Ron Dickerman:

If you have a good culture of advocacy and skepticism, you're going to end up in a really good place. Those that are too skeptical, they sit on the sidelines and they never do anything and they can't grow their business and they can't deliver results to their investors.

Those that are too much of an advocate get over their skis too fast, and that never ends well. So I think that's the hallmark of a great investment firm, is to make sure that you promote that healthy culture.

Nancy Lashine:

Hello, and thanks for tuning into Real Estate Capital. I'm your host, Nancy Lashine of Park Madison Partners. Park Madison is a capital solutions and advisory firms serving the global institutional real estate business. We sit at the intersection of real estate managers and their capital partners.

In bringing these two groups together, we speak to a broad range of thought leaders about recent trends in real estate investing, capital markets, operations and technology. And on this show we are trying to bring some of those insights and conversations directly to you. Our guest on this episode is Ron Dickerman, president and founder of Madison International Realty.

Ron founded the firm in 2002 with an investment strategy focused on providing liquidity to illiquid real estate ownership positions. Today, Madison International is a global leader in real estate secondaries, recapitalizations, and liquidity solutions with capital commitments of over $8 billion since inception for more than 175 institutional investors. Ron is an entrepreneur and a savvy real estate investor.

We discussed what inspired Ron to found Madison International, the different challenges he faced along the way, and ultimately how the firm became a global leader in real estate secondaries. We also discussed Ron's outlook for the real estate market and how he sees the real estate secondaries market evolving from here, particularly the growing popularity of GP-led recapitalizations. I hope you enjoy our conversation. Ron, delighted to have you on the podcast. Thanks so much for joining us.

Ron Dickerman:

I'm delighted to be here, Nancy. Thanks for the opportunity.

Nancy Lashine:

You started Madison in 2002, over 20 years ago. The real estate private equity business was still relatively new. So there was several well-worn paths in the business, if you will, at that point. But you chose the road not taken and focused on secondaries and liquidity.

I remember the first time I met somebody from your shop, I think I was on a panel up at Columbia and he was describing the business and I was so confused. I was like, what is it that you guys are doing? So maybe for our audience, just describe the business today of Madison.

Ron Dickerman:

I'd be happy to. And what an amazing ride it's been. Over my 35-year career in the real estate business, real estate has gone from a bit of an unsophisticated, perhaps bootstrap industry, a decidedly local business to becoming what we all know, a global asset class, highly sophisticated, and a part of any diversified institutional investment portfolio.

And on the back of that growth has been the back of the growth of Madison whereby the business has become global. But we all know that the real estate business is illiquid and cyclical and a multi-trillion dollar asset class. So it would follow that from time to time, existing investors in commercial real estate transactions seek an early exit.

They seek liquidity. They seek to recapitalize balance sheets or other methods to monetize the value of what they own. That is effectively a very simplistic description of Madison's business. We provide liquidity options to existing investors to sell illiquid pieces of real estate ownership before the natural realization of the properties or the portfolios themselves.

And one of the art of our business, which we can talk about, is that we've moved the goalposts around, we've reinterpreted our mandate, and we've been able to raise capital from a global roster of institutional investors to make our business larger and more impactful.

Nancy Lashine:

Let's dive in there. How have the deals that you've worked on or the situations evolved over the past 20 plus years in terms of the situations where you are looking to recapitalize, how you've structured them, have you evolved in terms of your geography and property type?

Ron Dickerman:

Yeah, so all of the above. When we started Madison 20 years ago, we were buying little bits and pieces of syndications and closed end funds. We sort of got started with Wall Street style syndications with a bunch of sponsors that no one knows ever even existed. Dean Witter, Merrill Lynch Hubbard, Cane Weber Properties, JMB Realty, Balcor, for anyone that might be of my vintage, those names will ring a bell.

Nancy Lashine:

They are so way too familiar for me, Ron. That was my first job on Wall Street syndicating those deals.

Ron Dickerman:

So little bits and pieces of syndications, and just to sort of get people's mind around it a little bit, sort of the predecessor firm of Madison started just a few years earlier than what you described. And it was really about the time of the dot com explosion, sort of 1998, 1999, and at that time, technology and there were new firms like Microsoft and Cisco that were getting started and starting to explode in value.

