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Oct 27, 2021

Andrew Drexler has been a Part of the First National Financial Commercial Team for over 15 years, and has Originated more than $4 billion in Commercial Financing. In 2020 alone, his team funded over $1 billion in Commercial Mortgages, of which $822 million represented transactions in Ontario and $236 million Represented Transactions in Quebec

In this episode we talked about:

  • Andrew’s Bio & Background
  • The Real Estate Market Liquidity
  • Debt Markets and Financing of Projects
  • The Retail Real Estate Outlook
  • Remote VS Onsite Work
  • Real Estate Risks and Opportunities
  • Underwriting Apartment Buildings
  • Condo Development
  • The Student Rental Market
  • Canadian and US Real Estate
  • Mentorship, Resources and Lessons Learned

Useful links:
https://www.linkedin.com/in/andrewdrexler/?originalSubdomain=ca
https://www.firstnational.ca/contact-us

Transcription:

Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time, or at least an in gentlemen, my name Jessica galley, and you're listening to working capital the real estate podcast. Our special guest today is Andrew Drexler. Andrew has been part of the first national financial commercial team for over 20 years.

 

Now, for those of you that don't know first national is one of Canada's largest non-bank mortgage lenders offering both commercial mortgages and resident residential mortgage solutions. And correct me if I'm wrong, Andrew, I believe you said that we're over 10 billion in, in mortgage originations.

 

Andrew (50s): It's going to be pretty close to 10 billion for this year. Yes, we're on the commercial side. It's going to be a very exciting year.

 

Jesse (56s): Well, first of all, thank you so much for coming on. It's it's great that you're being generous with your time. How you doing today?

 

Andrew (1m 2s): My pleasure. Good. Thank you. It's a beautiful fall day in Toronto right now. I love fall. It's my favorite season. So it's a beautiful day

 

Jesse (1m 9s): Transience of that fall season. We get it for such a small amount of time. That makes it so good. Well, it is a, it is false. Yeah, no, absolutely. I appreciate that. It is fall. It's a leaves home opener today. So at least versus Canadians for the hockey fans out there. What we do with, with guests that we have on first and foremost, Andrews, we like listeners to get a little bit of a background into, you know, how you got into the, the real estate space, maybe a little bit of, of your background and how you ended up where you are today.

 

Andrew (1m 44s): Sure. So, you know, I first got introduced to real estate actually, when I came as a 14 year old immigrant to Canada for Romania, with my family. And it was the first time it occurred to me that you have to pay rent to live somewhere. And I thought that was quite interesting. So I guess I went to school at the university of Toronto and upon graduating, I was very fortunate to meet more the co-founder of first national and, you know, he's a legendary figure in our industry.

 

He's been a great mentor for me now for 20 years. And so early on in my career Morty and I were looking after one of our largest clients from Israel who came into Canada and bought a lot of real estate in a very short period of time. And so early on, I was exposed to all the different asset classes and because they were short-staffed here, we did a lot for them, not just the financing, but a lot of the acquisition work and due diligence work, you know, and that gave me a really good understanding of both the equity and the debt side. So it's been, it's been a really amazing ride really for the last 20 years, we've worked on some really exciting deals, mixed use deals, construction loans, and pretty much every asset class.

 

So it's been, it's been quite an interesting last 20 years. We've seen a lot for sure. And you know, I'm excited about where the Canadian industry is. I mean, there, we see a lot of changes, but we also have some challenges going forward. So I think overall though, the industry, the Canadian real estate industry is in a pretty good space

 

Jesse (3m 12s): For sure. And in terms of coming out of the university of Toronto going, you know, meeting, meeting the, you know, the head of first national, was that your first path into real estate or was there, was there other companies that you work for prior to, to first national?

 

Andrew (3m 26s): No, that was my first. That was my first job out of university. It was, I was, I was quite lucky. Actually. I started a business lab in university, which led me to meet somebody who then introduced me to the Maury and went, you know, it, this is how the opportunity came about. And it's been, it's been a great opportunity that I really appreciated, you know, first actually has been just such a gold standard in the mortgage industry, Steven Smith and Moya Taz. And they've done a great job of being at the forefront of innovation. And, you know, like you said earlier, I mean, we're going to be close to $10 billion of new mortgages originated this year on the commercial side, the single family side is, is a leader in its space as well.

 

So we get a really good look at what's going on in the industry, you know, both from the commercial side and the, the, the, I guess the single family side and just the strength and the health of the overall industry. From that perspective,

 

Jesse (4m 18s): I'm curious to ask, I mean, it's not often you have a seasoned vet. That's been with a company like first national from inception in terms of the, the background that you've seen over the years, first National's evolution to, to what the different places that they lend within the capital stack. How has that evolved over your career there?

