“It’s Coming THIS Year” Ben Miller on 2023 Financial Crash

Dave:Hey, what’s up everyone? Welcome to On the Market. I’m your host Dave Meyer with James Dainard today. James, how you doing?

James:Good. I’m excited for one of our chats with Ben. I can go roundtable with Ben all day long. It’s kind of a dangerous road to go down.

Dave:James is talking about Ben Miller who is the CEO of Fundrise who has been on the show a couple times already and is honestly just like one of the most knowledgeable people about the economy in general. But he really knows a ton about the commercial real estate banking system. He knows a lot about different ways to make money in different climates. He’s one of these people who manages an enormous portfolio, like he’s got to keep making moves even during this type of climate. So we have a great conversation with him about what is going on in the economy in general and he gives some pretty specific predictions and advice about timing and when you should be buying when you shouldn’t. So if you are interested in the commercial real estate space at all, you’re definitely going to want to listen to this episode. Ben Miller, welcome back to On the Market. Thanks for joining us again.

Ben:Yeah, thanks for having me.

Dave:We have a lot of questions for you. You tend to be one of the most knowledgeable people we can bring on with regards to banking and debt and real estate strategy in general. We had a great episode with you, I think it came out back in January. We called it the great deleveraging. It’s a term you coined talking about the banking situation and some of the implications for investors. Before we get onto some of our new questions for you, could you just summarize the concept of the great deleveraging quickly for our audience?

Ben:Okay. Well, so there’s two words in it, great and deleveraging. So let’s just explain deleveraging.

Dave:I hope they know what great means. It’s self-explanatory.

Ben:So during the zero interest rate environment policy for the previous 15 years, most organizations and individuals normalize to super low rates. So you might be borrowing at 3%, even briefly at 2%. And when you borrow at low rates, usually it means you can borrow more money, right? Because if your interest payments are only 3% on a million dollars, right, it’s $300,000 a year. So when interest rates doubled or tripled, it meant that borrowers were over levered.They have too much leverage because interest rates are much higher and so they have to delever or reduce the amount of leverage. And because it’s so broad, there’s so many borrowers in the situation, it’s a great phenomena, great deleveraging.

Dave:What are the broad implications of deleveraging on such a scale?

Ben:I think I started talking about this back in October and we talked about it together in January is that it’s so fundamental that everyone is affected. It’s like the pandemic and what are the consequences of the pandemic? Well, where do you start? So especially in the United States, which is such a highly levered society, it affects you even if you don’t realize it. It reminds me of Silicon Valley Bank failure. I got involved in that. I can tell you that story, which is an interesting story because that’s one of those things where there was no one in tech who wasn’t impacted by it, even if you didn’t bank with Silicon Valley Bank.

Dave:Just on the broadest scale though, the implications for investors is that… I remember you saying basically you are concerned that people are going to try and deleverage and there might not be enough money, there might not be enough debt available to people to actually restructure their loans. What are your main concerns or sort of-

Ben:Okay. I get it. So the essence of it is you have a recession. That’s the natural consequences of it and you have a financial crisis of some kind and those two phenomenon that feed on each other. So that’s what I’ve forecast, whatever it was, seven, eight, nine months ago and it’s playing out. We’re seeing tons of bank failures. We’ll see more. We’ll see other kinds of failures that’ll cause a recession which will cause more failures. And then we’ll go from a transition period where people wondered if it was going to go down to a full downturn and then we we’ll be at the bottom.That’s a great place to be if you are an investor. So you don’t have to see it as a negative as long as you’ve maintained some liquidity, some reserves for that moment.

James:So I want to backtrack for a second. You said that you got involved in the SBB unwanted.

Ben:Yeah, we got to hear that.

James:I got to take a step back here. What did that look like? And then I think what we’re all wondering as we’re seeing that bank fail, like you said, it affected everybody. That’s a huge statement. And then we’re seeing things like First Republic and some other, Silver Gate. These other banks are starting to also have issues. A, what did you see when you went and got involved in that? And then what do you think the impact for us as investors, real estate or whatever is going to be in the next six to 12 months? Because as these banks are starting to have issues, sometimes the impacts don’t hit for six, 12 months down the stream. What are you guys seeing and what are you doing to work around that right now?