And people thought that that was the new economy and that real estate was an old dinosaur. So it was a perfect moment to start our business of providing liquidity, buying out people from their real estate, closed-end funds and syndications so they could go buy interest in dot coms and the new economy. So the way our business grew was in multiple prongs. The first was sizing, is that we started to realize that the business was institutionalizing and the value of commercial real estate assets, single properties and portfolios were rising.

So our transaction sizes grew from low seven figures to eight figures to nine figures. One of the transactions that we did as a litmus test was we bought an interest in 520 Madison Avenue, which is the old Tishman Speyer headquarter building before they bought rock center and moved their headquarters there. At the time we made our investment, the building appraised at $1.4 billion.

There was roughly 50% leverage, so call it $700 million of equity in one building. And we bought roughly a 20% interest. So you start seeing the size of this market opportunity. So the first was property and portfolio sizing. The second was the sophistication of our capital and the control and governance that we sought over the investments. When we started our business 20 years ago, we were passive investors.

We were trying to select sponsors that we thought were good fiduciaries who had a history of value creation and track record of success where they might've found themselves with a subset of underlying investors that were tired and grumpy for some reason and wanted an exit strategy. Our business has evolved.

Nancy Lashine:

Ron. You know never call an investor tired or grumpy, right?

Ron Dickerman:

Never to their face. But it's such an interesting dynamic about investor psychology and we can talk a bit about that. So the second theme was governance that we started to ask for and receive what you would think of as negative control rights. We want a seat at the table, we want to participate in major decisions.

We want to be a heads-up partner. We have good ideas. We invested at the beginning as a validation of the sponsor's business plan. This is not an adversarial relationship. Ours is a business of sort of backdoor entry points, and we're investing to support the business plan of the sponsor and to help them succeed with our capital and to solve what you would think of as a tactical problem where they have a subset of their investors that want exit strategies.

And we're seeing that more and more now with GP-led recaps, with changes in economic conditions, with volatility. Every investor has a view on the relative attractiveness of markets and the opportunity cost of capital, and that's effectively why our liquidity solutions and our business exists. So that's sort of big sea change number two. I would say sea change number three, which you mentioned was geography. Now we started in the United States.

We then opened offices in London and Frankfurt, and we expanded our business plan into the UK and Europe. We've been very ubiquitous and active in Europe. We've owned pieces of Canary Wharf, Sony Center in Berlin, the Trianon Office Tower in Frankfurt. We have a large life science portfolio. We have an industrial portfolio that's Pan-European. So that foray into Europe and the UK has been very successful.

And then I would say the last element, which has become much more topical is we began to staff up a series of data scientists and trying to use data analytics to inform our investment decision-making. I would argue that back in our early days we were a little bit more tactical in nature, and now we've become more strategic thinking about technology, how it touches real estate, live, work, play, what's the new patterns of millennials and how do they want to use their underlying commercial real estate?

So as part of that data thesis, we began to de-emphasize office and retail and began to emphasize housing strategies, multi-family, single-family homes for rent, very invested in logistics. We've been investing in cold storage, life science and data centers. And this corresponded quite well with first the Covid period. Covid is sort of the great accelerator, the great differentiator of commercial real estate.

So many of the trends that we saw before Covid were accelerated based on what the world had to live through. And then we can talk about this later, but of course we all came out of the woods of Covid and the woods sort of caught on fire with the Ukraine inflation monetary policy and the banking crisis that we've been living through over these last couple of days.

Nancy Lashine:

Okay. I'm going to try to unpack some of that. Let's just circle back to the first point, which was control. So you started out initially buying minority interests in assets where you trusted the managers and you were passive and didn't have control. Are you still doing that at all or have you moved to full control on your assets and how are you thinking about that?

Ron Dickerman:

So I want to be really careful about how I describe it. So what you call full control is definitely the way that the Madison value proposition has evolved. However, it is not the control that you might think of with our peer group private equity firms where it's their way or the highway. Our transactions are always a three-party bargain.

You have a sponsor who has a group of underlying investors of whatever level of sophistication from whatever geography around the world who have expressed an interest in some type of an exit strategy. The sponsor is looking to continue the business plan because this is typically happening sort of midstream. And then thirdly, Madison's looking to make a well underwritten investment.

So clearly the value proposition, it needs to work for all parties. So I would not expect that a sponsor would cede control of their kingdom over to Madison just because we're offering a liquidity solution to a single or maybe several underlying investors. So what we're looking for, as I said before, is what you would think of as negative control. We want to participate in major decisions.