 

Andrew (4m 36s): So we used to be predominantly an apartment lender on the I'm only going to speak from the commercial side cause that's where, where I work, but we are mostly an apartment lender and now we've become, you know, we do retail, we do office, we do self storage, we do student housing and retirement. We've really become a very balanced lender. This is a time. I mean, there's definitely a lot of liquidity in the markets, both for on the equity side and on the debt side, it's a great time to be a borer. If you have existing assets, it's a very difficult time to be a developer, looking for land, looking for new projects, you know, it's become tougher and tougher to make money in real estate, both buying and developing.

 

But if you do have an existing portfolio, it's a very good time and there's so much liquidity. I don't think I've ever seen this much liquidity in our market, again, both from the, the equity and the debt side.

 

Jesse (5m 28s): So how has the last year, well, almost two years now, this environment that we've, we find ourselves in, how has that, if, if it has at all changed the way that you look at the debt markets, the way that you look at financing of projects, you know, anything different philosophies changed over the, over the last 18 to 24 months?

 

Andrew (5m 51s): You know, it's a good question. So I think we've been surprised at how certain asset classes have held up. I think at, you know, we were worried about apartment owners and, and, you know, we were wondering whether people are going to lose their jobs and not be able to pay their rents. And the apartment sector has held up incredibly well. You know, I mean, the government's done their job to, to support people and then people to their credit have done a great job of maintaining their rent payments and not defaulting there. I think, you know, rebel is had its challenges.

 

You know, obviously people shop differently. Now. I think people are spending less, I think on the office side it's yet to be determined, right? I mean, I, I'm a big believer in the return of the downtowns. I think, you know, we've seen apartment vacancies in the downtown core across Canada go from 0% to 15% almost overnight. I think we're starting to see the return now and nobody's really back at work, but very small people are, people are back in the office. I think that we will go back fairly quickly. I'm so bullish on, on the Canadian major cities.

 

I mean, I just think when I look around the world, I, I wouldn't rather be, I wouldn't be anywhere else really than, than here. So I think there's a big draw from an immigration perspective, economic perspective, our, our political system is good. Are healthcare systems good or universities are good. So I think, you know, Canada will continue to be a strong point of, of, of entry, you know, industrial of course has been booming. And so that's, we all know that everybody's looking for, for industrial space and, and rents and values and land and cap rates.

 

Everything is it's at an all time high cap rates at an all time low, of course. So the Canadian market is held up really well. I, I would say my biggest worry is really more around the retail side. I think the, the office side will rebound and I think the office sector for the most part is owned by very large institutional players that have a deep pockets. I think on the retail side, I'm more concerned about, you know, when you lose the mom and pop tenants and when you see some of the anchors that are maybe downsized or not quite taken up as much space, I'm not sure that there's a long list of replacement tenants that are waiting in the wings.

 

You know, in previous years or decades, there's always somebody new coming out of the U S there's always somebody new coming out of Europe. We just don't seem that anymore. And I'm just worried that that rents probably in the long-term are going to be flat lower than where they are today. And that's assuming the occupancy stays at the level that it's at, but overall the market has been good. I think you certainly put more emphasis now on the strength of the bore and their cashflow abilities. You know, it used to be that somebody got, they had a good net worth, they're good to go, but now it's, you know, they own a bunch of different plazas and they're not quite getting their full, you know, a hundred percent of rent that they used to collect.

 

So can they still support the loan or what happens when their loans roll over? And they start all of a sudden going to a higher interest rate, you know, which is the next point, which is, you know, I do think unfortunately we're in for a, a period of rising interest rates. I do think that everywhere you look, you know, it screams inflation, and eventually that's going to make its way into the interest rate environment. You know, there's talk about one a day data being, being slowed down or reduced at all levels and malt and other, you know, many countries.

 

And I think that that ultimately will put pressure on bond yields to move up, which will result in higher interest rates are interest rates can lead to higher cap rates, you know, maybe a reduction in values. And again, the cash flow is, is a big concern. So we're definitely, stress-testing our borders a little bit more, and we're looking very closely at the ability of the property as well to, to support their, that they plan on taking

 

Jesse (9m 32s): Yeah, in terms of a lot there. But for, for the particular asset class, I'm curious with retail, as you know, we've seen, I think whether in the states, whether it's 26 or 27 square feet per person per capita, and we're somewhere 16 and then, you know, European countries, sub 10. So all that to say that we, you know, a lot of real estate or retail, I think that even prior to COVID, we, we knew it was overbuilt, but now really getting granular. And the ones that at least we see is that the grocery anchored or the good anchor tenant malls or areas experiential areas I think are going to be positive.

 

But when it comes to you looking at retail as an asset class, are you looking, you know, with much more emphasis on the credit worthiness of, of the tenants and what that tenant profile looks like?

 

Andrew (10m 21s): Yeah. I think it's, it's the long-term stability of that tenant and trying to anticipate what their long-term needs are going to be. So, you know, when I look at a Canadian tire, when I look at a Walmart, Walmart, which used to be obviously the gold standard, and you have one of those in your Plaza and don't even have to worry about the rest of the tenant roster. I think you, you try to say now, well, where would they be in five years? Do they still need that kind of footprint? Is there a chance that, you know, we're competing with their own sites and they go somewhere else because they need more or less, you know?

