Ryan Swehla Interviewed on Juniper Square’s “The Distribution” Podcast with Brandon Sedloff | Durable Value Ep 88
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Ryan Swehla: On this episode of Durable Value podcast, uh, we're going to take from a recent interview that I had with Brandon Sedloff with Juniper Square and their podcast, The Distribution Podcast. Hope you enjoy it.
Brandon Sedloff: Ryan, welcome to the show.
Ryan Swehla: Thank you.
Brandon Sedloff: Can you start by introducing yourself for our guests who, uh, haven't had an opportunity to meet you or don't know much about Graceada?
Ryan Swehla: Yeah. I- I'm Ryan Swehla, co-CEO of Graceada Partners. Uh, we're a private equity real estate firm focused on secondary and tertiary markets.
Brandon Sedloff: Excellent. Well, I'm excited for this episode. You and I have had the opportunity to get to know each other over the last several years, and I'm fascinated by your strategy.
Before we dive into that, you know, let's spend a little bit of time. How'd you get into the commercial real estate business?
Ryan Swehla: Yeah, so, um, I majored in finance in undergraduate at Columbia University. I worked at a hedge fund, and after staring at a, uh, screen trading, you know, multimillion dollars with the click of a button, uh, I, I realized that might not be my calling.
And, uh, was just ultimately gravitated toward real estate. I also at that time, uh, moved back to Modesto, California, and, um, real estate was something that had drawn me. My business partner and I both started working for a, uh, owner of real estate and, and I would say that that really was, uh, transformative in learning how to handle multiple aspects of real estate because we were doing, uh, brokering, leasing, construction management, asset management, property management.
I mean, kind of the soup to nuts, and that was really formative f- before we actually started our venture.
Brandon Sedloff: So you grew up in Modesto. Where, where exactly is that for the folks on the line who may never have heard of the booming metropolis of Modesto?
Ryan Swehla: Yeah, you, you may be, uh, looking on a map right now, but, uh, pretty much draw a line between San Francisco and Yosemite.
In the middle of California, that's Modesto. Uh, it's a metropolitan area, has about a half a million people, which is large by most state standards. But by the state of California, that's a small town. Uh, and, you know, I'd say aspects of my past have been, you know, a little bit contrarian because most people when they move out of a small town, they m- I moved to New York City, uh, went to Columbia, and that would pretty much be good riddance, last time that we ever see the, the small community, and, uh, ultimately was, was drawn back.
Part of that was family. Um, but, you know, I've, I'd say the way I look at it today, and even when I shortly, shortly after I moved back, markets like that in some senses have greater opportunity than the large, uh, metropolitan areas because, you know, large metropolitan areas, there are a lot of, lot of people there, a lot of competition.
Um, and when you get out to kind of smaller areas, there are just, there's just a lot more opportunity. And I mean that even from a career growth standpoint and opportunities for being able to, you know, move that next level in a person's career, not, not specifically speaking to real estate.
Brandon Sedloff: So growing up, you know, it, it, it seems, you know, before you got into commercial real estate, you went to Columbia, you worked at a hedge fund.
I mean, what was on your mind growing up in Modesto? Did you always have it in your vision that you were gonna leave for the big city and, you know, the Wall Street career? Uh, uh, to me, I don't, I don't know. You know, I didn't grow up in a small town, but it doesn't seem obvious that you would know a lot about hedge funds growing up in Modesto, but maybe I'm wrong.
Ryan Swehla: No, you're entirely right. Uh, little spoiler, I actually got a brochure from Columbia when I was in high school, and I said, "Oh, cool. A school in New York." I actually didn't even know that it was an Ivy League. That's how... That is more the, the typical kind of small town trajectory. Uh, and so no, I didn't. I just had a vision of like, "Hey, it'd be cool to go to college in New York" at, at the end of the day.
The, the finance track is interesting because the joke when you graduate from Columbia is, are you going into investment banking, consulting, or other? That's it, you know. And, um, so I, I was in the engineering school, and ultimately I was... Uh, I think I started in chemical engineering, something like that, but ultimately just realized engineering wasn't my thing.
Stayed in the engineering school, but they actually have this really cool track that is really kind of like analytical finance or, you know, quantitative finance within the engineering school. It's under the industrial engineering department. And so I'd say that was really what got my interest piqued into finance, uh, and, and ultimately drew me that direction.
Brandon Sedloff: Interesting. So you graduated, and then you were out on the streets, if you will, and you ended up at a hedge fund. How long did that chapter last for you?
Ryan Swehla: Yeah. It was about a year. Uh, I had spent four years in New York, and then, uh, a year in San Francisco, where this hedge fund was. Uh, very reputable hedge fund.
Uh, they were a leader in kinda tech investing in the day, Gruber McBain. And I was their sole analyst at the time, and, uh, it was a great experience. But, um, ultimately, what ended up happening was kinda that draw back to my roots and to where I was from, and then also that ability to kind of start out in a career, uh, more aligned with what I wanted to do,
Brandon Sedloff: so.
So when you moved back to Modesto, did you have a job? Did you know you were gonna go work for this real estate... you know, commercial real estate company, or did you kinda hit the ground and scratch your head and say, "Now what?"