We want a seat at the table, and those major decisions are the things that matter. Budgeting, capital expenditures every year, leasing above certain thresholds, financing of the property at any time. We've been very risk averse on financing strategies. We typically utilize moderate leverage. We inherit the leverage at the property level. We don't lever our own position. 98% of the financing we have in our portfolio right now is fixed or floating with a cap.

We have never taken variable rate interest rate exposure. So all that has served us well. And then lastly, kind of the big bugaboo is exit strategy is that the exit for us is the exit for the sponsor and the other investors. We want to sail to a third party in a process that we get to participate in using intermediaries and selling the properties on to the highest bidder.

So we've had a very clean history of realizations over the years because we've been very focused on alignment and we know risks when we see them. And sort of the art of the deal for us is picking our partners and making sure that they're behaving as good fiduciaries.

Nancy Lashine:

Yeah, as you're talking, I'm really thinking about the word partner because I've watched your team be fantastic partners when we worked together on the Black Creek transaction and there were just things that needed to change as things evolved. And you guys were just great partners.

Ron Dickerman:

Thank you.

Nancy Lashine:

Thinking about how the whole works out.

Ron Dickerman:

Thank you. And I have to say that Park Madison was an amazing partner for us too. It was one plus one plus one. I usually say one plus one equals three. In this case it was one plus one plus one equals four. So it was great math and the rest, as they say is history.

Nancy Lashine:

Let's talk a little bit about your expansion into Europe because from a timing perspective, it's unusual as I see it for a firm of your size to have grown so quickly from the US into Europe at a time post-GFC when the dollar was so strong and so many managers were saying, I can just find better opportunities at home.

Plus managing the currency was a real challenge for many. You've done a great job. I mean, you've done so many transactions across Europe and Eastern Europe and Poland. Was there just a lack of capital? Was it that you just had the right team there? How did that evolve for you?

Ron Dickerman:

It's a really good question, and I have to say it was a series of confluence events. I also like to think that it wasn't luck. It was a well-researched expansion based on our read of our market opportunity. And the way that went is our business is really about global counterparties is we zig when everybody else is zagging. When we go to all the major real estate trade shows, it's a bunch of sort of headless chickens running around looking for the next acquisition, the next financing.

And what we love about our business is that we don't get involved in any of that. Our view is tell me what you did five years ago or seven years ago where you might have underlying investors that have decided it's time for them to move on and let's have a professional conversation about how we can solve those problems.

So the first thing is the temperament of our transactions is a very healthy way to live and a very healthy way to invest. There is no one that has sort of a time clock ticking and says, you must close on Friday at five o'clock. So with that as background, the way that we expanded into the UK and Europe is that we established great relationships with global counterparties providing liquidity to their underlying investors, and they would come to us as very satisfied customers.

And their view is we enjoyed the experience. Our investors were able to monetize the value of their positions in these US-based opportunities. I have situations where clients told paper in the UK and Europe, and we want you to focus on those two. So for many years our answer was, no, sorry, we don't do business in the UK or Europe and we can't help you.

So it wasn't such a difficult sort of epiphany for us to make lemonade out of lemons and decide that we needed to be there. So in terms of the expansion, we're very methodical. Our view is let's learn these markets, let's get boots on the ground, let's understand the markets in which we want to invest, and then and only then should we begin actually allocating capital.

So it took us more than a year in each situation, first in Frankfurt, and then we opened an office in London. We staffed those offices with both Europeans, but also people that were trained on the investment staff here at Madison in our headquarters in New York. And we sent them overseas. And I think the DNA was strong.

We were very methodical about underwriting conservativism and our view is the worst possible thing we could do is stub our toe and fail on investments that were making half a world away and that we had to instill a margin of safety and conservativism in our underwriting. And we've grown the business to become a multi-billion dollar business in terms of the equity underpinning, the GIB, that the GIB is orders of magnitude higher than that.

And I would say the apple of our eye right now is an expansion into Asia, and we'll do it exactly the same way. Same. We've been knocked off our game a bit with regard to Covid and finally the emergence of China. We first thought our office there would be in Hong Kong. Now it's likely to be in Singapore, and we're in the process of making those plans now.

Nancy Lashine:

I didn't know that. I should ask you, so many US companies or global companies are leaving China now. Are you going to invest dollars in real estate in China or capital?