 

And then when you look at the, the, the rest of the tenants and you look at their rents and you even look at the renewal rates, like, are they really going to be getting those rents? You know, considering that, you know, they spend more on cleaning, they spend more on staff, they're doing a little bit less business than they used to. You know, certainly if you go into the mall and all of a sudden you're allowing two people per store, four people per store, you know, what does that do to their bottom line? It's got to impacted, right? And then you add in, again, the extra cleaning Dexter wages, certainly the profit is going to be decreasing.

 

You start thinking about supply chain issues, you know, where they're getting their, their items that they're selling their merchandise. Does that cost them more? Are they still able to get it on time again, that affects their profit, which ultimately for them to stay afloat, do you need to come back to your landlord and say, Hey, I'm sorry, guys. I want to stay open, but I need to pay a little bit less. So I think it's more about not just happens right now, but it's really what happens two to five years from now. That's really important from a tenant by tenant perspective.

 

Jesse (11m 56s): Yeah. That makes sense. In moving over onto that office side, do you, do you, well, I'll say this, do you subscribe to the, this, this idea? I think I'm, I'm partial to, I'm also, you know, obviously biased in, in the Toronto downtown market, but the idea that I think that 24 hour cities are going to come back, whether it's the new Yorks, the Las Vancouver, Toronto, I think suburban offices have held up decently. I think it's, it's a lot of the mid tier, you know, the, the class B class C in mid markets that I think are going to be the questionable questionable office is the ones that aren't connected to the suburbs through transportation.

 

Like you just, you know, having a car and the ones that aren't downtown connected via all the transit that we have here. What are your thoughts on that?

 

Andrew (12m 43s): You know, for me, the question is about when people are going to feel comfortable being on public transit, right? So I'm a huge believer in that downtown. I'm a huge believer in, in, you know, not just the hybrid model, but a return to work model, because I truly think people need to be around others to brainstorm, to be more creative, to be more productive. I know we've all been very productive for the last year and a half, but the reality is everything's been shut down. You've had nothing to do blood work, you know, but now as things open up, you know, it's easy to, to, you know, not feel as, you know, energetic or enthusiastic plus you've been, you've been locked up at home for awhile.

 

You know, when you come into the office, is it just a certain level of energy that, that kicks in, right. And I think for the young people, not that, that I'm so old, but for the young people, you really need to be around to hear what's going on, to learn about deals, to learn about what's going on in the market. You just don't get that from the home. And so I do think the office market will come back strongly in the downtowns across Canada. I just, for me, the question is more, is this six months? Is it a year, is a year and a half. And I think the answer depends on when will people feel comfortable being on transit.

 

Cause you know, everybody thinks they're going to drive into work. I tell you I live 15 minutes away and it takes me 45 minutes now to drive in with 5% of the people being downtown. And so once everybody's back to work, it's just no chance I'm doing a drive in and out of downtown. So, but I I'm a such a believer in the return of the downtowns and, and it goes the same for buildings, right? I mean, people are not going to be working, living in the suburbs for the rest of their lives. You know, if you have family, that's a different story, but the young people, again, who may be moved home or, or bought a place for our way that I just think they'll, they'll want to come back into the downtown, you know, and once their friends are back and the energy's back, you want to be in and around the downtown.

 

And you know, that will signify the return of that 24 hour city that you're talking about.

 

Jesse (14m 38s): Yeah. I think that's born out by most of our experience that we've had with our office. We've, we've opened in October, so not too long ago, officially on, on kind of a rotational basis. And there's definitely that feeling that vibe, you know, just kind of interoffice sports are kind of slowly coming back. And I really felt during COVID or that at least the beginning, I really felt for the individuals that were associates and analysts just coming into our industry only, you know, the time where you should be making the most connections speaking with the most people, they were kind of forced to be at home during that time.

 

Andrew (15m 12s): Yeah. It's very difficult that you just can't learn the same way when you're at home. You know, you try, I mean, I have a team of analysts and you know, we try to get them on calls. You're calling your client, you get them on, but sometimes you don't get the client, you hang up, they call you back. You can't quite just say, hang on, let me put my house on line. And these are learning opportunities where you just around people and you learn, I mean, I've learned so much by, you know, the, the predecessors or the people that are still our company that had been there before me just listening to them. You know, that's how you learn how to talk to clients. You learn what to say, what not to say, you know, you learn about stuff that's going on in the market.

 

I mean, these are really valuable things that I really hope that the young people see the value in that. And they forget that it's been easy to work in your jogging pants and, you know, get a workout in, in the middle of the day. But hopefully you'll you realize that the importance of, of being in the office?