Ryan Swehla: Uh, uh, I'd say somewhere in between. So I did have a job, uh, but I, I ultimately was looking for a good company to work under.
So I w- I worked for about three years. Before going into real estate, I worked for about three years in a manufacturing company. I was in inside sales, um, for the company. But, uh, that was to learn to kind of gain more experience in the corporate or the, you know, the, the business world. Um, and then just a, a, a part I, I didn't mention is my business partner and I met in third grade, um, on the playground in elementary school.
And so that's an important part of this story because while I, I'm working at this, uh, manufacturing company, he's working somewhere else. We're hatching these plans around how are we gonna get involved in real estate, and that's, that really precipitated both he and I quitting what we were doing and going to work in, uh, under this, uh, this guy that had a portfolio of real estate and g- and getting involved.
So there, there is a, a common thread of Joe and Ryan, uh, hatching plans. I will say, uh, in our break room in our office today, there is a photograph of the third grade class with all the head shots of the little kids, and you've got Joe in third grade, Ryan in third grade, and, uh, next to that is a seventh grade suspension slip because Joe and I actually got suspended for fighting each other, uh, at school.
It was, it was a, a really funny, uh, typical young kid story, but, uh, but it, it lives with us today, uh, in our firm. And it, that really is kind of the f- the fabric of kind of who we are. I mean, even the fact that that would be on the break room wall, you know, at the office. You know, it's just kind of who we are.
Brandon Sedloff: So you definitely check the box on, you know, partners that have been together for a long time, right?
Ryan Swehla: Yeah.
Brandon Sedloff: That's amazing. We're
Ryan Swehla: more like brothers- Yeah ... in a good way.
Brandon Sedloff: Yeah. Joe and Ryan hatching up plans. I love that. Um, so, so w- when you got, when you got back to Modesto, you, you went to manufacturing. But I- I'm just curious, like why real estate?
I mean, I grew up in a real estate family. It's all we talked about, um, albeit not institutional, I remember at the dinner table. But it doesn't... I don't know, maybe did you grow up in a real estate family? And if not, like how did you move from... What, what was attractive to you about the asset class or the sector or the career?
Ryan Swehla: Yeah, I mean, I would say it's a marrying of kind of my, uh, education and experience and where I was geographically. Um, because there, there are, uh, surprise, surprise, there are not high finance jobs in Modesto. And, uh, so as I was thinking about really continuing in the investment finance space, real estate was just kind of an almost a natural conclusion to that.
The other thing I'd say is, uh, working at a hedge fund, I recognized that, you know, i- being in the equity space or, or the, the, you know, the, uh, what I would call a more abstract investing space, I just wasn't drawn to it. Um, the physical nature of real estate was always very tangible and, and so I would say there was just kind of a draw to, if I'm gonna continue, you know, working in the investment space, real estate is a kind of a natural byproduct of that.
And I will say, you know, as, as we talk a little more about kind of the firm history, the, it, it turned out to be a, a very fruitful, uh, decision obviously. But, um, you know, in hindsight, I wouldn't say that when we were first making those decisions that, that, you know, we recognized what the opportunity set was ahead of us.
Brandon Sedloff: Yeah. I, I don't wanna get too into the nitty-gritty, but how did you... You know, how does one who doesn't have a family background in real estate get connected to people who are in real estate in Modesto? Is it a small enough community where there's, you know, a handful of operators who control, who are based there and control all the market, or did you have to kind of go on a bit of a hunt to figure this out?
Ryan Swehla: Yeah, I would say, uh, definitely a little more of the former. There, there are... You know, y- you would kind of know who the real estate operators were in the area. And, you know, just because we've- I've lived in the community a l- community a long time, uh, w- I was a- we were able to connect up with those people, and just start interviewing with them, and talking with them about the industry, and then ultimately figuring out what our fit is in the industry.
Um, I'd say the harder, the harder progression, uh, is from, you know, where our firm started to, to being an actual institutional investment manager. That was a much, uh, more methodical and, and lengthy progression, which I, I can certainly speak to.
Brandon Sedloff: That's... I think that's a perfect transition. So, you know, y- you and Joe kick off the business.
What year was that? I think it was right, kind of coming out of the GFC, if I'm-
Ryan Swehla: December of 2008. So Bear Stearns had literally just collapsed, and someone decided it was a good time to start a business.
Brandon Sedloff: W- why, why did you decide to start right then?
Ryan Swehla: Yeah. Uh, you know, market timing was not a factor. It, it really was that we were at the right point in our experience level that it made sense to actually g- go off on our own and start our own firm.
Um, and so it, it just happened to be, you know, right as, really at, at the beginning of the precipice of the GFC, which in retrospect was a tremendous learning opportunity. But we joked that, like, the first five years of the firm, we never knew what a good year looked like, because that's just the market that we were in, right?
And, uh, we originally started by doing the things that would allow us to earn revenue as a startup firm. So that was, uh, brokerage, that was leasing, sale, and that was also property and asset management. So kind of right out of the gate, we were doing all those things. Initially myself and Joe, and then as we grew the firm.
And we ultimately grew to be a, a fairly good sized, uh, third party property and asset manager. Um, w- I think we got to a team of probably about 15 people, um, and managed about two million square feet. And at that point, that was really, I would say, a, a big sh- uh, shift in our firm. Because, um, we started in 2008.
