gut, but, you know, it’s augmented by data that really supports how we’re thinking about it. Add on another layer, and I think this where I think we’re extremely differentiated. Which is, we have the data, we have the institutional investor experience from the team. But then we have the best operators in the country, in my opinion, who are going to then be on the ground, giving us data that doesn’t lag the way that a lot of these research reports do lag, right? You want a real-time understanding of what’s happening in the market.

If you’re diving in whether it’s Nashville, Phoenix, LA, you need to understand what’s going on the ground. And as an allocator, if you’re looking at markets all across the country, it’s really difficult to be the smartest about LA, or Atlanta, or Charlotte, you know, in every market. That’s why having that local operator that is not only working with us but also incentivized to generate outsize returns, that’s really important for the investor at the end of the day. And so, when you’re looking at, you know, what we’re trying to do from the MVP perspective, it goes back to what I said. It’s we’re trying to understand, you know, do we think over the next 12 to 24 months… Because it’s really hard to forecast this out five, six, seven, eight, nine, years, right? It’s really, kind of, let’s think about the next 12 to 24 months, does our data tell us that, you know, these markets will outperform the broader, you know, kind of, marketplace, or at least what the broader market thinks is going to happen? We layer that in with, you know, what the prices are, you know, cap rates of these assets, and the liquidity component, right?

And this isn’t liquidity, like, how we think about liquidity trading in and out. This is more, generally speaking, in the United States for real estate, the more liquid the market is like New York City being probably one of the most liquid markets, the more valuable that market is, all things equal. Because more institutional capital will come in, so you’ll have more buyers, more sellers. It just adds depth to the market, so that factors into it as well. Because we might, you know, come across a market that looks really compelling, but it’s so small that, you know, where in bad times, the liquidity goes away and it generally is a more risky investment. But it’s also, you know, are we wasting our time, you know, going to that market, and putting a lot of energy and effort if there’s not a lot of opportunities for us to buy things? So…

Andy: If all goes well, you would enter a market where you could have multiple projects, multiple assets, and really get to know that market?

Dan: Yeah, I think there is something to be said for scale, Andy. Where not just with markets, but with operators where you do spend a lot of, you know, energy and time upfront studying, let’s say, Salt Lake City. Okay, that’s a perfect example, right? Well, we did one deal in Salt Lake City. Well, we have a lot of knowledge there, and guess what happens? Generally, the market hears about a certain firm buying a deal, and you’ll get more calls, right?

Andy: Mm-hmm.

Dan: It’s just one of those things where, “Okay, they’re looking to get into this market.” So, it really is an advantage to do more than one unless there is a unique reason not to. But going back to, you know, these MVPs. The way that we look at it from the investment team’s perspective is, I like to say the 80/20 rule. We wanna spend 80% of our time proactively looking at the markets in the MVP, but we’re gonna spend 20% of our time being reactive in markets outside of the MVP with really good operators, who may have found an interesting opportunity. Because I truly believe you can find a good micro deal inside of a bad macro environment, and we wanna have the flexibility to really, kind of, be able to react to those deals. Because again, we’re not…

Andy: Could I ask? Dan, I’m sorry to interrupt.

Dan: Yeah.

Andy: I wanna ask about that, though, because you referenced, you know, larger funds, larger, you know, asset management firms. They have to take macro bets, right? There’s some investors at the institutional level, like, they can’t do a deal unless they can deploy half a billion dollars, and that really, I think number one, can limit you. Number two, it can lower your returns, right? Because there’s gonna be a whole universe of opportunities that are off the menu if you have to deploy capital, you know, in chunks of $1 billion dollars. So, is there a sweet spot for Cadre where a project is big enough that it has scale that it is, kind of, worth that? It’s almost like a fixed cost, right? Not totally fixed, but due diligence, and just all these, sort of, costs that are more or less fixed. Is there a sweet spot of size where it’s in that pocket where the institutionals aren’t necessarily… They’re not competing with you, but at the same time, it’s large enough that you can actually deploy significant capital?

