StreetBeats : Expert Insights

What Every Investor Should Think About with Bruce Stachendfeld | StreetBeats Ep. 64

Darren Powderly is joined by Bruce Stachenfeld to discuss his work in real estate law and what every investor should know before investing.

by Cyrus Maunakea
October 12, 2020 ·

CrowdStreet’s Darren Powderly is joined by Bruce Stachenfeld, Founder and Chairman of the law firm, Duval and Stachenfeld LLP, to discuss his work in real estate law and the unique position it puts him in, what every investor should think about before making their first investment, and his views on when CRE transaction volume will increase.

Darren Powderly, Co-Founder & VP Capital Markets

Darren founded CrowdStreet in 2012 after identifying the need to radically improve people's access to commercial real estate investments via technology. Over his 20+ year career, Darren has transacted billions of dollars’ worth of commercial real estate investments and enterprise software contracts. Darren is a driven leader who loves building relationships based on mutual success. In addition to building businesses, leading teams and advising a prestigious list of national clients, Darren has personally owned commercial real estate, syndicated investment groups and developed properties from the ground up.

00:00:03    Hello everybody. This is Darren Powderly, co-founder of CrowdStreet. I am very pleased to, uh, welcome Bruce Stocker today, uh, as my guest. He is a partner at Duvall and Stachenfeld in New York City. And, uh, Bruce, you and I have gotten know each other over the past several years, and, uh, appreciate you coming on this show today. You sit at a unique spot within the commercial real estate industry, uh, at your firm, leaving your firm, and, uh, really excited to have you. So please introduce yourself to the audience and tell us about yourself and your firm.  

00:00:35    My name is Bruce Stachenfeld. I'm the founder of a law firm called DVA Stack. I've been a lawyer now for, and wonder how you get so old, but, but it's been close to 40 years. Uh, I've been a lawyer in, in New York City, uh, real estate law, uh, starting out as a little baby associate, uh, you know, eventually growing up into more and finally founding Duval and Stachenfeld. And by happenstance, today is our anniversary. We were founded on, uh, October 7th, 1997, exactly 23, uh, years ago today. And in about two hours I'll be giving a toast, uh, to my firm, uh, for that. Uh, in terms of my background, obviously I'm a lawyer. I've done just about every kind of real estate deal imaginable from my first deal buying a condo for a client, uh, to some of the most complicated, uh, platform investments on multi-billion dollar transactions.  

00:01:26    So, yes, where lawyers can't hide that. Things that are more interesting and I think we'll, you know, bring out in this conversation is what I do personally. And I started doing this about 11 years ago during the global financial crisis. But what I started doing at that time was really what's morphed into the heart of, of our business model as our law firm, which is six words, and it's this, help our clients grow their business. This has been the whole basis of what we've done, what it's given me, and I think the reason that Darren wanted me on, on this, this, the podcast, is this, it gives me a pretty unique perspective on the real estate world because I see what everyone's doing. I see what a little baby developer is doing just starting out with this first deal in New York City. And yet I also know what the sovereign wealth funds, the biggest pools of capital in the world are doing. You know, what, what Blackstone is doing. I know what all these different players are doing, who's investing in who's doing what, and it, it makes me very useful and hopefully I pray, uh, interesting to you in the next, uh, minutes as, as we do  

00:02:29    This, Bruce is if, for those of you who don't know, he, he publishes a pretty regular, is it weekly, uh, uh, newsletter called a real estate philosopher, and he tackles different issue wide range of issues, and he actually goes out on a limb and makes some predictions, and where you're an other people are unwilling to go. Bruce is well researched and he makes, uh, some bold statements, uh, you know, uh, all often in the, in the face of extreme uncertainty. So let's talk about some of the recent writings that you've had and maybe a quick update on some of the things that you see in the market right now. Uh, you went back and the early days of the pandemic made a few predictions, and then you updated those predictions back in July. And I'd love to get an update on where you see some big themes, you know, on a go forward basis, uh, from, from where you sit in the, in the world of real estate.  