We actually bought our first property in 2013, so about five years later. And it was about four or five years later, after doing several individual syndications, where w- at that point, we really had a property management and brokerage business, and we were just investing on the side. Um, it was, it was probably around 2017 that we made this conscious shift and said, "We're going to take all that expertise and that, um, e- that experience, that resource, the team that we've built, and we're gonna take it and we're gonna turn it, and we're gonna focus it solely on our assets."
And so we selectively divested of third party property and asset management as we grew our portfolio. Um, and so... Y- yeah, go ahead. Uh, well, and so it, it, I'd say that was the point where it was really that conscious effort of saying, "This is n- this is where we are focused now." Uh, and being able to build off of the r- the, not only the resource and kind of the financial strength of already being an operating successful business, but also building on the expertise and the team that we had that was really about creating value for others for a fee, and then turning that and focusing it on creating value within our portfolio.
That, that was a big, you know, kind of a mental shift in, in our progression.
Brandon Sedloff: So creating value for your own portfolio makes a lot of sense, but it's not obvious to a lot of people that there's this parallel kind of investment manager profession career, which is actually quite different than the asset management business.
Was there an economic driver or, like, what was the, what was the motivation for making that pivot?
Ryan Swehla: Yeah. So a, a couple things. Um, I would say from a business standpoint, if we're the ones that are creating the value for owners, it, it, it was a logical jump to say, why are we, uh, simply in the fee business?
Why are we simply receiving a fee to, to do all this hard work to create value to grow NOI? We should be in the equity business. We should be taking our skills and taking our risk, our risk dollars, uh, and, and applying it that direction. I'd say that was one. The other thing really was this slow realization of how fruitful of a market we happen to place ourselves in.
So as we started, we, we had a... I would say very early on, we had always operated at a ver- I'd say a very high level or institutional level. Uh, we both, both my business partner and I have CPMs. We've gone through all the IREM courses. We have CCIMs. And, uh, and just, I'd say maybe because of the finance background that I had, we, we always operated at m- a more sophisticated level relative to our peers, even when we were doing third-party property and asset management.
And so when we started investing, seeing the ability to achieve returns, uh, you know, in a, in a very, I don't know how to say this, but maybe just a, a very easy way, also made us start to realize that the markets that we're operating in really are underserved, underutilized markets and un- you know, non-institutional, you could say.
And so to apply that institutional lens and approach in a market that is broadly not, uh, that was the second part of that realization that, you know, we really wanna be focusing our effort and our attention on that opportunity set.
Brandon Sedloff: So it's 2017. You make the pivot from being an asset manager to an investment manager.
You've just described kind of some of the thought process behind that change. Now, bring us up to speed. What is Graceada today? And I'd like to just better understand, you know, the size and scale of the business, you know, some of the markets that you invest in, kind of your overall thesis, and then we'll move forward and unpack kind of the, the strategy side of things
Ryan Swehla: So just snapshot of the business as a whole, uh, today we're about 75 team members.
We have about 600 million in assets, 650 million assets under management. Uh, we're vertically integrated, so part of the 75 s- uh, team members are property management, on-site people, that sort of thing. And obviously, you, you heard from our history that is really formative in who we are. So being... The ability to have our actual staff on the ground at the properties adding value is a really important part of what we do, especially in the markets that we operate in Um, and then I'd just say from a senior management level today, we have a, a senior management team comprised of myself, my business partner, a CFO, CIO, COO, uh, and then some very seasoned senior leadership below that.
We've been very fortunate to attract a team that i- is composed of very institutional backgrounds. Our CFO came from John Hancock Farmland, uh, where he had a $3 billion portfolio. Um, our COO came from a couple billion-dollar real estate operating companies, and our CIO came from Shorenstein and Bozzuts. So we've been fortunate to build out a, a pretty exceptional team right here in Modesto, California.
Brandon Sedloff: That's incredible. Uh, were all these people already living in Modesto, or did they relocate for the opportunity? 'Cause that was gonna be one of my questions, is how do you attract talent in a relatively, you know, n- narrow talent market?
Ryan Swehla: It's really an interesting opportunity because it, it is a challenge and an opportunity.
Uh, it's a challenge finding those right skillsets. Um, but when you do, it's a very sticky combination because r- we've found the skillset we need, and that person's skillset is being, you know, honored and valued in o- the market that we're in. And I would say it's a lot of different stories because, again, you know, we are in Modesto.
Modesto's about an hour and a half from the Bay Area. It's about an hour from Sacramento, and so we do have larger, um, you know, skillsets to draw from. So some of the folks, uh, actually did, uh, locate. They already were located in or around the area. Maybe they were commuting into the Bay Area. Maybe they were commuting up to Sacramento, and now they had an ability not to.
Um, and then others, uh, like our head of residential management, who came from Prometheus, uh, she lives in kind of the East Bay Area, and she does actually commute in three days a week. Our CIO, uh, lives in Sacramento. He, he comes in three days a week. Um, so I would say that the, our ability to be nimble and responsive to the market for the talent pool is really important.
You know, when you're in a larger market, you, you kind of, to some degree, you have the ability to be a little bit more relaxed in how you approach talent. Um, being where we are, we definitely have to be very thoughtful, um, and sometimes that means hiring talent when we find them and before we technically need them.