Ben:Yeah, it’s such a funny thing, especially if you haven’t been through a few of these before, is that when you see bad news in the headlines and it doesn’t affect you right away, people then start assuming it won’t affect you. If I went through ’01 and then I went through ’08 is there’s such a lag and you don’t appreciate it. Looking back in history how much of a lag there was. In ’08, I mean things started getting bad in ’06. It wasn’t until early ’08 when things were basically… I mean essentially some of these banks were dead man walking and it wasn’t even clear to the market until September, October.So I think that’s the same thing happening again that there’s this lag effect. And then the reason there’s a lag is that everybody is fighting it, right? No one just capitulates and they fight it by entrepreneuring, by selling assets, by raising money, by closing their eyes and kicking the can hoping it gets better. And so that’s definitely happening today. It’s happening with all sorts of institutions everywhere. The thing about why is it the great deal leveraging is that when you borrow two times more than you should have or two times more than you could today, it’s not a problem until your loan comes due.And then when everybody’s loans don’t come due overnight, they come due one by one and each time they come due, everybody tries to work out some way to kick the can and the bank doesn’t want to deal with it. So they try to kick the can too. Everybody is trying to kick the can, but the thing that’s why there’s this lag effect, there’s a wall. I mean you can’t keep the king forever.I think this really interesting, the seeds of, I think the saying is in every success are sewed the seeds of its own destruction. And so last time the solution to the crisis was extend and pretend. Everybody who held on in ’08 and ’09, and ’10 ended up actually doing a lot better than if they dealt with the problem. So the lesson learned with everybody was don’t deal with the problem, extend, pretend, put your head in the ground and hold on. And actually everybody did great.So everybody is assuming that’s going to work again this time and it won’t work this time for lots of reasons. I mean, it’s going to be a rich experience for everybody. I mean, it’s going to get worse. 2021, when you look back on it was so overinflated. It was so crazy. Prices got crazy and I’m like, that could happen the other way too, on the way down, that feeling of you’re just looking at things, you’re like, “This is crazy and it keeps falling. It’s so bad. How could this be? It doesn’t make any sense.” You’re like, “Yes, that’s that kind of experience.” And that is brutal. I mean, it is that negative sentiment that seeps into everything. So something like that ‘is coming. I think it’s coming September, October-ish this year. It’s really imminent.

Dave:Ben, what do you see that is so different this time? You said pretend and extend worked last time. What makes this round different?

Ben:It’s just a different problem. So the problem is over-leverage. There’s two ways you can deal with over-leverage, right? Two positive ways and one negative way. One is you grow your way out of it. Two is you pay the loan down and three is you default. You lose the asset. There’s a failure of some kind. And so some majority of the market will grow its way out. Some built residential will be fine, industrial will be fine. Lots of things will be fine. But then some part of the market will not like obviously office buildings.Forget growing. They’re collapsing. And the thing about over-leverage is that everything is over-leveraged. So when one thing starts collapsing, it starts pulling down the next thing, the next weakest link in the chain and it cascades through the system. So that’s happening. I mean, I didn’t realize that the Trump administration had deregulated the banks.What happened was Dodd Frank used to treat all banks greater than $50 billion. It’s too big to fail. And they were called systemically important banks. So they were really regulated. And then 2018 they rolled that back from 50 billion to 250. a lot of banks then said, “Great.” And they grew from 50 billion to 249 billion in the course of 36 months. Those are the banks that are blowing up. Why signature? Why Silicon Valley Bank? Why First Republic? They all fall in that sweet spot and they’re pulling down the next weak players which probably PacWest, Western Alliance and then eventually that’ll pull down some mortgage REITs and just will cascade through the system.

Dave:Ben, before we move on… James, sorry, just to make clear to the audience, the asset classes you’ve talked about are all commercial. Are you seeing any risk of some of this stuff in residential as well or are you mostly looking at the commercial asset class, like the broad commercial?

