The Real Market With Chris Rising – Ep. 1 Kevin Shannon

02:09 CR: I’m really pleased to have with me my friend and a real superstar in the business, Kevin Shannon. And Kevin, who a lot of people have known over the years, has really built a name as being one of the premier, if not the premier, investment sales broker. Kevin recently made a big move, left CB to go to Newmark Knight Frank. I’m really pleased to have Kevin on as our first interview here on the Real Market. So Kevin, welcome to the show.

02:35 Kevin Shannon: Thank you very much Chris. It’s an honor to be your first interview on your podcast series.

02:40 CR: I appreciate it. We’ve done a lot over the years, and I know that every few years I’ve gotta update my Rolodex to keep track of where you’ve gone, but I’ll tell you that one thing I’ve noticed is it’s always straight up, and the deals keep getting bigger and more complicated, and you’ve really built a great reputation in the business. One of the things I think I’m curious about is, tell me why this move has been to Newmark? What was exciting about the opportunity? And tell us a little bit, tell the audience here a little bit more about Newmark Knight Frank.

03:14 KS: Thank you for the kind words, Chris. Yeah, we took our team of 15 people to Newmark at the end of 2015. Obviously it was a big move. CB is a good company. The opportunity was really exciting, and it was different. This role here gave me more leadership, and it also gave me more of a blank slate to create something. Our CEO, Barry Gosin, who’s one of my very best friends, talked to me about the opportunity. Rob Griffin, who I call him the brother I never had, in Boston is a legend, was the number one producer at Cushman & Wakefield. The opportunity for the three of us to build something special has been truly exciting. And in the first two years at Newmark we’ve added 12 capital markets teams. And we’ve been dramatically increasing market share. Our team in 2017 just had by far our best year ever. The reception from clients like you has been terrific. And we’re building a band of brothers. It’s a culture. And when you have a blank slate, you have the ability to build something that’s very collaborative. And I think the reason people continue to come over and wanna be part of this is because the first people that come over really talk about and brag about the culture we have. And it is about culture.

04:54 KS: And a lot of the legacy brokerage firms have been around for a long time, and they naturally have silos. And those are sometimes hard to get rid of. And so when you have a blank slate and you get to paint it, take the palette and paint it the way you want, it’s extremely exciting, and the reception by other capital markets teams to come join us and do this. And my team and the client reception’s been wonderful. If I had to script it, I couldn’t script it any better than it’s gone. It’s been terrific and exciting. So thank you.

05:28 CR: Well, that is terrific to hear. Maybe talk a little bit about the markets that you’re spending most of your time in. I know that Newmark’s a national firm and has a great presence across the country, but where do you wake up every day and say, “I’ve really gotta be up to speed on these markets?” Which markets are those?

05:47 KS: At CB I covered the western United States, at Newmark I lead, I’m the co-head of national capital markets with Rob Griffin. The markets I spend the most time in are Los Angeles and Seattle. I follow Denver and Phoenix and Vegas and Salt Lake City, Seattle, Portland, down through San Diego. Do I have favorites? Yes I do, I really like Seattle. I like Salt Lake City too, and Phoenix and Orange County. I’m fortunate, if you look at where office capital wants to be, a lot of capital wants to be in the west coast because the growth markets that you find nationally, happen to be on the west coast ’cause they’ve got engines like Amazon and Microsoft and Netflix and Dropbox and Hulu and Google and Facebook and those companies and those growth engines are primarily concentrated on the west coast, which happens to be my market area, and it’s exciting to watch the tremendous growth, especially in some of these sub-markets like South Lake Union.

07:00 CR: That’s terrific, and you hit most of the markets that we, that the Rising team spends a lot of time in, but you also made a few statements there that I think could be very interesting. Almost every company that you mentioned there was a tech related company. When you look at, nationally, I don’t think if we were talking about Pittsburgh or some of these similar size markets to a Salt Lake City, we’d have mentioned those companies. What do you see happening on the west coast of the United States or in the western US, that’s really driving the market? Is it purely tech growth? Is there something happening around the tech that makes it more desirable than some of the eastern markets? What’s your sense of the drivers in the tech? ‘Cause it kinda feels like, wow, if we have another 2000 to 2002, little tech bubble, the whole western US could fall off a cliff. Do you see it that way, or how do you see it?

