What's Working with Spencer Patton

Spencer Patton is based in Atlanta as a partner in ICM Asset Managment. The company is headquartered in Calgary and invests in both Canadian and US projects. On today's show we are talking about the macro challenges facing the industry and where the opportunities are emerging. They currently have about $2B in assets under management. To connect with Spencer, email him at [email protected] or visit the website at icmassetmanagement.com -------------- **Real Estate Espresso Podcast:** Spotify: [The Real Estate Espresso Podcast](https://open.spotify.com/show/3GvtwRmTq4r3es8cbw8jW0?si=c75ea506a6694ef1) iTunes: [The Real Estate Espresso Podcast](https://podcasts.apple.com/ca/podcast/the-real-estate-espresso-podcast/id1340482613) Website: [www.victorjm.com http://www.victorjm.com/](http://www.victorjm.com http://www.victorjm.com/) LinkedIn: [Victor Menasce](http://www.linkedin.com/in/vmenasce) YouTube: [The Real Estate Espresso Podcast](http://www.youtube.com/@victorjmenasce6734) Facebook: [www.facebook.com/realestateespresso](http://www.facebook.com/realestateespresso) http://www.facebook.com/realestateespresso%5D(http://www.facebook.com/realestateespresso) Email: [[email protected] mailto:[email protected]](mailto:[email protected] mailto:[email protected]) **Y Street Capital:** Website: [www.ystreetcapital.com http://www.ystreetcapital.com/](http://www.ystreetcapital.com http://www.ystreetcapital.com/) Facebook: [www.facebook.com/YStreetCapital](https://www.facebook.com/YStreetCapital) http://www.facebook.com/YStreetCapital%5D(https://www.facebook.com/YStreetCapital) Instagram: [@ystreetcapital](http://www.instagram.com/ystreetcapital)

• 0:01Speaker 00

  Welcome to the Real Estate Espresso Podcast. Your morning shot of what's new in the world of real estate investing. I'm your host Victor Manash. This is the weekend edition where we interview notable people from the world of real estate investing. Today is no exception. We have a great guest all the way from Atlanta, Georgia. Welcome to the show Spencer Patton.

• 0:16Speaker 01

  How are you? Thanks for having me.

• 0:18Speaker 00

  Well, great to have you here. You were here on the show, gosh, about nine months ago. Lots happened. The world has changed even in that short time period and excited to get an update, but maybe for the folks who haven't met you yet, give a little bit of your backstory and how you got to this point in your journey.

• 0:33Speaker 01

  That'd be great. Thank you again for having me. So I'm a partner and managing director with a company called ICM Asset Managment. We are headquartered in Calgary in Alberta, province of Western Canada. We invest in real estate in Canada, the United States and Mexico. I'm the partner responsible for our US efforts. We've got a couple of billion in equity under management. We have three other verticals, but real estate is the primary driver of where we focus our efforts. I sit in Atlanta, our deal team and execution team sit in Atlanta, and we tend to focus on the Sunbelt because that's where we believe the most interesting opportunities exist.

• 1:17Speaker 00

  We've seen a lot of markets become oversupplied. A lot of Sunbelt markets get oversupplied, especially with residential, the poster childs, of course, Austin, Texas, Nashville, Phoenix, Dallas, San Antonio, Houston, going down the list. How is that amongst the other headwinds affecting your investment thesis? What are you seeing?

• 1:40Speaker 01

  Well, it's interesting. We have an active multifamily platform in Canada, which feels none of the headwinds that you just referenced. It doesn't mean that they don't have challenges, but debt is very reasonably priced up there. They don't have the development community aggressiveness that has traditionally existed in the United States. And so while we certainly have issues that we have to address, we, the oversupply component is much smaller impact, relatively speaking. As I said, we really like the markets that you just referenced. People want to live there. They tend to be in states that are generally well-run, pro-business,