Ben:Yeah. I mean the commercial asset class is where the fundamental assets in decline. You don’t have that in residential. You go outside in real estate like the private equity market, which is hugely leveraged trillions of dollars. Most of those businesses, they’re good businesses just over levered, but they’re connected to the world that we care about too. And so when they go down, they’ll come back and soak up liquidity.What happens in deleveraging is that just from a mathematical point of view, to have $100 million property just round numbers and it used to have an $80 million loan and now it needs a $60 million loan or 55 million loan, somebody has got to write a check of 20, $25 million. That check is being written by somebody somewhere. And if it’s not being written by you, the borrower, when the bank forecloses on you, the bank is writing that check because the bank is also levered, right?If you take a mortgage REIT, there’s Arbor Realty Trust, if you guys know that is, that’s a big mortgage REIT. It’s just they only lend to multifamily. They foreclosed on four apartment buildings in Houston like a week or two ago, $229 million of foreclosure. And they are levered I think eight or nine to one. What? 85% levered. Yeah, they’re levered 85%. So their $220 million loan is actually levered with $195 million of borrowing and they probably borrowed from Wells Fargo or something like that. So when they foreclose on that loan, they have to turn around Wells Fargo like you have to write a check because there’s too much leverage now because that loan is now not performing.So in the chain of connected lender to borrower as you delever the entire entire system has to delever. And what does delever mean? Someone is writing a check. Where are they getting that check from? They had to sell something, right? They don’t just have $25 million lying around. They had to sell stock. They had to take their money out of deposits and pay down that loan. So that liquidity is getting soaked up out of the market. The delever means you have to suck up this liquidity. And so that inevitably leads to a liquidity crisis.

James:So Ben, what you’re describing seems like a perfectly… It kind of seems like a Ponzi scheme a little bit to me at some point. These banks are, they’re funding loans, they’re reissuing them off, and then they’re levering up 85% which is getting sold on to somebody else who’s been levering that up. And what you keep talking about is that the can has to… It keeps getting kicked down the road and eventually it’s going to hit a wall. And then I think that’s the nature of a Ponzi scheme is you don’t know when that wall is or what’s actually going to cause that, but as they kick this can down the road, you also mentioned that it’s going to start having a natural effect downstream. Right?It’s going to start pulling down other classes and that’s where it’s really going to get to us as real estate investors. Access to capital, access to debt is essential for growing. It’s essential for executing your business plans. Do you think that this is going to have some major impacts on us as a real estate. Even the small, not the big guys that are out buying all the big… The REITs buying up the defaulted debt, prefer your day-to-day investors. Do you see that coming backwards? The bank is going to be a lot more limited? There’s going to be a lot less access to capital for us at these smaller banks?And then one other question I had was, is this going to start the domino effect of where we’re really going to go down to 10 to 20 core banks? Are these little banks going to just get wiped out of the market? It’s like because this could have major impacts if it starts sinking, right? If we start going into that free fall that can crush the market.

Ben:Yeah. So let’s do the first question because it does answer some extent the second one. So I would venture to get to already the fact that you can’t borrow from most banks that banking lending is virtually gone. That if you go to a bank today, you wanted to borrow $5 million. They’re likely to pretend that they’re yes, but it’s actually no. The banks today are defending their own liquidity. They’re worried about going out of business. They’re not going to extend liquidity to somebody else, they’re going to husband it or really just hoard it.They’re going to hoard liquidity. So what does liquidity hoarding look like? Well, definitely not lending. But second, it means that if your loan comes due, if you’re not getting an extension, they’re going to be like, “Pay me. I need that liquidity.” So I don’t think that you can borrow in America today except for with one exception. And that is basically if you bring the bank deposits… And just to explain how banking works, if you give a bank $10 million in deposits, they lever it 10 times. So they can lend your money back to you.That’s what they’re doing. That’s why they want deposits. Now, they want more deposits so they can hoard liquidity. So if you give them $20 million deposits, they’ll lend you five times that so they can get extra liquidity. So that’s the only place where you can get borrowing. And then the cost of borrowing, those are going to be very expensive, probably going to be at least 300 pips over over SOFR because cost of borrowing has gone up. If they’re borrowing at 4.5% for deposits and they have the cost of running the bank, they got to basically lend it 7% or 8%.

