Aileen (00:01):

Thank you, everyone for joining today’s episode of the, How Did They Do It Real Estate podcast. I’m your host, Aileen Prak. And today our guest is Brian Adams. Brian is the president and founder of Excelsior capital, where he spearheads the investor relations and capital markets, arms of the firm. And he has 10 years of experience in real estate, private equity and has advanced knowledge and best practices for strategic real estate investing. He has a lot of experience in real estate. So we’re going to get into this and we’re going to have a lot of great insights on today’s episode. We’re also, we’re very excited for today. Thank you so much for joining us Brian. How you doing?

Brian Adams (00:32):

I’m doing great. Thank you so much for having me.

Aileen (00:34):

Thank you. So can you start off by sharing a little bit more about your background and how did you get started in real estate?

Brian Adams (00:39):

Yeah, happy to. So I am a New York guy who married a Nashville girl. So my wife and I met in college in Connecticut, went to law school up in Boston, moved to Nashville. About 15 years ago, I was exceedingly fortunate. My wife’s family has a single family office that has invested in the commercial real estate space for the last 25, 35 years, mostly as a co GP or an LP into other funds or with other sponsors. So as an ex-officio board member, I started getting exposure to some of the investments we are making and some of the general partners and sponsors we were working with, I just fell in love with the business, became, you know, got the bug to be an entrepreneur and connected with my partner who is also New York guy that married a Nashville girl. And we started our company 10 years ago. So to answer your question fell into it by lieu of my wife’s family’s relationships on the investment side, and then really wanted to be an entrepreneur and thought real estate would be a great place to start a company.

Aileen (01:41):

Great. And so once you guys started the company, what have you where have you guys gone since then?

Brian Adams (01:47):

Yeah, so it’s been a journey, as you can imagine. We initially started raising blind pool co-mingled funds through our friends and family network, and we invested in deals in Nashville in our own backyard. And that was around 2010. So there were a lot of opportunistic and deep value add opportunities that were available at that time. We did mostly did urban infill for the most part pricing got away from us pretty quickly in Nashville, as you can imagine. So we started looking elsewhere and we started expanding the geographic footprint to places like Louisville, Birmingham, and Memphis etc. During that time we were continuing to raise funds, but eventually we discovered that our investor base, which is all taxable investors. So they’re all high net worth individuals or family offices or independent RIA is wealth management firms. They really prefer to do direct co-investment syndication as opposed to committing to a blind pool commingled fund vehicle.

Brian Adams (02:47):

So roughly six years ago, we pivoted towards just raising capital on a deal by deal basis. And once we started doing that, frankly, we started growing really quickly and it definitely helped kind of fuel the growth of the company. So today we manage roughly two and a half million square feet, total of commercial real estate. And the portfolio value is probably somewhere around $450 million gross asset value. And we’re in 12 markets across the Southeast, the Midwest, all what we term. And I think we’re going to get into this later, but we turn them all as secondary markets. So think of places like Tampa Bay, Raleigh, Kansas City, Richmond, Cincinnati, etc.

Aileen (03:32):

Great. So can you talk a little bit more about the secondary markets and what are some of the key demographic changes that are driving the change?

Brian Adams (03:41):

Yeah, happy to. So when we define the secondary market, we think of NSAs, which are kind of, you know, major metropolitan areas, not just the downtowns, which have a million plus people population-wise, but they’re not included in the top 10. And so that’s kind of how we demarcate a secondary market. There’s a whole lot of terms that get thrown around 18 hours, city, you know, secondary market. But we like to kind of crunch the numbers on the places that we’ll go. So that’s how we define a secondary market in terms of how it applies to the investment thesis we have for a long time, my partner, and I thought that this wall street narrative, that millennials, which are now the largest working population cohort in American history, it’s roughly 75 million people total the wall street narrative was that these people are going to be living in Brooklyn, wearing skinny jeans and eating avocado toast and not having a family for the rest of their lives.

Brian Adams (04:43):

And that just was going to be how they lived in a five story. Walk-Up now clearly that wasn’t the case. What was happening was because the 2008 and the great recession, their family formation phase got pushed back roughly three to five years, but we were starting to see that people were making choices about where they want to live, work and play based on quality of life, cost of living access to single family homes and access to education for their children. And like most generations, we have a tendency to rebel against the generation ahead of us, our parents. And we swear in college that we’re never going to live like them. We’re never going to live the same lifestyle, but inevitably we always want that kind of experience for our children. Once we entered that family formation phase. So we were seeing this play out anecdotally on the employee side, right?

