Today’s guest is Michael T. Fay
Michael is Chairman of the U.S. Capital Markets Group Executive Committee, Managing Director of Avison Young’s Miami office, and Global Director for the Asset Resolution Team Affinity Group. He has brokered over $16B in transactions over 40 years.
Show summary:
In this podcast episode, Michael Fay discusses the challenges faced by the office sector in the commercial real estate market. He highlights the major reset happening in the office market, with different companies implementing varying approaches to returning to the office. This has resulted in high vacancy rates and uncertainty about the future of office space in major metropolitan markets. Fay also discusses the challenges faced by lenders and borrowers, the potential repurposing of office buildings, and the shift towards industrial real estate.
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Intro [00:00:00]
Michael Fay's Career in Commercial Real Estate [00:01:03]
The Major Reset in the Office Market [00:04:01]
The resetting of loans and creative solutions [00:09:17]
Distressed office properties and new investment funds [00:11:30]
Redevelopment of malls and creation of urban centers [00:16:25]
Opportunities in the Real Estate Market [00:18:20]
Alternative Investments and Interest Rates [00:19:46]
Inflation and Commercial Real Estate [00:21:00]
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Connect with Michael:
Email: michael.fay@avisonyoung.com
Phone: 305-495-0003
Linkedin: https://www.linkedin.com/in/themichaeltfay/
Web: https://www.avisonyoung.com/professionals/-/ayp/view/michael-t-fay/in/miami
Connect with Sam:
I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns.
Facebook: https://www.facebook.com/HowtoscaleCRE/
LinkedIn: https://www.linkedin.com/in/samwilsonhowtoscalecre/
Email me → sam@brickeninvestmentgroup.com
SUBSCRIBE and LEAVE A RATING. Listen to How To Scale Commercial Real Estate Investing with Sam Wilson
Apple Podcasts: https://podcasts.apple.com/us/podcast/how-to-scale-commercial-real-estate/id1539979234
Spotify: https://open.spotify.com/show/4m0NWYzSvznEIjRBFtCgEL?si=e10d8e039b99475f
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Want to read the full show notes of the episode? Check it out below:
00:00:00:01 - 00:00:23:10
Michael T. Fay
Only about 50% of office buildings can really only be repurposed for multifamily or some other use outside of office. So what's interesting in what I'm hearing and what I'm starting to see is, yes, the foreclosures are coming in, but there's going to be, what I would say, a proverbial kicking the can down the road. What does that look like?
00:00:23:18 - 00:00:24:17
Michael T. Fay
Welcome to the How.
00:00:24:17 - 00:00:47:14
Sam Wilson
To Scale Commercial Real Estate Show. Whether you are an active or passive investor, we'll teach you how to scale your real estate investing business into something big. Michael Fay is chairman of the US Capital Markets Group Executive Committee. He's the managing director of Allison Young's Miami office, and he's also the global director for Asset Resolution and Team Affinity Group.
00:00:47:22 - 00:00:54:18
Sam Wilson
He has brokered over $16 billion in transactions over the last 40 years. Michael, welcome to the show.
00:00:55:14 - 00:00:57:09
Michael T. Fay
Thank you so much. It's great to be here today.
00:00:57:12 - 00:01:06:18
Sam Wilson
Absolutely. The pleasure is mine. Michael, there are three questions I ask every guest who comes on the show in 90 seconds or less. Can you tell me where did you start? Where are you now and how did you get there?
00:01:08:12 - 00:01:30:14
Michael T. Fay
Started commercial real estate when I was 13 years old. Honestly, I was 13 was the time when I wanted to really think about real estate. It was a great way to watch. Watch. It happened with some friends of ours. I started in commercial real estate 20 when I was 20 years old, actually this month, July 20, 23. It's been 40 years, so 40 years in the business right now.
00:01:31:10 - 00:01:49:03
Michael T. Fay
I reside in Miami, Florida and a couple other places. It's really it's been a great business. It was involved with a bank and some other really great entrepreneurial ventures in commercial real estate. Just allows such a purview into so many businesses and things going on. So that's why I feel blessed to be here.
