BIGGEST RISK with Jeremy Thomason

Commercial Real Estate Pro Network

J. Darrin Gross

I'd like to ask you. Jeremy Thomason, what is the BIGGEST RISK?

Jeremy Thomason

Okay, man, this is a great question. We are sitting here. I don't know when this will air, but we're sitting here on a on a Fed day. So the obvious answer to me would be interest rates. And so honestly, I'm not going to answer that, because that's just an obvious answer. And I actually have an insurance license too, and I sit in Texas, and so it'd be very easy for me to say, well, it's the high cost of insurance. That's an insurance that's just a really big problem right now for our industry. And in Texas, renewals, everybody's scared when their renewals come up, because it's just going to be a bad news story. So it'd be easy for me to say, well, it's insurance, and those interest rates and insurance are not really controlled by us in a lot of cases, so they do represent big risks. But I'm going to say it is something that I've learned through this last cycle. And so it's related to insurance and interest interest rates, there is a tendency, I think, in our space, to want to go chase whatever the absolute best deal is. So I'm going to use lending as an example. Three years ago, the whole space thought that the forward curve on interest rates was going to have near zero interest rates. And everybody institutional capital, everybody thought, You know what, the best deal in town is to go ahead and do a floating rate loan, and you'll cap yourself, you'll protect yourself with an interest cap, and you'll be fine. I. Obviously, we'll go into it. That was a mistake, mistake by our industry. We nobody could see coming. 500 plus basis points of interest rate movement within a year never happened like that before, and it just it's put a lot of stress on our industry. Similarly, insurance, the insurance markets call it catastrophic risk, high probability, high frequency, all of those different things, coastal all those things have put an upward pressure on rents, and we couldn't anticipate it. So my answer is, on the risk. Thing is, it's the risk of uncertainty. And so how am I going to answer this? I'm going to answer this by saying I am much better off working with someone that has experience in the space and taking risks off the table. So floating rate loan at 2.9 I could have gotten a fixed rate loan at the time with a little less leverage at four, but that 125 basis points was sure nice in my modeling, but I should have taken risk off the table because I only had a five year hold. So uncertainty is my answer. It's the uncertainty, and the way I'm answering it is, I, my job as a fiduciary to my investors is to take as many risks off the table as I possibly can, because there, God knows that there are so many different risks that I can't control and are going to hit me. So if I can eliminate risks and how I underwrite or how I use products and services, or how I look at a particular basis of a property, and take as many risks off the table as possible, then I'll be left with still a substantial amount of risk, execution risk and unknown risk, but my job is to eliminate risk, and I can do that in different ways, because there's all kinds of different risks. But the answer is the uncertainty risk to your question, Darrin, I know that may be too vague, but that's what I worry about, is uncertainty, and how I have learned in this last cycle is it's better for me to have certainty at a little higher price than it is for me to just hope that everything's going to be fine and chase the better priced product, whether it's insurance, whether it's interest rates, whether it's a contractor, certainty wins because I can underwrite I can underwrite certainty.

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