Brian Adams (05:32):

Friends of ours were leaving the upper West side. They were leaving New York, leaving Chicago because it was just very expensive and very difficult to have a family with COVID it’s really been exacerbated. So you seeing this really large acceleration of this demographic shift occurring out of major Metro gateway cities into these secondary markets predominantly in the interior Midwest, as long as well. The Sunbelt, Texas, Florida, the Southeast, etc. So those two things combined where we could find value in buying commercial real estate in the secondary markets, and then see that growth component of that population, job and wage growth coming from this demographic shift. That is what combines for our investment thesis.

Aileen (06:15):

That makes sense. And especially now with like you mentioned with COVID and everything like that, and the ability to work from home it’s definitely going to continue to impact it as an employer, start to realize this more and more.

Brian Adams (06:27):

Yeah. I mean, pre COVID the biggest challenge for employers was access to human capital and access to talented employees. And I don’t think that’s going to change in a post COVID world and employers are not stupid. And they see that their logical employee base is moving to these locations and they want to have a physical footprint there. They want to plant a flag there. So what we saw initially as the employee shift, now we’re seeing employers want to be first in line to establish themselves there so they can access that capital. And that’s why you’re seeing frankly, a lot of companies go to more of a hub and spoke model. You know, they’re still going to have the mothership be an LA or New York or Chicago or Seattle, et cetera. But they’re now going to have secondary campuses where they can have a distributed workforce where the employees are.

Aileen (07:15):

That makes sense. And so I’m in the secondary growth markets right now. Are there any particular places that you and your company are focused on?

Brian Adams (07:23):

Yeah, we’ve been very bullish on Kansas City, which I’m happy to get into. We’re in a contract on our fourth acquisition there, knock on wood. We’re hoping to close two weeks. Congratulations. Well, we’ll see. Casey’s interesting market and we’ve been active in Cincinnati and then we actually even though I’m going to go against exactly what I said before, we’re looking at a deal in Fort Worth, which is technically part of the Dallas metroplex. But we think of Fort worth as kind of a standalone secondary suburban market, independent of Dallas itself, just because the population is so big and, you know, Texas just experience phenomenal population growth. But Austin is really expensive. Houston is so tied to the energy markets that we can’t get comfortable there. San Antonio is coming. We don’t think it’s quite there yet. And so we really are bullish on Fort Worth. And so those are some of the places that are on the radar for us.

Aileen (08:20):

Yeah. I would love to get into Kansas City and the different metrics that you guys are looking at there, if you wouldn’t mind sharing.

Brian Adams (08:26):

Yeah. So the way we do this is we find an MSA that we like, right. It qualifies from a population standpoint, it’s had good solid year over year growth in terms of that population and just the right population. It’s that knowledge economy, STEM oriented workforce, 18 to 40 year olds, college educated that are moving there. That’s what you want to see. Kansas City has become a really good option for folks who are fleeing Chicago because they’re being taxed to death. And it’s a very tough quality life. The reason I personally loved the Kansas City market, it is the only MSA in America where there’s a class, a rail line that runs North South and East West. So when you think about distribution hubs, the Amazon effect e-commerce etc., and moving stuff from one place to another Kansas City is just very well a place. It has the second highest freight volume behind Chicago for railroad.

Brian Adams (09:22):

So we just think that there’s going to be a huge push towards that space moving forward. And it’s also, you know, frankly, pretty affordable. So those are kind of the reasons that we like Kansas City and we use the same analysis for other markets. Once we find the MSA that we like, we then filter down into the sub market data, which is kind of a pocket neighbourhoods within that MSA. And oftentimes it’s actually within secondary markets in the Midwest and the Southeast, because there are no geo-physical barriers. You have this huge amount of sprawl, right? There’s no rivers or mountains or coast to stop the population moving around. And so the difference between buying in Kansas City, near the airport versus Kansas City downtown, it’s legitimately like 45 minutes. It’s just, they’re different markets in themselves. And so once we find the MSA, we like, we go to the some market data and we look for what we can buy on a cap rate basis, what we can buy on a per square foot basis.

