Leading Voices in Real Estate with Matt Slepin | Durable Value Ep. 95

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Transcript: Ryan Swehla: On this episode of Durable Value Podcast, we're going to replay a recent interview that Joe and I had with Matt Slepin on his real estate podcast called Leading Voices in Real Estate. Hope you enjoy it

Matt Slepin: Hi, this is Matt Slepin, and welcome to Leading Voices in Real Estate. Today's conversation recorded on September 18th with Joe Muratore and Ryan Swehla, the co-founders and co-leaders of Graceada Partners, a real estate investment firm that focuses on value add multifamily and industrial assets in secondary and tertiary markets in the Western US.

This is a very different discussion for Leading Voices. We usually cover larger investment managers or sometimes regionally focused businesses, but I don't think that we've yet covered a company with a thesis around a type of market like Graceada's, focusing both on the demographic strengths of these markets, focusing on what is by nature middle market plays, and playing it strategically in a less commoditized and institutional part of the business where they hopefully can outperform and find real alpha across their business.

We've also covered co-head teams a lot in the recent past, but I think this is the first one with a team that first met in the third grade. I love it. I hope that you enjoy this conversation with

Joe Muratore: Joe and Ryan.

Matt Slepin: Joe and Ryan, welcome to Leading Voices in Real Estate. I am pleased to have you both on the show to talk about your business and where you invest in secondary and tertiary markets in the United States.

We've had some conversations through the podcast about kind of regional or more local developers, but we've never really gone into the thesis of investing in secondary and tertiary markets. And to me, that's utterly fascinating, both about your business and then what that means for other like kind businesses, if there are any, in the country.

It is a total contrast to most of our sessions, and in fact, the last podcast was with the co-heads of Blackstone's Link Industrial portfolio, so we are talking one end of the spectrum to the other. They were talking about using size and scale and playing in the major markets and in the core markets for industrial, and here we are talking exactly the opposite about an entire business, a business model, and business strategy.

So lots to talk about. This could be a really fun conversation.

Ryan Swehla: We're excited to be a part of it.

Matt Slepin: Thank you. So why don't each of you introduce yourselves and what your role in the company, and then we're gonna talk about your company, and then we're gonna

Joe Muratore: talk about your strategy.

Uh, my name's Joe. I'm a co-founder with my friend of 40 years, Ryan.

Uh, I also play the role of CEO, which means managing our internal team, our investing, our real estate outcomes, and, um, playing a bigger role in setting direction and getting there.

Ryan Swehla: And I'm Ryan Swehla. As Joe mentioned, we've known each other just for a little while. We can talk about that later, but I'm president of the company.

Um, I oversee, uh, capital formation, investor relations, kind of the external outward facing part of our company, and also involved in strategy and, uh, we both sit on our investment committee as well.

Matt Slepin: Cool. And I'm gonna wanna talk a lot about what it means to co-lead a, a company, but I-- let's just go back 40 years.

How old were you 40 years ago when you met? W- like, were you in the sandbox? Were you on the basketball- court. We haven't talked about that for a sec

Joe Muratore: Matt, when we met, it was the year of the Challenger. I don't know if that's good or bad, but we were in third grade, and I remember watching that launch together.

So, uh, this, it, it goes back that far, 1986

Matt Slepin: 1986, third grade. And so when you were in the third grade and you were just talking and you were hanging out, of course, you weren't imagining a real estate company or working together for this period of time. What was your fantasy of friendship at the moment besides the Challenger?

Ryan Swehla: Well, yeah, we definitely weren't thinking about a real estate empire, but, you know, it's, it's interesting. Partnership is a lot like friendship and, you know, working together in a company-

Matt Slepin: Mm-hmm ...

Ryan Swehla: requires that kind of humility and recognition of, of different views and perspectives. I would say, you know, when you're friends, you're friends because you naturally attract because you have different strengths and different weaknesses.

You don't even know why, but you just are naturally attracted to each other, and we palled around for years, you know, through elementary school, junior high, high school.

Matt Slepin: Well, we'll, we'll go from sandbox to what that really means after we, uh, we get a little bit further. It's funny, we've talked to brother and sister combos who co-head companies, so they go back a little further than you do in terms of their lifespan, I suspect.

And last opening question: What does Graceada... How do you say- Yeah ... the company's name, and what does that mean? Where does that name come from?

Ryan Swehla: Well, it's the, uh, central park of Modesto. It's called Graceada Park, and we named the company after it. We did not do a lot of testing in the market because it certainly looks like a Spanish word, Graceada- Yeah

which actually isn't a word in Spanish, but it was named after two ladies that their families donated the park back in the 1800s, and it- Beautiful ... was Grace and Ada, and so hence our firm's name is Graceada Park- or Partners.

Matt Slepin: Okay. We'll take it, and we'll talk about what Modesto means also, maybe as we get- Yeah

along in the podcast. So what is it that you guys do? Talk about the theme of your business, where you invest, how you invest, how much you have AUM. Lots to kinda cover for an overview.

Joe Muratore: Yeah. I'll start with the idea that we are, uh, we are of Modesto and from Modesto and steeped in Modesto. Turns out that there's about 80 Modestos in the Western United States.

You know, te- tens of millions, uh, of people live there. About 30% of the United States is sorta Colorado west, and a very large part of that lives in secondary and tertiary markets. The theme we'll talk about today is secondaries is the new primaries, and I think that's a, a really rich data theme for us.

But fundamentally, we started here in Modesto. We're in Modesto today as we film, and there's half a million people within, you know, 30 minutes of us as, as we stand, and they're underserved. And, uh, our firm started as a service provider, and we noticed that we were doing everything. We were, we were finding the opportunities.

We were managing them once acquired. We were selling them. We were handling the leasing. And, and our earliest thought was, "We should be applying the capital to, to this and doing it ourselves." The, the capital's parachuting in from LA and San Francisco and other places, I mean, why is this asset not being mined?

And, um, you know, over time we, well, we did apply capital and, and have been ever since. Today we're knocking on the door of a billion in, uh, you know, the, the ins- uh, institutional capital is a, is a big part of what's happening for us and we're in three states now, so we'll talk more about our thesis, but we're excited.

We tend to hear the comment that what we're doing is not something others are doing, that it is being done in a niche sort of way, and so applying capital in our niche way we think is a gigantic opportunity over the next two to 30-

Matt Slepin: An untapped niche is a really good way to do business. I love that. So congratulations.

And when people were parachuting in to do this, I'm assuming they were doing deals, not chasing an overall investment thesis that you have for your markets.

Ryan Swehla: Yeah. And, um, mostly just to kinda give a little bit of framing of these markets, and we, we used to be shy about using the word secondary and certainly tertiary market because- Right

in some institutional circles that can be like a four-letter word, and we can speak to, uh, some of the misconceptions around there. But these markets are predominantly private capital. One investor of ours who came from a private equity background referred to what we do as lower middle market PE, because in lower middle market PE you're really buying from the original owners of the business.

They're smaller transaction size. They're not institutionally run. Right. And when you look at secondary and tertiary markets, very much the same dynamic. You've got ownership that is predominantly private capital, non-institutional. So even the helicoptering in that we're talking about, a lot of that is actually private owners that they live in LA, they live in Chicago, but they like the yield component, they like some of the return metrics that they get in these markets, and they come in.

And then certainly overlay that increasing institutional interest, but again, kind of that more helicopter deal by deal, not a broader thesis or construction.

Matt Slepin: Okay. So much I wanna come back to, so much to cover. But let's keep with the headlines of your company w- uh, and what it is today. You're mostly multifamily and industrial.

Talk about that. Talk about how many assets. Just give us a sense of current size, scale, scope of company, and then we'll, I'll ask about capital in a minute. Yeah.

Ryan Swehla: Yeah, so today, as Joe said, uh, we're approaching a billion in AUM. We are in about 12 markets. We're vert- we're a vertically integrated team, so we handle the property, the asset management, the construction management, fund accounting, property accounting, all of that.

