Ownership Blindspots: When Market Data and Asset Operations Don’t Align

Introduction and Guest Background

Drew: Welcome back to the Peak Property Performance Podcast. I'm your co-host, Drew Hall, as always. And today we're going to explore the following theme, from market signal to asset reality, where CRE deals break between insight and execution. So before we introduce our guest today, I just want to remind our listeners to like, subscribe and share the podcast. This is how we are spreading the word on the PPP movement, the Peak Property Performance movement, and hoping to change an industry here. As always, if you think you'd provide value as a guest here, or you know someone who would, we welcome CRE thought leaders from all stages of ownership and operation, please reach out to us via the PPP website. Again, that's peakpropertyperformance.com. And that will link you to all of our LinkedIn and all of our other social account profiles. So we hope to see you there.

Drew: Quick intro, here's Bill Douglas, also a co-host. Welcome Bill.

Bill: Drew, always a pleasure to be here with you virtually. I get to introduce our guests, but before I do that, I want to give him a hard time because he went to this little school in Athens, Georgia, that's red and black. And I went to this little school in Atlanta, Georgia, that's yellow and black. And we don't like red and black very much. So it even says the hell with Georgia in our fight song. So I just had to get that in there, Rick. You didn't know it was coming.

Rick Lackey: You know, if it helps any, my father went to Georgia Tech and I was a Georgia Tech fan until I was about 12 years old. I'll give you a whole pass because you got it. But now, I've only missed one or I've only missed a handful of home games since I graduated. And when I graduated, it was a lot easier to get into Georgia. They used to pick on us that, you know, when it was hot in Athens, if you were a senior and you drove by the arches, they would throw the diploma in the back seat. It's a lot harder. It's a lot harder now.

Bill: I know. I was at a Tech event Saturday. I sat with the president and he told me they had 68,000 applications for 2,800 seats this year.

Rick Lackey: Oh my God. Whoa. I don't know if I could get in. Yeah. It's crazy to get into Georgia or Georgia Tech.

Bill: Oh, it's crazy. Well, if you don't have a 4.0, you know, you're toast.

Rick Lackey: I agree. Well, Georgia's so much bigger than Tech. Yeah. I mean, we're very singular, myopically focused and Georgia's broad. But I grew up in a house with two Florida graduates, so the hatred started before I went to Georgia Tech.

Bill: Yeah. I bet. I bet. Anyway. You know, it's good to be a bulldog right now.

Rick Lackey: Yeah. It is. There you go. And you saw Florida lose over the weekend, so that's even better.

Bill: Yeah. You know, it couldn't happen to a bunch of nicer folks.

Drew: Yeah. I bet. Everybody, this is Rick Lackey. I'll do his introduction. So most owners think they understand the market because they see reports, but the real signal is in the deals. And Rick Lackey lives in that every day. He's seeing what buyers are actually doing, where pricing is really landing, and where assumptions fall apart once a deal closes. So today we're going to talk about where deals look right on paper but fail in operations, where communication breaks between the deal and the asset, and how top operators actually connect market insight to performance. So again, Rick, welcome to the show. Glad to have you.

Market Intelligence and Deal Disconnects

Rick Lackey: Well, thank you. It's going to be a lot of fun, I think. Rick, let's start here. You're constantly in the market. You're seeing deals, pricing shifts, buying behavior. How does that market intelligence that you're seeing differ from what owners think is happening inside their own portfolio?

Rick Lackey: Oh, that's a good question. You know, the market always sounds better at the conferences than it does at the property level. It really kind of comes down to that. I'd say the biggest disconnect is probably the owners, you know, they all think that their asset is an exception to the market as opposed to, you know, just another commodity building in the market. You know, everyone thinks their building's worth more, will lease faster, deserves higher rents than, you know, what the market is actually telling them. Meanwhile, the market's pretty honest. You just have to listen to it. Deals, tours, tenant feedback, it's all there. I mean, you know, all you got to do is listen. It's just, you know, a lot of the owners just don't really want to hear it.

Drew: Do you think owners are making decisions as well based on either outdated information or incomplete information?