• 2:23Speaker 01

  traditionally have been affordable. You mentioned Austin. This was an interesting discussion I had in the last month with some friends there. They are developers. They can buy five-year-old vintage or younger product for five to 25% below replacement cost. And their argument was if you look at historical growth in Austin over the last 25 years, if Austin just returns to the norm, buying those projects, you're going to make a very nice total return. The challenge in that thesis is when does Austin or Nashville or Phoenix return to the norm? All of those markets you referenced are generally easy to develop

• 3:08Speaker 01

  in, relatively speaking. How do you address that? I think development is a strange place to be for the foreseeable future with uncertainty around construction costs, inflation. If you had asked me this question in December, were we going to see rate cuts or rate increases this year? I would have said rate cuts. Obviously, we just had a rate increase. I think we probably are in store for at least another one, if not a couple. And so that puts real pressure on development. And I do think the US economy is remarkably resilient in spite of all the headwinds that we face. And so I think if you can find the right investment opportunities

• 3:52Speaker 01

  in those Sunbelt markets, you're going to have some nice total return potential. It may take a little longer, you know, the two to four-year buy it, fix it up, flip it. It may take a little longer to hit those return expectations, but I would not be afraid of pursuing something in those markets. We may not be at bottom, but we certainly are pretty close.

• 4:15Speaker 00

  To pick up on the comparison between the US and Canada, you have markets like Austin, Houston, where vacancy rates are in the, in the teens, you know, 12, 14%, depending on part of town. Those are numbers that are just eye-watering. If we had in Canada, if a city gets to 3%, people are starting to panic. And yet, 3% would be considered fully stabilized, like that would be considered a tight market in the US. And in Canada, it's almost considered oversupply. So it's a very big difference in perspective between those two. Are you seeing that the same way?

• 4:52Speaker 01

  We are. But, but interestingly enough, is, is Canada is more stable, just generally speaking. They have the same underlying housing challenges, though. They have more people that need homes than they have homes. Affordability remains central to everything, every discussion you have. We're, we're doing some projects right now in Canmore, which is a resort community.

• 5:19Speaker 00

  Love Canmore.

• 5:19Speaker 01

  It's fabulous. But those are townhomes, but there has been a number of discussions around affordability and what you need. And so the good news is, is you don't have a glut of supply. So if you can get it approved, you generally have less competition. And that's not to suggest that Canada isn't competitive. It's very competitive. It's just a different kind of competition.

• 5:47Speaker 00

  Well, in fact, you mentioned Canmore. So let's, let's zero in on that because I think there's some powerful lessons. You know, the good news about, if I pick something at the opposite end of the spectrum, someplace like Houston, the good news is, for Houston, is it's easy to get anything built. The bad news is, it's easy to get anything built. And so it has this tendency to be perennially oversupplied. Canmore is outside the front gates of Banff National Park. You have a moratorium on century development within the national park. And Canmore is a smaller town, but yet you still have 5 million visitors a year coming through the front gates of the park. So there is a supply-demand imbalance, and that is an issue. And so if you can get it built, it'll fill up no matter what.

• 6:32Speaker 01

  That's our thesis, obviously. One of the challenges that exists, though, in a place like Canmore is pace. Houston, I, you know, my wife's from Houston, my father-in-law and in-laws live there. I'm a fan. They have growth. They have people moving to the community. And so while they have more choice, there, there are people who want to come to Houston to live. And Houston may not be as sexy or as interesting as Nashville or Austin is an example, but that growth helps offset that supply. And I do think markets in the United States traditionally have calibrated faster. Over the last 10 years, we've seen

• 7:13Speaker 01

  those cycles shrink in terms of how quickly you see the ups and the downs. The odd thing to me about right now in the States is there are so many macro factors that are outside of our control as real estate investors, owners, operators, developers. For the first time in a long time, it's hard to think about how to, to address that. You know, if it were just a rising interest rate environment, or if it were just a conflict over oil, maybe you could find some ways around that. I mean, for the first time in our lives, we have a $40 trillion national deficit. People are actually starting to think about that and talk about it as opposed to kicking the proverbial can down the street. But all of that puts

• 7:58Speaker 01

  pressure on how we do business. You know, we, we, you look at the short-term spreads and bond yields, and they still think we're 100 basis points too low on the Fed funds rate. And, and so even if Iran ended tomorrow and inflation softened considerably, I still think we're in for just some real choppiness and uncertainty as it relates to that. So we really like residential and we really like industrial in the States. Those are the two asset classes that we're focused on. We think industrial is interesting regardless of, of everything that I just laid out, because we continue to be a consumer-driven society. So we are looking at both development and existing opportunities, asset opportunities.