And so with that, we've got a team today of about 65 people, and that's spread across the markets that we invest in. And, uh, yeah, obviously, that's a scaling group of, of individuals as well. Our management team consists of about five people. We have a CFO, CIO, COO, and then my business partner and myself, and we have a very strong leadership team below that.

And since, uh, given your, uh, expertise and background, really look forward to talking about talent and, uh, how we find talent, uh, sitting here in Modesto, California too. But we could, we could sidebar that.

Joe Muratore: I'd like to add on, Matt, with regard to the asset mix. Um, early in our careers, we owned shopping centers and office buildings, and we still have a few remnants of those.

But, um, the thing that we kept coming back to was, uh, anchor tenants, along with TI and CapEx. Those, those sort of three themes were constant thorns in our side. Especially in shopping centers, you've got co-tenancy rights and CAM pools and a, a million pieces of complexity related to if an anchor tenant leaves this or that.

And then you have these giant roofs that are, um, and, and TIs, you know, large tenant leaves, new tenant comes in. They have the, uh, you know, market power to demand, you know, $50 a square foot in TIs, $100. It's incredible. And you would make gains with the asset and then fall backwards as TIs and commissions came into play.

Uh, so a, a thing we moved towards, uh, several years ago was the no anchor tenants idea. And what we love about, you know, sort of workforce housing, I, I won't say exactly workforce, but it's '80s, '90s, 2000s. It's not necessarily new. Mm-hmm. We have some newer product. And multi-tenant industrial is that these are, these are, uh, supply constrained assets.

It's difficult to build them. In secondary and tertiary markets, the rents don't justify new construction generally. They, um, you know, if one tenant leaves, another goes in. It's two versions of the same thing. On the apartment side- A tenant moves out, well, if you're well-positioned, it's an attractive asset, it's run well, there's a new tenant that wants to move in.

Our, our average market has 4 to 6% vacancy rates. There's, there's demand for quality product. And on the industrial side, lots and lots of 3 to 7,000 square foot tenants. I think we have 4 or 500 tenants at this point. And, uh, you know, plumber moves out, plumber moves in. Mm-hmm. Yeah. You know, distribution moves out, distribution moves in.

And we do have some larger tenants, but fundamentally we want, we want smaller tenants with enough demand on our... enough control on our side, and enough demand wanting our product that, uh, TIs stay low, commissions stay low, uh, and rents move up. It's a scalable business. With, with the older s- with the, with office buildings and shopping centers, we often say those are art projects.

Like, those are Like when you have a big office building, you're thinking about that lobby and that space and that tenant, and it's a local play. What we do is scalable. It's, we have this type of apartment complex, we do this. We run it this way. We can do that in Colorado Springs the same way we can do it in Sacramento.

It's, uh, we start with a scalable thesis. It's, uh, it's much more durable.

Matt Slepin: And the size industrial fits that theme well in terms of the type of tenants that you have. They're largely real people- Yeah ... more than big corporate stuff, so you're playing at that end of the spectrum in the industrial game.

Joe Muratore: Take out rent control.

Yeah. Take out politics. Yeah. And, and the market is what the market is. And we're, uh- Right ... able to move, we're able to improve assets, move rents to market, and treat our customers well in, in the current market environment.

Ryan Swehla: And the one other thing I would add to that is, going back to kind of that lower middle market private equity example, we're buying from private owners.

Um, so almost, actually 100% of the time we're buying from private owners. And private owners kind of have a different investment objective, which is long-term cashflow- Mm-hmm ... and, and keeping cashflow going. So they're not really focused on optimizing rent. They're not focused on pushing rents. They're not, they're more focused on occupancy.

And so what we've found over time is with multifamily and multi-tenant industrial, if we're buying an asset where the in-place rent is 10 to 40% below current market because you've got a private owner, um, it's much easier to grow NOI in these two asset types because you've got that shorter lease duration.

So we're typically, when we buy an asset, we can typically be growing rent 10, 25% in the first year just because you have the, the constant lease rollover in those two asset types.

Matt Slepin: And, and let's play with that for a minute, is, A, they're inefficiently managed from an NOI standpoint and from a growth opportunity standpoint.

B, I'm guessing the efficiency in terms of, or the inefficiency on a transaction is probably relatively high, so you're a pretty preferred buyer to jump in and learn about those things with less competition.

Ryan Swehla: Yeah. Um, I'll touch a little on the operational inefficiency and maybe Joe can touch on the, the sourcing part.

Right. So yeah, the, these owners are, they're owning it for cashflow. Typically they are not based in the area. Typically they have a third party manager and the third party management sophistication in these markets is low and they're not incentivized to really be driving rents or optimizing the asset.

Typically, just the operations itself is some of the greatest value add we're doing. Certainly we're adding cosmetically and amenitizing and things like that. A lot of what we're doing is just bringing efficiency to the operations so the tenant experience increases because they're u- they're used to a landlord who isn't doing things, a, a third party manager who isn't getting things done.

The tenant experience increases, but then we're often implementing for the first time utility reimbursement, amenity pricing, the dynamic rent pricing, all these things that in more sophisticated markets they've been implemented for decades. We just benefit from being in markets where a lot of those more sophisticated strategies haven't been implemented.

Matt Slepin: And it, it's interesting to pick up on the third party managers are less sophisticated and it takes a sophisticated owner to manage a third party manager well. Yeah. So if you have a high net worth or mom and pop who's remote, their ability to push and manage thoughtfully is hard. They, they put this one to bed.

"Okay, now I have this long-term investment. I'm not gonna worry about it 'cause I got a good third party manager. Everything's rolling along fine."

Ryan Swehla: Well, and e- if I'm being nice about it, they actually have different investment objectives. Their investment objective is maintain cash flow and consistency of cash flow.

Their investment objective is not optimize value and drive rents, which involves vacancy and, and turnover.

Matt Slepin: So there's inefficiency in the transaction market as well as inefficiency in operations.

Joe Muratore: Let me speak to the transaction piece, and I think this is a... Like, for people listening, this should... I hope this is one of the main things they take away.

A big... We're touching on a piece of our alpha and I wanna highlight it. This is something that makes us special. Let's, let's... The first part of investing in real estate, which is this idea that you make your money going in. In other words, if y- if you buy an investment wrong, it's never gonna be great. You have to buy it right.

So the key piece of our alpha here is, is twofold. One is 15% better conviction and one is 15% better opportunity set. So let's break that piece down. On the conviction piece- Currently we're in 12 markets, but we're working, uh, three corridors, the I5, the I15, and the I25, and we'll talk more about that later, but three vertical corridors in the Western United States.

And our properties that are there are like beacons of data and conviction and insight. Like, if you're looking on CoStar or Green Street, you're getting, you know, several layer... You're going through several filters by the time you're seeing it. You're not... It's not live data. It's not your personal data. Uh, number one, our goal is to have boots on the ground conviction, 'cause we're vertically integrated, about where rents are headed, where demand is, new...

You know, all that stuff. Uh, so we're feeling stronger or less strong. We're layering in a personal level of information. Uh, it should be 10 or 15% better than you can just find through data sources. It's ours. It's our lived experience. On the other side of that, uh, deal doing is a slow process. When you rush it, you always overpay.

We see it as like a Ferris wheel. You just put stuff on the Ferris wheel. Like, we put out two or three offers a week, sometimes totaling $100 million, and we put them out somewhat casually because in, in working secondary markets, to put out offers is, is really a fact-finding mission. W- we get, we get close, we underwrite But we often have incomplete data.

Uh, but we put out offers. They're non-binding, and they're, they're just little... They're-- It's almost like giving someone your business card. But in, in, in all these markets, you have these, uh, owners that have owned for a long time. They're secondary or tertiary markets. There's not, uh, our level of liquidity and ability commonly in these markets.

We're nice. We're easy to work with. We generate offers fast. And, you know, the Ferris wheel goes. Y- They get the offer. They show their kids. They talk about it. They socialize it. But our job is to marry up fifteen percent better c-conviction than they see, because they've been in that market forever, with fifteen percent, uh, better opportunity set.