Sometimes that means, oh, I, I was connected with this person, circumstance, and we weren't ready to fully hire for that capacity, but we know we're going to be, and the person presented themselves. We're gonna make that hire. Um, so it's definitely put us in a much more proactive and thoughtful mindset, uh, as it relates to talent.
Brandon Sedloff: Interesting. So what is your strategy-
Ryan Swehla: Yeah. So just boiling it down, uh, our focus is secondary and tertiary markets of the Western United States. Uh, we do invest in two asset types, multi-tenant industrial and multifamily, and I can speak to those two asset types. But the broad concept is that these markets represent about $1.6 trillion of real estate just in industrial and multifamily.
And for context, that's four times the size of the entire US self-storage market. So when we think about, okay, is US self-storage, is that a institutional asset class? Today it is. 20 years ago it wasn't. And so when we look at the collective market size of all of these smaller geographies, we see it as a tremendous, uh, opportunity.
It's... It is just a matter of how does one appropriately approach d- that, those markets differently than they would in primary markets Um, the two asset types that we focus on, multi-tenant industrial and multifamily. Primary reason for that, w- we've actually had a, I would say, a winnowing process in the asset types that we focus on.
We came from a background where we were literally managing and adding value across all four of the main food groups: retail, office, industrial, multifamily. And, and we've invested across all four of those asset types. But over time, we've recognized the value of sticking to these two, not as much for the macro trend.
We know the macro trends in those asset types. I don't need to speak to that as much. But the bigger part of it for us is we're very v- risk-averse managers. And f- and for us, our primary value add is we're buying from a longtime private owner who has owned the property for, you know, decades sometimes, and the in-place rents are 15 to 40% below current market.
So all, all we're doing is that mark-to-market value add. And so when you work in these two asset types, they have constant lease rollover, and you have an ability to very quickly grow NOI. You also have lower kind of ongoing TI and CapEx costs relative to office or retail. So I'd say those are the, the two main reasons that we focus on those two asset types.
Brandon Sedloff: And you mentioned secondary and tertiary markets. How, how would you define those?
Ryan Swehla: Broadly speaking, uh, w- tertiary, we would say, is between a half million and a million people, or maybe a million and a half. Secondary is kind of, you know, a million and a half up to four, four and a half million. So secondary markets in the Western US would be, like, um, Portland, Denver, Sacramento, Phoenix.
Um, tertiary markets would be places like Modesto, like Salt Lake City, like Boise, like Bakersfield. Um, and I think an important thing to touch on here is when people hear the words secondary and tertiary markets, sometimes there's kind of a, an immediate reaction or, or perception of what that means.
These are, uh, broadly, uh, diverse economies. Uh, each of these cities, when you look at the GDP pie chart by industry group, it's a very diversified, uh, economy. So what we're not talking about is kind of like one mill towns or, you know, very small towns that are dependent on one particular industry, and that industry changes, and it changes the economy.
These are, again, half a million and above population, and they're just broadly diversified, uh, economies.
Brandon Sedloff: So what is, you know, unique about your strategy, I guess? I mean, I, I, um, I, I know what is unique about it, but I gu- you know, why wouldn't any institutional manager be able to enter these markets and kind of run that same playbook, which is, you know, buy from local mom and pops, you know, increase rents, drive NOI growth?
N- Seems like a very logical risk-off strategy, but- Clearly- Yeah ... I don't hear about, yeah, Modesto or Fresno or some of these markets as often as we're talking about it on this podcast.
Ryan Swehla: Yeah. Absolutely. You- you've probably heard these words more often on this podcast than anywhere else. Um, so what I would say is, fundamentally, um, these are inefficient markets by their definition.
Um, in inefficient markets, you know, broadly speaking, in an inefficient market an investor has the ability to achieve higher returns without incurring c- the, the same amount of risk. You know, one could argue whether these markets qual- you know, quantify for or qualify for that. But, um, inefficient markets are, uh, where you really have information arbitrage.
You have the ability to, um, get deal flow and to execute on that deal flow in ways that are harder in more efficient markets. Uh, just for example, um, when we're acquiring, um, we're never operating in a bidded environment where we're, uh, you know, participating in a marketed process. Uh, this is... W- when we buy, it's from brokers that they heard that the patriarch passed away and the kids might wanna liquidate, or they know that this family's in some generational planning.
And so it's, it's a much more inefficient manner, and, and it takes being on the ground in those markets to earn the right to have that deal flow. So it's... In primary markets, because they're more efficient by their nature, it's very much a bidded, transparent process, relatively speaking. And so it's much easier for a group to helicopter into that market.
There, there are more third-party reports. There's more data available. There's more information availability. And so it's much easier for an institution to say, "Hey, I wanna be in Los Angeles and I don't currently invest there. I'm gonna going to come into that market and I'm going to build opportunity," because everyone's operating kind of under similar paradigms.
When you come into these smaller markets, it's much harder to be able to identify opportunities, to be able to execute on them. E- even down to you look at the quality of the third-party managers in the, in these markets, and they're very mom-and-pop. They're very non-institutional. So just the, the, the infrastructure needed to execute in these markets is very different.