Dan: Yeah, there is, Andy. And I think a couple of things to hit on before that. First of all, these big funds clearly have done very well, and they’re smart, have unbelievable, you know, intelligence and teams in there looking for deals. But, yes, they have to put out large chunks of money, and they’re generally competing with one another for those deals. So, you’ll see the big three, four, or five players, you know, bidding on, you know, auctions for those larger transactions. That to me, you know, they need to put out that capital. Where we look at it as we’re a sharpshooter. You know, when we look at it and say, “Okay, we’re putting together.” And we’ll talk about it later, Andy. But on the Cadre Direct Access Fund or the Horizon Fund, we’re looking to put out, let’s say 7 to 15 deals a year, we’re not looking for 50 or 100 deals. Like, we’re trying to be very measured about, you know, the deals we look at. We have a really big funnel, so for every deal we do, we’re probably looking at over 1,000 opportunities to, kind of, funnel…

Andy: Whoa, wow.

Dan: …one deal.

Andy: Okay, I’ve gotta ask about that. In my mind at least, you’d have to triage that where I don’t think you’d wanna have an analyst looking at every single deal. I mean, are there some that, like, basically the algorithm or are just, kind of, being thrown out right off the bat?

Dan: Yeah.

Andy: Like, how do you triage that kind of a universe of opportunities?

Dan: Well, that goes to the point where the Cadre MVP is very helpful to filter, right?

Andy: Mm-hmm.

Dan: So I looked at it as, you know, when we look at the pipeline we’re curating deals, it’s 1A and 1B, market and operator, right, the operating partner. I look at it as if it’s a bad market or a bad operating partner, generally, it’s gonna fall to the bottom of the list or middle of the list. Unless, again, we have an operator who is touting some a deal, then we’ll spend some time on it. But if it doesn’t have a good market or a good operating partner, it’s gone, right?

Andy: Mm-hmm.

Dan: If it has both of them, it’s gonna rise to the top of our pipeline, and we’re gonna dig in a little bit more. And so, we do have also other technology that we’ve put together that allows us to really sift through a lot of the data that we see quicker, right? So we can put in, let’s say, it’s an Austin B multi-family asset, we’ll put in, “Austin multi-family B.” And it pops up, and it’ll show us, you know, the last 10 to 15 deals that we’ve seen. It’ll show us the metrics so we can compare that deal to a lot of the deals that we’ve already seen, and we can get a good sense of the risk-adjusted returns for that specific deal. So, to your point, it’s more about the speed of killing deals than it is the speed of doing deals, right?

So, when we look at this, and we’re looking at it saying, “Hey, we’re gonna do, you know, whatever 10, 15 deals in a year.” You know, some years more, some years less, depending on the market. You know, we’re able to really, kind of, dig into these things, and spend time trying to find what we think are the best relative deals in the market that we’re seeing.

And, you know, so you asked about opportune size. You know, we tend to look at, kind of, $15 million to $40 million equity checks. So, when you look at leverage somewhere between 50% to 70%, you know, these deals tend to be $50 million to $100 million in total asset value where we think there is a sweet spot there where the larger institutions aren’t chasing it. Because to your point, you know, like, each deal takes the same amount of time. Like, a $1 million deal and $1 billion-dollar deal can take, you know, very similar time and energy for the investments team. So, our sweet spot is, kind of, in that, you know, $50 million to $150 million asset value, and we do feel like we have a little bit of an edge there. We think that it’s unique, and does have a little bit better, you know, risk-adjusted returns that we’ve seen.

But, you know, to answer that question. Like, we’re seeing these deals, we’re able to move quickly. We have conviction around markets because of the MVP, and then we have conviction around operators because of the relationships that we have with a lot of operators out in the marketplace where we’re trying to scale up with some of those, you know, top tier. Whether it’s an office user in Southern California, a multi-family owner in the southeast, there are operators that we tend to lean into because of their performance, and their track record, and the fact that we’ve done business together, and we know how they think, and we know how they perform.