 

Jesse (15m 59s): Yeah. I think the interface, zoom, whatever it is, teams it's, they've got, they've done well, but there's definitely those subtleties. I, in terms of, you know, you mentioned interest rates, you know, I think it kind of went under reported with the fed kind of decoupling their, their target inflation. I'm I'm assuming I, I should be, I should be more up on this for the Canadian side of things, but I assume that we will follow something similar to what what's going on in the states right now you mentioned inflation and, and as a result of eventual, upward pressure on interest rates, how do you view, how do you analyze that?

 

How do you approach that when from a, from a lending point of view?

 

Andrew (16m 39s): So I think the challenges with the construction projects, you know, where you have, you're trying to underwrite the future value of the asset upon completion. And you're trying to peg a certain interest rate, a certain ceiling rates that you cannot exceed. So you're structuring your construction financing based on the end value. When you have a certain rate that you can't, when you convert to the term that you cannot exceed. And so, you know, the challenge with, with apartment construction is that the projects take so much longer than they used to.

 

You know, you start off with approval is taking years now, too. So the pre-development takes a lot longer. The construction is taking longer and you know, whether it's COVID related, whether it's supply global supply chain, disruptions related, you know, everything is taking longer. And so, you know, now you're looking at a project that could be five, six years before you get to completion. So we're essentially trying to peg where the interest rates are going to be in five or six years, because that's what we've tied our construction loan to. So I think that's, to me where I have the biggest concerns, we mitigate that by saying, you know, we're really just focusing on large bores that have liquid assets and very good cash flow in their portfolio.

 

But a lot of these apartment projects are getting to be very significant. I mean, we're doing projects that are, you know, $200 million upwards of $200 million. That's a lot of exposure. You know, you have a, a 50% basis point 50 basis point rise in interest rates, which could impact your cap rate by 25 basis points. You know, that's a lot of, that's a, that's a big value of sling. And I think if you try to say, look, you know, we're going to increase the interest rate in our underwriting by 50 basis points per year. Or if you're trying to Peggy at five years out, that's two and a half percent.

 

There's no chance that anything today is going to cover. So it's, it's a bit of a balance, right? But I think the biggest challenges in the multifamily sector, I think, you know, industrial, not so much office, but industrial and retail, usually construction is a lot shorter. And usually you have your leases done right at the beginning. So you don't even have to worry about leasing risk at the end. So it's merely just pegging your construction risk and then how quickly you can turn out the debt. But I think apartments though, you do have some, some serious interest rate.

 

Jesse (18m 53s): Yeah. At least with industrial construction too. I mean, it's a slab of concrete at, at a certain point. And the, the, the construction itself is simpler. I'm curious, Andrew, when it comes to the underwriting of apartment buildings, for those that don't know that the Canadian market is a bit unique, especially in comparison to the states. A lot of our apartments stock is older stock in terms of the actual, when, you know, when you hear that there's a class, a class apartments in whether, you know, it's in Miami or Boston, we really started building a class not very long ago.

 

So the projects that, that you would finance or that you would look at geographically, where do you find them clustering and what type of, what type of assets in the apartments fear are you financing? Are you lending on?

 

Andrew (19m 40s): So there it's our asset class that, that transacts the most. So there is a lot of capital chasing apartments. So the existing portfolios are being bought the existing older buildings. There there's a lot of demand for them. There are a lot of international players that are a lot of Canadian REITs. There are a lot of wealthy families and investors that are still looking to acquire multi reds in Canada. And so that's good because you know where your debt is today, and it's been very cheap.

 

And so you can lock into a 10 year rate and still get some pretty attractive returns. We send a lot of new rental development over the past five years. And the reason for that is because, you know, it used to be that interest rates were high and rents were low, right? We had rent control for many years and there was no incentive to build apartment buildings. And like you said, the apartment stock in our country is very old and we hadn't had new construction for a very long time. And so the shift happened when interest rates started going lower and lower to the point where we were at historically low levels, the financing environment became a lot more conducive to new development.

 

And a key part for me was that the tenant profile had changed. So tenants right now, whether you're dealing with retirees cashing in, on their home equity, young professionals that either can't afford or don't want to buy a house right now, or international students, these are very sophisticated pennants that have said, you know, I want a nice building. I want a superior HVAC system. I want amenities like rooftop, patios, and barbecue areas where we can entertain friends. I want gyms in our building. And so this level of demand from the tenants has driven the, the, the, the increase in supply of new apartment buildings.

 

Now, not all new apartments have been luxury. You know, we've built, you know, call it no frills, new apartment buildings as well. You know, new apartment buildings that maybe don't have the same level of amenities. And we've built those, not just in the major cities, on the major transit nodes, but on the outskirts as well. And so those have been really well received. So I think to your point, our rental stock is very old. And anything new that has been brought into the market has been received very well, because there are lots of people that have the ability to pay more for their rent and want to live in nice places.