07:51 KS: I don’t see it that way, and I think that all those companies I just rattled off, their corporate headquarters happens to be in the west coast. And in Los Angeles you’d add entertainment and content creation, and that’s sort of our tech driver for Los Angeles, and a lot of entertainment is tech related as it goes more and more digital. And so I think we’re fortunate that those types of engines are all headquartered on the west. They do have satellite offices in the east, but in terms of a bubble forming and some big down… I don’t see a big downcline in the marketplace, what I see is this, I think the things that cause a recession, like too much leverage, over-building, of banking prices, a dot com or a subprime type of tenant bubble, don’t exist. And there’s nothing that I see right now that would tell me that there’s any type of recession in the near future. I see mostly all green lights.

09:00 KS: This has been a long recovery, I think we’re in our 102nd month of recovery, but when you look at the aggregate GDP, it’s only been 20%, and that’s below the average of GDP growth experienced in past recoveries. And so this has been a long recovery, but it’s been slower in terms of the growth and I think that’s helped increase the transparency and get a lot of capital more comfortable that there’s a lot of room to run here. Some people say it’s the early innings of a double header, but I see this cycle going for a lot longer because I think we’ve learned from the mistakes of the past. I remember the 90% financing and the 10-10-10 rent growth. Capital is just not underwriting that and the discipline that capital’s using is tremendous right now, and that’s true also on the spec construction loan side. You’re seeing a lot more discipline this cycle, by the lenders and clearly by the institutional capital. They all remember, and I think that also bodes for a much longer and healthier sustained recovery.

10:07 CR: That’s interesting. I think, when I wrote our investor letter for this year, I described it as a tough mudder race, in that we had to work together, sometimes it felt like we weren’t moving. But when we look back on the year for our team, we had a big success in buying One Cal in downtown LA. I wonder if you could go through, just on a high level maybe, but maybe end it up with one transaction, but describe what 2017 was to you, and maybe you can do it around your favorite deal of the year. I’m not asking for anything that you have to keep private, but just give the audience a sense for how 2017 went and maybe highlight one of your best deals.

10:49 KS: Yeah, 2017 was a great year. The year started with… After the election of Trump there was a clear rise in the stock markets, which the denominator effect caused more capital to be needed to be allocated to real estate. Interest rates rose up fairly dramatically and then settled in and calmed down. The first quarter was a slow quarter, but the year finished especially strong. Probably the proudest achievement I have for 2017 is our team did… It was probably 25% more volume than we’ve ever done, so it was a record year in terms of production. I’m fortunate I have a great team, we have offices in San Diego and Newport Beach now, so we’ve grown, we’ve got a great debt team that Dave Milestone and Fred Green and Michael Matchett lead. Those guys, that team is cranking. And we’ve got a new industrial division with Brett Hardy on my team as well, so 2017 brought a lot of growth, and a lot of great changes. But I think the thing we’re probably most proud of, is we sold over a billion of trophy single tenant deals, and we did it off market. We never launched a building, we sold them all, by the way, to foreign entities, but one of the initiatives we have at Newmark Knight Frank is to have somebody on my team.

12:26 KS: In this case Rob Hannan goes with Alex Rochelle, and we just go to Asia every three months and we go to Europe and we go meet the capital, and the relationships have evolved over the course of two years, where we can actually go to a principal or a bow post or a griffin and say, “We know who the buyers are for your deal.” And I think the last single tenant deal, in LA, the big deal was DreamWorks Ohana, but the last single tenant deal we did was an Amazon deal up in South Lake Union, in Seattle, and it was about a $270 million deal and we brought in Takenaka, who we had met with in Asia, and they did their first deal in Seattle, and it was a record price and a low cap rate. And our client principal in Touchstone was thrilled, and we found a buyer who had changed his number one market in the world from London to Seattle. And we did the same thing on two other deals, Center 425 and on another Amazon deal as well, and we did it with Facebook. And so, it’s the ability to monetize that and bring in six or seven offers because people in Asia or Germany know us, and we can go off market and create sort of the mini-auction, our team never had that capability before, and that’s probably the crowning achievement I think of 2017, if you will.

13:58 CR: Right, I think it speaks volumes for your team, and the leader that you are to bring this all together. Part of the name of the podcast is The Real Market, and one of the things I’d like to do is get into what’s really happening in some of the markets. But before we get into that, I do wanna ask you, if when you look at 2017, did you have one stumble or one thing that didn’t go the way you thought that you could maybe tell us about, and how you reflect on that versus all the other success you had?