Andy: Interesting. Okay, I want to turn to the data for a minute. And, you know, full disclosure, my bachelor’s is in information system, so I should know something about data, but it didn’t really take. It turned out I wasn’t really smart enough for all the computer stuff, so I ended up with all the dummies in finance. No, I kid. But I think financial data is super fascinating. Because, like, take the Federal Reserve, for instance, so much data, but so much of it is backwards-facing. And, honestly, I think it’s like six months out of date by the time that they act on it. That’s probably a conversation for another episode, but it’s amazing how much data the Federal Government releases for free, right, so I imagine a ton of the data input into your model is just public-domain, government-type data. But are you purchasing data from different sources, are you scraping it? Could you talk a little bit about where you get data that’s actually timely to, kind of, feed this model to give you that edge?

Dan: Yeah. Well, first off, you know, I will say I have a BBA and an MBA in finance, so I’m one of those dumb finance guys. So, no. In all seriousness, I’m the real estate guy, so, you know, it’s interesting when I joined Cadre six years ago. You know, a lot of these engineers who know nothing about real estate investing, and I knew nothing about, you know, writing code and some of the things that they do. So, it’s been an unbelievable learning experience for me, a steep curve.

But to your question. Look, we use public, private, and proprietary data. So we’re scraping, you know, lots of data that’s out there, we have our own private data, and then, you know… Sorry, we’re buying private, you know, information as well, and we have proprietary data that we’re also using, right? So, in aggregate, we are augmenting our commercial real estate team, which has executed tens of billions of dollars of deals in the U.S. over the last several decades with a lot of this data that, again, some of it conforms to what we think. And some of it is like, “Oh, wait a minute, that’s interesting. You know, I wouldn’t have thought that this market, you know, was gonna perform the way it was.” And then we dig into a little bit why.

A lot of it is behind the curtain, Andy. But, you know, through our data analysis, you know, we develop a model that ultimately allows us to monitor price trends for multiple markets and property pairings, you know, which just really tests relationship between demographic and fundamental variables, you know, which will tell us what future price growth should be. But we understand that each individual property performance in terms of, you know, these systematic and idiosyncratic components are gonna lead to different results.

But, you know, again, we look at it. You know, the data is there to inform and shape our conviction around these markets, but it’s really, really important, as a real estate guy and as in a relationship guy to say, “Okay, we have all this data.” To your question like that we scrape and that we, kind of, come up with our own, kind of, sense of that market. But you’ve gotta get into the market, you’ve gotta… You know, not every, you know, corner is the same, not every sub-market is the same. You know, understanding where population growth and, you know, demo growth is obviously extremely important, but it’s digging down deeper into what kinds of jobs. Are these, you know, higher-paying jobs, middle-paying jobs, or lower-paying jobs? Which really dictate what type of asset makes more sense to go after, whether it’s class A multi-family or class B multi-family when you’re looking at the residential side for office, is it urban? Is it suburban?

So, you know, there’s a lot of things that push and pull that we take, and that ultimately helps us, you know, obviously with our investment track record, which I think you’ve seen. But, obviously, we tout that as well. But we do feel as though these MVP markets have outperformed the greater commercial real estate indexes.

Andy: So, you know, you mentioned… I think you mentioned, like, correlations or machine learning. You know, forgive me if I, kind of, butcher some of the verbiage here with, you know, AI, algorithms, and machine learning. But so your system is looking for correlations between different data points, you know, related to, you know, price appreciation historically that maybe can be modeled out. You know, is there a risk that, you know, the machine learning model is gonna find correlations that are almost accidental? Like, is there a point where, you know, you find a correlation, or job growth, or whatever, and then a human has to, kind of, review that and say, “Does this make sense from a logical perspective?” Because, you know, sometimes a correlation will show up in the data, and it will just be like an artifact or whatever, and not necessarily meaningful. So, how do you separate that, you know, signal from noise with the machine learning, with the algorithm, and all the data?

Dan: Yeah, and look. I mean, to your point, there’s a lot of nuances to it. Look, you know, at the end of the day, we see that the market either is performing well or not well compared to what the overall general market thinks, right?

Andy: Mm-hmm.

Dan: But then there’s cap rates. And cap rates fluctuate, and not all cap rates are created equally. You know, some people quote trailing threes, some people quote four, some… You have to sift through, you know, the data. Again, we’re in an opaque industry where, you know, the data you’re getting is, A, generally stale, and, B, it’s not always apples to apples. So it’s, A, making sure we’re comparing apples to apples so that we can, you know, be looking at the right data.