Rick Lackey: You know, I don't know that that's really the case. You know, I think most every deal looks really good on an Excel spreadsheet, and that's kind of the easy part. You know, where things usually go wrong is people overestimating rent growth and underestimating down times and assuming that everything's going to go smoothly operationally when of course it never does. You know, reality only shows up about six or 12 months after the closing or after a building delivers, okay, if it's a new building. And you know, it all happens whether you're buying or you're delivering a brand new building. It's been happening forever. My father was a multifamily developer and developed about 4,000 or 5,000 multifamily units the old-fashioned way. They owned, built, and managed. They didn't have equity partners. It was their money. He called it the bigger fool theory, and there's always a bigger fool.

Rick Lackey: You know, what normally happens is multiple developers will see market drivers at the same time. They'll say, oh, gosh, what a great opportunity to do this in this particular geography. And you know, they're in the business of developing new properties, so you know, that's what they do. Then they go and propose their new building to their lenders, you know, and they pencil rents that will work for them to be able to raise the capital, right? And then they take those pro formas and they go to the lender, and the lender, normally the guy who's actually doing the deal for them is a younger, I mean, younger than me, but everybody's younger than me now, but you know, a younger banker, you know, used to be, you know, all the banks were in New York, so it was a younger Ivy League, recent Ivy League graduate that's smart, you know, book smart, is a whip, but he's never been through a cycle, right? And the reason he's never been through the cycle is because the lender that he replaced is now the CFO of the developer who's borrowing the money. And so the new really smart kid is what we call the bigger fool, right? Because he just, you know, he hadn't been there before, and the guy who has been there is the guy asking for the money.

Rick Lackey: So you know, the lending professionals, you know, they want to make the deal because that's how they make a living, right? So they do it, and so the developer raises the capital, but multiple developers are all doing that, looking at the same drivers, and then, you know, what everybody thought was one building coming to market is multiple buildings coming to market. So you know, the multiple buildings is, you know, when they looked at their pro formas and their drivers before, you know, they were making their assumptions based on their building delivering, not four buildings delivering, you know, all about the same time.

Bill: Within a mile of each other, yeah.

Rick Lackey: Right, right, all within a mile of each other, exactly. And so, you know, and that's how the cycle sort of happens, because, you know, then the concessions and the lower rents happen, which, you know, changes what was on paper to more what's the reality, and then the developers throttle back, and the new cycle starts all over again.

Drew: You call that the cycle, no, the market is honest, and I grew up in a house where like hindsight 2020 was one thing I heard a lot, but yeah, you just can't, like you can't deny the obvious, the numbers are the numbers. My dad used to joke about this whole book he had on the shelf, it was called How to Lie with Statistics, you know, you can take the same set of numbers and make it look great or make it look like the sky is falling. The numbers are the numbers. How you lie or market around it is actually the game.

Operational Visibility in CRE Transactions

Drew: You hinted at something here, Rick, let me go change it a little bit, you hinted at deals are underwritten in spreadsheets, right? I want to add that they're executed through operations, but in our experience, that's where breakdowns happen. Where do you see deals that worked on paper, but broke down once they hit operations, regardless of what the market's doing around that one mile you just mentioned?

Rick Lackey: Well, you know, that's a big one, okay? The deal gets done, and everybody celebrates, but that's only half the story. As soon as that part of the story is through, it kind of disappears, and everybody forgets about what happened. The brokers who put the deal together, and the lawyers who put the deal together, and the asset managers, not the on-site people, the asset managers in New York, they remember all the drivers. They remember-

Bill: They're the risk-takers, right? They're the ones that made the risk.

Rick Lackey: Right, right. Well, they all remember. And the salespeople, and the salespeople, and the lawyers who put the deal together, they remember all the whys. The why the tenant chose this building, or what their concerns were, or what was happening on the granular level of the market, like what other prospects were circling at the time, and what other deals were getting done at the competitive properties, and what it took to make those deals, and what issues came up in the tour. And a lot of times, the people on-site, nobody ever communicates that to them, because it wasn't in the official lease document, which is what gets abstracted, and what gets passed on to them. It's not in necessarily the working drawings of the tenant improvement plans. So it never happens, and it never seems to make the transition. That's too bad, but unfortunately, it's kind of the reality.