Because when you're working twelve markets or more, you know, you're getting o-- You're, it, it's... Like Warren Buffett says, uh, "Mr. Market presents an offer every day. It's your choice to take it." We're getting Mr. Market every day. Every day, we get a call. "What do you think? What do..." You know, it's like... So you, you've got this, you know, this data set of things, and we're marrying up opportunity with conviction.

Mm-hmm. And this is a self-reinforcing network because every time we buy a new building, every time we enter a new market, our data set gets richer. Mr. Market gives us more opportunities, and we're able to better match those up. And our ability to synthesize the data, to marry those things up, to value attributes in assets and markets and make that math equation work gets better and better as we go along.

Matt Slepin: Right. And the Holy Grail in real estate is an off-market deal. Right. And they don't exist in the primary markets in reality. Everything has a broker involved. What is your percentage of deals that either is truly off-market or has a passive broker versus it's actively marketed?

Joe Muratore: We are, are really, really, really good at this.

This is, this is something we know so well. So how do I say it? We were, we were in the brokerage business for ten years. Right. I'll speak to my personal experience, but I was a, a street broker for a long time, meaning, uh, just, you know, boots on the ground, lots of sellers and small shopping centers. What's really interesting is to work in an institutional setting now with that lived boots-on-the-ground experience.

It's, it's a Harvard of this business that's not as c- It's not that common. It's not... To juxtapose Main Street and Wall Street is not often done, and it is a secret sauce of our Modesto thesis and who we are. But so how do we buy? Our first answer is we were brokers. We speak broker. It's a helpful language in this business.

Many of our peers are, speak institutional. They look institutional. They sound institutional. They say, "What's on the market? Our data's better." And if you're in a best and final, let's start with you're in the wrong spot. Uh, best and fi- Our job is to create a reverse funnel. A broker's job is to funnel to the highest price.

Our job is to create a reverse funnel. So how do we create a reverse funnel? The first answer is tons and tons of offers with very, uh, with a stoic level, we achieve, we, we work to achieve a stoic level of putting these offers out. There is, uh- Mm. The more you're married to a deal, the more you're going to overpay.

So lots of offers, lots of time. That creates optionality. Everything starts something, and we often make about 20 offers for every deal we buy. It's great. Feels good. Offer out the door, forget about it, next thing. Secondarily, we talk to brokers all the time. We love brokers. We pay fast. We are super nice to them.

They are our buddies. We mostly thrive with junior brokers. We thrive with brokers and off-brands. If it's a top name brand and that guy's driving a Maserati, he is not our friend. We want the, the secondary third guy on the team who's been in the business seven or eight years. He could do the top broker's job.

He's trying to, he's trying to make his, his way. Those guys are gold to us, and we love talking to them. We answer fast. If it's a good deal, we, they get an offer out in two or three days. I mean, these guys are feeling empowered. Right. If, if the main broker gets involved, we're still calling the third guy.

Last thing I'd say is we work super well with those guys. Also, a market, like sometimes the best deals in secondary, tertiary markets come from, you know, RE/MAX Commercial or some place that's just not CBRE. Like, here's a person that wants to be a solo operator, they know their set of owners. They know when they have a great deal, but they value their autonomy.

You know, these, when their calls come in, they're often the richest because they don't have a listing.

Matt Slepin: Right.

Joe Muratore: They, they just have a lead and-

Matt Slepin: But what percentage or you do, you are going directly to owners- Yeah ... 'cause these are small markets. These are people who don't know they could market their deal.

There's someone who, hey, the patriarch just died, and there's four kids, and they'd rather monetize, and you get to hear about that through the lawyers instead of the brokers. Is-

Ryan Swehla: Yeah, let, it, let me speak a little bit to kind of the structural of the market because these are less efficient markets. Right.

So separate of any secret sauce that we have, we are working in markets that are predominantly private owners, and so it's just a more inefficient market, and so the sourcing is more inefficient. It is still better generally to be working with brokers in that they are... Their job is to find a transaction and get paid for it, and so they're very incentivized to find the owners that are actually ready to transact.

The difference, back to Joe's point, is the reverse funnel. We're never in a marketed process where they're asking for offers and best and final. What we find is that these are brokers that, because of our track record, relationships, whatever, they're c- reaching out to us when they first hear about this opportunity, or it's an owner they've worked with for decades, and they're now ready to sell that asset Flip side is maybe they've run a marketed process and it has been unsuccessful.

It's failed because the, the owner had high- too high of expectations, and a year later, six months later, the broker thinks that they're real about their offer and, and we get called. So there, there usually is a broker involved almost all the time, but the difference is it's a one-to-one negotiation between buyer and seller- Right

not a one to 15 negotiation.

Matt Slepin: Fair deal. Also, I'm, I'm thinking of, like, a mom-and-pop owner of a 60-unit apartment building in a tertiary market. If I'm dealing directly with you, I don't trust you. If I'm dealing through my broker, all of a sudden the translation from you to that person feels better, and hopefully that broker is moderately but not overly sophisticated, so then you win in your reverse funnel.

Just thinking.

Joe Muratore: Yeah. We, we- Okay ... yeah. Oh, go ahead.

Matt Slepin: Go ahead.

Joe Muratore: Well, I'll just say we, we've, we commonly purchase from the original developer. We commonly purchase from the original developer's children. We recently purchased from the original developer's children's children. Uh, it's a... Our portfolio has a, a, a number of these.

What's interesting is when you're working with longtime owners and families, I mean, this, these are estate issues. Think of if you've sold a house, Matt. You- When you come to market, you think it's worth... Uh, most people think their, their property's worth a fortune 'cause it's their property, and they have to go through their sort of stages of grief to get through.

There's a whole bunch of seller psychology to get to a real market price. So our job is to... You know, it's common in our, our business to be like, "Well, we know what the end price is gonna be. Why won't they take that now?" But you have to go through this journey with them, and the broker saves so much time relative to their cost because for them, this is b- one of two or three big things they're gonna do this year.

Right. For us, we need to work on 20 of these, and we need to closely work with these brokers while they handhold through stages of grief to get to the ultimate price. Often this involves listing, and then it didn't sell, or listing again. I mean, it is a saga, and we're, we're good at calibrating for the long-term pace of buying right

Matt Slepin: Hey, I'm an intermediary in my job as a recruiter.

Call me headhunter. We do this, but we do it with the human beings. And, right, so there's so much emotion involved through that process, but to know how to translate that to make good decisions is what you do, what we do, what brokers do. Everyone across the table does this stuff. Okay, couple of other threshold questions.

What is your average hold period, and then what's your capital look like and is it funds? So but first average hold period. So this is value-add stuff. Yeah,

Ryan Swehla: um, so we underwrite to five years, uh, typically three to five-year hold. As I mentioned, part of why we've focused on these two asset types is we have the ability to grow NOI faster.

So we're typically looking to exit between years three and five- Mm-hmm ... um, on an individual asset basis. It's actually not uncommon during our investment period of the fund that we'll have assets that we recycle because they've already, you know, had their use, their, uh, full growth. Uh, we do operate in a fund construct.

We're currently on fund four. Composition is majority institutional capital, and are currently our fund is on track to exceed our target of $300 million and approach our hard cap of $400 million.

Matt Slepin: Cool. Congratulations. Are you in a fundraise right now? So what's the n- timing of the next fund?

Ryan Swehla: Uh, this fund'll, will finish its fundraise in the middle of next year, and the...

So next fund would be probably 2029, something like that, fund five.

Matt Slepin: Okay. And so one, let's talk more about the dynam- We've talked about the transactional dynamics of your markets. I wanna think of the research base behind this thing that says, "Let's go for this." Yeah. Although, and one comment is how much timeline resilient is your thesis versus the thesis is right now, and it works right now for secondary and tertiary.

'Cause one of the lessons of the podcast is really doesn't matter how you buy, it's when you buy. Yeah. So how much does the when matter? And the post-COVID when in secondary and tertiary is important. Yeah. Post-COVID might continue, but I don't know that. So that's a lot- Yeah ... to think about, but kinda argue the points.