And that's, for us, again, having started in Modesto and kind of grown out from there, we've understood that implicitly and we've built our infrastructure around that. So it's... I- I'm not saying that it's impossible to replicate. Absolutely if a group put their focus on it, they could. But it's a much harder process to build out that infrastructure to execute in these more granular markets.
Brandon Sedloff: What does that infrastructure look like?
Ryan Swehla: Yeah. So, uh, two things I'd say, or three things really, which is, uh, people. So having people on the ground in those markets, because n- now you've got a feedback loop. So, uh, just as an example, in a g- in a given market, Bakersfield, actually, I'll use that as a good example.
We bought our first asset there. All of a sudden, we were seeing rent much stronger than a- any of the, you know, limited third-party data sources were demonstrating, but that was our real lived experience. And all of a sudden, we can take that, and we can use that to, on future underwriting. So I'd say people.
Um, the, the other thing is relationships. So relationships goes down to both the, the broker relationships and the vendor relationships in those markets, both of which are great information sources. And obviously, the brokers are, you know, pipeline sources as well. Um, so developing the trust in the markets that when they've got some, you know, circumstance, some off-market thing that they think might be a thing or it might not, we're the ones that they call instead of another group.
And then the last thing is just proprietary data, and that proprietary data comes from, again, that lived experience in each of these markets. Um, and, and I'd say those are really kind of the three ingredients is data, relationships, and people in the markets.
Brandon Sedloff: What surprised you the most? I mean, clearly you understand the benefits of smaller markets, having grown up in one and returned to one.
And, you know, you've got this thesis that you've been executing on for, you know, many years now. But w- what's been most surprising as you've expanded the platform about how these markets operate?
Ryan Swehla: A couple things. Um, and they, they hit on probably the two main objections that people have when they think of secondary and tertiary markets, and that is perception of liquidity and, um, how these markets perform from an economic standpoint.
On the, the perception of liquidity, it's, it's been fascinating to see our real-world experience through 2020 and through 2023. Obviously, through the, um, GFC, we were a third-party, um, property and asset manager, but we still lived through that, and we saw how assets performed during that time. But on the liquidity front, it's fascinating, um, and we actually recently did some research here because, uh, we were looking at what does liquidity look like, transaction volume over time in these smaller markets versus larger markets.
And we actually broke it out by asset size, and we found some really fascinating, um, information, which is that at the smaller asset size, whether you're in a primary market or a secondary, tertiary market, at the smaller asset size, it's way more liquid. The transaction volume does not have... It has, like, a quarter of the volatility of what we would consider to be institutional asset sizes.
So 20- We looked at, I think, 40 million and above and 40 million and belo- down to one million. And in that below 40 million segment, way more stable deal flow, way more stable volatility. Um, and it's really... So what's interesting is the institutional markets, the, the larger asset size, those are the markets that are less liquid and more volatile as, as markets change.
I'd say that was a huge eye-opener, and w- what caused us to look at that was that in 2023, we, we sold three assets at exceptional returns, and we bought four or five assets. And I would say that was the year, 2023, was, will probably be on record as the lowest transaction volume year in a decade. Um, and the why of that is that in these markets, it's more private capital than institutional capital, and private capital does not have the same motivations as institutional.
Institutional is sophisticated, so when the market changes, institutional capital steps back, and they say, "We're not transacting." Private capital has external motivations to the market. It's, uh, patriarch died. It's liquidity. It's, uh, I have a 1031 exchange. So there are all these motivators that would still make them transact in a otherwise, you know, challenging market.
So I would say liquidity was a, a real eye-opener and seeing how that happened, that performed through 2023 The second thing is, uh, kind of the economic vibrance of these markets. We work in only growing markets, and that's pretty easy to say because if you close your eyes and you point anywhere in the Western United States, except maybe San Francisco and LA for the last few years, but other than that, you point anywhere else in the western US, and these are all growing markets.
And so I, I would say w- w- we always operated in these markets, so th- this is kind of, in a sense, all that we knew. But seeing it through the pandemic, obviously there has been a, an upswing in interest in these smaller markets. I... We are already seeing that tail off, so I don't... That's not a, you know, a, a seismic shift, but it's tailing off right back into that long-term trend line of positive population growth.
So it's kind of like we, we had a spurt through the pandemic, and now we're just getting right back to that long-term trend line of population growth.
Brandon Sedloff: I heard you reference, I think on your podcast, um, the way that you think about market expansion is by following a similar strategy that In-N-Out has used.
Can you explain that? And by the way, for our listeners who don't know In-N-Out because they don't live- ... in the western half of the US, maybe, uh, you can talk about- Yeah ... why this is such a, a interesting and important- ... um, you know, metaphor for all of us.
Ryan Swehla: Well, I, I, I think, you know, most people know In-N-Out is kind of like a cult classic.
Y- I, I know when I went off to college, one of the first things I would do when I came back to the, the West Coast was go get an In-N-Out burger. Um, so it's very much the quintessential, you know, f- health... I'd say healthy, but not really. You know, it's, it's natural ingredients, but it's fast food at the end of the day.
It's burgers. But one of the things that, uh, people noticed about In-N-Out is, you know, you'd eat it, you'd say it's amazing, and then you'd m- go back to Nashville or wherever you're from, and you're like, "Why don't they have an In-N-Out there? Why don't they have an In-N-Out in Dallas?" I think they maybe have gotten there now, but...