James:And that’s an interesting point and that that’s something that I know myself and other investors have been doing we’re actually out interviewing banks right now because as capital is locking up, we’re either, A, the banks that we have existing relationships with, we’re transferring more funds to them because they’re actually loosening up their guidelines… Not loosening up their guidelines, but they’re definitely giving us access to capital.But that’s what you have to do as an investor right now. You got to go, “Okay. How much liquidity I have? I need to go shop this around and see who’s going to give me the most benefit.” And it really does work. I know I have another meeting with a private wealth company because they’re like, “Hey, if you bring us in your deposits, they’re actually giving you more lending power too.” And it’s essential for executing nowadays. It’s like the investors that have hoarded liquidity can actually shop their liquidity to the banks that need it really bad that also want to hoard liquidity.

Dave:So it’s like we’re all in this kind of weird cycle.

Ben:Hold on. Let me just let me make one comment about that though because it that’s definitely, we’re doing that, you’re doing that. But if you think about that systemically, anytime you move deposits, you took it from somewhere else, right? There’s no additional new liquidity. You’re moving it around and that’s causing basically the bank’s cost of doing business to go up because you’re basically able to negotiate good returns for your deposits, not just your deposit rate but also lending or other strategic assets you can get from the bank.So even though you’re like that’s an opportunity, it’s also a sign ’cause that’s not sustainable. You can’t keep doing that and not end up with more banks failing.

Dave:Given the situation, Ben, I’m curious how you would evaluate the fed’s policy right now and whether or not they’re taking an appropriate action because it seems like a lot of this situation is brought on by super high interest rates and even as the existing collapses they’ve raised rates, they said they might pause, but I’m curious, would lowering rates help us avoid this situation or is this now all in motion no matter what happens?

Ben:It’s hard to criticize the Fed. They have a much different perspective than I do. They have an inflation. They have political mandates. So at this point it’s always hard with… Anytime anybody criticizes the Fed, you can always look at an earlier fed decision and blame them. So you can go all the way back to the failure of continental Illinois and 1980 whenever it was, five.They had to eat the spider to catch the fly and so now they have to kill conflation which they basically created by the pandemic policy and then from this, they’ll create sort of the next problem. So if the priority is to eliminate inflation, which is their stated mandate, and they’ve been clear that they’re willing to basically let there be some pain in the economy in order to eliminate it. And the funny thing about the Fed, and this is also true with Chinese policy and Putin, they’re pretty clear.I think people just don’t believe them. So the feds saying they’re not going to drop rates till the end of this year or until they see really clear data that inflation has come down to closer to 2%. We’re a long way from that. So basically we’re going to suffer through the next seven months as we wait for the Fed essentially to have the line of sight to the next paradigm which is a lower inflation environment.

Dave:Yeah. Well, the reason I brought up that question is because you were like there’s no new liquidity, which is true except if the Fed introduces new liquidity because they can do that. But given their, like you said their stated focus of controlling inflation, they probably don’t want to do that.

Ben:I think it’s super unlikely not only because of the Fed but also because of the politics. I don’t think that there’s any political will in the country for the Fed to print more money and buy more assets. I think that is not likely. I mean, on the far left or on the right, no one wants the Fed printing more money to add liquidity into the system.

James:But what happens if there’s more banks that start failing? ‘Cause they obviously backstopped all the deposits. So let’s say that gets a little bit out of control, is that going to require for them to break from that policy because it seemed like they jumped in fairly, fairly quickly when Silicon Valley Bank crumbled?