Ryan Swehla: Maybe I'll start a little bit with kind of the f- the context on these markets, and then maybe you could speak to long-term trends. One thing we learned, again, we didn't start in New York City and say we wanna invest in secondary, tertiary markets. We just, we grew up in these markets. These are the markets we knew, and really we kind of stumbled, uh, you could say a- across the opportunity over time.

It was this slow realization that there's a unique difference on our, how these markets perform. But in the institutional world, when you say the word secondary and tertiary market, as I mentioned, it can be a four-letter word. People think illiquidity. They think these markets don't perform like primary markets.

They think the real estate doesn't perform like primary markets. And so even though

Matt Slepin: that was- Let me interrupt for a sec, 'cause the quest- what we think about as institutional folks is does it scale, and are we- Yeah ... getting paid for the additional risk? I don't know that there's additional risk, and you're proving scale maybe

Ryan Swehla: Yeah

Matt Slepin: Go on

Ryan Swehla: Yeah, a- absolutely.

And scale is a, a, a really interesting topic. Um, but the, the, uh, you know, these kind of misconceptions kept coming up, and so we, over the course of several years, took to providing the research and the data that supported what we already knew intuitively. And so over the course of a few years, I'll just quickly touch on the, the three main misconceptions that I mentioned.

Liquidity, that is a complete misconce- And if we use the lower middle market PE analogy, we all get comfortable with it, which is the idea that smaller transaction size is actually the more liquid part of the market. We looked at the entire Western US, we looked at primary markets only, we looked at secondary, tertiary markets only, and the data was consistent that when you're in that smaller average transaction size, that's the liquid part of the market.

And the reason for that is because you're in between institutional and private, so you've got essentially double the buyer pool. And what the data also shows, which this is, uh, really different than people's perception, being closer to private capital, you have a more liquid market than being closer to institutional.

We think institutional means liquidity. What the data shows is during downturns, institutions operate much more in lockstep with each other, and so the markets above 40 million asset size, whether you're in San Francisco or Bakersfield, if you're in above $40 million asset size, that's the, that's the market that freezes up.

And when you're in that smaller asset size, because private owners, they're not transacting just 'cause of m- uh, market timing. They have estate plans, they have patriarch passed away, they have all these other external motivations for transacting. And so that is a real misconception is the, the idea that these smaller markets are less liquid.

They're actually more liquid because of that private capital.

Matt Slepin: And I think the last two recessions, private capital- Yeah ... were the first places back in, and we all saw that.

Ryan Swehla: Yep, yep.

Matt Slepin: Even in- Yeah, and we're- ... major markets ...

Joe Muratore: big

Ryan Swehla: markets. Yeah. I mean, even today, our transaction volume has i- i- you know, it's kind of returned to pre-rate hike maybe a year ago.

And primary markets, we're still kind of waiting for that to occur.

Matt Slepin: Okay, three misconceptions. So that was one.

Ryan Swehla: So that was one. Uh, real quick, the, the other one is this idea is, "Hey, don't these markets not perform as well as primary markets?" We looked over the last 20 years, including the GFC, including the COVID pandemic, the rate hike, and In, we looked at Western US markets, the ones that we're, we're active in, compared to Western US primary markets, Los Angeles, San Francisco, and what the data shows is our markets have stronger GDP growth, they have stronger population growth, and less volatile in both of those.

Less volatility, GDP growth, population growth, job growth, better unemployment. And that really underscores, I believe it's a unique dynamic in the Western US. These are markets that for decades, for a century, have had year-over-year positive population growth because we're in the expansionary part of the United States.

So they've had this huge tailwind of demographic growth that has always been there and has provided the tailwind for the economic measures. And to your comment about COVID, the data actually showed there wasn't a huge COVID bubble of population into these markets. Rather, they still had this similar consistent population growth pre-COVID and post-COVID And that's a, that's a real, again, a real misconception.

We, we hear headlines about people leaving California, which is true. Mm-hmm. California actually had negative population growth. But the inland markets in California, the ones that are secondary, tertiary, that are more affordable, they actually were a huge beneficiary of in-migration. Um, so the data on the economics, again, it's, it's clear in our markets.

We believe that it's consistent across Western US secondary, tertiary markets. We're not so sure that that, because of that demographic component, we're not so sure whether that translates to other parts of the country.

Matt Slepin: Let's come back to that 'cause I wanna hear number three, but I have more questions- Yeah

about number two.

Ryan Swehla: Hey, last one is- So what's number three? Hey, I remember in the GFC that, you know, didn't these markets not perform as well as primary markets? And again, we took a, over a 20-year period, we looked at all the major real estate measures, value, cap rates, occupancy, uh, net absorption. And broadly speaking, if I were to summarize, it showed that these markets performed about the same.

So when you looked at value decline during GFC, primary, secondary, tertiary, about the same decline. When you look at vacancy increase during the GFC, they had about the same vacancy increase during that period, and we're talking industrial and, and multifamily. So broadly speaking on the how does real estate perform, it's about the same.

The one interesting thing is in net absorption, much greater volatility in primary markets than in- Mm ... secondary and tertiary. And you would think the opposite because the, the logic goes there's an abundance of land and it's cheap to build. You know, prices get to a certain point, they put up too much.

But what the data shows, that primary markets have that oversupply and then undersupply much greater, and we believe that that is the presence of institutional capital. The markets that have less institutional capital tend not to go through these big oversupply, undersupply. The markets that have more do.

Matt Slepin: Right.

Ryan Swehla: And we've seen this with Austin. We've seen it with other markets as well. But when you're talking about Bakersfield, there's just very limited institutional capital, so the only people building are the developers who are financing it themselves and have- Mm-hmm ... a very vested interest in not oversupplying the market.

Matt Slepin: So I wa- I wanna play... I was gonna use a Sacramento example, but maybe I could use Bakersfield, but I'm gonna go Sacramento. But here's the thesis. So you wanna invest in the primary markets, you wanna invest in the Bay Area, or you wanna invest in San Francisco, you wanna invest in the Peninsula. And you say, "Gosh, it's too pricey, so I'm gonna invest in Oakland."

The risky move, right? And then they go, "Well, it's too expensive there. I'm gonna invest in Sacramento." So during the cycles, people start overbidding on a repet- the, on that basis more to the furthest place you could go, then those- Yeah ... furthest places fall the most. Oakland probably did fall the most, so, uh, that's a different primary, secondary in a ge- in a, in a big city.

But is that thesis not true for Sacramento in terms of what fell and didn't, and did it ever get there?

Joe Muratore: Yeah. I'll start with an idea, and maybe you can- Yeah. Right ... follow up on that. But let's start with the idea that, uh, secondaries are the new primaries. Or let's, let's turn that argument on its head and say the axis has, has potentially shifted here.

So let's say we're comparing Sacramento and, and Los Angeles. I live in Los Angeles. My rent is really high. Takes me an hour to get to my office building in downtown. I have to get there in my car, find a place to park. It was expensive for gas. There was gridlock on the freeway. office building, I go to the 32nd floor.

You know, I try to get home, I try- You know, there's a lot of, uh, what worked before was a network. You had to be here to be a part of this network. Mm. What it's changed, especially in light of post-COVID, is now lots of people work remotely. They work remotely a couple days a week. They have access to further geography.

Their, their car can potentially drive them there without them touching the steering wheel. Uh, there's, there's new ways to work. Even now we're having this lovely meeting, and you're in a different spot than us, and, uh, we're still connecting. The point is- Mm ... world is getting more dispersed, and the argument for secondaries and even tertiaries is increasing.

And by that, I mean you can afford a house. You can live on a piece of land that's big enough to have a swing set. Your kids, my kids walk to school in Modesto. It's really nice. Uh, there's places to park. My, you know, the office is not far from the house. The point is, outside of that essential network to make, you know, economic network, quality of life in many ways, especially as you get to where Gen Z and millennials are increasingly being as the biggest spending cohorts, they want to be in a place that supports their, their family because they're starting to have families, or they do have families.

So starting with the idea that things are gonna radiate from Sacramento to Oakland to Sacramento might be a '90s or '80s or old school- Right ... idea that is, is totally different now. In fact, that's how we're building our business.