• 8:43Speaker 01

  On the multifamily side, it's short of deals that look and feel like Canmore, where there's a pocket of demand. We've done some stuff in Flagstaff, Arizona, as an example, which feels like Canmore to a certain extent. We've got a small build-to-rent opportunity here in the United States, or excuse me, in Atlanta that we're working on. Very select pockets at the end of the day. But if you said, here's $100 million to go invest in residential, I would be looking at existing 10-year-old or younger product in places like Nashville and Austin. I might look in Houston. It's not as sexy as some of those places that we just talked about.

• 9:21Speaker 00

  Yeah, that makes a lot of sense. We call those situations, we call them Swiss cheese, those unique situations. And it's not just picking Atlanta because Atlanta's growing or, you know, pick your favorite city, right? That's not strong enough a thesis. It's got to be that hyper-local, special situation. Or, like you said, opportunistic, where there's something that is perhaps a new build that is upside down for whatever reason. It's still a great asset. It's at 95% occupancy, but negative cash flow because the cap structure was wrong or whatever it might be.

• 9:56Speaker 01

  That's right.

• 9:57Speaker 00

  Right? And those exist.

• 9:59Speaker 01

  Very, very much so. I mean, and we're not immune, by the way. I mean, if you've done any real estate transactions in the last two to five years, there's a decent chance you're dealing with some challenges. And if you've got a 90% leased multifamily project, that was traditionally heavy in the positive cash flow category. Now, if your interest rate is 3, 3.5%, and you're staring the loan maturity in the face, there's a Wall Street Journal article earlier this week about just that topic. We're staring a pretty material reset in the face. And until recently, what we've seen is if we've had a challenging situation,

• 10:42Speaker 01

  our lenders have been pretty open to trying to solve those problems, give us, you know, I won't call it extend and pretend, but certainly some more time to think about it. We're a well-capitalized platform, and so generally, we've been able to, to address any equity shortfalls that might exist. But we're starting to see and have conversations now. It may be time to go ahead and wash your hands. I think if you're a new fund or if you have new capital to deploy, there's going to be some really interesting buying opportunities across all asset classes in the coming six to 24 months, because we have no choice but to see a capital structure reset. And again, Austin, Nashville, Dallas,

• 11:25Speaker 01

  Phoenix, Houston, to a lesser extent, Atlanta, those all still have good fundamentals, generally. People are moving there. People want to live there. They're generally pro-business communities. You can't avoid the capital stack challenge that exists. So if, if you're new and fresh capital, you're gonna, there're gonna be some really wealthy or wealth creation opportunities in the coming months.

• 11:48Speaker 00

  Yeah, absolutely. Well, Spencer, great to catch up. If folks want to connect, if they want to learn more, what's the best way?

• 11:55Speaker 01

  Sure. You certainly go on our website, icmsatmanagement.com. It lays out who we are and what we do. You can reach out to me through LinkedIn. My email is [email protected]. Please feel free to reach out. We're fans of the show. We listen, and we think, we think you guys do a great job sharing information with the real estate investment community. And I appreciate the opportunity to be a small part of that.

• 12:21Speaker 00

  Well, thank you, Spencer. Thanks for being back on the show. And for the listeners at home, definitely connect with Spencer at icmsatmanagement.com. The links will be in the show notes as well as the email address. And in the meantime, have an awesome rest of your weekend. Go make some great things happen. And we'll talk to you again tomorrow.