 

And, you know, frankly, the units have gotten smaller, but that's okay because you live in a brand new, beautiful building. And again, you have these great amenities and you have people over, they're not going to be in your, an apartment. They're going to be in the, in the common areas. And so we've seen a lot of new developments in, in that sector. The challenge now is will that continue going forward? And I think, you know, the demand side is definitely there. I think the challenge is in those risks that we're talking about, namely interest rate risks, the fact that the projects have taken longer, they're becoming bigger.

 

And with the construction costs today, escalating rapidly, you know, the returns are now getting to that point where they don't really make sense. And so this all leads to this affordability crisis that we have in Canada, which is both the home ownership, we're home on affordability issue and the lack of affordability on the rental side. And the challenge is that people don't understand that the issue is a supply issue. It's not a matter of cap, the rents, you can increase rents anymore, or you can't get rid of and evictions.

 

It's not that the issue is that we don't have enough supply and pre COVID. We were pretty close to 0% vacancy rate across the country. Most cities we're going to get there again, as soon as immigration opens up, as soon as the international students are coming back, as soon as people come back into downtowns to the office, that vacancy rate goes back to zero. And yet here we are with facing a, an, an affordability issue again. And so we need to find a way to solve that.

 

Jesse (23m 28s): Yeah, I think that is kind of the knee, knee jerk reaction. It's it's these symptoms. I think of the problem that you, you go to like rent evictions or these, these type of things where it's it's, the constraint is supply. And I I'd like to get your thoughts just on the, the history, at least of our market. A lot of it has been this shadow market of condo development, being a proxy or a replacement for what should be purpose-built apartment buildings, people that are fully intending on, on renting. Is that, is that dynamic, do you think that's still happening and will happen between the two asset classes and maybe just a follow-up to that?

 

If so, is that because of the, the ability to build condos is regulatorily easier than, than a purpose-built right now,

 

Andrew (24m 18s): I'd say that's a complicated question. So I think traditionally, it was easier to do condos because, you know, you would pre-sell, you would have a certain profit built in there and then you'd go get your financing. And then you start construction. You also had a very level of construction industry where costs were an escalating, like they are today. And your, your development timeframe was a lot shorter than it is today. So it was fairly cookie cutter in that once you, the risk was in picking a site in and getting the pre-sales done, once you did your pre-sales and you locked in your profit, then it was just a matter of building it out.

 

And it was fairly straightforward. The challenge now on the condo side is that, you know, as a lender, I don't even know if I want our borders to pre-sale or to pre-sell the full, you know, 75 or 80% of the building to cover a loan because frankly cost escalations are so high that it's going to eat them through their profit pretty quickly. And then I don't really want them losing their motivation halfway through the project where we funded half. And now all of a sudden there's no profit left. So it's, it's very challenging as a lender to decide, you know, what do you want, do you want pre-sales or not?

 

Having said that the price is the sale price is seemed to continue to escalate and costs are not slowing down. And, but the, the sales side is not slowing down either. So you're seeing sale prices per square foot that are getting higher and higher in Toronto. So condo projects right now still make sense. The challenge is that the rental side no longer makes sense. And so we need to find a way to continue to enhance, you know, entice, I guess, developers to build the, you know, rental product because we need it.

 

But I think the difference between the two, I mean, personally, I would rather be in a, in a purpose still rent the building. You've got professional management, you've got a building full of renters that are going to be there. Long-term with the condos, there's constant turnover. People aren't as careful with the buildings, you know, it's just not the same crowd, but having said that they both been successful. And so that tells you that there's a lot of demand for whether it's condos or whether it's new rentals. The idea is that people want to live in newer, nicer buildings with nicer amenities.

 

And so right now the condo market seems to be really strong. Again, the rental market seems to be picking up as well again. And I think longterm they're both going to continue to be successful. The challenge is, will there be enough enticement to the developers to build rental, or are people all just going to, to condos now and be selling that because you can still make it work from a condo perspective.

 

Jesse (26m 49s): And as, as asset value is safer, multifamily increase and, and net operating income also continues to increase. Where do we hit that point of like that unaffordable point? And I guess more importantly from a policy perspective, w what do we do to, to ameliorate that aspect of, of what looks like the direction our market's going in?

 

Andrew (27m 12s): So I think the challenge is, so right now you have a federal government that has a very strong immigration platform, which is great for the economy, which is great for housing. It's really good all around. I mean, you know, as a, as a fellow immigrant, I know that people come here because they want a better life, right? So they come and they want to work hard and they want to, you know, own something, their house or a business. And so it adds a lot of value to the economy. So you want to continue to encourage that. So the federal government has done that. They're also offering financing through groups like CMAT, you know, to encourage development, the provinces are doing their part because they're giving grants at different levels.

 

And the municipalities are trying as well. They're, they're waiving development charges for affordable units. They're waiving taxes. The problem is that they're operating independently. And as a group, they need to come together to, to sacrifice a little bit more to say, what is it that we can each give up in order to balance the equation that the developers have? Because right now, what the government is offering is not enough to support for the development. I mean, these developers are building two, three, 4% cap rates.