Brian Adams (10:21):

And then we stress test it to see how it reacted during the great recession. So we don’t like to see anything in terms of vacancy above 12 or 14% during the worst of the downturn. So call it 2010, 2011, if we can still buy things that seven to eight cap range. And we’re still somewhere in that $150 a square foot on a per pound basis, then we’ll start looking a little bit deeper. And so typically you find two sub-markets that will qualify and we’d like mature some markets. So we liked the ability to see that, you know, people have lived there that there’s been commercial real estate development there for probably the last 25, 30 years, because we’re very protective of our capital. So we want to make sure that as a landlord, a developer, can’t just throw up a hundred thousand square foot of spec and steal our tenants.

Brian Adams (11:11):

So those are all the dynamics that we look at and we’re especially focused on, on a price per square foot basis. Replacement versus replacement cost is important, but it’s really replacement rents, right? So if class a rents in the marketplace and that sub-market are on the order of it, call it high twenties, a square foot to justify new speculative construction. You probably need to be somewhere in the mid to high thirties, a square foot. So there’s a big Delta there and a big differentiator. And so that’s, that’s the dynamic that we like to see. And so for instance, South Johnston County in Kansas City checks all those boxes. We’d like the story, we like the pricing, we liked the growth orientation. And so that’s kind of an example of how we would underwrite a market, go to a market and then look for a specific deal there

Aileen (12:00):

That makes sense. Would you be able to share some of the resources that you’re utilizing to be able to do the researches on the sub markets?

Brian Adams (12:07):

Sure. It’s nothing kind of mind-blowing. It’s Co-star, it’s the market reporting that you get from Cushman and JLL and call yours and the usual suspects. And then, you know, we spend a lot of time talking to local leasing brokers, local leasing brokers, always know exactly what’s happening in the marketplace and they’re your best resource so they can tell you, yeah, I mean that, that report might say 20 to 50, but there’s an abatement there. They’re getting a year free rent. It’s more like 2150 or whatever the story is. So we spent a ton of time, frankly, drinking beer with leasing brokers and talking about college basketball and college football is because that’s what these predominantly guys, that’s how they live a lot of their social life. And so we have acquisition folks who just talk them all the time. So it’s a little bit of you know, art and science combined where we are crunching, the numbers are looking at the data, but it’s also that anecdotal evidence says, so invaluable,

Aileen (13:10):

Thank you for sharing. And so if we can turn the topic a little bit to the investor basis you mentioned that your investor base their appetite for the different investments have shifted a little bit. Can you talk a little bit on how you were able to hone in on their needs and the different ways that you were able to do that?

Brian Adams (13:31):

Yeah. And I think it’s a mistake that many entrepreneurs in our space make. They, you know, a lot, oftentimes we are, you know, alpha males and we think we know everything and we think we’re really smart. We’re well-educated and we haven’t an idea, right? We have an investment thesis, so we think this is going to be terrific. And so we, we start with, okay, well, I found this deal, and now I’m going to tell everybody about it, and I’m going to shove it down their throats, and it’s going to be terrific. And that’s how I started. I mean, I had these shiny objects that I thought would be great. I was going to take over the world. What I realized about halfway through that tenure journey I bet on is it’s much better to go to your logical investor base. Like the people that actually might invest with you, they give you their resources for, to you.

Brian Adams (14:18):

It is more prudent and more efficient with your time. If you actually go to these people with an empathetic approach and just ask them what they want. So instead of coming to them with the deal, take some time to say, hey, you know, if you were to invest in a commercial real estate, private placement, what would you want it to look like? What would the return profile be? What would be important to you? What would you not really care that much about? And if you have done these in the past, what are those negative experiences been? And you can hone and fashion a product offering that matches the needs of your base. And once I started doing that, the company really started growing much quicker. And what I realized was it was a lot simpler than I was trying to make it. I was putting all these bells and whistles audit.