Ben:Yeah. I’ll give you sort of like my operating scenario for how… My baseline map of how I think plays out and then I sort of reevaluate it when I get new data, just ’cause I feel like it’s hard to answer a specific question when not giving you the whole… Because the whole way I think about it… Because inside of that specific answer to your question is the Fed what will do sort of balance sheet neutral activity like they did with Silicon Valley Bank, which is they guaranteed the deposits or FDIC did and then they created this bank term loan funding program where basically you could give them a treasury and they would give you back 100% of the money but you didn’t sell it to them. Just 100% loan.So I think they’ll do lots of activity with their balance sheet, but I don’t think they’ll print money. I don’t only think they’ll lower rates until there’s really, really inflation is dead and buried and that’s because of the history of inflation. If you go back to Arthur Burns and Paul Volcker in both cases… And Volcker too, most people don’t know this, Volcker killed inflation in March 1980. It was dead. There was a recession. GDP went down on an annualized basis in Q2 of 1980 by 15%.So he reversed his policy and dropped rates and injected liquidity into the system. And then by Q3 inflation rose from the dead and came back at double digit 12% rates. He was shocked. He was shocked. There’s a book on this called The Secrets of the Temple. Well, anyways, the point is that then he basically went at it hard and created this massive recession in 1981. So everybody the Fed knows about the zombie power or the inflation. It seems it’s able to rise from the dead despite you thinking it’s actually buried.So that’s why likely they could go longer and harder at it than everybody who’s not an inflation expert. It’ll be unintuitive to us and we’ll be like, “What are we talking about? We’re economy in a recession. Stock market is collapsing. Everything is going bad. Why don’t you drop rates?” And the fed is like, “Well, we know that Arthur Burns and Paul Volcker made that mistake. We don’t want to make the mistake.” So that they’re going to wait longer than what seems intuitive to us, which is not going to be fun.

Dave:Yeah. I was going to say unfortunately that seems right but I guess wow, I didn’t realize that. I didn’t have 15% annualized decline and it’s pretty intense, right?

Ben:And see a quarter, yeah.

Dave:You could see why they reverse course. I mean, it’s probably the natural thing to do. But geez that that’s pretty crazy. So that’s a very helpful and well-informed opinion. It’s grim. So how are you adjusting your strategy and thinking about, you manage a very large real estate investing company? How are you guys proceeding with this thesis in mind?

Ben:I believe that it all breaks loose sometime this fall, September, October. I think that the debt ceiling crisis is the catalyst, not that the government is going to default, although there’s small possibility of that. I think it’s that it shuts down government, shuts down, spending, cuts budgets. And that combined with great deal leveraging combined with bank failures combined with everything else we’re living with today will drive us into recession. And the chance that the Republicans and Democrats agree to a budget without a government shutdown, without drama, seems remote.So I believe that that shut down and that period of uncertainty, which by the way it’s not a first time in history that you can just go look at 1994, 2011 where you had a Democrat in the White House and Republicans in Congress. In both instances there was government shutdowns, a lot of drama, stock market fell, 20% spreads doubled. So imagine if today spread is doubled from where they are today’s.

Dave:600?

Ben:Yeah. And it’s not even that they’re not going to resolve, it’s just that level of uncertainty and chaos will drive more institutions sort of off the edge. So sometime I think it comes to a head in this fall and then what I would plan to do is buy crazy. We’ve been trying to sit on as much cash and hold back and have reserves and I’ve been pretty negative for the last couple years. Even in 2021 I was like this curmudgeon and I’m going to tell everybody I’m like, “Just buy.” Because what’s going to happen I believe is that not only will there be everything that’s all this pain, but you can see the other side of it.In 2024, you can see the fed dropping. The thing about a crisis is that they feel like they’re… Once you get a real crisis, it feels like it’s going to be that way forever. In 2008 people thought it was the end of American capitalism, end of banking systems. So we’ll have some period of real fear. I know we’re real estate investors, but I’m like buy liquid, buy liquid stuff, whether that’s like an asset-backed security or that’s the Vanguard, REIT index.That’ll move 20% in 60 days, 90 days and the meantime you’ll try to buy one property and it won’t even trade. So it’s like the paper markets… I mean, especially asset-backed security, which is probably far from most people’s area. This happened every time in my careers that buildings won’t trade but the paper underneath of it will, you can go out and buy a lot of multi-family paper at what would be 35% LTV at a six, 7% interest rate.You couldn’t buy that at a six or 7% cap rate and you can be $80 a square foot basis, I mean way, way, way deep into the portfolio of $500 million multifamily. I mean, the paper markets will just absolutely collapse because what’s happening with paper market just to go back to the great deal leveraging and the chain of borrowing the borrower borrowed 80 million from Arbor. Arbor turned around, securitized that and they borrowed 65 million from the market and that $65 million who bought that?Who bought the AAA and the AA and the A banks? And so banks are going to be dumping all the liquidity. They have to dump that paper so they can knock out of business. And so the forced seller in the market is the bank.

