Episode 33: You Need These Two Things to Enter a New Market

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Joe Muratore:
Most of our deals are not based on the macro trends of the market. They're based on a specific, unique opportunity that's being motivated by some sort of thing. A family has decided to sell off assets in this market. I don't know, something has changed. And one of our advantages is we work in multiple asset types, and so we see more opportunity from different directions within the same markets and submarkets.

Moderator:
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Joe Muratore:
Entering new markets or new asset classes is tricky, in a sense-

Ryan Swehla:
Maybe scary.

Joe Muratore:
Maybe scary. It's like anything, you're starting something from a place of not having good deals and not knowing what the right expert level deal decision making looks like, to getting deals done and building up a track record. And both of those things, everyone goes through them, every company does, but as we enter industrial in Sacramento or multifamily in Denver, there's a whole group of relationships and neighborhood level knowledge and expert zone things that need to be learned. And today, we are going to talk about the two things you need to have to enter a new market or asset class within a market. And those two things would be, well, you need to have a pipeline, a deal flow, and you need to know what a good deal looks like and be able to convince that submarket that you are the right group to do it. So how do you do that? Any thoughts on this?

Ryan Swehla:
Yeah, I love this simplifying because as we were talking about this before, it sounds like a really complex thing, and it is, but it sounds like a really complex thing. Okay, how do you enter a new market? And when you really boil it down, the two ingredients are a pipeline of deals and knowing what the right deal is. So maybe let's talk a little bit about each of those. What does it look like or how do we get a pipeline of deals when we're entering a new market or a new asset class?

Joe Muratore:
Yeah. And let's back up just a tiny bit. It starts when you look at markets and submarkets that are experiencing positive population growth, and are likely to continue to experience positive population growth for the next decade. It helps when there's a supply and demand imbalance for a specific asset type, so coming into a market, I prefer to start with, and we prefer to start with knowing there's a wind at our back. This is a desirable place to be and there is a supply or demand imbalance that favors our type of investing.

Building a pipeline from there is a lot of legwork and a lot of calling and talking to sellers and talking to brokers, and telling your story. "Here's how we did this in another market. Here's how we did industrial in Sacramento here. Here's how we did small bay industrial in Sacramento and here's the firms we worked with, here's the results we had. Hey, Mr. Broker over there, what do you have on your pipeline? What do you see?" Cause what they're assessing is, all right, are these people legit? Can I work with them? Are these people that get deals done? And how much handling is it going to take for me to make money with this group as a client?

Ryan Swehla:
We often use the analogy of Mine Sweeper, you know that old game where you press one square and maybe a few other squares open, you press another square. We've talked about how real estate is a relationship business, and so a lot of times, it is pressing on one area and then that opens new opportunities, new relationships. So in a given market, it's, okay, who do I know in that market? Who do I know who knows people in that market? How do I accelerate the process of people recognizing that we are an active participant in that market space?

Joe Muratore:
Yeah. One of my favorite tactics is trying to make someone's career. So we'll do three or 400 million in acquisitions this year. We did almost 150 million in acquisitions last year. We are doing tremendous deal volume, and I think of myself as a young broker and the people that helped make my career. And when I enter new markets, I look for the most motivated parties, and these are often the mid-level brokers that are on a team. They're the second or third person and they're talented and they know, but they need a group like us that can put wind in their sales and help them make their career. So the trade I like to make is be an incredible client for them in exchange for them leading us to the best off market deals, and really putting in the legwork to find those hidden gems that aren't just out there for the mainstream. And so when I enter a market, I look for those hungry, hardworking but knowledgeable mid-career brokers that know enough to get to the great deals, but are still hungry enough that they really want them, and that's been a good strategy.

Ryan Swehla:
So then that kind of gets to the starting the pipeline.

Joe Muratore:
Yeah.

Ryan Swehla:
But what we ultimately talked about is having a pipeline, so how do we then develop that into an ongoing pipeline? In certain markets, if there's a deal to be had, we're probably the first person to hear about it. How do we get to that level?

Joe Muratore:
We have to earn that right. The first answer is nothing moves quickly. It takes six to 18 months to develop a pipeline where you're doing deals. It takes a year, two, three, to develop a robust pipeline where there's always great deals to do, but step one is make offers, just make decisions quickly, make offers. So step one, call a bunch of people, find leads, underwrite all of them, take seven, find the three that are best and put an offer out, and often, we can do that in a week. Sometimes, we can do that in two days or three days, but what we're doing is we're creating brand, we're creating traction, we're creating activity, we're getting rejected, we're learning from that. We had to do underwriting and check our assumptions and develop conviction around those assumptions just to get to an IRR and a hold period that made sense to us to write an offer, but we write offers, and we write offers with intentionality.

