Alternative Investments or Traditional Assets – Which is Better?

Aviva (00:00)
This week's listener of the week is Sellit CRE. Sellit, thank you so much for leaving us a five star review. And for those of you listening, if you leave us a five star review below, you might be next week's listener of the week, week, week. This week on Commercial Real Estate Secrets, we have Scott Lurie. Scott is the founder, CEO, head honcho of

F street Scott thank you so much for being on the show today.

Scott Lurie (00:32)
It's great to be with you. Thanks for having me.

Aviva (00:34)
Yeah. So Scott, tell us who you are, what you do, and how you got there.

Scott Lurie (00:42)
Sure. My name is Scott Lurie. We are a Milwaukee based real estate, alternative investment, real estate firm. We focus on three different verticals, multifamily. We focus on industrial and we have a hard money lending practice all focused around real estate and alternative investments.

Aviva (01:03)
So, can you define what an alternative investment is for me?

Scott Lurie (01:09)
Yeah, there's been a lot of, I guess, inquiry as to what alternative investment is. And the traditional portfolio of an investor has long been traditional equities in the equity markets, whether it's stocks at that point, and then couple that with mutual funds and bonds has been the traditional form of how people have invested and how people have focused on their retirement or

wealth creation or net worth. The alternative platforms have come to light over the years, which is just a deviation from the traditional investment practice, which is investing in stocks, bonds, mutual funds to investing in alternatives, whether that's oil and gas, whether that is, in our case, real estate or lending. There's a lot of alternative investments that are now

available in our fast -changing ecosystem and those are now inclusive of some are crypto -based, some are focused on alternatives in terms of movie production and there's so many vast different alternative investments. Our firm focused exclusively on real estate sector and we just provide an alternative form of providing returns to investors through real estate.

Aviva (02:35)
It's funny you bring up alternative investments because it's just like you were saying, it's like you had the traditional stocks and bonds and then we get introduced to real estate. And now in 2024, there's like this exponential. I mean, not to say there hasn't always been alternative ways to invest, but crypto and art and you can invest in any, you know, it's it's becoming exponential as our.

communication and grows. And I suppose if somebody puts a value to something, it could be an investment. So, so how did you? Yeah, go ahead.

Scott Lurie (03:14)
That's right. Yeah, the other the other part of that really is that the access has traditionally been if you think about how investors go back to the, you know, the start of it, how you would make an investment, you would at some point call a stockbroker. This is going back where they would do a paper ticket. Then you have electronics platforms that are allowing people to make investments. And then you have the self investment. Right. So you have the E trades of the world that were really providing a catalyst. I can do my own investing.

in these equities on my own. And then everything's changed where you have alternative platforms such as fstreet .com, for example, which is just an alternative platform where one can go and make an investment online today. And so the accessibility to whether it's a real estate platform, as you mentioned, art, there's baseball cards, there's firms out there like Rally that allow for you to invest in almost anything, video games that are historic. You know, you have the platforms that are now

become very widely accepted in the world. And the mainstream is now figuring out that, if I can make alternative investments, which outperform the market, I too can create more wealth. I too can create better cash flow. And so that is what the adoption rate is really becoming. And you're seeing that in 2024 and beyond is really the accessibility to these alternatives are real and in front of everybody today.

and the accessibility to them is super easy to use, which is most important.

Aviva (04:47)
Yeah, it's interesting because it's like anybody can become an investor. And of course, that's a great thing, but sometimes you got to learn the hard way. So, but, but that's investing for anybody. So, you, the, you know, you just have to learn from your mistakes and.

Scott Lurie (04:58)
That's right.