Matt Slepin: But you're, you're making two different arguments, 'cause one is it's a 40-year trend that you're describing, but the other is- Yeah

the post-COVID trend of people- Yeah ... who are able to get out of-

Ryan Swehla: Yeah ...

Matt Slepin: the Bay Area mess to get to a place where they can have a sustainable lifestyle.

Joe Muratore: The chart shows both. The chart shows- Yeah ... a secondary acceleration of the first secular trend.

Matt Slepin: Okay.

Ryan Swehla: And I want to touch on that too because you, you mentioned kind of is this a market timing thing versus not.

I think an important thing to add context, which I, uh, didn't, is secondary, tertiary markets in the Western US have $1.7 trillion of multifamily and industrial real estate. By any measure, they are a large and a substantial market. And so an important point to add is that we're not looking to catch on a secular trend.

We may believe that that secular trend is existing and will add tailwind to what we're doing. But if you just zoom out, kind of like you said earlier about inefficient markets, if, if you zoom out and say, "Okay, there's $1.7 trillion of real estate in these markets, and it's predominantly non-institutional," it is only a matter of time until institutions figure out how to effectively access these markets.

And that's why for us, really kind of the, the core thesis is to be the institutional player that is just like 20 years ago in self-storage or, you know, 15 years ago in mobile home parks, to be those first groups that are- Yep ... really figuring out how to access these markets.

Matt Slepin: Absolutely. Totally. And I love the lower middle market PE play 'cause that is a great parallel to this.

Let me ask one other question about drilling down on your thesis, which is if it's only Western states, the best markets in the country from what I remember as of 10 years ago, before COVID, were the big cities in the West. The worst markets over the last eight years, or something like that, have been those same big cities.

Yeah. So does that... And now they're coming back because it got so bad. But is your data set corrupted, your story corrupted- Yeah ... by the huge run-up in those Bay Areas, the California cities, and Seattle and Portland or whatever, Denver- Yeah ... and then their fall? Does that make that not relevant to other secondary and tertiaries?

'Cause I wanna think for a moment about non-Western states- Yeah ... in the same thesis, because that still fits the lower middle market PE metaphor that you have.

Ryan Swehla: Yeah. The, the, the, really the population growth thing is pretty hard to argue, you know, because real estate is demand-driven, and if population's growing, then you have, you know, growing demand for real estate.

If population's declining, you have a different problem. And there are certain p- other parts of the country that have had more muted or even negative population growth.

Matt Slepin: So Midwest has lost population- Yeah ... so we can't take this thesis necessarily in this, to those places.

Ryan Swehla: Yeah. The, the other interesting thing on the population note is when you look at the primary markets in the West, even if you cut off COVID, that, you know, post-COVID, every time the markets started to get overheated, population actually went into a decline.

So even pre-GFC, the primary markets started to see a population decline. And it's really interesting to see how there's volatility where it goes negative and then positive in the primaries. But in the secondary, if you look at the graph, it's pretty stable, positive. It's not a lot of ups and downs. The volatility is much lower.

And one of the questions we've been asking, I don't candidly know the answer, is okay, well, if you have a lot of out from here, wouldn't that mean that over here you'd see a l- a spike and then a decline? And I think the only answer there is that when people are moving out of these primary markets, they're really dispersing across the United States.

You know, they're not, it's not necessarily I move from San Francisco to Oakland to Sacramento. It's especially today, I'm moving in a more dispersed manner. But it is interesting to see that population volatility is much higher in the primary markets, whereas in the secondary, tertiary, again, over a 20-year period, very kinda consistent positive population.

Matt Slepin: Yeah. You're not in Sonoma County because Sonoma County, I believe, is slightly losing population, and it's a more elderly population.

Ryan Swehla: Yeah.

Matt Slepin: I, I'm a focus- Affordability ... group of one that moves this.

Joe Muratore: Santa Rosa has long, good long-term, uh, bones for demographics, so I... But we're not there now, but they're-

Matt Slepin: Okay

there's an argument. Be there. I love it. So, and, and the development there is really interesting. Same with Petaluma, two towns right adjacent to where, where I am. So tell a story about an apartment building, a typical apartment building in your portfolio so we get a sense of what, you know, size, scale, and story, and then do the same on industrial, and then we'll move on to a different topic.

Joe Muratore: Sure. Uh, I'll start with, uh-

Matt Slepin: Westlake?

Joe Muratore: I'll start with, uh, the lofts that- Yeah ... deal we're working on right now. I could talk Westlake, but, um- The Lofts, 232 units in, uh, Fresno, California. Whose MSA is about a million people. By contrast, San Francisco proper is 700,000 people. So there's a lot of people on an island, uh, in the middle of the United State- or in the middle of California.

It's, it's known for affordability. It's also buoyed by agriculture, and it's in the middle of the state, so it's got a, a distribution focus. Point is, uh, we purchased 232 units across from the, uh, university there. It's a Division One Fresno State. It's probably one of the best CSUs, most durable CSU.

Property came to market at, uh, they had a new, new appraisal, 37 million. Came out, uh, came to 35 million. Uh, w- the last group, uh, had tried to turn it, turn it into student housing with sort of mixed results, and they'd sort of reached the end of their capital and needed to, to make a move. We offered 31 million.

We ended up getting it for 29.7 million seven months after it went to market. So we, we let, you know, sellers go through their stages of grief. We put 2.8 million in, uh, capital into it, took it back to traditional, significantly u- upgraded the, uh, exterior. We renovated 80 units. Today it's on the market at 46 million with the same long-term broker, and, uh, best and finals next week.

So fingers crossed. The, uh, NOI at a market cap rate justifies that value, and, um, we're excited about what we did in 18 months. Uh, a little bit of an extreme example, but being a vertically integrated company like we are, uh, this is where the, the private equity piece of it comes in that we are able to, uh, attack an asset and- Mm-hmm

radically change it from what it is to, uh, what we believe the, the market allows.

Matt Slepin: Well, I was expecting you were gonna say a 60-unit tired building, not a 232-unit building.

Joe Muratore: 232 units are a lot cheaper in Fresno than they are in, uh, San

Matt Slepin: Francisco. I think you're like 130 a door, 135. We bought it at

Joe Muratore: 127,000 a door.

Replacement is about $300,000 a door. A hallmark of our markets is affordability, both on rents, uh, but also on purchase price. And while- Mm ... replacement cost is only one argument, it is very helpful if you buy things right, and we are very thoughtful about buying things at a significant discount to replacement cost.

But the, you know, there's always that continuum of you can't buy junk. You know, here's junk, here's overpriced. You can't You can't buy quality and pay too much, as Howard Marks recently talked about in an Oaktree, uh, memo, but you can't buy junk either. So you gotta, you gotta find that right spot of quality and value, and that's...

We spend a lot of thought and effort around that.

Matt Slepin: You've quoted Warren Buffett before, too. You just quoted Marks, but Warren Buffett would say the same thing. What's, cigar butts I think he called or something like that. Yeah.

Joe Muratore: Well, I'd rather buy a, a good company at a fair price than a fair company at a good price.

Matt Slepin: Exactly. And also the fat part of the market for multifamily is workforce. It's not luxury. Yeah. Yeah. So you're in at the price point, not low income, not luxury, but that middle market for multifamily is huge, and it's undersupplied by far.

Joe Muratore: I'd like... Could I address that? Yeah, yeah. A key, another key idea here is to think of, you know, in, in private equity, uh, real estate, it's very important to talk about hold period.

And it's very important to talk, as you very rightfully said, it's not what, it's when. Great. Those are go- you know, those are gospel, but let's set them on the shelf for a second. A longer, bigger idea is to see workforce housing and small bay industrial as quasi utilities. Mm-hmm. To see them as grid, in our case, throughout the Western United States for a very long duration.

There are going to be millions of new renters entering the market over the next five years as millennials, you know, continue to, to form up and Gen Zs enter the market. There will be hundreds of millions of square feet needed in small bay industrial that don't currently exist. A big part of our markets are the rents don't justify new construction I- i- if you spend 300 or $350,000 per door to build apartments, you need $2,300 in rent.

