Using Lessons from the GFC to Navigate Today's Market | Durable Value Ep. 94
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Ryan Swehla: Today we're gonna talk about the lessons we learned from the GFC. Uh, we're gonna talk about how there are similarities between today's environment and the GFC, and also talk about the differences. And most importantly, I hope people come away, uh, with a better understanding of what actionable things they can do today based on that experience, uh, to navigate today's market since we're in the middle of it.
Joe Muratore: The GFC was in, started in 2008, and I hate to say that was 18 years ago, and we were, we were younger, uh, people then.
Ryan Swehla: Less gray.
Joe Muratore: Less gray. You know, at that time our business, uh, was engaged primarily in, uh, selling REOs for banks. That was what was needed at the time. Our, our best clients were banks. Mm. I personally remember, uh, speaking to a, a, a person that was going to lose their building on behalf of the bank and informing them of, in a polite way, of what was about to happen and, uh, working to do it in an orderly way.
That was a very challenging, uh, part of my early career. But today there's some characteristics of that happening as well. It's not quite the same magnitude and it's a little bit different, but some similarities.
Ryan Swehla: Yeah, and I remember when we were in kind of the midst of the GFC, it just felt like an unprecedented time.
We were working with special servicers, special assets. Distress was everywhere you looked. Today it can feel like this is an unprecedented time. We have this high interest rate environment. We have a war in I- in Iran. We have all sorts of dynamic factors, the AI, growth in AI, that make it feel like an unprecedented time, and yet still it's the, the idea that, you know, history doesn't repeat itself, but it rhymes.
And there are a lot of factors that w- are similar today to what they were.
Joe Muratore: In 2008 they were securitizing large tranches of debt. They were being, uh... buildings and houses were valued at prices that were speculative. Um, there was not skin in the game and the lenders or- Aggregators were aggregating these loans into pools and selling them off, and when there was just the slightest bit of a crack, the whole thing fell apart.
It was, uh, much more of a real estate problem than it is today. Today, it's much more of a financing and timing problem. Mm-hmm. If you look back to 2008, we were working on behalf of banks. That was the main dynamic. Banks had taken the properties back. They were going through a slow process of figuring things out.
It was a m- more institutional problem. Today, it's a little bit different. In post-COVID rates, the Fed raised rates 400 to 500 basis points. And where's the fallout? It's in that 2019 to 2022, '23 vintage. There's a lot of syndicators. There was a lot of floating rate debt. Uh, there was a lot of, uh, relatively higher, high leverage.
It's not that the assets were impaired. They were, and still are, largely highly occupied. They're still in need, it's just that the, the financing and the timing is all hitting in a weird way and there's not ready relief in sight.
Ryan Swehla: I'd say that's one of the biggest differences between the GFC and today is the GFC also involved an economic recession.
There was an absolute Destruction of, on the demand side of real estate. Today, obviously in the office asset you have that, and then in, to a limited degree, you do have some oversupply in the, in the apartment markets, but you don't have this kind of demand destruction that happened during the, the GFC.
But the interesting thing is, during the GFC, as we saw cap rate expansion, that was almost entirely a product of people repricing the risk that they perceived. They saw that the market, you know, there's lower demand, softening interest, less liquidity, and so investors were adding a premium in the form of a higher cap rate to compensate for that.
In today's market, we have also seen cap rate expansion significantly. The big difference is the cap rate expansion is really a function of the financial situation changed. Interest rates are higher, my debt costs are higher, and this idea that the risk fe- free rate is at a higher rate, and so therefore, you know, risk assets like real estate need to be priced at a higher cap rate.
So it wasn't the... While we had cap rate movement in both environments, or cap rate expansion in both environments, one was really driven by a risk premium, whereas other, the other today was really driven much more by the change in the financial markets.
Joe Muratore: Feels like a car crash or a traffic jam in that all these loans from '21, '22 are coming due, and something like 60% of the loans are maturing frankly later this year and into early next year.
There's this whole massive event of commercial real estate loans maturing. Banks and funds are all acting in all sorts of different ways. For the most part, they're extending, they're working to find solutions, but that patience will sort of run thin. And with the GFC, it took about 24 to 36 months before resolution started to occur.
Uh, it seems that we're, that's happening here as well, but maybe we're only, you know, 25 or 30% into the recovery. So it's like the crash happened i- or is happening. Mm-hmm. Some resolution is happening. Others- Mm-hmm ... is waiting to happen. But I think a key thing to say at this moment is, number one, transactions are very low, but that doesn't mean the clock isn't moving.
The distress is happening in the background. Maturity dates are coming. Extensions are coming. That can only happen for so long. And the other thing to say is this is early innings. As much as it would be nice that this has moved towards resolution, this is probably a second or third inning. Now is a very good time to be seeing deals, underwriting deals.
On the one hand, cautiously buy because more distress is coming. On the other hand, there's a lot of people that know that more distress is coming too, so you should be buying some and preparing to buy more, and I think this does favor our secondary market's thesis where there's less capital and less focus, but that's- Yeah
something to talk about.
Ryan Swehla: One of the similarities and then dissimilarities is, uh, lack of availability of debt, lack of credit in the market. Both in the GFC and today, we see this pullback from lenders, but what's interesting is it's, it's different dynamics in, in this case. During the GFC, the pullback from lenders was real, actual property level distress That made the fundamentals of the assets more questionable, and an economic recession that made the demand side more questionable.
What we're seeing is, uh, a pullback from lenders and, um, actually I shouldn't say it's really a pullback from lenders. What it is is, uh, because we, we are able to get and obtain financing in this environment. You know, we, we have not had meaningful difficulty getting financing. The challenge is that the assets that are coming to maturity were done at very different economics than today.