00:01:49:07 - 00:02:07:00
Sam Wilson
Yeah. My gosh, that's that's a heck of a career and a heck of a job. I mean, I'm thinking just the amount of change that you went through from 83 to 0 three. Right. Like that was that was incredible. And then to see that, then turn and then do it again for the next 20 years, that's a lot.
00:02:07:01 - 00:02:21:01
Sam Wilson
That's a lot to compress here into a 15 minute podcast, and I'm sure we won't even begin to scratch the surface. Tell me, what are some things you know that you're working on right now that you said, hey, this is this is something I'm really excited about in the commercial real estate space.
00:02:22:24 - 00:02:46:20
Michael T. Fay
So right now, just to go back to what you just said and these 20 year segments, I think I nine different downturns. So that was from the RTC days of the nineties to the Russian ruble crisis to the war and the Great Recession of oh eight and of course, the pandemic and today our great inflationary the so, you know, we see these and there's a couple more in between I think today.
00:02:47:04 - 00:03:20:13
Michael T. Fay
What's exciting is that they're really a tale of many cities and it depends a lot for the country. There's all sorts of opportunity that goes on in different product types, whether it's office for a retail, multifamily development deals. You know, we do some of the largest, largest sales of development sites, especially down here in South Florida, out working on the $1.2 billion sale for Dante, the Malaysian gaming company, which we exclusive represent where the middle of several offers, all that which we're locking in on right now.
00:03:21:03 - 00:03:55:13
Michael T. Fay
We have other larger development sites that we do work with the courts. We do work with the special servicers, which I'll get into in a moment on the curbside. But, you know, I would tell you, each area of the United States is got its own opportunities and weaknesses. But I think the biggest weakness that we're seeing across the whole country, South Florida being the exception or as the office for the office, the return to office, the amount of office buildings that are experiencing the distress, the higher vacancies of digital.
00:03:55:14 - 00:04:09:10
Michael T. Fay
Right now, we're going to see one of the largest resets, I think all the office product that we've ever seen across the country. This goes for all the major metropolitan markets to CBDs as well as even tertiary markets.
00:04:11:00 - 00:04:16:20
Sam Wilson
Major resets. What are some things that you're seeing when when you say major reset, what comes to mind?
00:04:18:00 - 00:04:37:23
Michael T. Fay
So a major reset really is what's the office what is the office going to look like? What does office space look like for the next two years, five years, ten years, 20 years? How our employees work, how are people coming back to the office? So a lot of the work around the office, there's different, you know, different companies of work to work differently.
00:04:38:17 - 00:05:07:13
Michael T. Fay
You know, a lot of groups have got a three day work week, a lot of groups are doing a full time. You got to come back to work. So some groups and companies are having a specified amount of days and weeks and vice versa. So I think each company is going through that. What's bad and what has been very tried is the owners of these office buildings are experiencing these companies say we don't know what we want.
00:05:07:16 - 00:05:31:10
Michael T. Fay
So therefore there's a large amount of uncertainty. How much space am I going to be? What does the amenities look like? What what do what do employees want to come back to? Do they feel safe? Do they feel secure? Why? Why should people come back? I already said, you know, our biggest thing is camaraderie, communication, collaboration and partnership.
00:05:31:10 - 00:05:53:23
Michael T. Fay
And so we kind of drive off of those four pieces of why we're back in the office and what we're doing in the office. But a lot of companies feel differently. So what, in my opinion, is as we go through these this thought process, you're now hitting on large vacancies. But look at New York, you're probably sitting at a 32% vacancy rate.
00:05:54:21 - 00:06:20:09
Michael T. Fay
But this that's not uncommon. There's a lot of other areas you could go to Chicago, you go to Houston, you could go to L.A., you can go to all these other major markets or having resets, if you will. So that's that's the big reset. The second part of the reset is really what are the lenders doing all these large office portfolios and or individual assets across the country?
00:06:20:09 - 00:06:43:14
Michael T. Fay
So when you sit there and have all these groups that are trying to figure out their load, so we've got rising inflation and rising interest rates, interest rates right now or at the top, as we've seen, that is put a major downward pressure on a lot of these groups that have got what we call maturing loans. These are loans that are maturing during this period of time, which is really creating, again, more downward pressure.
00:06:43:14 - 00:06:48:03
Michael T. Fay
So we've got these two confluences coming in and really created this downward pressure.