But, you know, I’ll give you a real-life example. We bought a deal in Austin, Texas a couple of years ago, a multi-family deal, okay? And it was a deal where there wasn’t a lot of value-add, meaning you’re not coming in and fixing anything, you’re not coming in and putting a ton of capital to, you know, get a return on your investment on the capital. It was purely a market bet on a good solid asset that we thought was in a growth market.

But, you know, look, a lot of people, when we were talking at investment committee were like, well, you know, you and I talked a little bit before this, Andy. And it’s, like, it’s not a secret that Austin is a market a lot of people wanna go to. Like, Austin is not a great secret anymore. As a matter of fact, for years, we’ve been saying in the real estate business, “How do we find the next Austin?” So, Austin has always been, you know, in the vernacular from that standpoint. But guess what, you know, we did our data. We went to our data scientists and said, “Hey, look, we’re looking at Austin right now. Let’s try to find a correlation where we can show where we are in the market today, and what people’s expectations of growth are, and compare that.” You know, to your point, looking backward, which is not always the best, but it’s all we’ve got, right?

Andy: Mm-hmm.

Dan: But we were able to find data that showed that, yes, Austin, everyone is thinking Austin is going up, but we found, you know, that that point in the cycle, we would actually probably outperform, you know, I guess the broader market perception of growth. Because of certain, you know, algorithms that we ran, we got conviction that it was the right time to buy at Austin at that point in time. And that even though the broader market thinks Austin is gonna grow at whatever percent growth, that, you know, we were buying a value that made sense based on…

Andy: So, you’re really talking about pricing and efficiency then. So, it’s like it’s obviously, you know, other investors understand that Nashville and Austin have demographic tailwinds, have a lot of tailwinds that are driving those places forward. And in general, that’s priced in. But, you know, how much premium, you know, do you price in? And what you’re saying is, you know, there might be price inefficiencies, so maybe Austin has a 50% premium or 100% premium compared to a median home price nationally. But, actually, it ought to be 120% right now based on the data or whatever. So, it can be hot, but, nevertheless, still mispriced?

Dan: Oh, there’s absolutely pricing inefficiencies in the commercial real estate market. I mean, if you just think about the process that we go through, I mean, it’s not on an exchange. It’s a broker, and we have operators on the ground who see what’s going on. I mean, you know, again, I’ll give you a perfect example, and I think it’s there’s no better way to, kind of, describe it than to tell you what happened.

So, in late 2020, coming out of the pandemic, there were a couple of markets that really, kind of, stood out to us from our data science, and I’ll give you two of those markets. At the time they were Phoenix and Tampa. So, I said to my team, I’m like, “Okay, let’s try and find the best deals we can find in those markets.”

So in Tampa, you know, we turned to an operator that we’ve done business with before, who owns in Tampa. And I was talking to the gentleman who was running, you know, the east coast for that firm. And he said, “Hey, we’re looking at like four or five deals in Tampa right now.” And we walked through all those deals, and I, kind of, earmarked one of ’em. Like, there was one deal in particular where it was owned by a family on the West Coast. They only owned one asset on the East Coast. Most of the assets they owned were on the West, so they really weren’t focused on Tampa in particular at that time. Our partner had an asset, an ’80s vintage asset, this was an early 2000s vintage. So, all things equal, early 2000s should, you know, generate higher rents, right?

Andy: Mm-hmm.

Dan: Well, our partner had a property no less than a mile of the [inaudible 00:28:52] ’80s vintage where they were getting higher rents than this property because it was mismanaged. It was one of these, you know, kind of assets that we saw where I said, “Okay, early 2000 vintage, so it had good bones. You know, it was institutionally owned, but not really because they hadn’t been focused on it. And there was not a lot of capital that had been put into the asset to, kind of, really push the revenue the way that it should have been.