And so if you bought an asset in 2021 at a 2021 valuation, that's very different than what that asset is worth, cap rate NOI, uh, today than what it was in, in 2021. So it makes it harder for lenders. Lenders can't underwrite the deal that they underwrote in 2021. It's a new deal that they're underwriting today, and it's not because the asset level is necessarily not performing.
It's just because we're in a higher interest rate environment, and so the DSCR and the, the debt yield needed to u- obtain that loan require different, um, economics than they did then.
Joe Muratore: So even though there's different reasons for the GFC versus today, the playbook is, is somewhat similar. The winners in the GFC were the ones that didn't need the market to cooperate in order for them to win.
They had the staying power and liquidity to buy at bottoms and let the market play out. This will, this will happen here as well. A lot of the deals we're buying these days are, uh, all cash. There's, there's, uh, distress to them. The play here is that syndicators especially, but also large funds, you know, find themselves with a timing event.
Their fund life is ending or, um, their debt is maturing and they, they need to move on, and it's increasingly, it seems like, more acceptable out there that people are aware of this problem and people are working to achieve the best returns they can and move on to, to newer vintages. What's interesting right now, especially with, you know, the oil spike and the Iran conflict, is, um, fear is increased.
And this isn't ... the idea is, to Warren Buffett, is, you know, buy when the tide is out. And usually the bottom is when it do- no one's clear on what the resolution is. By '27 and '28, things, resolution will seem more, more obvious, but here in Q2 of 2026, especially right at this moment, fear is high. Do you wait until fear subsides- Yeah
to, to buy? No. You buy positions you can hold.
Ryan Swehla: And that's where asset selection comes in because when you're in an uncertain time of the market- That is, on the one hand, when some of the best purchases happen, and I think many of us look back on the days of the bottom of the GFC and think, "Man, if I had more money to invest during that time," you know, would've done ex- incredibly well.
And it's easy to look back and see that. During that time, the real winners were the ones that bought quality assets at distressed prices, and I think that's a lesson that can be carried to today. You have this unique opportunity where the entire market is priced in a cautious, conservative way. And so to be able to use that and then apply it to assets that are strong assets that have
You know, you think of some of the, the newly constructed assets that we're buying today that we never would've purchased before because we just couldn't make it economically work, and today we're able to, to make that work.
Joe Muratore: It, it also applies to markets. Some markets, uh, experienced tremendous supply build-up during the last cycle, and, and now that's being washed through, and so those markets are experiencing greater distress.
But what's interesting is for the markets we invest in, largely secondary markets, often rents are more workforce-oriented. They're below what pencils to, to build new supply. Most of what we buy historically is at about half of replacement cost. Point being is that a lot of the secondary markets, um, are insulated in ways that primary markets and, you know, large secondaries haven't been, so.
Ryan Swehla: Well, and to add to that, the developers that are developing in those markets are balance sheet private developers, so they're using their own risk capital to go out and build. So the bar to build new supply is higher When you get into markets like Austin or even, uh, Denver, in markets that we invest in, where you had a lot of institutional capital, a lot of frothiness, where we saw the most kind of oversupply or frothiness on the supply side.
You know, the markets that essentially are less institutionally favored actually are less volatile and less subject to this kind of, like, oversupply-undersupply dynamic.
Joe Muratore: Now is a, an incredibly interesting time to invest in other markets. I mean, frankly from 2012 to 2022, with a lot of up and to the right, it was very much momentum play in that you're like, "Well, what are prices now?
What are prices now?" Today, I mean, it is hopscotch out there. It's, it's a tactical operation. I mean, we have five to seven deals coming into the company per week. I mean, we tend to execute on about one in 20 or one in 30. It's very much looking for the right distress story with the right, uh, advantages we have.
So markets we're already in or, or adjacent markets, markets where shorter closes and all cash or can be more valuable. A newer product than we historically have been able to work on, a timing maturity or we gotta close in a month kinda things. I mean, this is what we're seeing and, um, on the one hand it's very, uh, important to stay disciplined 'cause it- those stories are exciting.
On the other hand, these are not stories that we, we've commonly heard in the 20 years of this- almost 20 years of this firm. And a- this is a r- I would say, a generational buying opportunity for our firm, and, uh- Yeah ... not one to be messed up, but not one to be missed.
Ryan Swehla: I think some of the key lessons that we learned out of the GFC that we apply today are buy well.
You can't make up for buying at the wrong price, or it's very difficult to make up for buying at the wrong price or buying the wrong asset. Buy well, use conservative leverage, and then grow NOI quickly. Grow value quickly on the asset because that delevers the asset. So what does that mean for our listeners today?
To the point that you made earlier, let a lot of pitches go by. This is an environment where you have the luxury, if you have capital available, you have the luxury to be able to look for those right deals, right asset, right capital structure, and not feel, uh, that you need to take advantage of the first opportunity that comes.
Joe Muratore: I agree. The main story here is, uh, be aggressive, but be aggressive with cash flow, uh, with assets that are prepared to go the duration. Now is the time to look for durable assets with cash flow, uh, that you can buy at a 20% discount or more. N- now is an incredibly important time to act
In this episode of Durable Value, Joe and Ryan break down the parallels between the 2008 Global Financial Crisis and today's commercial real estate environment and, more importantly, what actionable steps investors should be taking right now.
Timestamps:
0:00 — Intro: GFC vs. Today's Market Overview
2:06 — It's a Financing Problem, Not a Real Estate Problem
3:30 — Cap Rate Expansion: Then vs. Now
5:13 — Where We Are in the Distress Cycle (Early Innings)
8:19 — The Winning Playbook: Liquidity, All-Cash Deals & Staying Power
10:36 — Why Secondary Markets Are More Insulated
13:03 — Key Lessons: Buy Well, Use Conservative Leverage, Grow NOI Fast