14:29 KS: Yeah, that’s an interesting question. It was a year that was littered mostly with a lot of successes, and I’m trying to think of a deal that didn’t go quite so well. By the way, the first half of 2016 there was a few of those deals when the stock market sort of crumbled and the VIX went to a high, but in 2017 I… I’m trying to think, Chris, and I’m sure there’s a stumble or two, but it’s mostly smiles and I’m trying to think of something…

15:15 CR: As you know me as a developer I’m the optimist, so I wanna think it all goes the way you’re saying. Was there anything in dealing with either a buyer expectation or a seller expectation, that you felt it took a lot of work to get someone to see what was really happening? Were there some predispositions from either a buyer or a seller that made a marketing process more work? So it doesn’t necessarily have to be a seller. Here’s where I’m getting at is, I personally believe is it took about six months, the first six months of the year, for people to recognize that the economic policies were actually gonna change. And they really didn’t change until the tax changes at the end of the year, but I really found the first part of the year, that when we were talking to our LP partners, it was a real struggle because every question was, “Well, the cycle’s gotta end, right? It’s been going on for so long.” So did you have anything where you had to really say to people, “Look, you’re looking at this through the wrong lens?” And did that change any marketing strategies or it just make it tougher or anything like that?

16:26 KS: In 2017, the year started slow in terms of the amount of deals. And everyone was trying to figure out post-election, what does this mean? Clearly there was a lot of optimism, and the stock market rallied in… I think the stock market rallied in part based on the perception that they believed there would be some new laws that would benefit businesses, which ultimately got enacted. 2016 was much more of a struggle. And I remember post-Brexit, I remember all the Korean buyers and a lot of the foreign buyers just evaporating. I remember, the deal I probably worked hardest on, was an Amazon deal I was selling for Vulcan post-Brexit, which is Paul Allen’s company. And my buyer was David Edelstein, who I met at a USC Price board meeting. He told me he had a $2.1 billion exchange. He wanted to buy in West LA, I told him he should go to Seattle, and I told him why he should go to Seattle. And he took his team to Seattle and we ended up doing four deals for over $1.2 billion.

17:44 KS: That was actually another proud achievement, and Urban Union, and Facebook, which is Dexter station in Center 425, all closed in 2017, and they were all led by David Edelstein, and that all started at a board meeting, but it was gratifying for me to take somebody who’d never been to Seattle and convince him that’s the place to make a bet. And then watch him make over a billion dollars in four bets, and so that was… I worked hard to do that, ’cause you had a buyer that had never been there, didn’t know anything about it. But it was really gratifying, ’cause we ultimately had successful closings on all those properties.

18:27 CR: That’s terrific, and congratulations. I’ve heard you say, tell this story before, and I think it’s great you can share it with our audience. But maybe this is a good entry into talking, and one of the things we want to talk about are particular markets and given the success you’ve had in Seattle, can you give us a sense for why you think there are real estate metrics that make Seattle a great place to invest?

18:48 KS: Seattle… By the way, I love west LA. I think downtown has a lot of legs and is a great basis play right now and in the long term’s gonna be a fantastic place to have capital invested. But Seattle just, from a growth perspective, it’s been incredible. And from a credit perspective, it’s got the best credit of any market on the west coast. It’s Starbucks, it’s Costco, it’s Microsoft, it’s Amazon, it’s Facebook, it’s Boeing, it’s Starbucks. It’s got some great engines. And what I like about Seattle, if you look at Facebook, in 2010 they had 10,000 feet there, and I think right now their footprint’s a million feet. And they’re replicating what they have in Silicon Valley. And the reason it’s attractive up there is your rents are significantly below San Francisco rents. You’re apartment rents for your employees are about 40% cheaper, so your cost of living is about 40% cheaper. Your salaries, San Francisco’s maybe 10% higher, but you don’t have State of Washington income tax.