Drew: I mean, how often is the issue not the deal, but the lack of operational visibility? Take a swag on that. Are the operations people being involved in the deal process? Is that the question? Maybe the issue is not the deal numbers itself, but they don't really... Like when a building's traded, there's no operational visibility other than financial reports. Traditionally, we're seeing that change, but I'm hinting at how much would that change if there was a history through data of operational visibility.

Bill: I think it would help with the new purchasers. They would know more, but part of that problem is if you share some of that operational data, it might not say something as pretty as they would like to be portraying. So that's a catch 22, huh?

Drew: Yeah, it is. Well, I was going to ask you about acquisitions with hidden operational issues, maybe not intentionally hidden, but diligence wasn't thorough enough. Do you have an example of where an acquisition fell apart because there were such hidden operational issues, not fell apart, but hurt the new owner?

Rick Lackey: Oh, I mean, it happens. It happens kind of all the time. The blind risk in trading a property, I think it's a risk. And I guess it is a blind risk, but you can only do so much and you make your decisions based on certain assumptions. Generally, those assumptions are made by people and people make mistakes and market dynamics change. Think about right now, no one saw the pandemic coming. Nobody saw that. And the pandemic's subsequent result to office occupancies is now what we're calling the back to work challenge that employers are having.

Drew: RTO. Yeah. Return to office.

Tenant Expectations and Market Cycles

Rick Lackey: Yeah. And that translates into tenants taking 40% less space every time they renew. And then also having a flight to quality. So you now have tenants leaving all the B class buildings and moving to the high-end buildings and B class buildings now even being torn down or at best repurposed. Nobody even saw that coming. The same thing with the housing shortage. All the multifamily developers out there are all using the need that we all know exists, but for a housing shortage everywhere. They're all going out and trying to pencil the multifamily development deals and the ones that pencil best are luxury apartments because they have higher rents. But if you look at the real place where we need new housing stock, it's in the attainable housing size. Then you factor in, of course, none of us knew even during the first Trump administration that tariffs were going to affect building materials. Nobody really thought about the tariffs against Canadian lumber suppliers, making it where mid-rise apartment complexes in Dallas that were already penciled aren't penciled anymore because the cost of lumber went up enough to where the numbers didn't work and it was completely unforeseen. And that happens every cycle. It happens every cycle. It's just different. It's a different pain point, but the cycle does repeat.

Bill: Oh yeah. The results always, the bottom line always repeats. School of hard knocks is a wonderful teacher.

Rick Lackey: Yes. It does get your attention. We do a survey every week through CRE network by one of my companies to about 25,000 commercial real estate professionals around the country. I recently asked them what were the different drivers of this cycle that we're beginning right now? If we say that there's some confidence coming back to the cycle right now, it's a little different. In the past, it's always had fundamental drivers like supply and demand, where this time it appears that this cycle is a lot of it's being driven by government involvement. Interest rate changes are getting equity capital off the sidelines, regardless of supply and demand. Return to work policies are drivers. And now AI is changing the amount of employees that people need. We never know, but we know they're going to be different and we know whatever goes up is going to come down.

Drew: That's right. Well, let's think through some of the ways that this information flow breaks down as we go broker, owner, operator. It's almost like a game of telephone, but is there a category or type of information in your mind where you see the biggest breakdown along that chain? Like key lease terms or tenant expectations, something in the repositioning strategy. Is there something that is just, you said it happens about all the time, but is there a particular type of information breakdown?

Rick Lackey: Well, I'm certain I'll be wrong if I said it happens every time, but I think a preponderance of the times it might be tenant expectations. Maybe the tenant side of the deal knows the expectations and maybe the landlord side doesn't know them as well. They just want to make the deal and the guy says yes. And they say, okay, let's paper this thing up and get it done where I'm sure that we could all learn on the landlord side, we could learn more about the whys for the tenant. I'm not sure that we don't, but I know on the part of the transaction that I'm normally part of, which is the beginning, we're really working to get the deal signed.