So, we saw that, A, look our market… You know, at the time, it was called the Cadre 15, now it’s the MVP, told us Tampa was gonna outperform. So we went in, and we said, “Okay.” We saw four or five different deals. We honed-in on this deal because of the submarket we thought was growing because of certain companies were coming in this location. And then we identified an asset because of our operating partner who said, “Hey, look, there is a real opportunity here to outperform the market. There’s a pricing inefficiency here, right?” Because, you know, a lot of people were buying because cap… You know, were buying lower cap rates because, you know, there was low debt, and people had priced in some growth.

Well, in this instance, we thought not only was there market growth, but there was a big mark to market that the, you know, general market wasn’t pricing in because of that inefficiency and mismarket or mispricing. And then, there was also a big value-add component that, again, we thought we had better transparency on pricing because our operator was doing it in that same submarket down the street on a worse product and was generating, you know, really strong return on their investment.

So, we went in, we bought that asset. And sure enough, you know, we’ve been able to outperform not only, you know, what the market thought, but what we thought in terms of rental growth, in terms of return on investment for that capital. So, you know, when you’re looking at it, and saying, “Yeah, is there inefficiencies?” Absolutely. In the real estate environment, you know, you have, you know, a process that’s not… Again it’s opaque, it’s a little bit archaic. You know, but it’s what we do, and it’s how we make money, it’s how we transact. But having, you know, the MVP point to Tampa, having a local operator on the ground who knows the market really well and knows it real-time, right, Andy? Like, the information they told us was because they were managing an asset in that submarket. Nobody knew what they were getting on rents. You know, eventually people did know.

Andy: Well, that’s so interesting because that story that you just told it shows the value of, you have the data, the modeling, but then you also have that operator giving you that proprietary information and that local market knowledge. And it’s really the combination of all that information, you know, gives you that edge. One thing I’m curious about, because the report that I reviewed and I think there was even a press release that I’ll make sure to link to that in the show notes. The press release announced Cadre’s MVPs for 2022.

So, these were the three markets that were MVPs in each of the three sectors that you analyzed, Charlotte, Raleigh, and Nashville. So, these triple crowns, so they were favorable in, I guess, office, industrial, and multi-family. Do you find that, you know, generally speaking, if an MSA is strong for one of these sectors is it usually strong overall, or is it all over the place for industrial versus multi-family?

Dan: Yeah, I think it is unique between industrial and multi-family. I mean, a lot of it is, like, for industrial reasons, why they’re strong. Are they near a port? You know, from a truck perspective, are they within an eight-hour drive of the city, right? Because the more population you can have for, you know, an eight-hour drive for a trucker is gonna be more valuable. So, you know, the things that we look at for multifamily and industrial, you know, are very different.

Look, there’s some correlation, and there’s some overlap. But, you know, I would say multifamily and office are probably a little bit more correlated than industrial would be. Because, you know, the industrial, okay, is it last mile, is it something that it’s a great port, and it’s distributing, you know, up and down the coast? You know, Chicago is obviously a great industrial market or at least is, you know, a huge industrial market. I’m not gonna say it’s great, but it’s huge. Why is it there? Because it’s, you know, the middle of the country. Dallas, the same thing. And I am a Chicago guy, so I could…

Andy: Chicago, wasn’t it at the center of, like, a bunch of railroads, and that’s pretty much?

Dan: Yeah. Well, it also had the Great Lakes, which, you know, at the time, you know, boats were coming in, you know, from Europe. That’s a long time ago. I mean, you know, look, if you wanna go back and talk about the history of cities, I love it, I mean, I really… You know, I drive through Illinois all the time because my kids have hockey games all the way down and south of Illinois. We drive by, and it’s like, “Well, why is Peoria not flourishing the way it was, you know, 80 years ago? Well, you look, it was on the river, but the river is not used anymore because we have trains, we have highways. You know, there are different ways and more efficient ways of getting the product to the customer, and so that’s killed cities over a centuries, right?

Andy: Well, and speaking of change. And I have to ask because multifamily industrial and office… Is office dead? I mean, is this the least attractive sector in the sectors that you’re looking at? Or do you have, kind of, a different take on office than the default take in 2022?