 

And again, with the longer timeframe, and you were saying five, six years, by the time you're fully leased, that's a lot of time to wait and a lot of risks from an interest rate perspective and cap rate perspective and ultimately valuation perspective. So, you know, if it's barely interesting right now for developer to build, and they're only doing two or three, 4% cap rate, and that's assuming that everything pans out, you're just going to lose them, right? And so what can we do? We need to come together. We need to shorten from a municipal perspective, we need the shorter shorten approval times, you know, approve or reject an application within six months.

 

It can take two years, you know, maybe entice them, give them more density, but they have to build a certain amount affordable. But then you waive development charges on the full building, not just on the units that are affordable. Maybe you wave Realty taxes on the whole building, not just on the affordable units. These are things that, that have to happen in order for us to, to stimulate development. I mean, ultimately, look, if you're a developer, you have two sides of the equation, right? You have the development side, which right now costs are through the roof, and you need to reduce that.

 

And so from a government perspective, you can only help with agency self-assessment tax, where you can help out by waving or reducing development charges, or by, by maybe subsidizing land. But then once it's built on the operational side, if you're trying to put a cap on the rent that they can charge, and you're trying to entice them to reduce the rent to an affordable level, you have certain expense line items that can be adjusted. You can't adjust, you can't adjust insurance, which is going through the roof as well. You can't adjust wages.

 

I mean, again, huge inflationary pressures on wages and the staff. And so the only thing you can do is you can adjust Realty taxes, which is the municipality. So this is my point. Like the, you have to look at both sides, the development costs and the operational side, and, and is at all levels of government, we have to come together and we have to piece it to then entice these developers to provide more housing, which then in turn will, will alleviate your, your housing problem.

 

Jesse (30m 28s): Yeah, that's interesting because even on the office side, I think they've phased most of them out, but the tiger grants that we have where we're the tax incremental aspects of, of basically assisting whether it was developers or large tendencies with, with the tax piece, it's like, that's only one piece of the equation. And it's funny, we had, we had John Love on the program and other, you know, big name in Canadian commercial real estate, who said the same thing. It was a coordination problem with, with the different provinces that, you know, people need to be talking collectively and, and the federal government and the provinces need to need to work at this project.

 

Not, not unilaterally, but together. I'm curious if you want to pivot to an asset class. That was how I got started into, into the industry. And I know it's something that I wanted to chat with you about on the student residence, a student rental market in general, I think at the beginning of COVID just like you were mentioning before with our thoughts that apartments might be, you know, might be in trouble. And then it turns out they did pretty well compared to the comparatively. My first thought was when this happened, the first few months was that student rentals were going to get hit the hardest, just in, just in virtue of the nature of the pandemic.

 

How, how has the student rental market been, what, what has been the experience that you've seen over the last year or two?

 

Andrew (31m 47s): You know, I think as an asset class, they struggled a little bit and, and frankly, you know, they did because all of a sudden they had no students, right. And, and in the privately owned residences, you know, people stayed in, they weren't sure if they should go home or not. I think in the ones that were either owned by a university or managed by a university, you know, they allowed people to leave and basically let them walk out of their leases. But that's, to me was a shorter blimp. I mean, I absolutely love this asset class. I think it's got the most upside in, in Canadian real estate, you know, student housing to me, you know, when you think of it back when you're younger than me, but when we used to go to school, it was cinder blocks.

 

It was ugly buildings. It was, you know, poor locations, you know, the, the knock on it was you had eight month leases and you had kids that would just trash the place, right. I mean, that is completely gone. Now, you know, we do so much student housing at first Nash. Then I tell you, these buildings are unbelievable. I mean, you'll have, first of all, the wifi, capacity's huge. And it's the number one, you know, by far most important element in, in the decision of a, of a student. So that's different. They have amenities like gyms and, and, you know, again, these rooftop patios and study rooms and indoor parking and 24 hour security.

 

So that's from a tenant perspective, it's a dream they're located very close to campus in most cases. And from an operational perspective, I mean, these kids are now, they realize how lucky they are to be in those places. Their 12 month leases, they have parental guarantees. Sometimes they have cross tenant guarantees. So there's no issues with damage. And, and from a demand perspective, there's so much demand, you know, we have, we're, Canada's huge for international students. You know, I'm not sure if you know, but there, I think that the number is 5 million international students and Canada's third behind the U S and Australia.

 

Our education system is amazing. Our universities are ranked really well in the world. And so there's a lot of demand for these universities. Most of the students that are coming in have money there for them, whether they're paying $750 per month or $800, it doesn't really move the needle too much. And so you have really strong demand and equally important is the fact that it's the one asset class that is a great protection for inflation, right? Because you have 50% turnover every year.

 

And so unlike retail or industrial or office where you're locked into long-term leases for apartments, where you're maybe five to 10% turnover per year in student housing, you get 50% turnover. So it's the only asset class that allows you to truly capture the inflation should that materialize. So I think from a demand perspective, you're good from an operational perspective, you're good from a inflation perspective, you good? So I I'm very bullish on, on student housing and the quality of these purpose-built buildings are very high.