Drew: I realize you may not have these details down at the operator level, but just, I'm curious if there is something that you've seen in terms of what operators should know coming out of the transaction that they usually don't know, is there something that fits that category?

Rick Lackey: Well, probably why the people moved to start, right out of the gates. So why did they move to start with? And then what are the pain points that were all part and parcel of that? I often tell people that one of the biggest pain points, if you talk to a non-entrepreneur, the CEO or the owner of a large entrepreneurial company that's relocating, and you say, what are your biggest fears? And they say, well, it's going to disrupt the lives of my employees, because chances are they're moving further away there, if they're trying to save money, they might be moving further out or something. And I know that's going to mess with everybody's commute. I'm not so sure that the landlord ever knows any of that, because I guess you're not asking the question, because it might reinforce one of the negative attributes of a property, as opposed to the positive. I think there are a lot of those.

Optimizing Property Performance with Data

Bill: We see the best CRE owners connect market insight to underwriting to operations, but they do it in a continuous loop. So what do these best owners do differently when it comes to actually using market insight to drive the asset's performance, instead of just, I'm talking outside of just pricing?

Rick Lackey: I think the best owners are close to the deal. And as I say, close to the dirt, they are really close. It's not just reading reports and talking to their brokers. They've got to be, they need to know what's going on in the building and listening to the tenants themselves and adjusting fast. And the very best ones are, they're part of the community as opposed to just having their foot soldiers being part of the community. Those are our favorite clients. Our favorite clients are the ones that could tell you what the wall outside the pool looks like or where the dog park is at this property, or how come the gym is so dusty and dark at this one, or why do we still have a theater at that one? A lot of the asset managers are not that close. And then I think another challenge is some people fall in love with their own assumptions and they make assumptions and they know that the market's dynamic, but they want to believe because they made these assumptions that the market is static and it's not, it changes and it changes every day. The reporters and the people that costar and all these other great data providers, they're getting the data old. The real data is what's happening, what people are talking about. And by the time it gets to the report, it's old.

Drew: Well, that data is just market facing data. We talk a lot about data from an operational perspective. Again, if somebody has it, that we're finding it old as well. So I heard you say the best operators are in touch with what's going on at the property level, right?

Rick Lackey: Correct. So you mentioned market data from costar, for instance, but think of other data around the property, internal, not just external market facing. If somebody wants to tighten that loop, like right now, some of the listeners on this show, what's the first move they should make?

Bill: Listen, and I mean, actively listen. Maybe with some of the questions you're asking me, it's making me think that maybe we need to learn more what's happening once the tenant gets in the building and be quicker to react. So instead of waiting for it to become a problem, seeing the challenge when it happens and addressing it and realizing that that challenge might exist throughout the rest of the property, maybe, but that's kind of off the top of my head based on what you're saying to me and I believe that's possible.

Drew: I appreciate you saying listening because AI is all the buzz, but AI is worthless without the data. So the data is how you would listen when you have to get the data, right? So there's steps to get the data. And we talk about all of those on the show all the time, but I love the way you're saying, just listen, listen to the tenant, listen to your broker, listen to your employees, but listen to your property. Is that a fair statement, Rick?

The Role of Listening in CRE Success

Rick Lackey: The property. Yeah. The property and the people that are occupying it, really what you've got to listen to. The people that are doing the listening have got to be, it's got to start with the people that are on the property, but then the people who own the property and the asset managers that are oftentimes in other cities, they've got to be able to get that data in quickly. Using data to operate a property is very different than using data to optimize a portfolio. The data is the data, but as it rolls up, it becomes more strategic and less tactical and the strategy around the same data.

Rick Lackey: is very different at a portfolio level than it is a property level. That's not a question, that's a statement, but we see that all the time, Rick.

Bill: Oh, I believe it. I absolutely believe it. And you know, it's, I recently went to Cretech in New York, the prop tech conference.

Drew: Oh, I can't believe we didn't see you there. Yeah, you were there.

Rick Lackey: Michael Beckerman's an old friend and-

Bill: Likewise, yeah.