00:06:49:08 - 00:07:10:07
Sam Wilson
What so what are lenders let's talk about that for a minute. What are lenders doing and what are borrowers doing their own office space? I mean, we haven't and forgive me if I'm wrong, tell you. Tell me if I'm wrong, rather. But I don't know that we've seen mass foreclosure in the office space yet. Is that is that the case?
00:07:10:12 - 00:07:44:00
Michael T. Fay
And so you're asking. Great question. So I'm going to break it down to basically two or three areas. So what what's happened is I wrote the asset resolution revisiting. We've got 140 different people across the US and the major market and tertiary markets and we are all hyper focused on helping lenders. That's is the special servicers, the banks, life insurance companies and even Bassetti lenders work through any issues that they have during this time.
00:07:44:00 - 00:08:07:00
Michael T. Fay
And by the way, separating office for 1/2, it could be an issue of a shopping center, could be an issue on a mall. Right. These things. And by the way, it's also depends on what part of the market you're to see the market, the country. So we're seeing that under the scenario of the office buildings, I will tell you there's been some really large major national banks.
00:08:07:17 - 00:08:35:17
Michael T. Fay
Those banks peeled back many, many borrowers after the 2008, 2009 crash. And they would have call it 90,000 borrowers. They scaled it down to 10,000 borrowers. The other 80,000 borrowers went up to community banks. They went off to regional banks. So they the large banks spread the risk. But what's happened is the call it the 10,000 customers they kept were the large ones.
00:08:35:17 - 00:09:03:03
Michael T. Fay
Those were the 150, 253 or $400 million credit facilities. And there's an old saying, little kids, little probes, big kids, big problems. So we've got that big kid, big problem. That's affecting a lot of the servicers and the banks. So when we think about the office buildings themselves, that's where the resets come at it. So you've got maturity and you've got vacancy issues and you've got return to work and what does it look like?
00:09:03:20 - 00:09:31:15
Michael T. Fay
So I read a statistic probably six months ago. All the office buildings, only about 15% of office buildings can really only be repurposed for multifamily or some other use outside of office. So what's interesting in what I'm hearing and what I'm starting to see is, yes, the foreclosures are coming in, but there's going to be, what I would say, a, the proverbial kicking the can down the road.
00:09:31:15 - 00:09:56:13
Michael T. Fay
What does that look like? The kicking the can is really to say, okay, we're going to extend your load, we're going to reset the load. We're going to do a lot of different things. But it depends on your servicer that looks a little different than if you're a bank and so you've got these different ways. So I think the resetting is they're going to get creative and state listen, the property was worth $100 million.
00:09:56:13 - 00:10:17:00
Michael T. Fay
The loan was 60 million. So now all of a sudden the property is worth 60 million. So does the bank want it back? The bank may say, listen, borrower put in 10 billion or let us work out a short sale. Effectively bring in a new buyer that's going to put in ten or 15 million. That will keep the of the 60 billion.
00:10:18:06 - 00:10:39:24
Michael T. Fay
There's going to be a lot of creative ways. Now, the problem is banks handle it differently than servicers because you've got bondholders on the service side, you've got credit default swaps, you've got a lot of other what I would say pressure points in that as opposed to a bank which the banks making decisions based on their capital and their earnings for the actual quarter.
00:10:41:08 - 00:11:08:19
Sam Wilson
I know that's a that's a really, really interesting scenario that you're painting there. So 85% of office space will forever be office space is what I'm hearing. You're saying we can only convert 15% of it if they're kicking the can down the road, trying to get creative, trying to work out strategies, or even doing cash in refinancing is I mean, how how are borrowers doing that?
00:11:08:19 - 00:11:17:09
Sam Wilson
Hey, come up with ten or 15 million bucks for an office space maybe that's vacant or is already underperforming like get that. Well, million bucks from where?
00:11:18:02 - 00:11:43:04
Michael T. Fay
So I will not name names, but you can figure out the names, the names of all the big investment houses and investment groups that have got all this product in their portfolios. They're either selling it the major discounts and getting out or to handing it back. Right. But they're giving it back. Now, what's interesting, those same groups are also creating new funds.