20:06 KS: And so your salary’s about the same. Your cost of living’s about 40% less. Your office rents are significantly less, probably about 40% less. And so I think a lot of those engines in Silicon Valley recognize the talent base and the labor pool you have in Seattle. And then the other advantages I just talked about… And so Seattle’s got more cranes than any market in the United States. There’s a reason for it. About 85, 90% of the office space has been pre-absorbed and pre-leased. You build and they have come, and that continues and continues, and that market’s just been fun to watch. For me as a broker, by the way, that market’s got a lot of merchant builders where they build, lease, and sell. And if you look at LA, a lot of our builders are Hudson and Kilroy, and they don’t build and sell. We don’t have as many merchant builders here, so from a brokerage perspective, Seattle’s a fun market to work in, but I do believe maybe the best market in the country.

21:13 CR: Have you seen it filter down to Portland at all? Portland’s a market we spend a lot of time on we haven’t bought in yet. Want to, if we can find the right opportunity. Do you see an effect from the success in Seattle down to Portland?

21:29 KS: Oh, yeah. You’re seeing the same thing happen in Portland. The momentum that you see in San Francisco, and the Bay Area, and Seattle has translated to Portland. I think a lot of capital, later cycles looking at Portland, is a little bit better basis place with more legs, potentially, more room to run. But Portland’s part of that Pacific Northwest, and a lot of the energy that you find in those other two markets you’re now finding in downtown Portland as well. And Portland’s become increasingly popular with capital. One of the problems with Portland is it’s always been tough to get scale, but there’s been more trading recently. But the dynamics in Portland are similar to the other two markets.

22:15 CR: So as we come down the coast between… Obviously we all like the five markets in California. If you had to really zero in on a market, you think there’s opportunity between San Francisco… The San Francisco-Oakland area, between that, Silicon Valley, LA, Orange County, and San Diego, which of the five of those markets do you think has the best opportunity to grow and make some money on in 2018?

22:42 KS: I like the coastal markets. I like LA, and Orange County, and San Diego, with the exception of west LA, is all well-below the prior-peak pricing. It’s well below replacement costs. I think that basis play late cycle’s attractive to a lot more capital, and so we’re seeing more capital focused on LA, Orange County, and San Diego. So I like that dynamic. In the Bay Area, in Silicon Valley, things have run up pretty substantially. In San Francisco since 2010, the average annual compounded rent growth has been like 12.6%, and so the rents have run pretty far. And so I think that market… I think capital in that market’s a little bit more cautious on the rent growth. And they’re concerned that because it’s run so far, you might be towards the end of a cycle there. I think the market that’s really benefited the most is Oakland and the East Bay, and there’s a lot of capital that’s come to the conclusion that this is where the puck’s going. And the puck’s clearly sort of already there. So I think Oakland’s got a lot of upside. Silicon Valley, I think that…

24:01 KS: Capital that’s looking at San Francisco and the Silicon Valley is a little bit nervous about the per square foot pricing, especially in the Silicon Valley for some of the more commodity stuff. And it’s just a reflection on how high the rents have run. And so those markets are above prior peak and the rents have run a long way. Orange County, San Diego and most of LA, including Downtown LA, with the exception of west LA, still seems like they joined the party a little late, and they may have more room to run. But being below prior peak pricing and replacement costs is always… I think it gives you an element of safety. So hopefully that answers your question, Chris.

24:45 CR: Yeah. No. I think you’ve hit it. I just wrote a blog post that got published this week talking about our excitement about, one, being Orange County. We feel like Orange County’s kinda been late to the party and left behind a little. And we think that’s gonna be a great market. You touched on Orange County, but we also really focused on Denver as a market that we really, really like. And then follow that up with Salt Lake City, where we’re spending a lot of time. Can you talk about those two western US markets? Denver first, and maybe a little bit about Salt Lake City.

25:20 KS: Denver is an exciting market. The growth in Colorado, the net, the growth and the population. The migration to the state is all been very favorable. It’s got a world class transportation system. LoDo is got all the energy of South of Market, or South Lake Union. And capital’s recognized it. LoDo pricing, there’s several comps over 700 bucks a foot. And I do remember back in 2010 when $400 was a shocking price for LoDo. And so that market continues to run. There’s a great amount of talent there, there’s a nice culture there. Suburban Denver is improving as well, but Boulder is a sub-market that’s getting those techy tenants, getting the Googles of the world. And Boulder’s actually seeing $700 a foot as well. And so I like Colorado. And it’s interesting, a lot of the people that build in Seattle are also in Denver. And those are the two markets. And there’s maybe three or four of your top developers in Seattle, operate primarily just in Denver and Seattle. So I like what you see in Denver as well. And I think that’s gonna continue.