Rick Lackey: Back when Michael was the top PR guy in America for commercial real estate before he became the prop tech guy. And Michael, you know, invited me to come up there and I walked through the exhibit hall and literally went to every single booth and simply asked the people, what do you do? You know, what does this do? And I was truly mind blown with the granular measurements that are very important that I've, I'd really never contemplated that people are measuring today. And it's available, readily available. And it, you know, they're a cost-effective solution.

Drew: Yeah. The data is so valuable, so very valuable. Yeah, the thing that I was thinking about just now when we were talking about examples of, you know, listening to your building, listening to the people as well, the tenants and operators, but listening to the building, an example like, you know, ideally you'd like for your data to show you that your game room is beyond whatever capacity it needs to be, you know? And people just breathe by it like, oh man, I came here because I really was excited about that amenity right there, but it's always too busy. That pool table's always taken, or just whatever. This is a very, very street level example of what's really out there happening. So you'd much rather hear about it from your system that's sending you that data about occupancy for that particular space versus a tenant who's probably not going to tell you the first time they notice it. It's probably going to take a little bit of irritance before it builds up to a level where they're like, willing to let go.

Bill: You learn it on their exit interview, even worse.

Drew: Exactly, yeah. I thought about something in just the past few days. I was like, I noticed something was wrong somewhere. And it was, you know, it was random. And I was like, I would never take the time to report this. So if I'm not willing to take the time to report it, I'm sure most everybody else is not willing to take the time to report it. So I wonder how long it takes before the person that can make a decision or, you know, can fix this ever even hears about it, more or less, being able to be proactive.

Final Thoughts and Contact Information

Rick Lackey: Yes, yeah, exactly. All right, well, Rick, before we wrap up, we always like to take our guests to what we call the extra floor. It's just a few questions here that are like gut level, whatever the first thing is that comes to your mind, just fire. There's obviously, there's no such thing as a wrong answer. Just what comes to your mind here? Get to know the human side of you. So let's start with this first question. What is the best piece of career or life advice that you think you might've ever received?

Rick Lackey: No question what that is. It's simply the good old golden rule that you do unto others as you'd have them do unto you. But you gotta take it a little step further and really dig down into that statement. Do unto others is the first action step. You have to help the other person first. And you have to help that other person in a measurable way, in the same measure that you'd like them to help you back. So, you know, don't give somebody a ticket to a farm team baseball game if you're wanting to get a million dollar sale.

Drew: Yeah. Well, what's one habit or practice that consistently makes you more effective?

Rick Lackey: Oh, you gotta follow up, must follow up. If you can meet all the people in the world you want, you can hand out as many business cards as you want. You can market as much as you want. But if you don't follow up, you're not gonna get any business.

Bill: All right, last one. Do you consider yourself an early bird or a night owl?

Rick Lackey: I've been both and I'm probably neither now. I'm kind of in the middle, you know. I get up and I have my coffee and I don't sprint out at five o'clock in the morning anymore. And I definitely don't stay up late. But that's just a function of my age, so.

Drew: So Rick, tell our listeners how they can contact you. What's the best way?

Rick Lackey: Well, you know, the best way is probably to check out one of our two commercial real estate networking websites, one being realprofessionalsnetwork.com, the other being crenetwork.com, which is our virtual platform. And you can always call me. My mobile number is 404-550-8700. It has been for a long, long time. And I imagine it will be for a long, long time. And I'm anxious to hear from anybody.

Bill: Well, Drew, that's a new one. We've had many, many, many, many shows and nobody, Rick, has ever had their cell phone number on the show. That's a first. We know you mean business now. That's good.

Drew: Well, yeah, well, you know, like I said.

Bill: I'm impressed.

Rick Lackey: Well, you know, you're just not gonna win any business unless you talk some.

Drew: I understand. It's of significance.

Bill: I understand. Well, thank you, Rick. And thanks to all our listeners. And again, as Drew said at the beginning of the show, don't forget to follow, like, subscribe, and more importantly, share an episode. Find one you like and tell your friend they should listen to it. Or tell a colleague they should be on the show. We'd love to have you. And we'll see you on the next episode of Peak Property Performance.

Drew: We'll see you on the next episode of Peak Property Performance.