2008 REAL ESTATE CRASH HAS FINALLY STARTED!!!

SPEAKER_1 (0:00)

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Michael Zuber (0:30)

All righty, folks, it is finally here. We are going to repeat the 2008 catastrophe in the real estate market. Just to be clear, this is not going to happen in residential, but it is absolutely going to happen in commercial. If you don't know what happens, banks were or lenders were doing these fancy extend and pretend. They all thought that Kevin Warsh would deliver a series of rate cuts, and they hope these rate cuts would lower cap rates, increase values, and they would take smaller and smaller hits. Well, guess what? The Fed has started a series of rate hikes. Data since then has taken the chances of an October rate increase all the way to 77%.

And I've heard from multiple people this week that they have gotten notices that lenders are crying uncle, and they are saying, pay up, or we are foreclosing.

Jonathan, something you and I have been talking about for years, feels like it just broke, and we are going to see a bunch of foreclosures in multifamily. What are you hearing?

Jonathan (1:35)

Yeah, I mean, I'm definitely hearing the story that banks are not negotiating anymore.

They are, I mean, of course, that's a general statement. There are probably some banks out there that are still negotiating, but what I'm hearing is more banks are saying enough is enough. You've had your couple of extensions. Things haven't improved. We don't see them.

Michael Zuber (1:59)

They've gotten worse. Let's be clear.

SPEAKER_1 (2:01)

Yeah. Yeah.

Jonathan (2:03)

We don't see this resolving favorably in any kind of reasonably short timeframe.

So we just need to get our money back out and recycle it. And frankly, I'm sure that's also what going through their minds is, we can lend it out at much higher interest rates now too. So we're going to take a haircut on the capital, but we're going to be able to redeploy the capital at much higher interest rates. And that's good. Yeah.

Michael Zuber (2:33)

And again, if people don't remember 2008, and there's somebody who lived through it, invested through it, profited handsomely from it. Let me just remind you what happens from here.

The first couple of banks, they get really aggressive with foreclosures and we start putting them out. They are actually going to win. What does that mean? That means they're going to get the smallest haircut.

And then as other institutions have to market, this trickle that becomes a stream becomes a raging river. And we are going to see a cycle of significant pain. Now, I suspect the stuff that comes out first is going to be, it's really weird, it's kind of bifurcated. It's either the really, really good stuff, or it's the really, really bad stuff.

Because they're being picky, right? What to force. But then, at some point, just everything comes. And that was the GFC up close and personal. Everything was coming, and it was, it was a race to the bottom, Jonathan, it was ugly.

Jonathan (3:34)

Yeah, I mean, I think what you'll see is probably the banks taking back, you know, it's like, they punish the good operators, like, they'll take back the best assets.

Michael Zuber (3:47)

Yeah.

Jonathan (3:47)

And the tip of the top first.

Michael Zuber (3:49)

Yeah. Because they move.

Jonathan (3:52)

Right. Yeah. And so they'll be able to, exactly, they'll be able to find buyers off market for those things. They'll go to their strongest borrowers and say, would you guys like this?

Take it off our hands. You know, we'll get it to you for the value of the loan.

Michael Zuber (4:10)

We'll just, you know, you get a 20% discount or 25% discount from last purchase. The bank's whole. The operator's screwed. The LPs are screwed. But the bank's fine.

Yeah.

Jonathan (4:22)

And then you'll see, so that'll be sort of like, they'll cherry pick, you know, mix all these metaphors, take the cream off the top, right? And then you'll see them sort of working their way down through worse and worse quality assets until you've got the fire sale stuff.

Michael Zuber (4:38)

Yeah. Let me ask you that, because I see it a little differently. I kind of see it like a layered cake, where in the beginning, you're right, they're going to take the top off. But I also think they're going to take the worst of the worst, and they're going to kind of compress it this way, and eventually meet in the middle. Do you see it differently?