Ron Dickerman:

I think the answer is not right now. I think our strategy in Asia is ex-China. The truth is a significant part of our capital underpinning is now coming from Asia. We're establishing great relationships there. Our Asian counterparties value the relationships and are looking for trusted sponsors where they can find a differentiated experience. So we spend a lot of time in Asia and our view is there will be investment opportunities.

Nancy Lashine:

Got it. As interest rates have risen so quickly, one of the things that we hear many of your peers in the private equity world, not secondary players, but private equity real estate investors doing is gap financing, which feels a little bit like it could be a secondary trade, but it's obviously being done because investors are not able to refinance their debt. Is that something that you are looking at doing in this market?

Ron Dickerman:

Our view is that that could be a compelling opportunity. There will be a lot of hedge funds and shadow lenders who will be stepping into that space. My personal view is that's probably a 10 to 12, 12 to 14% returning business. What we find interesting is that our temperament is not to be lenders. We like to be equity investors with a margin of safety and sort of a place on the capital structure that has conservativism on the one hand, but equity upside on the other.

And I didn't say this before, but we also have a quality bias in the properties that we are investing in. What we seek to accomplish for our investors is an asymmetric return between quality, risk and return. So we are not buying distressed buildings and portfolios where investors want liquidity because they're broken.

We're buying what you would think of as core to core plus investments, which are in compelling growth oriented sectors and cash flowing where the investors might be fatigued for a variety of reasons, including all the world volatility that you know about and geopolitics that happen all the time.

So the reason I'm giving that as background is heretofore Madison has not been a lender. There's a couple of other lenders named Madison. It doesn't happen to be us. And at the end of the day, our DNA and our ether is being an equity investor. So I do think that will be a compelling opportunity. Lots of players will be competing with themselves to fall into that space.

The way it typically works is it's a good business for a while and then returns tend to wane and you sort of get pushed up higher and higher in the capital stack. And our view is, is that's not the game that we're looking to play.

Nancy Lashine:

Can you give us an example of an equity style investment that's taking advantage of the distress in this environment?

Ron Dickerman:

Yes, we're seeing a significant amount of institutional joint ventures, sponsors 80/20 transactions. We're also seeing club deals, co-investment side-cars, which underlie the equity in either single properties or more typically for us broader portfolios where some of the underlying investors are looking for exit strategies. So a rational investor wouldn't sell a property today.

We're in the midst of a commercial repricing of assets, the likes of which we probably haven't seen in 30 to 40 years. And that's going to take a while. Everybody knows what's happening with interest rates and spreads and borrowing costs. So our view is, it's only the investors that really seek to redeploy capital or have an alternative need for that capital that are looking to transact in the current marketplace.

So we're seeing a broad swath of opportunities, joint venture partners who can no longer fund their joint venture obligations going forward, existing investors, endowments, foundations, pension funds, high net worth investors. We're seeing the redemption cues in open-ended funds starting to swell. You know all about the non-traded REIT business.

And it's been the poster child of distress with household names where they're not able to satisfy the redemption cues of their underlying investors in the non-traded REIT space. All those things are fodder for Madison's investment strategy and we're looking at all of them. So the opportunities abound. They're in the billions of dollars and again, what we're looking for is an asymmetric REIT relationship between quality, risk and return.

Nancy Lashine:

So the elephant in the room as I listen to you talk about this is office and you've obviously owned interest in class A office. I believe you've been avoiding class B. There was an idea going into this year or last year that office would recover once the pandemic became less of a consideration, but we haven't seen it, certainly not in the US, probably different in your other markets. How has your view shifted about office in the US?

Ron Dickerman:

Yeah, so I mentioned a few minutes ago that with some luck we began analyzing the office business and I would say it was during Covid where we took a hard right turn. So the truth is we have not invested in an office building in the last three years. We do own legacy office buildings, both class A and class B. And I mentioned this at the beginning about Covid being the great accelerator, the great differentiator.

We're in the real estate business and we own office buildings. So it won't surprise you that we came into the office early. I came back to the office in the fall of 2020 before there were vaccines and our entire office census came back in March of 2021. On the other hand, when you think about other professions in the technology area, third party administrators, accounting, the legal profession, very few of those professionals are back in the office and the truth is they may never come back.

So we have recognized there's been a sea change in the use of technology. I Zoom now from the backseat of a taxi cab, the backseat of an Uber. I don't have to rush into my office at eight o'clock in the morning to take my typical calls from Europe. It's changed my behavioral pattern and I'm in the office every day. So there's a bunch of young people, some of my children included who don't go into the office anymore.