Dan: Yeah. Andy, I could talk for hours on office. You know, there’s a lot of dynamics going on here right? Which office investing is cyclical, you know, it’s a lot about vintage. And, you know, office, you know, when we talk about real estate and why it’s a good inflation hedge, right? It’s can we mark to market quickly? Well, you know, with hotel, you can mark to market that day, right, because you’re leasing it out day by day. With multifamily, it tends to be 12-month leases, so you can capture a lot of the upside. With office, depending on, you know, the type of office. But, like, big CBD office buildings are 7, 10, 15-year leases, so it takes more time to reset. But it’s also the cash flow sometimes is misleading because there’s so much capital needed to release these… You know, with these office buildings, a lot of times the cashflow gets eaten up. So, it’s all about, you know, a lot of times, if you’re going in based just on your exit, you know, so it’s vintage. It’s, you know, when are you buying.

You know, 2020 obviously, you know, really hit office hare for obvious reasons that we don’t really need to go into, I think everyone’s pretty aware of that. So, as we sit at the end of ’22 going into ’23, what’s happening? I think a couple of things. One, there is obviously the health, people going back to the office. But there are a lot of people who wanna be hybrid workers. But what’s happening, what we’re seeing is as we head into a potential recession, there’s a lot of layoffs occurring. Just this last week, I mean, Amazon 10,000 people, Facebook… You know, so I think what’s gonna happen is more and more of these CEOs are going to, you know, lean back into, “Hey, look, being in the office is important.” You know, these companies didn’t spend billions of dollars on office campuses because they thought it was inefficient to be in an office together.

Andy: Yeah. You know, Dan, it really does feel like the leverage in… You hit the nail on the head. It feels like in the last seven days, the leverage has, kind of, swung from one extreme to the other. And I think that the employment market, the job market, I think we’re gonna see it, kind of, invert and flip pretty quickly, unfortunately, you know. Because…

Dan: Look, I’m old school, I love being in the office. I see collaboration go up, I see efficiency go up. Look, there are certain things that aren’t efficient, and I’m not saying you should be in the office five days a week. Like, Fridays, work from home, I think that’s great. I think, you know, you need to balance your work and life a little bit. I think a lot of people probably went a little bit too extreme one way or the other over the last year or so, and I do think being in the office…

Andy: The five-day weekend.

Dan: Yeah. I mean, look being in the office three or four days as a young 20-something professional, I look back 20 years ago, I benefited from listening to, you know, my bosses. I also benefited from having my peers. Like, I spent 100 hours a week working, and it’d be midnight on a Wednesday night, and I’m stuck on a problem. I’d turn, you know, to the cube to my left and say, “Hey, Brian, you know, I’m thinking about this, what are you thinking?” You know, if I was at home, either I wouldn’t be able to call him at midnight because that’s late, or I’d maybe email him, “Are you up?” And it just becomes inefficient. Plus I’ve gotta tell you, we’ve started going more and more to the office. And when I’m in there, my team’s there, I can, kind of, say, “Hey, here’s what I’m thinking, what are you guys seeing?” And you can get really spontaneous value to the company from that interaction, and I just think there’s efficiencies.

Look, it’s not every industry that’s like that, but I think it’s a lot more that are like that aren’t. And so, I think what’s gonna happen is there’s going… Right now in the office market, you’ve got 10% to 15% of the stock in markets that are getting 80% of the demand. Newer products, cooler, you know, in Chicago because I’m here. Fulton Market, you know, gets the majority of the demand because it’s where these younger, you know, folks wanna be. And, you know, look, that’s what you want, you want a recruiting tool.

I think in the next two, three years, we’ll see a shift back to going to the office. Again, not five days a week, but three, four days a week. And I think it benefits the younger talent to be like, “Look, if employee A and employee B are the exact same.” I’m not gonna, you know, [inaudible 00:38:38] it, but they’re the exact same person. One is going in the office three days a week, and their bosses are there, the other one isn’t. Who is gonna get promoted, and that’s gonna help? Who is gonna learn more? I just think it helps to be in the office. You can do some remote working. And, look, half my job is on the road right, Andy? Like, I’m going to markets, I’m seeing deals, I’m talking on conferences, panels, meeting people, so I’m used to, kind of, being on phones. I love what happened in 2020 because the Zooms are better. I think Zooms do give you a little bit more of that personal touch, but it’s not the same as, you know, being in the office together, seeing someone in 3D, and really driving a connection.