And In-N-Out was very disciplined about saying, uh, "We will only expand as we go. We will not hopscotch into a market, no matter how much opportunity that market represents." And the reason fundamentally is because they have infrastructure and efficiency, and they're more focused on maintaining their efficiency, their cost structure.
Uh, In-N-Out's very affordable, relatively speaking. Um, they're, they're more focused on that than they are on the opportunity set of hopscotching into a new market We view it kind of the same way as In-N-Out, that infrastructure is critically important. A- and for us, it's really about, uh, being able to manage risk and being able to, uh, control our outcomes.
And so for us, when we look at expansion, it really is along the nodes where we already have infrastructure. Um, that way we're building on the relationships, we're building on the markets, we're building on the proprietary knowledge that we already have. We believe that it's very risky to helicopter into secondary and tertiary markets because you just don't have that infrastructure and that knowledge base and those relationships.
And so we, we do look at the three inland, um, north-south in- interstates in the United States as kind of our lifelines. That's the I-15 in, uh, Utah, I-5 in California, Oregon, Washington, I-25 in Colorado, New Mexico, that area. And so we build along those. We have infrastructure along each of those interstates, and our expansion plan, much like In-N-Out, is the adjacent market to us, moving along those market adjacencies.
So we don't as much look at, "Hey, this market exhibits some compelling opportunities. I'm going to helicopter into that market." We view that as risk. Instead, we look at it very much as kind of a slow expansion process along the, the nodes where we operate.
Brandon Sedloff: That's fascinating. And so what does that addressable market look like?
And is it... You know, as an institutional investment manager, you mentioned the size of the multi and industrial markets. I think you said 1.6 trillion, if I'm not mistaken. I mean, i- is that the right way to think about market depth? 'Cause that ties into the, the, um, sentiment around, or the perceived sentiment around illiquidity.
Ryan Swehla: Yeah, absolutely. Yeah, and, and that is exactly it, is we kind of w- when we, uh, started looking at the broader geography where we were investing and where we were growing, uh, we looked at what is that market opportunity set. And the 1.6 trillion number, again, that's just industrial and multifamily in the Western United States.
And for context, it's four times the size of the US self-storage market. And the reason I mention that is because clearly US self-storage has become ins- has, has had the ability to be a large enough asset size that institutions have deployed into it. And so we view these markets as being very similar. Uh, I would also say it's similar to self-storage in this sense 15, 20 years ago.
And for those who are in the business at the time, you would remember this. But institutions, when, when self-storage y- people started thinking about self-storage or mobile home parks or single family rentals, you know, whatever, whatever it is, uh, when, when those first movers started investing in that space, what did the inst- what did institutions say?
Market's too small. It's too disaggregated. It's mom and pop. It's not sophisticated. It's illiquid. You know, kind of the same litany of reasons, uh, with secondary and tertiary markets. And then, of course, what happened over, uh, 15 or 20 years, it's now kind of a regular part of that. And to, to think that a market that represents just in our asset types $1.6 trillion, to think that it won't become part of the institutional allocation, I think at this point is, uh, you know, foolhardy because i-it's, it just represents such a large market.
So then the question is simply how, not if. And, and that's really how we view the world.
Brandon Sedloff: And to some extent, correct me if I'm wrong, but it seems like the businesses in these communities are the lifeblood of a lot of the, you know, American economy. And you mentioned previously kind of in-migration and population growth into second and tertiary cities.
I'm curious, like what are you seeing from your teams on the ground that's happening in these markets right now? And what, what does that tell us about the relative health or challenges that our broader economy faces? 'Cause, you know, yeah, w- what's happening in New York or San Francisco or LA is one thing, but what's happening in Fresno or Modesto or Bakersfield is another.
Ryan Swehla: Yeah, absolutely. Uh, and that's an interesting one because, uh, we... And recently we've started to look at some of the data related to rent growth and values and cap rates and, uh, GDP of these various markets. And in many ways, these markets have, over the last 20 years, have performed better than their primary counterparts.
A- and that's just a function of, a, a big function of that is positive population growth, right? Real estate is driven by demand, and if you've constantly got additional demand, it helps to cure over, uh, oversupply. Uh, and, and you'll see even in the markets th- like Denver or Salt Lake that clearly had some momentary oversupply in multifamily recently, uh, you already they're curing, curing right out of that.
Denver, I think, just had four months of positive rent growth. So that's not to say that, you know, the problem is solved, but the point being that when you've got positive population growth, it always is a tailwind to, to whatever strategy you're, you're focused on. And then, as I mentioned earlier, these are broadly diversified economies.
You know, no one industry sector is more than 15% of a given, uh, economy. So there's, there's just not... Obviously, when you have a, a broad market downturn, everybody is affected. Uh, but that's primary markets and that's secondary markets. And interestingly, in some cases the secondary and tertiary markets have recovered better than primary markets.
Brandon Sedloff: So we've talked a lot about the benefits. Now what's not working? You know, it can't all be- It can't all be rosy. Yeah. There's gotta be downside of operating in these markets. So what's the, what's the dirty truth behind, uh, being, being a, a, a first mover in some of these, these markets?