00:11:43:20 - 00:12:07:20
Michael T. Fay
Okay. Investments, funds to go back and buy distressed office at a reset number. And that's what's going to end up happening because it's the only way to look when you when you think about offices and I'm talking about class A trophy assets were you and I don't care if you use New York City just because everybody's picking on New York City today.
00:12:07:20 - 00:12:35:07
Michael T. Fay
You know, somebody said it was called New Glut City, you know, glut of office space. I read that an article somewhere, right. 88 with the imagination of having corporate tenants on long term leases forever. And it's very hard to move. And all of a sudden today it's changed, COVID changed that whole thing. So now these corporations, as I said, are working differently and their employees are working differently.
00:12:35:07 - 00:13:06:16
Michael T. Fay
People are working differently. So therefore, that whole that whole system and that whole business plan has really changed. So it's forcing a reset, which I keep saying at it's forcing a different look. And the way to do that is, is to really get real with what the situation is and handle it. So, you know, all these groups are having properties back, but they're also figured out new funds, distressed funds or opportunistic funds to go back and say, how do we work on the reset and make this better?
00:13:06:24 - 00:13:15:19
Sam Wilson
Absolutely. I mean, it's it's the it's the right time to buy. It just kind of seems like I mean, obviously, these large companies can pull this off.
00:13:16:06 - 00:13:45:14
Michael T. Fay
But let me say one thing, which is really think you will find believe it or not, and I'm not suggesting that, but you will find some major metropolitan cities in the CBD, areas where you may say this office building will no longer be there. They're going to figure out either if they can't repurpose it, which is about 50%, you may see these buildings getting pulled down and then having a brand new build where we are seeing this in Miami or land values of Miami are continuing to increase all the time.
00:13:45:21 - 00:14:00:11
Michael T. Fay
And, you know, we're bordered by Biscayne Bay and the Everglades. So the the amount of land I mean, you can look it doesn't matter if you're Chicago. It doesn't matter if you're a New York, L.A. It's it's really, you know, land constraints that drive everything.
00:14:00:16 - 00:14:17:23
Sam Wilson
Yeah, absolutely. Absolutely. But on the buy side of things, I mean, I was talking to somebody else here on the show recently and they were saying, you know, hey, we're buying office space in New York City as fast as we can possibly get our hands on it simply because they're paying three or 400 bucks a square foot. When he goes two, three years ago, we're paying nine.
00:14:18:21 - 00:14:20:07
Michael T. Fay
Or 1100. Right.
00:14:20:16 - 00:14:26:22
Sam Wilson
Right, right. And he goes, even if we're just even if our plan is to buy it and sit on it, like, okay.
00:14:27:09 - 00:14:44:15
Michael T. Fay
That's where you get to. But, you know, look, you get figure out today. So office buildings are very interesting. You have cost of capital, so you've got the interest rate, then you've got debt improvements and certainly a tenant rep, at least high commissions, those are all very, very big. The old adage was make it disappear, turn it off.
00:14:44:15 - 00:15:04:15
Michael T. Fay
Owning an office building as you own it, but you make all your money off the sale, sign it. And that's what it was for years, you know. Right, because it's a cap asset class. It was also considered one of the safest asset classes for years. And and now, you know, multifamily, you know, it's paid carpet. Thank you very much.
00:15:04:22 - 00:15:29:14
Michael T. Fay
You know, I can raise rents all year long as leases rule. So that's why multifamily continues to still be an asset class. No other asset class is just the back end of that industrial. You know, when you think about the pandemic pressing forward, the use of Internet retail sales, it went from that call it seven to 8% to 15% in a period of two years.
00:15:29:18 - 00:15:58:03
Michael T. Fay
That was almost like 10 to 12 years of growth compounded into only two years. And when you think of the logistics that's going on and the distribution centers and everything else that happens, that's what you know, you look at great companies like Prologis and these other larger groups of these larger industrial groups that continue to build and service the retailers from that standpoint, but also the last mile logistics, which is really becoming interesting.
00:15:58:11 - 00:16:01:05
Michael T. Fay
So Industrial Can has really got it.
00:16:01:05 - 00:16:22:23
Sam Wilson
Absolutely does. Yeah. It's very, very, very interesting to watch kind of how all of these interplay and see which ones are really doing well and which ones are struggling or plateauing. And again, you know, I've heard it said since I got in real estate a decade ago, you know, that real estate is local. I mean, I think I think I'm hearing that from you in the South Florida market.