But our markets can only get 1,650. They can only get $1,700 in rent. Maybe they can get $1,900 in rent. Sometimes it's 1,200, depending on the market. But the point is l- again, on the continuum, living in that world of increased demand, enough increased demand, but just not hitting affordability thresholds that justify new supply.

And, uh, that's, that's the tension we live in. Mm-hmm. And if you see it as a grid, if you see it as a necessary, durable, long-term utility, like they are not making '90s apartments anymore. They, they are not that big. They do not have balconies in the same way. Do- they do not have the same size bedrooms or closets or kitchens.

Like, you can't make '90s apartments anymore. You have to make what we make, what, what's made today, which is smaller and more amenitized to, to justify that size. When you can buy... A big way we think about things are, if you're gonna develop, you have to spend 100% of the money and get 100% of the rent. We tend to spend about 50% of the money and get 75% of the rent.

Love it. That's the simplest way to s- to see our, our thesis.

Matt Slepin: Well said. Okay, let's have an example on industrial side.

Ryan Swehla: So Elk Grove Industrial, we purchased, um, about a year and a half ago. A- and I would say The Lofts, while it's an epic example of, you know, our vertical integration and ability to execute, the one caveat is it wasn't a longtime owner.

It was a group that was trying to convert it to student housing, and they failed at that, and so we, we kind of brought it back on the multifamily track. Elk Grove is kind of more typical in that regard. It's an owner that it was actually three partners out of the Bay Area, also out of area owner, owned it For about 20 years, and they just got to the end of their partnership.

You know, this is typical. It has nothing to do with market timing. It's just, hey, partners at some point, they wanna kind of move on and do their own thing. Broker was doing his normal outreach of calling owners and finding out who would be interested in selling, and they said, "Well, yeah, we'd be interested in selling at this price."

And the price that they happened to say, the broker knew that's actually a fair price for the property. It might even be a little low. And so he, uh, immediately turned around, called us, uh, and our team. Within 24 hours, we were at the property. Within 48 hours, we had an offer to the owner, and that kind of swiftness is one of the hallmarks of, of what we do.

To describe the asset, I think it's about 300,000 square feet. It has maybe 25 tenants, maybe 30. And the, the interesting thing about multi-tenant industrial is it's really an underappreciated asset class. We're not talking flex office, you know, in the Bay Area or LA or these urban markets where it's more office-y.

These are true industrial, but they're 5 to 20,000 square feet, and it's composed of users that are really serving the immediate area. So it's like strip retail or grocery anchored retail for the area, but it's industrial. So these are tenants like pool service companies, landscaping, contractors, light manufacturers, specialty distributors, and it's, it really is a diversified composition of tenants.

With this particular one, the rents were about 35... underwrote, the rents were about 35% below current market for the same dynamics we talked about before, where the owner doesn't wanna spend money or, or have vacancy. And so we came in knowing how strong that market is, and so far we've actually been able to achieve higher than our original underwritten rents at that out.

The, the multi-tenant industrial, we're typically buying with a less than a three-and-a-half-year WALT, weighted average lease term. So typically it takes about three to three and a half years to really work through most of the re-rent roll, and, uh, we're partway through that process right now. We actually got the appraisal back, the third party appraisal at year-end, and we're very pleasantly surprised with The value of the property.

We knew we had purchased it under market. We also then saw that the rents we were achieving were higher than we had originally underwritten, so that, that asset's performing very well. We probably have another couple years on that asset.

Matt Slepin: Cool. And are you newer into the markets in, say, Colorado or Utah and those other corridors?

Talk about that, and then we're gonna start- Yeah ... to wrap up and change subjects.

Ryan Swehla: Yeah. Um, so we made a very intentional push to those two markets in particular because our thesis, what we've s- found effective in California is we call it kind of the In-N-Out Burger model, which is everybody's annoyed that In-N-Out isn't in whatever state they're in, but that's because they will only expand to the adjacent markets next to them.

Mm-hmm. And we found just a ton of efficiency by expanding along adjacent markets that allows us to take all that market data, the relationships, the knowledge. When you're in secondary and tertiary markets, a lot of that is very hard to get. It's very inefficient. And so when you're expanding from an adjacent market, it just accelerates your conviction and your ability to execute.

Several years ago, we made the conscious decision to establish a flag on I-15 and establish a flag on I-5 because those represent kind of the three north-south corridors in the Western United States. And so we've, we've been in e- each of those markets for about four years or so. Um, and now we're to the point, and you can tell where you've really kind of reached an inflection point.

I'd say probably a couple years ago, we reached the inflection point where deals are coming to us, where brokers are calling us because they know what we like and what we're looking for. And we've got the concentration of resources and staff to be able to execute in those markets. And so I think today in the Colorado market, we, we have three or four assets, and we're in the process of buying another three or four.

In the, in the, uh, Utah market we have, I think... or we've purchased, I think two or three assets, and we're looking at some others as well. But we'll- the, you know, we're continuing to expand up and down those corridors, so down into New Mexico, up into Wyoming, Montana, down into Arizona, up into Idaho from Utah.

Matt Slepin: And s- let's think about this in the non-western states. You're not there, but I wanna play it, play around with it a little bit. I'm thinking Midwest hard. I think growth markets or stable markets less hard. Could you do this, or have you thought about the thesis, say, in New England, or you thought about the thesis in the growth markets in the Southeast like Florida and Georgia?

Are there secondary markets that you think behave similarly, or do you not know anything about that?

Joe Muratore: I'll, I'll speak to it, which is to say, uh, and we, we would probably say it differently, but I'll say it my way, which is- 100%, no problem. Where there are population sets, there are inefficiencies. Dominant,

Ryan Swehla: you'll see the difference in our, uh, you know, different perspectives that add value.

Of course.

Joe Muratore: That's a very good question. Predominantly our supply is about 20 million. The, you know, south of Blackstone Link and that's, uh, north of the local family offices. Um, y- the i- it, it's more about the process or the practice than it is the market. I mean, the point is getting there, establishing the relationships, putting out offers over a period of time, dealing in that, that tweener space with, uh, conviction, ability, and balance sheet, which we can do with friendliness, with peerness, establishing a beachhead of assets, and then clustering around them and then, and then moving up and down corridors.

There's a... This, this isn't, uh, this isn't... What do they say? You can, you can copy process, you can't copy conviction. The point is, like, the way we approach things is, is native to our lived experience, our, you know, our Modesto thesis, and there are Modestos everywhere. And they, they're durable enough that, you know, hundreds of thousands to, you know, w- at least hundreds of thousands of people b- are there for a reason- Mm-hmm

uh, a- and not w- seeming to want to leave, and there is billions of dollars of real estate in all of those markets, and it does have to be owned by someone. That middle, lower middle market as we talk about needs passionate, sophisticated owners and W- we believe we're- You could do ... we're- Yeah ... we are well qualified for that space.

Matt Slepin: So the growth thesis in the western states that we talked about before and I was- Yeah ... pushing and- Yeah ... all that stuff. Yeah. It maybe even in a market, I'm gonna play with Ohio for a minute, like as flyover world, which it really, I don't, but whatever. One of the best podcasts I had, really interesting guy who r- ran a group called, like, Redwood Housing, a BTR business.

Biggest BTR builder in the country, I believe, is building BTR in secondary markets in Ohio, which he knows like the back of his hand. Those markets are stable. The dynamics of that stable market half an hour outside of Columbus, Ohio, is exactly what you're talking about. It doesn't have to be growth, it's stability that you're describing, and need.

And

Joe Muratore: yeah, and value that, that real estate's

Matt Slepin: not replaced. Stability, need, value, and the same- The

Joe Muratore: cost structure doesn't

Matt Slepin: support

Joe Muratore: replacement ...

Ryan Swehla: efficiency. Yeah. And I would, the, the, the only, uh, caveat I would give there, which is we're currently in 12 markets. Call it 50 or 60 of these markets in the Western US.