And my experience is that's choppy waters but when you start writing offers with the intention of winning, people take notice, and over time, you find out who your allies are, you find out who's going to go to bat for you, and then that magic moment comes when you get your first deal done. And when you get a deal done, there's this amazing thing in the market. All the players, it's like blood in the water, they recognize a transaction. "Who's this? What's this? What?"

Ryan Swehla:
Never heard of that group before?

Joe Muratore:
"Wait a minute. Where? Huh?" And now, you've got a kernel of a reputation, and now, you mold around that, you find that next little one, and over time, you build... In many of the markets we're in, we are a dominant player. We get that first call every time, but that is definitely earned and it's fragile, and you must build that with care.

Ryan Swehla:
So now, we've talked about building that pipeline and having that pipeline, which is great. So then we just say yes to every single deal, right?

Joe Muratore:
Of course.

Ryan Swehla:
So that now, overlay when we're talking about entering into a new market, we've established the pipeline, we've established the deal flow, how do we develop that muscle around knowing what the right deal is?

Joe Muratore:
Yeah. Well, I'll put it this way. There's a lot of ways to explain this but I'll try this way, which is that there's three stages to learning a market or a submarket. The first one, and there are degrees of difficulty. Let's picture playing the guitar. I hand you a guitar. If you spent 10 hours on that guitar, you could learn 15 chords that sounded pretty good, and you could probably play a few songs and people would be like, "Oh, maybe he's played the guitar. Maybe he knows something about playing the guitar." Well, you only played it for 10 hours but you played it and you kind of know how it works. All right, there's a second level, which is that maybe you get some lessons, you take 10 lessons. All right, now you're starting to experience just a few hints of mastery.

And then there's a third level, which is you've been playing for years, it's your guitar, you own it. You didn't rent it, you know the frets personally. So in entering a market or a submarket or an asset class, my first and most enjoyable part is just parachuting in like a Navy Seal and just seeing all the co-star comps and driving them. If it's multi-family, walking in like I'm a potential renter, asking to see units, looking at the ceilings, looking at the lighting, looking at the layout and just doing that. And after two or three days, I know enough to be dangerous. I know what the comps are, I know what they look like, I know what amenities they're near, I know how close they are to the airport.

Ryan Swehla:
You know enough to be credible.

Joe Muratore:
Yeah. I could sit in a conversation and know one submarket from another and not sound like a total idiot.

Ryan Swehla:
Yeah.

Joe Muratore:
A second secondary level of that would be either having an employee in the submarket that's from there or finding trusted broker relationships, usually multiple ones so that you start to build a sounding board and you can recognize credibility. But brokers, especially good ones, especially ones that you can speak to broker to broker or speak to with our knowledgeable background, you can get to that secondary sense of whether they think it's a good deal or not and you can bounce it off different groups and hear who thinks it's bad, who thinks it's good and why, and you can get to a secondary level somewhat quickly. And as you begin to execute deals, you're going to validate those assumptions. Were the rent assumptions right? Was the lease up time right?

And now,± you're entering that third phase, and that takes a few years to multiple years of, "Oh, we own buildings in that market and have for years. We've been through multiple lease cycles. We've been through up and downs in the market cycles." That's the third phase. But I think we are excellent at all of those. We are great at entering quickly. We are also great at developing local relationships as credible experienced real estate people, and ultimately, I think we're great at the long term hold, but you cannot enter a market and figure out which deals to do without going through those stages.

Ryan Swehla:
Yeah, and we've used the bullets and cannonballs analogy a lot, which is we say that one of our key competitive advantages is that in the markets where we operate, we are the most active, we're the most active market participant. Well, that's great for those markets. Well, what does that mean when you then decide to go into a new market? Wait, hold on, you're just going against your thesis. And that's where the bullets and cannonballs really crystallizes that approach because it is about recognizing that we're not the most knowledgeable, most active market participant. We are not. That is the end game, that is the goal. The goal is to have that depth in that market, but that's where we're firing off bullets and using a few assets to help us develop that conviction muscle and to be able to develop that knowledge around that market, and then going deep, and then building scale around that as we develop that conviction.