Yeah, don't forget people used to learn from their mistakes when they heard the penny stock was going to go from a penny to a dollar and they would put their net their life's worth into it and it went from a penny to less than a penny and they're like, that didn't happen. People have been learning by the old fashioned way. You know, you only learn a lesson when it costs you money or you get hurt. People are learning that lesson in this space, right? They're really learning to say, hey, us as a real estate firm or us as an alternative investment really.

you know, there's a risk in everything. There's a risk in buying GE stock. There's risk in buying Amazon. There's risk in buying alternative investments. but there's also a really great transparent platforms out there that allow you to make a calculated, engagement. The nice part of alternatives is you can usually talk to the, the sponsors or the people that are doing the investing versus I want to talk to the CEO of Amazon. I'm sure Jeff Bezos or, whoever's in charge is not ready to take every investor call. So,

You know, it's just different. The world's changed and for the better, as you mentioned, because people, it's not only for the wealthy anymore, which is really important to us. It allows those that have worked hard, that have created the accreditation status to be able to grow that position to keep up with what was always the real one percenters that are just expanding the wealth disparity or the wealth chart tremendously. And we think that the alternative platform is really going to help bridge or shorten that.

to allow the people that have worked really hard and are accredited to continue to grow their assets and be competitive in the new world. And it's really liberating to see it happen in front of us.

Aviva (06:46)
I think that's awesome. I love the internet for evening the playing field. Like you said, for the 99 % or just the percent that's smart enough to go after it and save and be strategic. So yeah, tell me about the real estate. What type of assets are you? And tell me about, yeah, tell me about your real estate. I know you are.

Scott Lurie (07:03)
And pay attention. Absolutely.

Aviva (07:15)
a ground up developer. What are you developing? Why are you developing it? Tell me about that.

Scott Lurie (07:21)
Yeah, so we focus on two verticals in terms of the ground of development. We build multifamily development. So we build class A multifamily development in it around the southeastern Wisconsin market. We also do have assets outside of the state of Wisconsin. And then we build industrial all over in the greater Midwest region. We focus on those two sectors. Primarily, we find the resilience in those two sectors to remain incredibly strong.

And so what happens is we're building right now, we're in the process of a 66 acre development in Oak Creek, Wisconsin, for example, that'll have a total of 800 dwelling units on it. We've just completed 199 of those units. We'll be starting at the end of Q3, start of Q4, the 132 remaining, the next phase, which is 132 units. We've got townhouses that are for rent and for sale. So we really take some of the more,

I would say challenged or challenging developments. And we couple that with what is available to us by way of municipality participation through TIF. And so TIF is tax incremental financing. And that piece of it really allows us to cover the gap. The TIDs were always created for the but for explanation of why additional capital would be needed to a project. And so.

Well, that has been probably abused or stretched over the past 20 years of its existence or and beyond You know, the reality is is that having that additional? government municipality support allows for these developments to actually come to fruition and so we focus our developments in the multifamily space where we can Where the market demand remains high so that's very important to us Obviously know that limited supply we also look at when the new builds have been created in those markets

meaning when has the last multifamily building been built. In Brown Deer, for example, it was in the late 80s when the last building was built prior to our development. And so we were able to say, there's demand here, which the occupancy is in the mid 90s there. And we also know that no new development has happened over the past 30 years. So that is a big opportunity for us. Couple that with the opportunity from the TIF to be able to support what we're doing.

And those are the opportunities that we can deliver on the alternative investment above market return.

Aviva (09:44)
Wow.

Makes sense to me. Tell me, you know, I know development can be very cyclical and I know the debt markets, which you also have experience in, have made development challenging as of recent. How are you navigating the new debt markets? And if you could share your experience in lending, I think that would be really valuable.

Scott Lurie (10:19)
Sure, so our lending business is a complete separate practice of ours. We're a hard money lender, which is an asset -based lender for short -term capital. We really focus on our lending platform is really focused on one to four family for those people that are either fixing flipping homes, single family homes, or those that are buying in for rent where they're stabilizing or doing some improvements to the assets, and then eventually holding that for a long -term rental. And so that...