Brian Adams (15:01):

My investor base wants three things, a safe place to park capital long-term that’s uncorrelated to the market. They want some kind of something close to an eight to 10% cash on cash yield, distributed, hopefully monthly, quarterly, so passive income, because oftentimes they’re trying to replace their fixed income portfolio, which has really underperformed recently. And then they want all those tax advantages that come from direct real estate ownership, right? So we don’t have any institutional LPs. We are very focused on net of fees after tax returns. And to be honest the tax code is a, it’s a set of incentives and disincentives for you to do certain things and to promote certain behaviours. And it’s very clear that it’s promoting you to invest in commercial real estate because the advantages are crazy and you should take full advantage of it. So we have a controller in house, who’s a CPA with a public accounting tax background. We can’t give tax advice, but we can do everything possible to really accentuate all those benefits. And those are the three things that we do. And, you know, once I started orienting more towards filling the need in the marketplace, amongst my investors, the conversations all flowed much smoother. And that was a big lesson for me.

Aileen (16:16):

Thank you for sharing. And so what are some of the different syndication platforms that you’re utilizing now to kind of grow your investor base?

Brian Adams (16:24):

Yeah, so we are operators sponsors ourselves, and we actually raised the capital ourselves too. So we have a team of 15 people total for the most part, I’m involved with investor relations, business development and capital markets. And I spend a lot of time now with COVID creating content, doing webinars, doing things like this, to tell people what we’re doing, but we don’t, we haven’t to date used any of the larger crowdfunding websites for a whole host of reasons that I’m happy to get into. So you know, we have a network of individuals and families that are legacy investors and we’re constantly meeting new potential investors and that’s where I spend a lot of my time.

Aileen (17:07):

Okay, great. And so you mentioned a little bit about the crowdfunding. Can you talk a little bit about that?

Brian Adams (17:13):

Yeah, it’s an interesting space and I think it’s, you know, the democratization of access to alternatives is a real trend, and we’re going to continue to see that trend play out regardless of your political leanings. It’s going to be a way for politicians to try to bridge this inequality gap that we’ve seen in America. And so we were very bullish on that concept with the crowdfunding websites. They can be very powerful. They can raise a lot of money very quickly that the problem that I see with it is their business models are based a B2B SAS platform and not as kind of commercial real estate operator and investors. So they burn a lot of cash too, on their customer acquisition costs, and they don’t necessarily have any positive revenue. And there’s friction costs involved when you work with a sponsor like me, there’s a negotiation that occurs when I look to put a deal on their platform, right. They’re going to charge me certain things. And I think that access to that capital is great, but there’s a cost to that capital. And I just have not seen a scenario in a platform where I think it’s justified to pay the cost of capital for us.

Aileen (18:29):

That makes sense. And so with your investor base now, do you are their interests starting to shift a little bit more? Especially during this time?

Brian Adams (18:40):

Yeah. You know, it’s interesting. In March, April, May, obviously people were scared and nobody wanted to do investments. And then the market started picking up. And then there was a, there was a real uptick in you know, people who were interested in these types of things. And then it kind of went back down with the election and now there’s been another uptick. And the theme has been, the market seems to be disconnected with the real economy. I don’t trust it to keep just going up until the right meanwhile, treasuries and other fixed incomes and private credit or junk bonds or corporate credit. The yields are so terrible that if you’re a taxable investor, trying to keep up with inflation and your cost of living, you need a third way. And that’s where I think the story really is these alternatives, be it private equity, private debt, commercial real estate across the spectrum.

Brian Adams (19:38):

It’s really about, in my opinion, providing people access to different ways to maintain that quality of life without going way out on the risk spectrum or the leverage spectrum in their public market exposure. And so most of the conversations that I’ve had have been about that, and then it’s always about, are there tax efficient ways that I can invest? And that’s where differentiating us from the REIT sector has been a lot of what we’ve been doing on the education side, because rates, in my opinion are a poor proxy for direct real estate exposure. They’re very correlated to the market. They’re very tax inefficient and there are better ways. And I think that’s what we’re seeing is in the past, people thought, well, I can invest in REITs or I can go to a Blackstone fund of funds, or I can do a deal with my buddy on the golf course, but there’s this third middle-market way where there’s great operators and sponsors out there doing some really good deals. And I think that’s the conversation we’ve been having for the most part.

Aileen (20:35):

And so can you talk a little bit more about the tax benefits? I know we’re not CPAs here, but at least from your opinion some of the different tax benefits that that they’re experiencing versus like in Erie, in the typical rate.