00:03:12    So, so in terms of the real estate philosopher, I started doing this, I guess it's about two-ish years ago. It doesn't come out weekly. It doesn't come out any particular time unless I feel like I have something to say. Yeah. And what I try to do is not talk about what everyone else is talking about and, you know, pontificate whatever else is, I try to think about stuff and then I, you know, use my brain to reason from that and try to come up with my theory, which may be stupid, it may be brilliant, it may be whatever it is, but the idea is this supposed to be provocative, thoughtful and, and analyze what's going on.  

00:03:44    Yeah. So some of the thoughts that you had on the pandemic in the ear in the early phases, and then some of your current thoughts on, you know, what we're seeing out there, uh, would be great to share.  

00:03:54    So, okay, here's a few of them. Um, one of them is, uh, I, I stuck my neck out. It what I called a Big V recovery. Mm-hmm. <affirmative>, I think I might be the first person to say Big V, although others talk about V and you know, hasn't happened. You know, I, I I guess we're not sure yet. Uh, I wanna see how the rest of the third quarter is evaluated in terms of what's happening. Certainly the overall economy has recovered a lot quicker than a lot of people thought. Yeah. However, you know, to be fair about it, um, has it recovered for everybody? Absolutely not. Certainly in the real estate world. Confining my remarks to their, you know, there's some areas like retail hotels and a bunch of others that are getting crushed and in other areas have, have actually, uh, come back a a lot quicker.  

00:04:39    But one prediction I made was, was that another one was that New York City, uh, New York City. There have been so many people, uh, really trashing on New York City. I mean, there's just so many things wrong with it. The taxes are crazy. Um, there's, you know, the crime has increased. Uh, COVID has basically emptied the office buildings, public transportation people are scared of you could go on and on and on. It's just awful. And I've stuck my neck out there and saying that anyone who's bet against New York in the last 200 years has been dead wrong. Mm-hmm. <affirmative>, I'm very confident they'll be wrong this time as well. Mm-hmm. <affirmative>, all the things that make New York special, they're not leaving. I mean, the New York Philharmonic Orchestra is not moving to to, to the suburbs. It's not going to happen, but they will be. And when they are, what's gonna happen is people are gonna be here and then your friends are gonna be here and you're gonna kind of start to feel like a bit of an idiot that you're not here, and then you're gonna be here.  

00:05:32    And then, I don't know how long it is, is it a week, a month, a year, five years? But at some point it's gonna be obvious that New York is transforming itself yet again and booming like crazy. Third prediction I made that I believe has been trued so far and will it prove out, is that there's, um, a lot of people thought that it was gonna be a brilliant thing to buy distressed debt. I mean, everybody and their mother, their uncle, their kids, kids, their friends was thinking about buying distressed debt. And one prediction I made is that, that will not happen so easily, cuz what's going to happen is there's enormous pile of capital out there, which we'll talk about more in a, in a few minutes, is gonna just bid the price up. So the people who are gonna be able to buy distressed debt are the major players that always buy distress debt. They know their business and know how to do it. And the parties that think they've gonna suddenly change their business model pi into distress debt and buy its 70 cents on the dollar and clean up, I predicted that was not going to happen. And so far it hasn't.  

00:06:31    Yeah, no, it's, it's great stuff and, and you're well researched and you have, uh, a great network of people that you share ideas with. And, um, um, I think that, you know, a couple of thoughts on the Big V, um, it has from a lot of people's perspective, and you've pointed out, you know, correctly, you know, maybe more like a K right? Like, so certain portions of the population have experienced that Big V and other portions of the population have been, you know, are, are as bad today as they were this bifurcation of the mar of, of the people's experience, right? Whether, you know, it's based upon your job, your career, uh, or you know, if you're a knowledge worker versus in an, you know, a service worker. Do you see with, with regard to that case shape, you know, bifurcation of the market, uh, any, any major, you know, contrarian, you know, uh, thoughts there?  