That sector remains strong in terms of demand as the constraints of what you're describing, the rising interest rates continue to, and most importantly, the lack of liquidity in the lending space right now is really causing demand to remain and in the foreseeable future, remain strong in terms of our lending practice. We continue to issue out tremendous amounts of loans each month and that continues to.

be a great opportunity here at F Street. The interesting question you've asked is also pertains to the rising interest rates and how it impacts development. And let's be abundantly clear, it is a bloodbath out there right now. If anyone tells you it's different, you know, I would tell you that they're not being honest with you. The challenge...

in the rising interest rate environment, if you take developers that started a project two years ago when interest rates were in the low threes or even in the low fours at that point and couple those with now where we are in the low to mid, high sevens, low eights in terms of development, you're basically increasing, doubling your interest expense. A lot of developers didn't walk into that with their eyes wide open and we're seeing the ramifications of that in

in the debt markets right now where projects are either that were scheduled to refinance or not able to refinance due to covenant breaches, which is the biggest constraint right now is the DSCR covenant or the debt service coverage ratio covenant. Most banks are liking to see 1 .2. And a lot of these are below one at this point, not even one to one due to those rising interest rates. And you can't catch that. You know, the only way to fix that,

is really underneath your income side of things. And if you're engaged in 12 -month leases and can't roll those leases and further the market would support another 7 or 11 % increase in market demand by rental rate, well, then you end up in this scenario where we're walking into right now in the next 12 to 18 months, that'll continue to be a tremendous problem until some reprieve happens out of the debt markets to allow for the coverage ratios to actually work.

A lot of what we're seeing is impacting why developments are not moving forward. So there is a lot of developments that are queued to be moving forward that are just continually getting delayed. Some of ours included in that, right? If you look at the interest rate environment or if you're evaluating what's happening is becoming in fashion right now, the private debt funds in terms of financing some of these deals, you're basically taking a pretty big gamble that on the, on the,

12 % interest that you're going to be paying to the debt market that when it comes time to refinance in 24 months that the opportunity to do so is going to be present and we're optimistic. We do think that that is going to be the market but to start swinging at that is a little challenging. So how have we navigated? Well, we've really put the pause button on a couple of our developments that were pending and we've said,

hey, we're gonna continue to monitor and we're seeing that as a pretty prudent decision right now in the marketplace. And so I think you're gonna see and have seen new starts and multifamily throughout the country start going down at a tremendous pace. We do see tremendous pent up demand remaining for the number of dwelling units missing in our country, as well as the liquidity sitting on the sidelines ready to enter into the real estate market. It's just a question of when will that happen?

And so the other side of it is there are opportunities within the local bank sector, local bank, local credit unions that are allowing for some of these deals to happen where they can get a little bit aggressive on price and continue to do some transactions. And so we just started a development in 105 unit ground up multifamily here in just in the suburbs, northern suburbs of Milwaukee. And we were able to get a local lender to be able to underwrite that deal. And

and get us closed and start construction. But we've underwritten our exit at a much more conservative interest rate. We've also focused on how can you, what are the backdrops in terms of making sure that we are able to be successful and we were able to raise $11 .3 million of equity, which is really important. That $11 .3 million 12 months ago was really $7 .5 million. And the reason that that got so constrained,

is due to that DSCR coverage, right? We're constrained not on value. We have the value, we're creating the value, we're doing everything right. And so are so many great developers out there. But the banks have coverages and covenants that you have to live within. And that seems to be the driving limitation for everyone to continue to be successful. And unfortunately, the folks that underwrote incredibly aggressive are unfortunately gonna pay that price.

And some are paying it right now, candidly. Some are struggling with great challenges. Some banks are starting to see take backs. We're seeing foreclosures increasing in the commercial markets and multifamily with those class half full, hey, we're gonna make this happen and the world's never ending. And everything goes in cycles, as you know, right? And we're kind of in that really bottom of that cycle and it's dark down there. It's a very challenged place. And...

You know, we're optimistic. We remain optimistic here, but we're ready for some rate reduction. So hopefully that happens in 2025.

Aviva (16:33)
If you were to give advice to a first time developer, what is a piece of advice you would give them?