Joe Muratore:
Yeah. An important tool of this is the ability to see a market with fresh eyes. This is also extremely dangerous territory. It is both powerful and dangerous, but you can never buy this year's deals at last year's prices. That works going up, that works going down. But it is not a static environment, it is a dynamic and flexible environment. And in entering a market as an outsider, you do have a different perspective, and the entrenched market occupants have a longer term perspective, but sometimes, especially when they've been in the market a very long time, call it decades, they tend to get a jaded perspective for that market.

And it might be, in fact frankly, it often is, that that market has reinvented itself in a new way. It has new growth factors. It has new employment or new reasons that are driving that city, town, community, in ways that weren't happening before. COVID was a great example of this. COVID created fresh value in cities that hadn't had the same level of value before. Denver and Boise at one time were very sleepy markets with slow growth and high recessions. Today, they are hot and moving and have increased reasons for being valuable and increased employment that they didn't have.

Ryan Swehla:
And even just from a long term trend in the markets where we operate in, it's pretty consistent long term growth year over year in these markets, these are growth markets. So a lot of times, it's not even necessarily that the market has shifted as much as it is that the people that we buy from are typically long term holds, so they're people that have owned the property for a long time. And so they just have a different lens. It's like talking to your grandmother about what the price of bread used to be and what the price of bread is today. Especially when we're in an inflationary environment, people don't recognize that where a property transacts today is very different than where a property transacted 10 years ago.

Joe Muratore:
And guess what, if you come back 10 years from now, it's going to be a different conversation too. People are going to say, "Remember back when." And maybe that price will be different, maybe it'll be similar, but the point is time moves forward and things change.

Ryan Swehla:
Yeah, and I think that go goes back to being that most active market participant because the most active market participant doesn't mean the group that sits and owns property for a long time. It means the group that is regularly transacting, because the regular transaction is the most real time feedback loop, and again, that works on the ups, that works on the downs. The group that is most active in that market is the one that is able to recognize the trends, both directions, the market trends both directions faster than anybody else. That's the ultimate goal.

Joe Muratore:
And most of our deals are off market. Most of our deals are not based on the macro trends of the market. They're based on a specific, unique opportunity that's being motivated by some sort of thing. A family has decided to sell off assets in this market. I don't know, something has changed. And one of our advantages is we work in multiple asset types and so we see more opportunity from different directions within the same markets and submarkets. And we're quite comfortable acting on industrial or apartments, or sometimes on office and sometimes on retail, but the point being is that on any given day, the firm's phone rings and my phone rings and other team members' phones ring here, and it's someone who's got a lead, and there's a reason behind it and it's unique and they think it's special.

And let's say half of those leads are not great. Let's say of the other half, we're going to pick the top two or three, but the point is, we're getting unique stories every day that aren't just, "Hey, the market's trading at this. Potatoes are trading for this," and whatever. It's not commodities, it's unique little stories, and where we find those stories, we find a piece of edge. We find things that aren't quite trading at full market for some reason that our firm with its depth, with its people, with its talent, with its capital, has the ability to uniquely solve, or at least we got there first.

Ryan Swehla:
Yeah. And so at the end of the day, the goal is big pipeline of opportunities and deep market knowledge about those opportunities and deep asset by asset knowledge, but I think probably one of the most important things that we're saying is both of those things take time and you have to invest the time to be able to get there.

Joe Muratore:
I think we are also saying, and I will conclude with this, I believe and I think you believe that our model is scalable. I think that we are great, and time will tell, but I think we are great at entering new markets and new asset classes, basically taking the tools we're already good at and applying them in new places. And I'm excited about how that's going to play out. I think that it's not just the market is our strategy, it's our rollout and our culture and our ability to create and find opportunity is what makes us unique and special.

Moderator:
Thank you for listening to Durable Value, an investors' podcast where we demystify commercial real estate with safe, sound investment strategies to help you balance your portfolio. If you enjoyed this podcast, be sure to rate it on iTunes or wherever you get your podcasts. To learn more, visit graceadapartners.com where you'll find more information, investors tools, case studies and more. This podcast is hosted by Joe Muratore and Ryan Swehla. It's produced, edited and mixed by Melodic with intro music by Ian post. Thanks again for listening and we'll see you next time.

Summary
Joe and Ryan discuss the key ingredients needed before purchasing real estate in a new market.

Runtime
19:08