 

I mean, as a, as a parent, I can tell you that if my choice was a basement apartment for my kids with three other friends or one of those buildings, it's a no brainer we try to take and I'd be happy to pay more.

 

Jesse (34m 53s): Yeah, for sure. And I think when I started investing, it was in Waterloo. I went to school out there and that was, I think, kind of when I was finishing, they started to build these purpose built and, you know, pool rooms, gyms, like, eh, like everything you're describing here. And then the other piece is even compared to, in juxtaposition to regular apartments, where you have tenants that will stay in because we still have rent stabilization in Ontario or rent control in Ontario, you have the turnover. So you have the natural mark to market with, with the rents with student rentals that I think gets overlooked probably through the haze of this idea that students are just trashing these places, which it, you know, if you see, if you see the way that they're built today is not the case.

 

I'm curious when you are for student rentals, because you see a lot of these companies in, in the, in the states and in Canada that are signing up, sorry, they're, they're buying properties, they're developing them. And then they're actually taking on the property management of the companies. Is that, is that something that's being looked at holistically when you're underwriting those deals?

 

Andrew (35m 59s): Yeah. I mean, look much like seniors, housing, student housing is very much an operational business. So, you know, as much as I love the asset class, I think the caveat is you have to know what you're doing from an operational perspective. I mean, there's a different level of rapport you have to have with your tenants. You interact a lot more. They're very spontaneous. They want things immediately, right? Like they can't, I have a request for something to be fixed and you get two days later, it has to be immediate. You have to address things right away. So there's a different dynamic with your tenants at the same time.

 

Look, you are getting substantially higher rents because of this. So there's very much an operational component to the business. And I think the good operators don't know how to do that. And they can create synergies, especially if they have a larger portfolio. And so that's really important. So we do look at who the operator is, and it does make a difference that, you know, you're not a one-off and you understand what it's like to be and manage that asset class. You know, I think the more and more we're seeing consolidation in that as well.

 

I mean, we're, we're, you know, we're happy to have, you know, aligned with some Woodburn who are the top two operators in that field, and we can see how great they are managing their portfolio, because they understand again, how to manage. And they create synergies by having so many buildings in that, you know, a new player out of the U S Harrison street there they're coming in as well. And they've had experienced operating student housing in the U S so you're starting to see international interest in this asset class. You know, there's, there's squad Rio there, RBC, there are people that are large Canadian institutional investors, CPP, you know, who have large international portfolios, and they've never come into the Canadian market because it was too fragmented and it was too small.

 

And you know, now that there'll be some amalgamation now that you're starting to see players develop bigger portfolios, I think there'll be more interest because somebody that's large can come in and buy a large portfolio versus the one-off, which again is not going to move the needle. So, you know, again, I love the asset class, but I think it's, it's really important to understand the operational aspect of it, to know that what you, you know, when you're going into it, you need really need to know what you're, what you're doing and how you're dealing with

 

Jesse (38m 13s): On the, on the construction side for, for student rental, are you seeing companies that are building completely from scratch in some of these towns or, or actually buying existing existing properties and, and converting the use or, or, you know, changing something to student residents, whether that's complete change of use or just adding to the existing?

 

Andrew (38m 34s): Yeah, I think all of the above, you know, we've seen traditionally, it's been the one-off developers that have built, and then they've sold, you know, to the larger players, like the likes of Woodburn and align best. We're seeing these companies partner up with developers now as well for future developments. We have seen, you know, people come in and buy finished products with the hope that they'll be able to acquire more in that market. I mean, there are certain markets that, you know, certainly Waterloo has had a lot of development.

 

Kingston near Queens has had a lot of development. Toronto has had a lot of development, you know, I think though for the most part, what people don't understand is that these universities are full and the buildings, the good quality buildings are full as well. And so if you're building a good project, I don't think there's a risk for over-saturation. You know, I'm not worried about what a loo being oversaturated, because when you look at the enrollment, it's increasing substantially every year, and these kids again are coming from abroad, or they're coming from Toronto, or they come from Montreal, they come from other cities, they're there for the quality of the university.

 

And they're gonna pay if they're paying so much for tuition, they're certainly going to pay an extra a hundred dollars a month to live in a brand new purpose-built building over a, you know, an old basement apartment. So I think the good quality buildings in these places are full and the good operators know how to run them, to keep them full. So I'm, I, I do believe that that this will continue. You know, the other thing is some of the universities own buildings on campus, but they're old buildings, you know, they need retrofitting and to do that, you need to really gut them.

 

You need to empty them and got them and start them almost, you know, from the beginning, which means there's a, they're gonna decrease supply. Right. Which means that you're going to need more, you know, off-campus supplies. So that, that helps as well. The markets.