Ryan Swehla: Uh, uh, infrastructure.
Inf- absolutely infrastructure. I, I would say that that is the, the biggest thing is as we, you know, slowly, methodically expand into adjacent markets, um, along I-5, I-15, I-25, it's building that infrastructure. And actually stepping back, when we first built the infrastructure in, on I-15 and I-25, those are jumps, you know, into Utah, into Colorado, and that was a big learning curve.
Um, and, and it's, you know, it's, it's getting entrenched in the market, and it doesn't happen overnight. So you buy an asset, and first of all, you spend... We probably spent two years underwriting assets and evaluating assets, uh, before we bought our first asset. But you buy your first asset, and now you've got that feedback loop, and you have that ability to grow and develop your relationships off of that.
Um, so I would say th- those were the biggest, uh, s- shifts. But as we expand into adjacent markets, there's still that learning curve of the nuance of that market and how it operates. Um, the other thing i- is that, uh, we do view our, uh... Today we're in, I think, 10 markets, and, and we do view each of those markets a little bit like levers.
With the two asset types we view like levers, and then the markets we view like levers. So we, we will never move out of a market completely because we believe that having that infrastructure is, is a, is a proprietary value. And so we'll never move out of a market. But just as example, I mentioned Salt Lake.
Right now we're not l- underwriting multifamily in Salt Lake 'cause we're, we're seeing where the market settles out, and we're waiting till we see pricing that looks appealing. Meanwhile, industrial continues to be strong there, and so we, we are, um, acquiring another industrial asset right now in, in, uh, the Utah market.
So I, I would say, you know, knowing which levers to pull and where and timing, I'd say that's, that's another aspect of it.
Brandon Sedloff: And will y- Do you envision yourself ever expanding further east, or are you gonna stay kind of I-25 corridor-wise?
Ryan Swehla: Yeah. I, I mean, I wouldn't say no, but I would say it's a, that's, that's a long ways off.
I, I think at, at this point we see a huge opportunity set in building along the infrastructure that we've, we've already built, so really at this point is a north-south, uh, movement along those lines. And, you know, who knows, 10 years down the road if we're, you know, fully north-south, then, then we can look at other opportunities.
But we definitely view Western United States, those three corridors, secondary, tertiary markets as our, uh, you know, kind of our strategy and our focus. And in that strategy space- We, we do view ourselves a little bit like our, our goal is to be the Kleenex, right? Is to be the, the brand associated with that strategy, which is a good and bad, right?
Uh, it, it also is an education process because we're talking about a strategy that is starting to gain institutional traction but is not broadly accepted, and so that's a downside. You know, it means that that education process is a big component of what we do. Um, actually, I was at the, uh, s- SACRS conference last week, State of California, you know, county retirement plans, and they had a, a Shark Tank competition which was great.
I've never done that before, but they thought it would be just kind of a fun, you know, lighthearted, you know, get... groups get up, give a three-minute pitch, and you've got, you know, three institutional senior consultants, uh, as the sharks kind of judging. And we went up against some name brand firms and some very popular strategies, and, uh, we won, uh, best overall private market strategy.
And so to see some of the resonance or the appreciation of the opportunity in the market is, is really, really powerful.
Brandon Sedloff: Wow, that's awesome. And to get that, uh, acknowledgement from investment consultants is no small feat 'cause we know that, uh- Yeah ... they, they see it all. So congratulations to you on that.
Ryan Swehla: Thank you. Thanks.
Brandon Sedloff: So l- let's spend the last few minutes... You, you mentioned something early on that I'm curious about. You kind of made this decision to move to an investment manager. Um, and, and you raise and manage capital on behalf of institutions, which is different than individuals. You mentioned that journey maybe, you know, I don't know how linear it was, but as you look back on the last kind of eight to 10 years, you know, what are...
kind of what has surprised you most or kind of what have you learned as a, you know, emerging manager in institutional investment management? Because a lot of our listeners, you know, have a little bit of institutional capital or may be thinking about making this transition. So I'm curious to know, uh, you know, through your lived experience, what, you know, what you can, what you can share.
Ryan Swehla: Yeah, and by the way, I would say Alliance Global, uh, Heather Border, Jen Stevens have been... were really instrumental in, in our progression. Um, so I do wanna give a little bit of a shout-out to them. So we started really as friends and family, right? We were just kind of on the side, found a deal, got some friends and family together, and then we made this progression.
And what I would say for, for folks that are looking at that, or they're partway through that, um, progression, is it's, it's much longer than you think, and it takes a lot more infrastructure than you think. Um, it, it really... If I look at, uh, how we are as a firm today compared to how we were five or six years ago, it's just almost night and day in terms of how we...
our internal controls, our processes, how we do things, how we view things. It's, it... All of that is just the table stakes to be able to compete in the institutional world. The second thing that I would say is, uh, one thing that we found surprising and, in our case, edifying, is that, uh, really the institutional world is, um, constant learners.
Every- everybo- every LP that I've ever met are these continual learners who are always trying to aggregate and, and digest a lot of information and data. And so for us and our strategy, because it in- it requires this education process, that's been really edifying to find, uh, institutions that are just l- literally kind of gobbling up the, the, the data and the analysis and, and kind of what we're seeing in the markets.