James:So you’re saying that these banks are going to write the notes down. I mean up to where you could be buying them almost 35 cents on the dollar?

Ben:Well, a little more complicated than that but yeah. So right now banks are selling their performing loans. They told me they were going to do this and I was like, “How can you do that?” But it was in the news today. Bloomberg, I mean, I knew this was coming but I thought it was banks selling performing loans.So PacWest sold $2.6 billion in construction loans for 2.4 billion. So 92 cents on the dollar to Kennedy Wilson which is a private equity fund complex. So it’s an average 8.4% interest rate on those construction loans because the construction loans have another two and a half billion of draws. PacWest didn’t have the money to fund the draws so they had to sell the loans.So they’re selling performing loans at 92 cents on the dollar. That seems like, I don’t believe those numbers. I don’t believe that’s actually what happened, and that it was probably a structured transaction so that PacWest could tell everybody that it was 92 cents on the dollar, but there’s no way. I believe private equity fund bought it for 92 cents on the dollar.But anyways, I know the paper they’ll sell, it’s the securitized bonds underneath of the building. It’s not the actual… Real estate investor is obsessed with trying to get ahold of the building. Don’t worry about the building, just focus on getting the returns. And you get that by buying essentially the securitized bonds.

Dave:Ben, for most of our audience who are smaller and probably don’t have access to that type of, I don’t know, maybe just aren’t used to buying paper and that kind of stuff, if they do want to buy the buildings, are there any specific property types within commercial that you think are going to do well? Like you said, office is getting crushed. Would you still buy office in a couple months?

Ben:No, I would never buy office. That’s crazy. What you can do, you can go to the bank and they can say, “Okay, you can pick…” If you’re an inside player, you know the market, I don’t know, make up someplace. James, I’m going to pick on you here, but let’s say I’m like, “I bet you, James, overextended, James probably he is doing okay, but if he’s loans come due, he’s going to want an extension.” And I go to the bank and say, “Hey, bank. James is not doing that great. Why don’t you sell me that loan?”PacWest just fell over 90 cents a dollar. Why don’t you to sell me your loan for 92 cents on the dollar. You need liquidity. Maybe I’ll pay 100 cents on the dollar. Maybe I’ll just buy James’ Loan. And the bank is like, “Oh great. I need liquidity and you’re willing to literally take James’ loan like his…” I’m going to make up a number, “$10 million loan on his $15 million property? You’ll buy from me at a good price?” So they just got liquidity. It’s like getting deposits. They just literally took something that was an illiquid asset worth millions of dollars in the balance sheet. They got liquid and now I’m James’ lender and then James shows up, he’s like, “I need an extension. I can’t refinance today.”And I’m like, “Sorry, James, I’m going to foreclosing you if you don’t pay me off.” And James is going to have a hard time finding a refinance property, you’re going to end up owning James’s apartment building for 65, 70 cents on the dollar because the bank basically sold you the loan.

Dave:There’s going to be some shark swimming in the debt market.

Ben:Yeah.

James:That was happening a lot in 2008 and ’09. People are coming in the back door buying debt, foreclosing it out. Well, I remember seeing that quite a bit.

Ben:Yeah. It’s not something I’d want to do because if you’re going to buy one or two properties in this cycle, a great way to do it is to get ahold of that loan because what’s your worst case scenario? James pays you off.

James:Yeah, right.

Ben:Probably he had some default interests and maybe the bank sells it for 98 cents on the dollar or 95 cents on the dollar. If it’s a floating-rate loan and you’re probably getting a good yield on that, are you getting seven, 8% on a floating-rate loan today with the option to potentially own it for 65 cents on the dollar? Pretty good.