And I guess we have a view that we need to be a team, we make decisions together, we mentor our young talent. And at the end of the day, I highly encourage young people in the business to key off the habits of successful people, to find those mentors. And the truth is you need to do that in the office, but every company is making their own decisions.

So just to sort of put a pin in it, our view is the office business is forever changed, hybrid working will be here forever. And at the end of the day, people have different views about their preferred lifestyles. So given the fact that office leases are typically five to 10 years, maybe three to five years, we have not seen that the tip of the spear or the equilibrium being established in the office business.

Leases have not yet expired for companies that have changed their work policies from before Covid to the current period. So there's downward pressure on rents. We're sitting here in New York City and my understanding is the physical occupancy rate of the office buildings that you see behind me is about 60%. The economic occupancy is substantially higher, but those lines are going to cross when those leases expire.

So there's a big talk about office to residential conversions that might be a thing at the margin, but that will never be able to absorb the tens of millions of square feet of vacant offices that are going to exist across the United States. So there is an equilibrium reset that needs to occur. It's a bit about what happened in the retail business going back five to seven years with the emergence of Amazon and the internet. So the story has not yet been written.

Nancy Lashine:

Do you have a different view about the future of office and the viability of office in Europe or in Asia?

Ron Dickerman:

Yes, it's interesting. Our Asian colleagues and even our European colleagues have a sense maybe that they're going to spend more time in the office. I think there's less going on in terms of flexible work time. The Europeans were much slower to return to the office. I remember traveling around Europe and meeting our investors in coffee shops and then eventually having them come back to the office and they were taking meetings with Madison and our equity capital markets team, including me.

And their viewers, it's the first time I've been back in the office in a year and a half. But I think at the end of the day, this is going to impact all users of office buildings around the world, and it's critical that we wait for the equilibrium to be established. I think the other thing that you mentioned in your question is the differentiation between class A and class B.

We all know the story of One Vanderbilt in 50 Hudson Yards and some of the very high-tech ultra class A office buildings being established. And the fact that those who have decided that the office is going to be part of their future are stepping up and leasing space. We were an example of that. We leased the office space that I'm currently in, in the teeth of Covid.

We doubled our office footprint and we committed for 10 years. That was a bold bet and our view was we were betting on ourselves. And on the other hand, it was one of the best economic leases that I have signed in my investment lifetime, given the fact that we timed it very, very well for us and the fact that we had a need to expand our office footprint.

Nancy Lashine:

Well, I'm delighted that you're our neighbor. I wish I had the opportunity to have signed for 10 years at the price that we did as well. That was on offer.

Ron Dickerman:

Timing is everything in life.

Nancy Lashine:

Timing is everything. So real estate is obviously, if you think about it as an inflation or a growth asset, it's because of rental growth. And so when you look across the different asset classes, are there any where you see above market rental growth likely for the next five or seven years or for your investment period?

Ron Dickerman:

It's interesting. We're in this perfect storm, right of inflation, monetary policy intervention. It's kind of a battle between the Fed that wants to slow the economy and they want to slow the pace of rental growth. We're coming off super white-hot rental growth periods for multifamily, single-family homes, logistics and the emergence of new asset classes like cold storage, life science, data centers.

People have been investing in self-storage and student housing for a long time. So if you put all that up and kind of mix it, our view is you have to look at the long-term demographic trends, what's happening with tax rate arbitrage, where are the demographics going, the move to the Sunbelt. And I think at the end of the day, it's really about relative performance. And one of the other things that's interesting is that right now in the United States, there's more multifamily housing being developed and delivered than single-family homes.

So we actually think if you get through the current period and look at the next sort of three to five years, you really have to get back to fundamentals. So we're very focused on housing strategies, we're focused on SFR, seniors housing, we're focused on logistics. We've made two very large data center investments. Everybody knows what goes on in their iPhone every day and the use of data is absolutely exploding.

And then we've been finding other asset classes that have gotten the shot in the arm during Covid, things like cold storage. My wife and I used to make the annual trip to, or I should say the weekly trip to the grocery store and now the doorbell rings and FreshDirect or Amazon Prime is dropping off groceries at my front door.

And the fact of the matter is that's putting different needs and stress on the cold storage food chain, which is creating the emergence of a whole nother industry. So we've made investments both in cold storage and life science. So we're really focused on asset classes that are tech enabled, that are poised to outperform.