 

Jesse (40m 29s): Yeah, for sure. Andrew, we have four questions. We ask every guests at the end of the show and want to be conscientious of your time before we, before we get into that, we'd just love your thoughts on, on where you see opportunity in maybe the, the short to mid term in, in whether it's Canadian market us, you pick,

 

Andrew (40m 50s): I would say the only asset class that I really like is the one we just talked about, student housing. I just, I liked the protection against inflation. And I liked the fact that your tenants are not rent sensitive. I would say that is probably my only real opportunity. I mean, I still like multi-racial development providing that it's in the right markets and you have a very longterm outlook on it. You know, I don't think you should be building an apartment building if you have a five-year timeframe.

 

I think if you're a generational investor and you're building good quality real estate, that you're gonna pass through generations, I still like rent a multifamily, but you know, if you're just buying for the short term, I don't like it as much.

 

Jesse (41m 35s): Gotcha. All right, Andrew, if you're good to go with these all, I'll fire them off at. Yeah. All

 

Andrew (41m 40s): Right. Let's see it.

 

Jesse (41m 42s): Okay. What is something that, you know, now in your career, it can be in first national or, or business in general, you wish you knew when you, when you got started in this industry,

 

Andrew (41m 55s): You know, I would say understanding the, you need to add value to be properly compensated. And I would say, you know, don't be afraid to ask, to get paid, providing the, you add value. You know, most people, you know, they're always uncomfortable too. And I was too, too, oh, I got to talk about fees now. Well, that's who I got to ask to get paid, but you know what? I've come to realize over the years, if you truly add value, you should get compensated for, for your services.

 

You know, nobody works for free and you know, you should get paid. But the key though is understand how you add value. So understand who you're dealing with and what it is that you can provide to make that person, that company, that board, that developer better, you know, how do you enhance their life? To me, it's about, you know, making people money, saving the money and mitigating the risks. You know, these are the, this is sort of the mantra I live by. You know, when I talk to somebody it's like, can I help you make more money? Can I help you save money? And can I help mitigate your risk?

 

If you do these things, you're adding value. And if you add value, I think you should get properly compensated for it.

 

Jesse (43m 2s): What does mentorship mean to you? And what would you, what piece of advice would you give the younger individuals coming into our industry?

 

Andrew (43m 11s): You know, mentorship for me was huge. I mean, you know, everything I know in this industry started with Maury and I am forever grateful for, for his mentorship and his guidance and his, you know, introduction to people and watching him, you know, how he talked and how he dealt with people. It was, it was really useful for me. I think as a young person, you know, try really hard to be around good people and try to listen as much as you can. You know, there's so much knowledge and the people that had been around in the industry for a long time, they have so much knowledge, you know, of how deals work of real estate of just so many tidbits that you can pick up along the way.

 

I would say, if he can really put yourself in an office that's surrounded by and surround yourself with good people, you know, really do that, which is why I'm so adamant about people coming back to work. Cause I think that's the only way you can really learn. You know, you're not going to learn by being on a team skull, you know, you need to be there in person. So surround yourself with good people and just be a sponge, try to learn as much as you can also have a really long term outlook. You know, don't focus too much on what am I going to get paid today? You know, what's my job title today. Think about, you know, what is it that you can learn and are you around good people?

 

Because if you are, then you're going to learn a lot and you're going to, you know, benefit more in the long run. That's

 

Jesse (44m 33s): Great. What a book recommendation would, would you be able to give our listeners, we can put it up in the show notes,

 

Andrew (44m 41s): Huh? Atlas drug, but that's about a thousand pages and that takes a really long time.

 

Jesse (44m 47s): That's hilarious. I, that is the first we've gotten that. That's a, that's pretty good. And that is a long one though.

 

Andrew (44m 53s): You know, I, I thought the Steve jobs book was interested in the way he constantly challenged the status quo. You know, whether you like them or didn't like him as a person, I just loved the creativity and the ability to constantly challenge that I'm not satisfied with this, make it better. I want this. And every idea of his was always challenged and questioned, but that's how you create new things. Amazing things.

 

Jesse (45m 16s): I'll take us a month to make, okay, we need it next week. Last question. The, a nice softball first car make and model

 

Andrew (45m 26s): A Ford tempo, Ford

 

Jesse (45m 28s): Tempo. I

 

Andrew (45m 29s): Like it.

 

Jesse (45m 31s): That's funny. We had a, we had a Ford Fairlane on which I think, I think it was a car that my dad drove back in the seventies, but that's the first Ford tempo right on Andrew for first of all, thank you so much for coming on for individuals that if they're in the area or want to reach out connect, where's the best place for them to go

 

Andrew (45m 51s): LinkedIn or the first national website? My contact is there,

 

Jesse (45m 55s): I guess today has been Andrew Drexler. Andrew, thank you for being part of working capital.

 

Andrew (45m 60s): My pleasure, Jesse. Thank you.

 

Jesse (46m 9s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you liked the episode, head on to iTunes and leave us a five star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one. Take care.