So what I would also say is just that that education process is so critical. People think of it as a marketing or a sales process, and in some sense it's really not. You know, that's a component of it, but a, a very large component of it really is that education process and, and being a, a value leader and being able to provide value, uh, to the institutional world.
And, and in, in some cases, you know, we've been providing value with some LPs for three, four years, and we've have not received dollars from them, but we have a great relationship, and we anticipate that, you know, at some point in the future when their, you know, uh, allocation aligns, we'll do something.
Brandon Sedloff: Yeah.
Well, I think that's great, and I think that's, uh, the right long-term, you know, perspective in terms of how to build and maintain institutional capital relationships and, you know, having, uh, the, the privilege of having a lot of these individuals who make allocation decisions as friends and professional acquaintances.
I know nobody likes to be pitched, and everybody, uh, definitely wants to learn, and they need a, a safe space to do that. So as you look forward over the next few years, we're recording this in May of 2024, kind of what are like the top two or three, you know, business priorities that you're focused on on the go forward plan?
Ryan Swehla: I would say, uh, number one, continuing to build out the infrastructure. Um, so we will methodically expand to adjacent markets, you know, one or two a year, um, as we slowly grow into this space that we view to be our kind of, uh, market space. Um, the other thing is just continuing to build out the team. We've been very fortunate because our roster of senior management and next level down management is just top-notch, and frankly, oversized in terms of their raw horsepower relative to where we are today.
So we really are built to be able to scale into... We'll probably cross a billion in AUM, if not next year, then the beginning of the following year, and we, we anticipate continuing to grow from there. But that next level down is th- really that associate level and that analyst level is an area that we are very focused on finding those next right hires.
Because as you scale, if the leadership team is already built to be able to s- handle a fair amount of scale, you still have to build that infrastructure below And then, um, the, the last thing that I'd say is really, a- and I, we haven't spoken to this, uh, on this podcast, but really continuing to live our core values.
So we are, you know, born and bred in a secondary, tertiary market, and, uh, we believe that that's part of our DNA. Um, I would say our ethos is generally, uh, uh, where we're from is called like the Midwest of California in some senses, and so it's very much that kind of, you know, the positive side of that Midwest ethos.
And one, one of our... We have five core values, and our number one core value or our first core value listed is positive, caring, and humble. And I think those words are not, um, often associated with the term real estate private equity. Um, and, and w- we believe that that's a key part of who we are. Uh, we don't handle ego.
You have to check your ego at the door. If you're a high ego person but you're a top performer, you're just not meant for our company. Um, and so staying true to those core values as we grow and ensuring that we are hiring, we're promoting, and we're firing based on our core values is just a really important part as we scale.
Because as you know, as you scale an organization, it's hard to retain that culture, and unless you're conscious about retaining it, um, it, it has an ability to drift away.
Brandon Sedloff: Well, I think that's a perfect place to leave the conversation. You're, you're the first person I believe to talk about values on our podcast, and it's something that's very near and dear to our heart at, at Juniper Square as well.
And, and we know that it's not just about talking the talk, but walking the walk. So Ryan, I appreciate you joining me today. It's great to learn more about your story and the story of Graceada, and look forward to continuing to follow the journey going forward.
Ryan Swehla: Sounds great. Thank you.
In this episode of the Durable Value Podcast, Ryan Swehla is interviewed by Brandon Sedloff from Juniper Square's "The Distribution" podcast. Ryan and Brandon discuss the private equity real estate strategy of Graceada Partners, focused on secondary and tertiary markets in the Western United States.
Ryan shares his journey from Wall Street to Modesto, California, where he and his third-grade friend Joe built a $900M real estate investment firm. Learn about their contrarian approach to investing in overlooked markets, the infrastructure required to succeed outside major metros, and why they believe secondary and tertiary markets represent a $1.6 trillion opportunity.
Timestamps:
0:00 - Introduction & Welcome
0:42 - Getting Into Commercial Real Estate
1:41 - Growing Up in Modesto, California
3:21 - Columbia University & Wall Street Experience
5:32 - Starting in Real Estate & Business Partner Joe Muratore
8:04 - Why Real Estate? The Tangible Appeal
10:27 - Starting Graceada Partners in December 2008
12:00 - First Property Purchase & Early Growth
13:02 - The 2017 Pivot: From Asset Manager to Investment Manager
16:10 - Graceada Partners Today: 75 Team Members, $650M Assets Under Management
17:42 - Attracting Institutional Talent to Modesto
19:50 - Investment Strategy: Secondary & Tertiary Markets
21:50 - Defining Secondary vs. Tertiary Markets
23:25 - Why Institutions Struggle in These Markets
27:48 - Surprising Insights: Liquidity & Economic Performance
32:06 - The "In-N-Out Burger" Expansion Strategy
36:37 - The $1.6 Trillion Addressable Market
39:19 - Challenges: Building Infrastructure in New Markets
43:34 - Lessons for Emerging Managers
47:00 - Business Priorities & Core Values
About Graceada Partners:
Graceada Partners is a vertically integrated private equity real estate firm with $650M in assets under management, focused on multi-tenant industrial and multifamily properties in secondary and tertiary markets across the Western United States.