James:One of the best deals I ever did was buying a note for three days and then foreclosing it. And the bank, like Ben said, they wanted to dump the note. We bought it for 20 cents on the dollar and then we sold it at the auction for 60 cents on the dollar. It was crazy. I was like, “Wow, this was easy. We didn’t have to fix it. We didn’t have to lease it. It was done.”

Ben:Yeah, paper. You can give Wall Street a lot of grief. Man, it’s so much easier dealing with paper than with property. So I went to dinner last week with a big bank. It’s one of the biggest regional banks. Some people might call them a super regional. And we went to dinner ’cause we had a lot of deposits with them and they wanted to just press the flesh and they wanted more deposits from us. So we had a long dinner and I’m just asking them lots of questions. One of the things I asked them is I say, “I heard about banks who are needing to sell performing loans. Isn’t that a sign of real weakness? You sell non-performing loans, but sell performing loan means your liquidity crisis of the bank and the liquidity crisis means the bank is in trouble.”And they said, “No, no, no, not at all. Lots of banks are doing it. We’re even going to do it.” That doesn’t mean we need to stop that. “Oh, okay. How are you going to decide what loans to sell?” I’m like, “What price are you going to sell them for?” They’re like, “Well, we’ll just sell the ones that we don’t have a deep relationship with, i.e. no deposits.” And they called them the ankle biters. “We’ll just sell the ankle biters.”I was like, “Okay. We’ve bought a lot of banks over the last few years and those banks have a lot of loans that we inherited and relationships we don’t inherited. And so we’ll just sell those ones.” “What price do you think you’re going to get?” “Well, PacWest is about to set the market, so we’ll find out.” So today came out 92 cents on the dollar, which by the way, I do not believe. There’s no way. There’s some hidden structure in that that’s giving them a headline number because PacWest or any bank today is obsessed with having headline numbers that support the bank’s narrative that they’re liquid and healthy.So there’s probably hidden structure in that deal. But anyways, the point is banks are sellers. Probably every bank, you could go to them and buy loans from them and that probably the structure is either seller financing or maybe some take-back risk that you can push back some of the risk, or some, there’s a deal to be had. And then the problem is the banks will be inundated. So it’s having a bank relationship where you have deposits. You show up with deposits and say, “By the way, can you put me on the top of your list when you’re selling nonperforming assets in Seattle?” They’re like, “Sure, of course we will. That sounds great. We have a relationship with you.” Which means deposits. So it’s a very mean rich opportunity for investors with liquidity.

Dave:All right. Well, that’s great advice. I mean, I think for everyone who is listening to this, if you don’t know how to do this, there are funds obviously, I assume Fundrise also does this. There are ways to get into this if you aren’t familiar with how to do this yourself. Or do you know is this something that a normal real estate investor bank could feasibly do on their own?

Ben:We have a debt fund and we’re out there lending people who need capital to basically pay down their loans. This is true almost all professions, most people are focused on the thing that they know how to do. So they might be a flipper and they want to flip, and that’s what they’re all they’re focused on, but they’re at… I know lots of office developers and they just wanted to do office. They would buy office buildings and even when it was clear that work from home was going to really be a problem for them.So right now it’s not the time to buy properties, it’s the time to be in the lending business or focused on credit, on finance. That’s where the opportunity is, whether you’re in paper or you’re in banks or you’re going to just be a bridge lender. And so trying to buy right now is premature. It’s just it’s not a buying environment. You can buy maybe later this year or next year. Anybody who has a problem, first thing is not going to deal with it. They’re going to basically hope it goes away, hope that the fed that drops rates and then they’re only going to deal with it when it’s a serious problem.And the first thing they’re going to do is see if they can borrow money. So if you’re going to lend money, then you can lend it to them and you can go probably a 15% return or some really high yield. And then after they can no longer borrow money, then they’re going to sell the building. And that’s at least probably six months away.

Dave:So that’s why you see September, October, this all needs to basically play out?