Brian Adams (20:49):

Yeah. So again, just kind of like people say, don’t fight the fed, don’t fight the IRS code. You can complain about it. And some parts of it are ridiculous, but is orientated towards people owning commercial real estate and residential real estate. So just go with it along those lines, to some of the things that we do, we do cost segregation analysis. We do accelerated appreciation and we structure all of the dividends as a return of capital as opposed to income. Right? So ideally I cannot, I’m not a CPA. I can, I give tax advice, but oftentimes we’re able to show a loss in your K one in year one and two and maybe three, meanwhile, you’re getting a double digit yield from your investment, so you can offset those gains in your portfolio elsewhere with those losses. And so those are kind of the three big things that we do that, you know, in addition to some other, you know, esoteric type approaches that my controller could tell you, those are kind of the big items that we focus on.

Aileen (21:57):

And in your opinion, right now in the next six months or down the line, where do you kind of see the market kind of going the trend?

Brian Adams (22:06):

Yeah. And it’s a great question. And it’s all about where your risk level is, what your risk appetite is. I am a firm believer that, you know, after Memorial Day, it’s going to be a brand new world because of the vaccine. And I think what you’ll see is at least on the private side, there’ll be a lot of positivity. I think a lot of people are going to travel this summer. So there’s going to be a lot of people just out of the office. And then once Labour Day hits, it’s going to be bananas. And so be ready for a super busy Q3 and Q4 across the board, because I just think that’s the way this is going to play out to answer your question. When you think about how to deploy capital into the space and how to allocate capital into the space, it’s about your risk adjusted returns.

Brian Adams (22:54):

So if you’re a risk on, if you want to really get after it, there are some deals to be had and hotel and retail right now, and they’re not without risk, but you can buy things at a pretty steep discount. You probably have to be a cash buyer. You can participate in some larger offerings where some institutional people are really putting some serious money to work in that space. It’s probably going to be a three to five-year story there, but you could probably have some incredible outside gains the other end of the spectrum, if your risk risk-off and you just want to, you know, get some exposure, but not take too much risk on, you could look at something like self-storage or mobile home parks or data centres or cold storage where the yields are pretty paltry, but you’re very insulated and is a very safe investment.

Brian Adams (23:43):

I still think office triple net and multifamily are somewhere right in that middle. And I often times will tell people, listen, you can think office’s dead forever, but on a risk adjusted basis, if you’re able to still get between eight to 10% cash on cash yield on your money, I think it’s probably one of the better places to do. And you can do it with flex and industrial and you can do some hybrids, but again, I just don’t think individuals should be trying to invest in products that give them a 3% yield with no real upside. I just don’t think it’s worth the illiquidity and the risk premium. So I personally think a lot of people are going to want to go back to the office in a pretty dramatic fashion. I think multi-family continues to be a good place to be. And obviously the industrial space is only just continues to grow. And I don’t see that changing anytime soon, if you’re, if you really want to do your homework, senior living is super interesting, but I’m not smart enough to invest in it. You need somebody smarter, but there’s some cool things happening there. And obviously with the vaccine coming, there’s probably opportunities. But again I’m not smart enough.

Aileen (24:58):

Thank you. Appreciate all your insight into that. And Brian, what’s next for you?

Brian Adams (25:04):

Yeah, I mean, we continue to find opportunities where trying to close when, like I mentioned, in two weeks, we’re going to contract on a deal in Fort worth and you know, we’ve created a good business and we have great investors and I think there’s still a need for what we’re doing in the marketplace. So I’d anticipate trying to do our usual cadence of, you know, two to four acquisitions next year.

Aileen (25:26):

Great. And Brian, how has real estate investing impacted your life so far?

Brian Adams (25:32):

Oh man, that’s a big question. As, as a recovering attorney, it’s allowed me to start a company where now I have 15 employees and it’s afforded my family, you know, really nice quality of life and a lot of opportunities to send my children to grade schools and to have incredible experiences. And so it’s, it’s utterly changed the entire trajectory of my life, to be honest with you. And it’s opened up this whole world where, you know, real estate investing can kind of be the Wild West because it’s a low barrier to entry business aside from the capital component. And so you meet a lot of characters, but there’s also some really great people. And that’s the part that I enjoy the most and that I miss the most frankly, about being locked up is going out there and meeting all these people that are involved in this ecosystem because a lot of them are crazy. But they’re usually a lot of fun. So that’s the, what I enjoy the most about the business.