00:07:24    Let, lemme take a running start at that answer, but I'm gonna lead into, just, just gimme humor me for 30 seconds. Absolutely. One of the, one of the basic things that every real estate investor has to consider at the outset is, do you wish to outperform or do you wish to average perform? Okay? And this is a basic question. Now, if you decide you want to outperform mathematically, you therefore take the risk that you'll underperform because you are doing something different than everyone else. Mm-hmm. <affirmative>, this is all just basic math. Okay? So now you say, how do I outperform? If that's where you want to go and you start looking at things, now let's just take hotels. Okay? Everybody knows hotels are in trouble since everyone's looking at the same thing, everyone's doing the same math, right? They're all saying, well, this hotel used to have a 68% occupancy, it made this much money.  

00:08:19    It's gonna take my view two and a half years before it gets back to thing. I'm gonna discount the present value and I'm gonna invest this much money as should get that much return. How are you going to outperform there? I don't see it. Okay. Are you really gonna do your math better than the 30,000 other people looking at the, on the internet at all the different hotels? Now, you may get lucky and find art artwork situations Sure. And, and you should, and that's what real estate people do. But in a big picture sense, outperforming in hotels seems a little bit difficult cuz everyone's seen the same game. Retail, I kind of think might a place where you could outperform, and here's why retail isn't really a word that should be used anymore because it encompasses many different things. But then you start thinking, well, what actually is retail evolving to, what I would say it's evolving to is what I would call power niches.  

00:09:11    It's, it's basically the idea of coming up with a way of doing business or a product type or something that you own. And you really, it isn't just as simple as somebody coming in and buying somebody else's wears. So then you start thinking, well, how can I outperform investing in retail? So I would advocate that a savvy investor that has made the business decision up upfront I wish to outperform. Look at the different possibilities either in shopping centers, malls, or wherever people are selling things that are loosely called retail. And see what is actually the mix of what's going on there. And I think you're gonna find an awful lot of places where this is a chance to get in on something dramatically good at a very low price. And of course, a chance to getting something dramatically they add at a low price that will be lower. But the reason I advocated is I think it's, it's a poster child for the concept of taking the risk of outperformance. And of course the, I'm sorry, taking the upside of outperformance and the concomitant risk of underperformance, that's,  

00:10:12    Those are great thoughts and great sort of, you know, uh, economic, um, um, theories, uh, to support your, your thesis to be a contrarian, uh, in certain se sectors of retail. So, uh, good stuff, Bruce, that, that's the kind of thing that gets me excited and I know many of our investors excited as well. Um, and you know, that's one of the things frankly that has been interesting about the CrowdStreet marketplace is because we we're nimble, we can go to where the opportunities present themselves and, you know, around the nation and working with certain sponsors who have expertise in redeveloping retail, right? Reimagining retail, you know, that that will be part of our thesis going into 2021 because there is a lot of price dislocation. Uh, the p lot of price discovery, which has not quite happened yet because there's been so few transactions.  

00:11:05    Um, and just for the audience, uh, number, you know, uh, information at this point in time on a year to year basis, this has been solid for, uh, the last four months. Commercial estate transactions are down 68% according to Real Capital Analytics. And so when we say, you know, pricing discovery, uh, it's hard to discover, you know, or know what something is worth when transactions are down so dramatically. So, um, Bruce, what are your views on when transactions will come back and, and what are gonna be some of the driving forces behind an increase in transaction volume?  

00:11:38    So the markets are ruled by two emotions, fear and greed. And we saw like an amazing example of this only what, six and a half months ago, you know? Yeah. We were all so greedy at the beginning of the year, you year, you know, things were going to the sky, the stock market hitting record every three days. It was just like, oh my god, money pouring out. And then we hit fear and the markets crashed, I think 10,000 points in like three weeks. And then all of a sudden they rang the bell at the bottom, Hey, it's time to buy. Let's get greedy again. And then the markets shut up. Okay? So we're watching fear and replay out, and the real estate market doesn't move as quickly. Obviously at some point they are going to ring the bell and, and the bell will say it's the bottom time to buy.  