So, office though right now is very tough. Look, interest rates are up big, the cost of capital is up big. You’re gonna run into a lot of office assets that were bought in ’18, ’19, ’20 with three to five-year-old debt. Well, what does that mean? That’s coming up. So, you know, the debt capital markets. If you just think all things equal with the cash. You know, if income is the same on the asset, which it’s not. But if it was, you’re borrowing cost is going up 2x because where you could have borrowed it 3.5% a year ago now is 7% from…

Andy: So, yeah, absolutely. I mean, the short-term headwinds… I mean, I 100% agreed. But I like that you have, I don’t wanna say contrarian, but a little bit more of that, you know, bullish long-term viewpoint on office. So, I’m just curious, are you still looking at office deals into 2023, or is it, sort of, a wait-and-see for that specific sector for Cadre right now?

Dan: Well, I always say… My point on that, Andy, is I wanna see every deal. Good or bad, I wanna see it, right?

Andy: Sure.

Dan: That’s that funnel we talked about earlier. I wanna see those 1,000 data points, so I can do the 1 best deal, right? But, you know, are we gonna lean into an office deal right now? I would say it’s a very low probability given the fact that unless you have to sell right now, you’re not selling an office building. So, unless we have a distressed seller, it’s gonna really be hard to have conviction around where the pricing would be for that seller to be forced to, kind of, sell.

Now, I just read an article that JPMorgan and Deutsche Bank are thinking about selling their commercial loan balances now, selling ’em out, so that’s the first domino to fall. If you go back to ’08, ’09, ’10, obviously, I invested right after the GFC. When you look at the office trades, well, first, you know, the debt is sold, you know, at a discount. You know, the lenders are gonna sell because they don’t like to foreclose. But then that person is either gonna buy it and foreclose on it, or buy it, and work with, you know, the operator to extend and get them through the next couple of years. But that really starts to set the floor, right, you start to see valuations. Until you see the floor, it’s gonna be hard to gain conviction on value right now. So, we are looking, but it has to be extremely compelling for us to dive in.

I think in ’23, there will be some interesting buying opportunities. That’s why when you look at the products we’re putting out there, I would say half of our time is spent right now still on the housing market in some way, shape, or form. You know, whether that’s multi-family investing, SFR, you know, student housing. And the other half I say we’re opportunistically looking at office, industrial, and hospitality acquisitions. And, you know, so from that standpoint, I do think over the next year or two there’s gonna be some pretty compelling office opportunities. But, you know, you’ve gotta know what you’re doing, what you’re buying, you know, understand the capital. And having a great operating partner who knows how to lease these things, and knows what assets will lease and what won’t because you will have winners and losers.

And, look, we saw trends before the pandemic, kind of, shifting to the suburbs and shifting to these secondary markets like in Charlotte and Nashville, and those are the types of assets that we bought pre-pandemic from an office perspective. And we think that the trends are just gonna accelerate, and that those markets are gonna have real good opportunities. So, that’s why when you look at, kind of, the Cadre 15 on the office front you’re not seeing San Francisco or New York in there. You’re seeing some of these, you know, kind of, secondary markets.

But, you know, one of the things you asked is, you know, it just because someone is… You know, kind of, fundamentally, we think is interesting in the office world is it obviously fundamentally good in multifamily? Philadelphia is a good example. And office we think there’s a lot of potential tailwinds over the next couple of years. Again, [inaudible 00:43:14] at the right basis. But for multi, we don’t see that. But for industrial and office, we like the Philadelphia market. But in multifamily, we think it’s a little bit oversupplied, overpriced, and the cap rates aren’t as compelling when you look at IRRs on a risk-adjusted basis.

Andy: I like that. So, sector by sector, and I will say just my personal two cents. If you guys are looking hard at an office deal, then given what you said, then I’d probably look at it hard too, right? Because if it’s, you know, that much of an opportunity that it does rise to the top, then I personally would be like, “Okay, I wanna see what this deal looks like.” So, that being said, I know Cadre has different investment options available for high-net-worth accredited investors. So, I know that you all offer deal-by-deal investments, diversified portfolios, and you also have the Cadre Horizon Fund that’s more focusing on defensive income-oriented investments. So, could you tell us a little bit more about these different products, and what type of investor goal that each product might be appropriate for?