We certainly have our hands full, so to speak. The, the other interesting thing is really around scale because, um, as we've noted, li- the liquid part of the market is that $10 to $40 million asset size. And so a real guiding light for us is we will not slowly... You see this in managers as they get bigger, they have to go up in asset size.

But when you go up in asset size in these kind of markets, that's really where you incur risk. So for us, the governor to our growth is really gonna be around scaling the infrastructure to be able to continue to buy, add value, and sell more of these smaller assets versus going up the food chain in terms of asset size.

Joe Muratore: Back to the In-N-Out Burger idea I fed my family there a couple nights ago for $26. I mean, this is a gigantic group that, uh, produces quality, uh, at value. And, and the point being is it takes extra discipline and conviction and determination to stay at a smaller, that $10 to $40 million size, which is a sort of a safe harbor in between the bigs and the smalls.

Uh, but, but w- we're building that, you know, that, that is, uh, essential to our thesis, and we're vertically integrated, and we put extra effort into building out that thesis, and we're not looking to, to move outside or below it. There's so much opportunity in this lower middle market spot, and it's durable because our competitors, the large ones, don't have the incentive to get smaller, and the smaller ones usually don't have the capability to get bigger.

So this is a great middle ground for us to build a scaled geographic business model.

Matt Slepin: It's wonderful. Durable, I like that word a lot, and you will have competition. Others are gonna listen to this podcast. There's brokers who heard a lot from what you've talked about. There's other private equity folks who wanna do business models that make some good sense.

Talk a little bit more. We started at the beginning. Let's go back to the sandbox when you were in the fourth grade or whatever you described, and just think through a little bit the pathway that you've come f- through together, how you work together now, and then the company you've built. So comments about company culture and your partnership.

Ryan Swehla: Well, uh, definitely has, uh, our, our partnership has definitely been founded on friendship. There's no doubt about that. Um, Joe and I with some other guys just, uh, did 140-mile bike ride around Lake Tahoe. So- Good

Matt Slepin: for you. I've wanted to do that one.

Ryan Swehla: So we, we, uh-

Matt Slepin: The Greatest Bike Ride in the World it's called or something, right?

Ryan Swehla: I highly recommend it, but, but point being that we're not just here in the office together. We actually hang out after hours as well, and a well-functioning partnership is far more valuable than a sole proprietorship or, you know, a sole owner. You have so many, especially in the investing business, you have so many risks around echo chamber and around self-reinforcing, and that's been, been a really valuable part of our partnership.

But I'll, I'll just kind of back up a little bit that we started with, we were working together at another firm, a, a real estate firm here in Modesto, and we started more and more thinking about starting our own firm, and ultimately we did that December of 2008, which was about two months after Lehman Brothers collapsed.

So it's perfect timing for entering the real estate market.

Matt Slepin: Mm-hmm

Ryan Swehla: Not so. But, uh, we, we started as a third-party broker and property manager, and so that really, in retrospect, we got a PhD in distress because we were the ones on the ground stabilizing assets in the worst possible environment, worst possible situation.

We worked with distressed borrowers, foreclo- uh, you know, foreclosed assets, special servicers, the whole gamut, and it really, in retrospect, was formative in, in how we kind of view the world. We, we tend to be pretty low leverage, low... We, we tend to-- We've always been fixed rate debt, balance sheet lenders. We don't do securitized debt.

We saw what happens when securitized debt goes wrong, when, when assets go wrong with securitized debt, and so there were a lot of lessons that we learned through that. But I would say probably the, the best lessons that we've learned are the grit and the resilience that it takes to grow a company from zero and do it through the most challenging real estate environment any of us have seen in our lifetime, lifetimes really, and to be able to then build an investment company out of that.

Matt Slepin: I love that. Joe, any comments to this?

Ryan Swehla: Well, 40 years is a long time. Apparently- Marriage is tough ...

Joe Muratore: there's something that works here in, uh, back to durability. I, I would say we are... We think differently, uniquely differently. We have the ability to argue things out. I would say, you know, after, you know, these decades, we've gotten better at seeing our triggers and staying, uh, the...

You know, I, I've listened to some of your other podcasts with other co-heads, and the point is, like, you gotta stay in your lane the right amount, and you gotta overlap the right amount, and there has to be the right amount of friction to have good ideas and avoid hubris, spot blind spots that the other st- doesn't see, but there has to be enough, uh, self-control to, uh, mute every...

There can be a brotherhood component here and, you know, the... And I suppose earlier in our friendship it felt much more, sounded much more brotherly but the, the point is, over time, we've, we've, we've built a, a really good rhythm- Um, and a- as certainly as the firm's grown, we're at 63 people today, we, we've been ab- we've by necessity had to build out our lanes, trust each other in their spots, not co-decide on everything.

We've built this out. We've got v- extremely competent leaders with decades of experience, you know, and managers in our company with master's degrees. And I mean, w- it's the right amount of, like it's taken this sorta toughness and grit to get here, but we have the ability to step back and build this the right way, and I'm really thankful for that.

Matt Slepin: Yeah. It's, it's interesting. People ask me all the time, 'cause I, you know, as a career planner or recruiter, whatever the right words are for this, people say, "Okay, I'm at an inflection point. What do I do?" And I always say to people, and this may be my way I had to do it, was go find a partner. Don't do this alone.

Don't go on your journey by yourself. I've always looked for partners. It's really hard. My first partner in my headhunting business that I set up, you know, we didn't work well together. I wanted a partner so badly 'cause I didn't wanna do it myself. I didn't wanna pound my chest to be myself. And in real estate, we think about the chest-pounders a lot- Yeah

more than the togetherness folks a lot. Right. And so the message is really interesting here.

Joe Muratore: If you wanna go fast, go alone. If you wanna go far, go together, as the old, uh, quote says.

Matt Slepin: I'll let that one be. I agree.

Ryan Swehla: And that's an interesting touch on our core values because, you know, the real estate industry is characterized by, uh, hubris, ego- Right

you know, hyper-competitiveness, and we certainly operate with, you know, high level of discipline and execution. But, um, our, our first core value is positive, caring, and humble, and those are typically not words that you associate with real estate private equity. But it really is a, a reflection of kind of how we view the world.

Our, yeah, our other core values are owns the mission, excellence in execution, wants to win. So we really have kinda the, the more typical excellence and, and competitiveness, but it's over-layered with this idea of being positive, caring, and humble. Uh, we-- that extends all the way down to our people on the ground at our properties, and it really is a, a privilege to be able to, you know, find people that share those core values all the way down at the property level, and know that by and large, if a tenant is coming into one of our offices or talking to one of our property managers, they're gonna receive positive, caring, and humble in the context of whatever hard conversation or difficulty that we have to-

Matt Slepin: Fair deal

Joe Muratore: I'd add to that that we went through a discovery process years ago and landed on a core pur- purpose of we create environments that transform people's lives.

And what's super powerful about that is, number one, it reflects our goal to actually improve, improve the world and improve people's lives. Most of what we... Most of the properties we buy are undisciplined properties. They-

Matt Slepin: Mm ...

Joe Muratore: they suffer from a lack of leadership. We, we solve for leadership and discipline and, and communities can flourish there.

What, what we do isn't just about making money. We fundamentally improve our assets and our companies, our company to create a place that life can flourish, because you need constraints for freedom, and our goal is... You can't, you can't do the scale we're looking to accomplish with me and him being like, "What?"

Uh, uh, you can't be a, you can't be a grouchy or a hand holder to, to do this. You have to create a, a platform. You have to create environments. You have to create leaders. Most important thing is you have to create open-handed leaders who create leaders. I mean, this is, this, this ecosystem, uh, makes the mission possible.

Matt Slepin: Totally true. It's interesting. I don't usually editorialize it the, when I do my introduction to these podcasts, but I did after the last meeting with the Link guys, and they're two leaders in private equity, and I said to them, "I was surprised by-" Positive, caring, and humble. I actually felt that. This great team thinks some-- And so not all PE therefore has the chest pounders.

That's not- Yeah ... the business that lasts- Dangerous ... a long time.