Ben:Well, first there’s going to be the macro crisis and then borrowers were going to be stuck with… There’ll be no money. This is hard. They’ll go through a period with no money anywhere that already there’s so little money in the market. And the institutional market, there’s no money. No money institutional market either. Don’t believe the headlines. They’re really distressed. Starwood property trusts as an example, close to the edge, really close to the edge. They’re levered here. You can go look at this. They’re levered 15 to one.

Dave:Wow.

Ben:They have a $70 billion asset base. Do you think that asset base is going to have any losses? It’s an office. They have 30% are performing office. They’ typically lend 80%. So they’re just praying that it doesn’t come, doesn’t hit them. That’s a good example of maybe they survived, but that’s like there’s a razor thin margin. They have 6%. That’s equivalent 93.3% leverage. So they have 6.6% equity on a $70 billion base. And that’s Starwood, right? That’s not like one is saying that’s a weak, unsophisticated player.

Dave:All right. Well, we do have to wrap this up, Ben. This is a really helpful analysis from you. Thank you. And I think it’s a good warning for anyone who’s in the commercial space to be wary of buying right now. But as Ben said, there’s still good opportunities if you can get into lending. And if not, sounds like your advice would be to wait a couple of.. Till at least Q4-ish to start considering buying anything. Ben, is there anything else you think our audience should know before we let you get out of here?

Ben:My father used to say, “You know it’s the top when everybody thinks it’ll never be a bottom again. So you know it’s the bottom when people think it’ll never be a top again.” So there’s a cycle. We’re going to go into the down part of the cycle. People will lose their heads and that’s the opportunity. It only happened half a dozen times in your life. So keeping that perspective ahead of time, obviously when things were hot was to… And then when things get cold, and things were really bad. I had one of my best friends when bankrupt in ’08. He’s fine now. He’s fine. Totally. So it’s just not to let the doom and gloom overwhelm your perspective.

Dave:That’s a great way to go out because even though your short-term analysis is grim, it’s good to know that your long-term analysis is still positive.

Ben:I think we’re going to have a roaring, roaring comeback. I think it’s going to be incredible, but it’s not going to be this year.

Dave:All right. Well, Ben, obviously people can find you at Fundrise. Is there anywhere else that they should look for you if they want to learn more about you?

Ben:Yeah, I have a podcast also called Onward, which is, podcasting is so fun. So if you want to hear a little bit more in the weeds on this type of stuff, I love getting into it.

James:It’s a great podcast.

Dave:Awesome. Great. I know James was listening to it today.

James:Yep.

Dave:All right. Well, Ben, thank you so much. We appreciate you being here. It’s always fun to have you on, and hopefully we’ll see you again soon.

Ben:Yeah, thanks a lot guys.

Dave:Man, I love when someone gives us a specific timeline where they think things are going to happen, where it’s just like September, October, things are going to go (censored) and that’s when you start buying. So should we have him back in September, October?

James:I definitely think we should have him back, which that’s coming off the seasonal month. We might see that. Who knows? I’m hoping that something happens.

Dave:Honestly, yeah. I mean, I think hopefully it’s not just this huge thing that cascades throughout the whole economy, but I think there is a sense that valuations are still too high and things do need to come down. So I think we’re just going to have to wait and see.

James:Well, I’m be on pins and needles. I’m so burnt out of waiting for the shoe to drop, so let’s get the shoe dropped and let’s get moved on.

Dave:I totally agree. If it’s going to happen, let’s just get it over with and maybe it will. So anyway, thanks again to Ben. It’s always fun having him on. If you haven’t listened to his previous episodes, I think there’s one back in January. It’s called The Great Deal Leveraging where he goes into the risks here in a more technical way. You should definitely check that out. But we’ll definitely have him back on again in the future. James, thanks as always for being here, and thank you all for listening. We’ll see you next time for On The Market.On The Market is created by me, Dave Meyer and Kailyn Bennett. Produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, researched by Pooja Jindal, copywriting by Nate Weintraub. And a very special thanks to the entire BiggerPockets team. The content on the show On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.