Dan: Yeah, absolutely. Look, we have… So to your point, we have, kind of, two, you know, flagship funds. We had raised, in 2020, our first in a series of call it value-add funds. We’re finishing investing that right now, we’re gonna launch fund two early next year. So, that value-add fund will again… It’ll be more focused on, you’ll have, again, similar to what I was saying before, both funds similar strategy of looking at probably half residential sector, and then half opportunities looking at office industrial and hotel. But, you know, we also have the Horizon Fund, which you mentioned, which is more of a core-plus fund, longer-dated. We’re looking to grow the value of those assets over a longer period of time. Probably a little bit more cashflow oriented, a little bit lower return profile on the Horizon Fund, but longer-dated stuff that we wanna own 5, 7, 10 years.

The value-add fund is gonna focus more on, you know, we definitely are gonna look at cash flow. But we’re gonna look at ways of augmenting that cash flow whether it through additional capital to generate outsize, additional cash flow, or whether it’s, kind of, buying a little bit more opportunistically an office building or something like that where we think, “Hey, it’s more of a three-to-five-year time horizon.” Shorter time horizon on the value-add fund, a little higher returns. And then, on the Horizon Fund, it’s core-plus more downside protection. To your point, Andy, both good risk-adjusted returns, just different profiles. One is, you know, trying to build wealth over, you know, a longer period of time. The other one is shorter, taking advantage of maybe mispriced assets within the market at that point in time.

Andy: I really like that product mix. I mean, it seemed to me that would allow you to take advantage and be flexible where there’s an opportunity with those multiple strategies, multiple risk profiles that, you know, you can execute on an opportunity while still keeping it within a fund, you know, that’s aligned with a particular risk-return profile. So that being said, Dan, where can our viewers and listeners go to learn more about Cadre, and your research, and all of your products?

Dan: Yeah. So, I mean, If they go there, you’re gonna see a lot of the research that we’re doing that we’re publishing will be on You’ll be able to read more about the Horizon Fund, you’ll be also able to read about, you know, what we’re doing with the Cadre Direct Access Fund today. And then, eventually, we’re gonna be launching that, you know, in the first quarter, so you’ll be able to, kind of, see more updates about that. And at, you can read about the Cadre MVP that you mentioned and that we’ve spoken about in terms of how we’re driving, what we think is outsized alpha in the commercial real estate investment place.

But, you know, look, you know, we just launched that Horizon Fund, to your point. You know, this is an investment vehicle were working into drive really long-term value for our investors. And, you know, it’s really more income-oriented investors. Ultimately, we think we deliver the benefit of the yields and long-term growth of real estate, and all of that can be… You can see some of the deals that we did. So, there are deals on the platform today that you can either invest in, or you can see examples of deals where we’ve come in and obviously made money for our investors. So, it’s all on, Andy.

Andy: Awesome. So, for our listeners, I’ll be sure to put links in all of those with the link to the MVP page as well as obviously to in our show notes. And our show notes are always available on Dan, thank you so much for coming on the show today, discussing, you know, the very unique approach to market selection that Cadre has. I really appreciate your sharing your insights with us.

Dan: Great. Well, I appreciate the time. It’s always fun to talk about what’s going on in the real estate investment environment. It’s moving quickly. You know, but in our industry, things tend to move a little slower on the private side as they do the public side, so we also, you know, spend a lot of time analyzing what’s going on in the public markets, and really using that to shape, you know, how we view value. And we think it’s a really good opportunity today to be investing in commercial real estate over a longer period of time, which is why we, you know, launched the Horizon Fund. But it’s also why we have this value-add fund to take advantage of some of the price dislocations that we think are gonna, you know, be prevalent over the next, you know, 6 to 12 months.

Andy: Absolutely. I love that approach, Dan. Thanks again.

Dan: Thanks, Andy.

Andy Hagans
Andy Hagans

Andy Hagans is co-founder and CEO at AltsDb, and host of The Alternative Investment Podcast. He resides in Michigan.