Joe Muratore: Dangerous.

Matt Slepin: So, and I do find, after having done 200 some odd of these podcasts, is that one of the themes of my guests is that they're pretty decent people. And so it's decent people who create fortunes. Now, some of them are chest pounders too, right?

Or some of them are chest pounders, not too. They're just the chest pounders. That exists out there. Yeah. Often it exists out there in the developer, 'cause to be a developer, to make something from zero- Yeah ... then you have to have a different kind of conviction and belief to put that kind of risk out there- Yeah

in your vision, and those folks may have some of that more than what you've described across, which is totally correct.

Ryan Swehla: We, we, you know, it's funny, we get asked about, um, how we handle, you know, we're in workforce housing. We raise rent when we buy properties, and we've been asked about how, how we handle that.

And, you know, number one, it is anchored truly by positive, caring, and humble, but it's also anchored by making sure that we're creating value for that tenant in a way that makes them happy to be there. Many of the tenants that we, especially on the apartment side, but even on the industrial side, we'll buy properties, and we immediately hit the property with improvements.

We immediately hit the property with a higher level of service. And it's, it's so different working in this less competitive environment because our competitors or the competitive property is owned by private owners that are not managing things well and that are not providing the same level of service.

And so it really does allow us to, you know, kinda go to bed at night feeling like we're actually contributing positively to the world, even though we have the word private equity associated with the work we do.

Matt Slepin: Absolutely. Okay, last question on Leading Voices is your advice to a young person entering into real estate.

Joe Muratore: I'll go first. We've been talking about a lot of books today, but, uh, there's that famous book, The, The Hard Thing About Hard Things, Ben Horowitz. It's fun to ask, you know, like, what would a venture capitalist say to our business or to see different perspectives. But a thing to draw on from that is there's, you know, if there's a clear path from A to B, then it's commoditized.

Your, your opportunity is capped, your pay is capped. There's so much, especially in this AI world, especially right at this moment, we're at some sort of a inflection point. There is so much non-clear A to B. And I tell my kids, like, "Don't, don't s- if you can see a clear path to where you're headed, you're, you're going in the wrong direction."

You need to move towards something you care about or find interesting, but then, but then you're gonna have to find that, that journey. And I'll add to that, that there's, like, you know, degrees of pain or degrees of... Pain's the wrong word, but, like, discomfort- Uncertainty ... tied to potential growth. If there's not a small amount of urgency or crisis to what you're doing, if it's very calm, you are in first gear, and you are not moving towards, like, go on vacation.

The, y- there should be challenges that you're solving quarterly that are like, "This is a ch-" I mean, if you're growing and if you're pushing, there will, for a fact, be challenges that you're not sure about, and that's going to require you to grow in your knowledge, grow in your relationships, grow in your resources.

You're going to be forced to level up. And, uh, I could give a whole speech or sermon on this, but the point is, go where A to B is not clear, and, and if you're not feeling uncomfortable challenge, you know, you've picked a, you've picked a comfortable life, and congrats on that.

Matt Slepin: It's funny. When, when I... Uh, I'll interrupt for a sec.

When, when I was graduating, before I graduated college, I had no idea. And all of a sudden, in junior year I said, "You know, I should be a doctor," because anything a doc- they're always in demand. It always works. You don't have to figure it out. But, you know, I'd never taken a bi- biology class, so it was a little bit late to do that.

But I was really freaked, and the fear of going into a world that made, that I had no pathway was terrifying.

Ryan Swehla: Yeah.

Matt Slepin: Then even when I started in a search, it was terrifying. But, but, but that makes... The terror helps you go somewhere. So don't pick that easy, righteous, right, right path. It's really good advice.

Brian?

Ryan Swehla: Well, and this is where our personalities or our worldviews overlap because I was gonna say something actually very similar, but maybe, uh, with a slight twist to it. I beat

Joe Muratore: him to it.

Ryan Swehla: Yeah. After

Joe Muratore: 40 years, I can smell it.

Ryan Swehla: Which is, like, the path less traveled. We both grew up in Modesto, but I went to Columbia University in New York, and when you graduated, everybody was asking, "Okay, are you doing investment banking?

Are you doing consulting? Or are you doing other?" And that was kind of it. And, uh, y- and I, uh, you know, I worked at a hedge fund, but ultimately found our path to what we're doing here. And what I would just say is that when the herd is going one direction or everybody's saying, "This is what you need to do"- Mm-hmm

number one, they may be right. But always ask the question, "Is this really what I need to do to get to where I wanna be?" And think about where you're looking to be in the future, and find out what those people have done and what their paths have been. And then the second thing that I would add to that is find, actively seek out mentors everywhere you can, and they can be found in the most unusual ways.

My son is, uh, in an economics course at University of Portland, and he really liked the textbook that the, this very extremely well-known economist had written. And he emailed the economist and said, "I really like your textbook," and blah, blah, blah, and he got this really nice response back. And it just goes to show that you can find mentors and connections everywhere.

And so I'd just really encourage as a young person, always have an eye open to that and always get out of your comfort zone to m- to meet people and, and find them.

Matt Slepin: That's really awesome. One of the reasons we do the podcast, if not the major reason, is I'm trying to get young people to see different pathways that they can follow, and you guys have gone a very different pathway than any of our other guests.

So add this to the list- Yeah ... of ways to behave to go find yourself, to find that thing that you get to do. So this is wonderful conversation, and thank you both.

Ryan Swehla: Thank you so much. Thank you.

Matt Slepin: Hi, this is Matt Slepin, and welcome to Leading Voices in Real Estate. Today's conversation recorded on September 18th with Joe Moratori and Ryan Swehla, the co-founders and co-leaders of Graceada Partners, a real estate investment firm that focuses on value add multifamily and industrial assets in secondary and tertiary markets in the Western US.

We've also covered co-head teams a lot in the recent past, but I think this is the first one with a team that first met in the third grade. I love it. I hope that you enjoy this conversation with Joe and Ryan

I've also been doing a number of podcast trades recently, so both this episode and the next one with Bob Hart from TruAmerica are back-to-back podcasts where I do this interview, and then the guest interviews me for their show. So definitely check out Graceada's website for more information on their business, but also for a link to their interview with me.

I'll also put that into our show notes once their episode is released. Please enjoy today's show, which I know you will. As always, if you have a few minutes, please rate our show in your favorite podcast app, and please follow and subscribe to the show and share your favorite episodes with colleagues and friends.

I encourage you to visit the archive on your podcast app or on the ZRG website, where you can go back and check the library. If you have comments on the show or if you'd like to talk about how ZRG can help your business on the talent side, including search, consulting, or advisory in the real estate space, please contact me at mslepin@zrgpartners.com

Ryan Swehla: And that's why for us really kind of the, the core thesis is to be the institutional player that is just like 20 years ago in self-storage or, you know, 15 years ago in mobile home parks, to be those first groups that are really figuring out how to access these markets.

In this episode of Durable Value, Joe and Ryan join Matt Slepin on his podcast, Leading Voices in Real Estate, to share how they built a real estate firm by investing where institutional capital rarely goes.They break down why secondary and tertiary markets outperform the headlines, how they source off-market deals, and what "lower middle market private equity" looks like in real estate.

0:00 – Introduction & episode preview

0:14 – Meet Joe & Ryan: Co-founders, 40-year friendship, and the origin of Graceada

4:12 – Business overview: multifamily + multi-tenant industrial, $1B AUM, vertical integration

4:44 – "Secondaries are the new primaries" — the thesis behind Western US secondary & tertiary markets

18:10 – Off-market deal sourcing: the reverse funnel, broker relationships & 20 offers per close

28:10 – Debunking 3 misconceptions: liquidity, performance, and volatility in secondary markets

41:12 – Real deal breakdowns: The Lofts (232 units, Fresno) & Elk Grove Industrial

1:06:14 – Advice for young people entering real estate & lessons from a 40-year partnership

PodcastGuest UserJuly 7, 2026podcast, investing strategy, Commercial Real Estate, asset management, paul dolinoy, mosser capital