26:43 KS: I also like Salt Lake City. I think if you look at the growth in population there that’s gonna be phenomenal. Goldman Sachs’ second biggest concentration of employees is in Salt Lake City. You’ve got a great labor pool. And you’ve got more, if you look at the rent growth forecast and the employment growth, Salt Lake City is one of the national leaders, although it’s a little… It’s sort of a hidden gem. One of the problems with Salt Lake is also getting scale ’cause product doesn’t trade as often. But you are seeing the capital, that is buying there, is frequently from the coastal markets. But a lot of the things that people like about the coastal markets exist in Salt Lake City. And so that’s a market we’re seeing more capital focus on, just like you are.

27:37 CR: That’s terrific. We certainly see a real opportunity in Salt Lake and Denver. One element that I think is really important about Denver, is that it sits in the middle of the country, it’s a purplish state, it doesn’t sit on one side or the other. It’s a place where you can put a headquarters and people can move, quality schools. I think Denver over the rest of this cycle is a really good place to be. One of the things I wanna do on this podcast too is kinda make someone like you accessible to maybe a young generation of real estate professionals. Could you talk a little bit about how you got into the business? We’ve known each other for a long time, and I’ve watched you grow in the business. But I think it’s hard for a younger person to say, “Well, how do I get to where Kevin is?” Can you talk a little bit about what brought you into real estate, what was it about… Real estate’s a lot of different things, why brokerage? Within brokerage, why investment sales? Can you give a little background on that?

28:35 KS: I’m happy to share that Chris. I took a class my sophomore year at USC with Rocky Tarantello, and he was a… It was a introductory real estate class. And he was a compelling professor. And once I took that class I knew I wanted to go into real estate. And it was crystal clear to me. And so I always remember Rocky and what USC did for me there. I ended up, after taking that class, I took 20 units of real estate classes. I took every MBA and BS program that you could take in real estate at the time. And so that’s how I got hooked on it. I think when I came out I wanted to be a developer, but there was no jobs in development at the time to be candid. And so I became a broker and I remember starting, I had an $800 a month draw. And I knocked on a lot of doors. And I cold called and I… You pay your dues in this business and it was actually humbling to… I remember I got kicked out of two office buildings. And I was like, “I went to USC to do this?” But I also tell young people that the two people that kicked me out of those office buildings, one guy was [29:57] ____ and one guy was Al Escobar. And I ended up doing deals with both of those guys.

30:00 KS: And so it’s persistence, and then it just sort of gravitated. I became a full time investment broker in 1996. I thought I was a great multi-tenant landlord rep in the South Bay. You had the end of the Cold War in ’91 and the South Bay was a disaster. ’91, ’92, ’93 were really, really tough years. ’94 was as well. Becoming an investment broker at the end of ’95 was fortuitous timing. I was still single, and so I just walked away from all my landlord leasing business and decided to become an investment broker, and the rest is history. I look back and I thank the Lord. It was a bold decision and the timing was perfect. And at the time, after those horrendous years in ’91, ’92, ’93, ’94, no investment broker had a track record, and so I could actually go and compete. Today, a new investment… If you wanted to be a young investment broker, it’s hard to compete with the track records that exist. But that’s how I got into real estate and that’s how I became an investment broker.

31:25 CR: Is there something about investment sales that really, you found, drove your passion as opposed to doing office leasing or industrial leasing?

31:35 KS: I was a leasing broker, and I did the South Bay. I think I had exclusive listings on over three million feet in Long Beach, Torrance, and El Segundo. There’s one project in Torrance, it was called Co Executive Plaza at the time. TRW pulled out of six buildings, 156,000 feet. I think it took me four years and literally 132 leases… I think the average lease size was about 1400 feet. And I just said, “I can’t do this anymore.” And if I had been the leasing broker maybe in West LA it might have been a different outcome, but I got involved with a couple of sales in ’91 and ’92 as a leasing guy. I remember getting called by Security Pacific Bank at the time, in 1993, and they called me and said, “There’s only been three sales in the South Bay and you did two of them. Can you come in in ARGUS’ project called Voyager Court?” And I went to my manager, Dave Drum, and I said, “Do we have Argus?”