Aileen (26:29):

And so what is one thing that, you know now about real estate that you wish you knew when you first started?

Brian Adams (26:34):

No hard to pick one thing I would say the biggest mistake I made was not appreciating the fact that when you are starting an investment company, when you’re trying to be a sponsor, a GP, whatever term you want to use, there are two risks that you’re taking. And I don’t think investors appreciate this either. For the most part, you’re taking a risk that, you know, what you’re doing on the real estate side, that the deals work, that you know how to find them, you know, how to close them and you know how to run them. That’s a lot, but there’s this whole other side of the house where you’re also starting a small business, right? You have HR marketing reporting, tax audit all these things that you need to support the real estate investment side, but don’t really have anything to do with the, with the dirt itself. And I totally underappreciated how much work it would take to have the proper infrastructure to have a successful real estate company. And so I wish, I mean, I learned the hard way and I think it made me a much better manager, but that’s something that I try to tell young people all the time is, Hey, it’s not just about going on finding great deals. There’s, there’s this whole other side of it that you need to embrace. Otherwise, I think you’ll be, there’ll be very difficult to be successful in this business.

Aileen (27:53):

Okay. And what is one thing other what is one thing that sets the successful people apart in the real estate investing business

Brian Adams (28:02):

Humility? I think our business is a great one, but it’s full of, as I mentioned before, a lot of white, alpha males who have had the privilege of never experiencing failure in their lives. And there’s a hero complex within our industry where it’s almost as if it’s, you’re being spurred on to take more risk and you’re being pushed to be the biggest AUM or the most square footage. And honestly, that’s not the game that we play and that’s not the business we’re in. I think it’s the wrong mind-set to have in the business. But unfortunately it is endemic within our industry.

Aileen (28:47):

And what tools or techniques have you used to improve the efficiency of your business or your personal life?

Brian Adams (28:53):

Yeah, I mean, I think like everybody, technology has totally changed the way that I live. I’m old, I’m like 39, 38. And

Aileen (29:02):

That’s not that old Brian.

Brian Adams (29:04):

I was in college, we didn’t even have Facebook. That’s how old I am. We didn’t even have it. I didn’t have a cell phone in college. I’m old. So you go from that, like, I remember calling my parents on a payphone in college and you go from what how I live today, which is like texts and G chat and Slack. And we use a sauna and all of these things and, you know, it’s, it’s kind of baby not answering your question, but there’s efficiency and then there’s productivity. And sometimes I really wonder if we’re trading efficiency for that productivity. Because I see a lot of people running around and we’re doing a lot of things and we have LinkedIn and etc., but I honestly don’t know if I get more done today than I used to, but it certainly has totally impacted the way that I work.

Brian Adams (29:55):

The biggest advantage, I think for sure has been the ease in which I can conduct my investor relations. We use Juniper square, you know, 24/7, 365 people can log in and see everything they want to see. I can automate my reporting. People can kind of access that reporting anytime or anywhere that they want that has really allowed us to scale the business pretty dramatically because I just don’t have to be on the phone all the time or have to make three email connections to get somebody there. K one, for instance, that has been a total game changer. And I think it will continue to be a way that people can kind of get into the business at a much more kind of less capital-intensive means.

Aileen (30:37):

Awesome. Thank you so much for sharing everything today. Brian really appreciated it. And so if our listeners wanted to find out more about, and so we’re going to Alicia find out more about you, Brian?

Brian Adams (30:51):

Yeah. I’m very active on LinkedIn. So if you look me up Brian C. Adams, Excelsior capital, shoot me a message. Shoot me a note. Connect with me. I’m happy to talk. You’ll probably get your money’s worth out of my free advice, but if you’re interested in what we’re doing, I’d be happy to chat with you. And then you can go to the website, Excelsiorgp.com. You can sign up for our newsletter. We won’t spam you. We send out something once a month with kind of our industry insight, etc. And then I have a podcast called colloquium that actually just launched today, probably more Brian Adams, Xavier widens your life, but I’m out there and I’m happy to connect if you want to learn about.

Aileen (31:26):

Awesome. Thank you so much for sharing Brian.

Brian Adams (31:29):

Thank you for having me.