00:16:22:23 - 00:16:24:15
Sam Wilson
You guys are having a.
00:16:25:15 - 00:16:50:13
Michael T. Fay
It's it's it's local in a lot of ways. But when you start to look at industrial industrials more regionalized, if you will, only because of what your handling of retail is local. But it depends also what you're doing. But, you know, when you look at the Internet sales for certain retailers and that experience becomes a whole different game and how that's played.
00:16:50:13 - 00:17:14:08
Michael T. Fay
So look, you know, I think, you know, good neighborhood retail you know anchored retail's good the malls we are having several malls right now we're in a couple of foreclosure malls. You know, we're image the malls like the Broward Mall here in Fort Lauderdale for Rialto. It's an incredible mall. And it's got such an unbelievable upside of development and a replay there.
00:17:14:08 - 00:17:37:20
Michael T. Fay
So, you know, we're in the middle of doing that. We're going to have a call for offers here in the next call. It probably right after Labor Day weekend. But my point being is this is the transformation of malls and creating what I would say, urban urban centers, if you will, that will have residential redone, retail, destination, entertainment, things of that nature.
00:17:37:20 - 00:17:56:19
Sam Wilson
Yeah, those are cool projects to to see come around. I mean, in malls, my gosh, the amount of land those take up and the redevelopment front there it's saying that sounds like that's an awesome opportunity. And I looked at a project here recently, I think it was in Cincinnati, similar idea. I mean, just an enormous undertaking. And it was.
00:17:56:19 - 00:17:57:08
Michael T. Fay
Absolutely.
00:17:57:12 - 00:18:19:00
Sam Wilson
All all the the the the redevelopment of an existing mall. What are some other opportunities do you really see right now? I mean, you get to see things from a lot of different angles. But when looking at the real estate, commercial real estate landscape kind of across the country, what's something you see is you say, hey, there's excellent opportunity in what.
00:18:20:15 - 00:18:45:06
Michael T. Fay
I, I still think, you know, if you're looking at real estate, you can look a lot of these, right? Some of the reach of this public sector of the stocks. I think you could follow some of those groups and probably get some interesting buys from that standpoint as this reset is taking place, whether it's an office read or industrial read or a retail, whatever they may be or even a multifamily, I think you'll start to see some of those play.
00:18:45:06 - 00:19:09:09
Michael T. Fay
So if you're not buying real estate, you could participate from that standpoint. I think also, you know, the crowd source funny continues to be some people are doing that. But you know, again, you've got to be careful with the sponsors. You've got to work with the right sponsors. You know, you've got to watch what's going on to see how they handle their assets or what they do.
00:19:09:23 - 00:19:32:17
Michael T. Fay
You know, commercial real estate really for years and years and years, you know, those capital intensive, you will have a large slug of equity. You need to be able to apply your loans. So right now, the opportunity, I think, is going to be watching the interest rates. As for the next two years and the fallout, remember, stock market goes down the fast as it comes back, as fast as real estate goes down.
00:19:32:17 - 00:19:56:10
Michael T. Fay
Really slow and it takes a while for it to come back. So right now we're on the downward slope in a lot of these areas that I think we might add some decent foreclosures or short sales or motivated sellers. What are the key components here that I think we are seeing for the first time in a long time was interest rates for the last call it since the Great Depression.
00:19:57:18 - 00:20:31:17
Michael T. Fay
The Great Recession of 2000 ignited. Interest rates were low. So you had you couldn't really go to alternative investment, to the stock, to real estate. Right now, you're seeing banks pay 5%, 6%. Look at the treasuries. There's alternative investments that you can go into and get that call at four and a half to 6% without much benefit. So the interesting part is people maybe say, I've done I want to move into something else so you'll see some other sales happen from that standpoint as well.
00:20:31:17 - 00:20:42:03
Michael T. Fay
So I think the alternative, because interest rates have gone up, it creates a different sliding economic opportunity on both sides for sale or buy.
00:20:42:10 - 00:20:59:10
Sam Wilson
It really does. It really does. Let's talk about inflation for just a minute. I mean, it's one of those things, you know, what your thoughts around a a diverse portfolio that is inflation protected inside of commercial real estate. What's the what's a play you'd recommend?