32:48 KS: And he said, “Yes.” And so I got the Argus. And I read the instructions, and I was in the office until 4:00 AM, and I did my first ARGUS. And then I met with the bank at 8:00 AM the next day and told them it was worth $4 Million and “Here’s my ARGUS.” He goes, “Yeah. This is exactly what our ARGUS looks like.” And I got the listing, and from then on I started doing ARGUS’. Investment sales is just much more fun than doing multi-tenant leasing in the South Bay.

33:21 KS: Then when I went to Grubb & Ellis after leaving Colliers Seeley, they started exporting me and bringing me to other markets like Phoenix and Seattle, and Portland. And I just found it fascinating to learn these new markets and go in and talk capital markets and look at the trends, and the different script each market has. And I just loved it. I love going to different markets. Every asset in real estate’s different, and then figuring out what the script should be and why somebody should hire you. It’s a great living. I really am fortunate, I love what I do.

33:56 CR: That’s terrific and I appreciate the honesty on that. I think those of us who’ve been in real estate for a while share a lot of stories like that. But I do think one of the things that’s unique about brokerage and real estate and being a developer is it’s not as though you walk into a culture and are given a time card and say, “We expect you to do this for eight hours.” You really gotta take responsibility for yourself. You gotta take responsibility and have self discipline. Can you talk a little bit about what are the things that you do on a daily basis, on a weekly basis, that has allowed you to be successful? And what’s the culture of your team when it comes to just personal responsibility?

34:38 KS: The culture is, “We’re all one. We are one.” Our team could have a better year in Seattle than they did in Orange County, or like in 2017, Orange County crushed it and maybe San Diego wasn’t as strong. We still… We compensate people on what they bring and do for the team and we all pull together, and so the culture is “We are a team.” And the culture, by the way, of the Capital Markets Group for Newmark is “We’re all one.” We all share everything, we talk candidly, we hunt in packs. And that culture is what’s gonna grow our market share. And that culture’s what’s gonna attract the newest and best talent, which we’ve demonstrated time and again just building our teams out. And so, what I do every day is… Well, I’m probably usually up at 5:30. I frequently cook breakfast for the kids. I have four kids. I’m on my iPhone more than I care to admit, but I’m also… The one thing I always… You put the customer first. And you make commitments, you do it. When you’ve been doing this three plus decades, there’s a service delivery and expectations clients have.

35:57 KS: And candidly, you’re not cold calling anymore, you’re getting a lot of repeat business and guys are calling on you because they know your team can execute. And so making sure… Promises get made, properties get all the attention they should, that all the calls are being made. The market at times will make us look good and the market at times will make us not look so good. But doing your job and fully exposing the product and having the market speak and knowing that this is where the market is, is fine. ‘Cause there are times when interest rates rise and your pricing will go down. There’s times when you have a Brexit situation and capital goes to the sidelines, or the stock market plummets like the beginning of 2016, you can’t control those. You can’t control when the CMBS market’s gonna be functioning. But you can control how hard you work and how many calls are made and what you do day-to-day to help your client. It’s always client first. It’s always… I always ask them, “And you’re my customer, what would you like?”

37:07 KS: I’m always free to give recommendations, but it’s… Maybe it boils down to Irish Catholic guilt, [chuckle] and doing what you say. It’s a lot of work when the market’s busy, but I also know when the market’s not busy, like 2009, I don’t forget what the market was like then. The one thing we did was we didn’t lay anybody off, we kept our whole team together. We had some of my competitors… Some investment banking firms have three rounds of layoffs and lay off 33% of their work force. We didn’t do that. The team is extremely important to me, the security of the team is important to me. The fact that I’m helping teach, and tutor, and being a role model for 25 people on my team and 100 people on the west coast in the capital markets, it’s a responsibility that’s important to me, but it’s also something that’s extremely gratifying and fun to me. I love teaching people, I love helping people. I’ve just been blessed. I’m in a fortunate situation and I look back at my career and the path I’ve taken to get here. I still keep the rosary beads in my pocket every day.