Scott Lurie (16:41)
Yeah, I would say make sure you really have your proformas and realistic lenses on when you're underwriting deals. We see a lot of deals that come across our desk and you know, it's not that they're comical by way of humor, it's comical by way of lack of sophistication that really puts you in a situation where unfortunately the alternative investment market's gonna get a loser by way of...

some investor is going to get sold on a deal that's going to come through, that's never going to materialize. And unfortunately that puts a black eye on everyone's, you know, and everyone's in the category, in the asset category. It's like a thousand point drop in the stock market makes everyone mad that day. And it, and you see that happen. So as a first time developer, you know, I would say make sure your proformas right. Make sure you're, you're, you're sophisticated enough to understand the ups and the downs. Make sure you're providing enough ample interest reserve.

to weather the storm. That's so important for everyone weathering this storm. The storm can rain for a while and we've got to make sure that everyone's being prudent. And then obviously on the top line and the bottom line, make sure you're underwriting from rents that are actually realistic and in the market. You know, there is not a better widget out there today that allows for an extra 20 % increase in rent versus your neighboring peer cop. And while we see that sometimes because...

people feel as though their widgets a little better. The reality is that the market doesn't allow for that. And we really encourage prudent underwriting.

Aviva (18:11)
Love it. Is there a development in the US that you just look at or think about that you think stands out above all the rest? Any product type.

Scott Lurie (18:23)
Well, you know, the, the one thing that just stands out in my mind that you see so much now that's, that's only, it can only happen in one place in this world is like the severe in Vegas, right? A billion plus dollar entertainment facility that has a singular purpose and they multi -purpose it, but it's, it's event. It's an entertainment facility and only in Las Vegas can something like that even make sense. And I don't even know the economics of it, but.

It's happening and people are having a blast there and it's so fun to see all of the amazing pictures from whether it's YouTube to fish to the Grateful Dead to the movie that they're showing of reality. I mean, it's really impressive. And if you look at that development, you're like, wow, that can only happen here in Las Vegas. And you're like, yeah, that's right. Only in Las Vegas. But that's your perfect example. If you build it, they will come in in Las Vegas. They will come and they support it. So that's one of those that really caught my attention.

Aviva (19:15)
Yeah.

Scott Lurie (19:23)
If you look at some of the other master plans that are out there, you know, some of the, some of the developments down in South Florida are really remarkable. And I spent a little time down there and see what they're doing and continue to be marveled at the creativity and more importantly, the amount of money that is willing to buy at, you know, what was a thousand dollars per square foot is now over $2 ,000 a square foot and the demand just keeps going. So.

We continue to be very optimistic in the space and we love seeing the creative partners and creative peers that are out there.

Aviva (19:58)
It's an abundant world. There's a lot of real estate to go around. And as long as you have that mindset, sky's the limit. Literally. Scott, what makes you happy today in your in in what you do in commercial real estate?

Scott Lurie (20:00)
That's right.

That is right.

Yeah, that's a happy is a great question. It's obviously subjective to everyone's, you know, come into the office and seeing our team, my team, the team I've built, the team that's building on top of the team I've already built is really rewarding and makes you happy. It makes you see success breed success. And that's super fun. seeing our projects and seeing the, the lives that are living there, 199 units, which includes well over 199 people living on the beautiful shores of Lake Michigan. That makes you happy. That changes someone's.

Life when I get an email from a from a resident that says hey, this is the greatest place I've lived that makes you happy when you are able to forge and and materialize great meaningful relationships that makes me happy so, you know this this real estate space is so powerful and really gives you an unbelievable opportunity to network and build a phenomenal network there are really good people in this industry and That makes me happy

Aviva (21:16)
It's funny, you know, we manage, we lease and manage and own about 108 industrial units. And there's a large percent of people who don't really care for their landlord. But there is that small percent who, like you say, call you up and say, thank you for what you've provided for me and my family and the opportunity. And that is a really special interaction because not all landlords are evil. We're.

Scott Lurie (21:45)
That's right. We agree.

Aviva (21:46)
Yeah, so Scott, where can the audience find you, follow you, and contact you online?

Scott Lurie (21:54)
Yeah, so we have a really simple URL. It's F street .com. That's F as in Frank street .com. We also are available are from our lending platform at Instagram at hard money Scott dot does a hard money Scott. So Instagram hard money Scott. If you're looking to look at our some of our investments or look at what we were producing F street .com is our investor facing URL and we'd love to hear from you.

Aviva (22:24)
Scott, I think you brought a ton of value today to the listeners. Thank you so much for being on the show and for everybody listening. We'll see you next week.