00:21:00:16 - 00:21:20:00
Michael T. Fay
Well, I think it's anything I mean, a lot of a lot of people were kind of going back, you know, for us, what we look for work with clients, you know, if it's a if it's a retail center, right, and and there's fixed there's fixed, Bob. So that without CPI increases, you know, you pretty much you're getting you're pretty much locked.
00:21:20:00 - 00:21:37:22
Michael T. Fay
It it is what it is. So as inflation goes up and you're other things go up, you know, the value of the asset is either going to stay the same or go down. So I think, you know, looking for opportunities where there CPI increases or tenants rolling over, you can have these resets the by the way, that's got on industrial right now.
00:21:38:12 - 00:22:02:19
Michael T. Fay
But a lot of these areas where they had all these leases or that industrial because it's become such a hot commodity, you can end up raising the rates that you're getting on your decimal space. And we've seen some increase, you know, increased unbelievable rates. Same thing with multifamily, multifamily, because it rolls every year. You can kind of catch up your rents to what your expense or inflation.
00:22:02:19 - 00:22:17:00
Michael T. Fay
So, you know, I think, you know, there are several markets within the country that I've seen that 10 to 25, 27% multifamily rental rate increases over the last couple of years.
00:22:17:14 - 00:22:26:00
Sam Wilson
Right. Yeah. It sounds like to summarize, you'd say anything that you can reprice in a shorter time frame than other things have. Maybe be the the.
00:22:26:00 - 00:22:36:20
Michael T. Fay
Absolutely, absolutely. No, no. That was a problem with office buildings. Office buildings. They were locked in with certain fixed rates and weren't going anywhere while it was safe. Remember, high risk, high return, low risk, low return.
00:22:37:01 - 00:22:48:09
Sam Wilson
Right, right. And it's funny because in in that even those office spaces were locked in. It was almost you thought it was lower risk, but now it looks like it was a higher risk in the end deal there.
00:22:48:09 - 00:23:09:18
Michael T. Fay
Well, you know, but but but when you have two black swan events of the pandemic and then the global inflation that we had, which was pressed on by other global logistics and things of that nature, you know, you would have never thought that. I mean, you can look at the different the different graphs of each country and where it stands, where it is.
00:23:10:00 - 00:23:23:13
Michael T. Fay
It's just interesting to see. I mean, it was totally a global pandemic, but it's been a global inflationary issue. So those are the two Black Swan events within a two year period, which is really what's at downward pressure.
00:23:23:19 - 00:23:43:06
Sam Wilson
Absolutely. Absolutely. This has been great. Michael, thank you for taking the time to come on the show today. Certainly learned a lot from you. I love to get your current kind of state of the market insight. Loved hearing about office space, kind of where you see opportunity on that front. You guys are working on some absolutely very cool projects and again, thank you so much for your time.
00:23:43:14 - 00:23:48:11
Sam Wilson
If our listeners want to get in touch with you and or learn more about you and what you do, what is the best way to do that?
00:23:49:07 - 00:24:03:24
Michael T. Fay
So please you email me at Michael Dot say at Abyss and or I'm always available by cell phones. 3054950003. That is service.
00:24:04:01 - 00:24:19:16
Sam Wilson
You are a bold man, sir. I don't know that I would put my phone out there if I were you, but thank you very much. For those of you listening, that's an incredibly generous offer from Michael to put both his email and his phone number out there to get in touch with him. Michael, thank you again for coming on the show today.
00:24:19:16 - 00:24:21:00
Sam Wilson
This was an absolute blast.
00:24:21:15 - 00:24:25:22
Michael T. Fay
My pleasure. It was great. Thank you. Great question. To the great top three. Did have a great one.
00:24:26:03 - 00:24:47:13
Sam Wilson
Hey, thanks for listening to the How to Scale Commercial Real Estate Podcast. If you can do me a favor and subscribe and leave us a review on Apple Podcasts, Spotify, Google Podcasts, whatever platform it is you use to listen. If you can do that for us, that would be a fantastic help to the show. It helps us both attract new listeners as well as rank higher on those directories.
00:24:47:13 - 00:24:50:19
Sam Wilson
So appreciate you listening. Thanks so much and hope to catch you on the next episode.