38:29 CR: [chuckle] Well, I share that “Catholic guilt” part of it with you, but I think the most important part is the gratitude. I agree with that as well. And you’ve had an amazing career and I know that when I’m out there and I’m doing the things I do, which is raise money and try to find deals, you’ve been a great sounding board for me. I’d love to ask you this question, because when I’m in front of the CalSTRS and the CalPERS of the world, the number one question I get is, “Why make a real estate commitment at the end of a cycle?” And it somewhat drives me nuts because I do think you can make the argument that, “Don’t invest, it’s like a broken watch, it’ll be right twice a day.” But if someone were to say to you, one of the major investors, “Kevin, is this really a point in the cycle where I should be making real estate commitments?” You went through a lot of the things that I say back as well, which is, there’s not over leverage, there’s not over building, really the risk is recession. But how would you answer that to a CalPERS? Should a CalPERS be investing in either core, core-plus or value add real estate? From your perspective, or where you sit, how would you counsel those public pension funds and some of those major investors?

39:39 KS: Well, I guess there’s a couple of parts to that. What’s your hold period? ‘Cause if you’re buying a core deal and a lot of these core funds, they don’t hold five years or 10 years. They hold forever. If you’re a REIT, you’re gonna hold it maybe forever. In the buyer interview I just did with Takenaka, they said their hold period was infinite, and then they told me since the mid 1600s when the company was founded, they’ve never sold anything, and it’s true. And so with somebody like… If you got a long term perspective, you should aggregate as much real estate as you can because… You look at people in Manhattan, people got crushed in ’08 in Manhattan. Only the people that were over leveraged and the people that had the staying power to hold on to their assets, now have assets that are worth 30% more, right? And everyone… So you’re way past prior peak. And so to me, if you get good quality real estate and you own it, there’s gonna be some down cycles, there always is. But long term, you’ve got a great piece of real estate and there’s gonna be a lot of points in time where you’re gonna be able to monetize it and make some money.

40:50 KS: I know why it would be a little scary right now to do value add deals, ’cause the recovery is over 100 months old, but ironically the amount of money being raised the most right now is for value add deals, and core is not raising nearly as much money. I personally though… When you look at your alternatives and where you’re gonna put your money, you’re not gonna put it in the bonds market. And I think everyone currently thinks interest rates are gonna rise. The stock market went up 25% in 2017. The multiples are at sort of uncomfortable levels, if you will. In real estate right now, you can buy… You can go to secondary markets on lease stuff and get double-digit cash on cash at below replacement cost in suburban markets. And if you go to the CBD and you’re gonna pay up for it, but the pricing you’re saying in the CBD product, West LA, Playa Vista used to be 450 a foot and then it was 600. I think today Playa Vista’s over a 1,000 bucks a foot, and Seattle used to be… It used to be 500 was a huge number and now it’s over 900, and Denver used to be 400, it’s over 700.

42:09 KS: If you have great product, and if you look at it, by the way, what you do, Chris, is you reimagine office buildings and environments, and if you look at the age of the office inventory, about 20% of it was built in the last 20 years. And so you’ve got a really old inventory that’s really a lot of product that needs what you can do to it, and so when you do a best in class rate of position or you build a best in class new building, capital has been well rewarded. But I just think it’s… You could say it’s the least worst investment alternative, but what I do believe is I don’t think the next downturn because you don’t have the excess described in prior downturns, that there is gonna be a recession at some point, but I think it’s gonna be a mild recovery, and this is gonna be a really long run. Sure there’s gonna be some downturns, and we saw it, by the way, in the first half of 2016. I think pricing was off 5-15% in the first half of 2016, and that was a great time to buy.

43:19 KS: But it’s a great… The one thing about real estate is it’s become more and more transparent, the information’s gotten better and better, and it becomes a safer and safer investment alternative for CalSTRS and CalPERS. And so I just think you just have to have a long term perspective and then look at your returns, especially with debt. ‘Cause even though interest rates have moved up, and the benchmarks at a three year high, this is historically still really attractive debt, and the cash on cash returns for a lot of this stuff is pretty attractive. I’m personally buying real estate and I bought real estate last year, and I’m investing in real estate on an ongoing basis. My philosophy is, I’m just gonna hold this stuff. If I got good product, I’m just gonna hold it long term.

44:08 CR: I hear you. I’ll tell you, the one area we didn’t really touch on, which I’d love to just very briefly, and then we’ll conclude with the final question, but I’d really like to touch on your sense of this tax bill that’s gone through that’s not even a month old really, the effect that’s gonna have on tenants and tenant decision making. Our view is, it’s not just the Apples and the Googles… The tax, the repatriation rate goes from 35 down to 15.5. Yes, they’re gonna bring money back, but think about some of the law firms or think about some of the multi-national corporations who are gonna bring money back, and now incentivize through the tax code to make longer term plays. What’s your sense, or when you’re talking to sellers or to buyers about what you see happening with occupancy and absorption?