00:12:22    You were mentioning price discovery, it's a real problem. You know, you used to have covid and you have an election coming up, you know, there's all this uncertainty and most parties with money, and there are something we should probably talk about. Darren is this wall of capital, but the parties sitting there with their money are saying, you know, I don't really lose anything by waiting a little longer. And let's see if things settle down, is there gonna be a second wave of covid If economy is shutting down, is this thing gonna happen? You know, what's gonna happen? Uh, you know, with taxes, uh, after the election? There's a lot of reasons just to, to wait a bit. But here's the thing. If you have money to invest, if it's your own money, you can do what you want. But if you have money, that's third party money and most of capital lying around one way or another is either public stockholders, private investors.  

00:13:07    If you are the only one not investing, when you're peers, competitors are, think what you're doing, okay? You are making very clear that you are one of the parties that is taking the risk of underperformance in return for outperformance, you are diverting from the hurt. That's very, very dangerous. Okay? If you outperform, what happens? You get a bigger bonus. If you underperform, what happens? You get fired or worse, your company goes. So if you think about it, the pressure to, I don't say follow the herd, but to at least kind of, sort of follow the herd is incredible. So what I think will happen is this, they will ring the bell soon, but at some point when everybody kind of feels like things have stabilized, which I don't think is that far off, I think it's months, not certainly not years, me, me too. It's probably the next few months you're gonna see a, a stampede into real estate investing. Uh, I don't, I don't mean uncautious stupid moves, I just mean you're gonna see  deal flow really exploding action  

00:14:13    As we, uh, look towards this inter our chat chat here. Uh, any other thoughts, uh, whether it be, you know, about your hometown in New York City because people are looking at New York and thinking what's gonna happen next? Or, or just other, other observations or, you know, partying thoughts for the audience?  

00:14:31    So I, I guess this is one thing that I, I've noticed, um, and this is, you know, harkens back to the beginning of our conversation where I see so many different parties doing so many different things, but on the one hand, you've got an unprecedented, uh, amount of capital dry powder, it's off the charts. Uh, how much money is, I mean, I don't know any one of my clients that doesn't say I've got dry powder to invest. Okay? And it, and it's usually enormous piles of money, like, you know, billion dollar funds or, or whatever it happens to be. That's one side. The other side is there are an enormous number of relatively smaller to mid-size players that are struggling to find capital. And I hear a continuous lament, you know, I, I have a great business model, I have a fantastic pipeline. I could grow this business, I just have trouble finding capital or capital constraint.  

00:15:22    So you wonder, oh, why does the pile of capital just go over the other side? And the devils are in the details. Uh, sometimes the parties that need the capital don't know the parties with the capital. Or more often the parties with the capital are saying things like, I need to write a 50 million check for it to be interesting to me. And the other parties saying I need 3, 5, 7, 10, 15 million and they don't mesh. But the interesting thing is, there are enormous number of players with skills and, and, and, uh, ability to capitalize if they had the capital. And then there's parties with capital and that twain haven't quite met. And one of the things I'm spending an enormous amount of time on is, is putting those parties together and figuring out how to make things happen even if they're not so obvious.  

00:16:07    Well, Bruce, uh, I hope you have a great day in New York and uh, I too am a huge believer, uh, sort of a forever believer in New York. If I had enough money, I'd buy one of those 50% off luxury condos in Manhattan right now, that's a screaming deal in my opinion. Oh  

00:16:23    Yes. We have clients that are, are, uh, or actually thinking, you know, not buying them and clients are thinking about selling 'em. And you're probably right, it is probably a screen view.  

00:16:33    That's a contrarian move right there, right? Uh, everyone's fl you know, everyone's fleeing to the mountains of the suburbs. It's, uh, probably time to buy yourself a Manhattan, uh, condo. So, well, thank you again. Have a great day and, uh, we'll look forward to speaking with you again soon.