44:57 KS: I think… Corporations have been printing a lot of money for a long time now, and they’ve been very profitable. They’re gonna continue to do that and this tax law’s gonna… This tax law is gonna put some fuel and help accelerate what’s been sort of a lagging GDP growth. People are gonna have more money in their pockets, that’s gonna help retail. The pass-through changes helped rate ’cause of the change in the tax rates. They help partnerships that are owned in pass-through entities, which is most of them. If you are a foreign corporation, there are some tax savings too on your residuals, on your exits.

45:40 KS: And the 1031 laws weren’t changed. I think the tax law’s gonna have a lot of benefit for real estate companies, and it’s gonna have a lot of benefit on tenants and corporations. You described a lot of what’s happening early in the first month or so, I think that’s gonna continue. You’re gonna see Corporate America benefit from the lower taxes. I think they’re gonna put the extra money to work in terms of maybe increasing R&D spending, giving back to the employees as you’ve seen with some companies, and all this is good generally for the economy and continued growth in the economy, so I think it’s gonna be clearly a net positive for going forward in 2018.

46:26 CR: That’s terrific. Well I don’t think it’d be a conversation between the two of us if I didn’t broach this subject, but a lot of people know that I was fortunate to play for the old ball coach, Steve Spurrier, at Duke, but it’s really, it’s the Bruin blood that goes through my veins. My dad played at UCLA, my mom went there, I grew up there. I just gotta ask, is Troy a little scared over there now that the Trojan beater Chip Kelly has come over to Westwood? What’s the thinking over there about Trojan football in 2018?

46:58 KS: I love college football, and I love college sports, and I’m not gonna say anything about our basketball team versus your basketball team right now.

47:09 CR: See this is when I quickly jump back to, “Hey, I’m a Duke guy.” Those guys who steal sunglasses would never have made it in Durham, but that’s not fair for our conversation. I agree with you that the Bruins have a black eye on that one, that’s for sure.

47:26 KS: It’s an unknown. I’ve heard both sides of it. I do… Clay Helton is such a great person, and I think he’s gonna have a very strong recruiting class. It’s not gonna be a lot of recruits, but it’s gonna be highly ranked recruits. It’s gonna be interesting ’cause we’re gonna… We lost our running back, our quarterback, and our best receiver. And you lost your quarterback, but you got Chip Kelly. I would say that we are worried, but I think one of the first tests is how the recruiting goes, and I’m not sure it’s been as big a impact as we feared, us Trojan fans, but I will say I totally respect his play call, and I think he’s a genius in football. And so I expect it’s gonna be interesting. I think it’s gonna be more competitive than it has been recently and I’m still hoping that the good guys, and that’d be the Trojans, still come out ahead, but I think it’s healthy to have that type of situation where you get the new coach. And clearly he’s a capable coach and it’ll be interesting to see what happens going forward, but we’re not shaking in our boots yet, if you will.

48:50 CR: Well I think the great thing about what the Trojans were able to do last year was finally, the Pac-12 Championship came south, which has been a long time coming. And I think you’re right, I think Clay Helton is really a spectacular guy, and though I’m not a Trojan fan, you always wanna see young men being coached by really good mentors, and I think Clay Helton is that. Hey Kevin, I really appreciate you being a part of this. I’m excited about trying to bring the opportunity to the community out there, to really hear people who are experts like yourself talk about what they see happening, and really take the blinders off and really say, “Hey, this is what’s happening in this market and this market. This is what I see.” So I appreciate your honesty, and as always I appreciate your friendship. Thank you so much for doing this.

49:33 KS: Hey Chris, you’re always cutting edge. I’m not surprised by your initiative here, and good luck with it. And thank you for reaching out to me. I’m always happy to help, and the relationship we have with your firm is special for us as well. Thank you.

49:49 CR: Alright, my friend. Have a great weekend. I assume you’re doing sports all weekend like I am. So… [chuckle]

49:54 KS: Yeah, no, we’re gonna be running around. So, you too. Thanks buddy.

49:57 CR: Alright buddy. Talk to you later. Thanks.