Nancy Lashine:

You mentioned SFR, single-family Rentals. Are you talking primarily about bill to rent and how are you thinking about that space right now given that obviously we are under housing, we don't have sufficient housing, we're not building a lot of single-family homes as you mentioned? And you would think that people will have a hard time moving because they're locked into their low interest rate mortgages. Does the math work on those deals today from what you're seeing?

Ron Dickerman:

We have historically been investing in scattered homes, which are occupied or we've been investing in the process of buying, renovating and leasing single-family homes, all of which have been scattered. We've looked at strategies with purpose-built single-family home communities. And I would say that we've seen things that we like. We've seen things that perhaps we don't like in terms of locations, the concentration of the assets that have to be leased.

And now given the stress going on with interest rates and single-family home builders, we've been looking at excess inventory in existing PUDs where there may be opportunities to buy swaths of single-family homes from existing developers. So we think that given mortgage rates, credit screening, cost of capital, that there's a significant population in the United States that are renters by necessity, not by choice.

And at the end of the day, they would rather be in a single-family dwelling with a single-car garage or a two-car garage. And we're trying to capitalize on those demographics. I keep coming back to arbitrage tax rates where people want to live, work, play. So we think housing is going through a very difficult moment because it's a very interest rate-sensitive sector, but we think the fundamentals are very solid that there's an under-supply of SFR in the United States with the aging of the younger population, they're going to be having families and looking for single-family home opportunities. So we're very bullish on the sector, not right now, but as the interest rate environment stabilizes.

Nancy Lashine:

You've also done something that's somewhat unusual for a private real estate investor. You've been active in public companies and you've bought publicly traded REITs over the years. Obviously there's an enormous spread today between the public and private markets. How are you thinking about those opportunities today and do you see that as an important part of your business in the near term?

Ron Dickerman:

Very important part. And we have been listed property investors for over a decade, and our view is it makes us better investors being aware of market gyrations and valuations both in the public and the private side. So we've had a very active business out of being a private capital provider to public companies.

We've invested in joint ventures, we've made pipe investments, private investments in public equity, and we've also bought listed property shares in high quality public REITs where the shares are trading at substantial discounts and where we can take a weighted position. It's a matter of public record. I recently joined the board of Veris Residential, the former Mac Callie. We are the single largest non-index shareholder of that company.

It owns 6,000 residential units across the Hudson River from Hudson Yards and Brookfield Place class A residential at roughly half the rent of Manhattan. So we think there's something special going on there, and that's effectively been our track record. And I think our investors have given us a pass. We have sort of a dedicated bucket in many of the flagship funds that we raise and manage.

And the idea is there's moments in time just like now where the best value in the real estate business is on the screen on Wall Street, not on Main Street. So at the end of the day, you can cultivate the companies, you can cultivate the sectors, and we think that's smart investing. So we've taken our time and I think overall the track record has been very, very good.

Nancy Lashine:

Well, good for you. Let's talk about you a little bit and your career path. What made you think about starting your own real estate company? How'd you get there?

Ron Dickerman:

Well, I would say there was something special about the real estate business. I grew up in the Boston area. My dad was in what I would call the old-fashioned real estate business, which was fascinating. He was an electrical engineer at the time, probably making $18000 a year in annual salary. And his view was, how am I going to afford college for my three children and decided to take some of his savings and he bought a two family house in a town a couple miles away.

And then a couple of years later bought another two family house and another two family house. And when I was a kid, I used to go visit on the weekends and we would do the maintenance and cut the lawn. And it just struck me as a very understandable investment strategy. And although the numbers seemed large at the time, the risk seemed very manageable.

What more staple is there in the United States than single family homes? And in this case, there were two family homes. So I sort of took a liking to the real estate business. I was focused on it from a very early age, which I think gave me an advantage. When I was an undergraduate, I taught a class at Tufts University in the experimental college on real estate investing.

I was a senior and then I went to the Columbia Business School and I majored in real estate finance. And then it's sort of a great example of never knowing where life is going to lead you. And I threw in a resume to a real estate investment banking program at a company called Smith Barney, which is now part of Citigroup. And I showed up for my first day on the job and I thought I was going to finance big office towers in the sky.

And what they said is, we're going to put you into a special department, and that department is called direct investments. And what you're going to do is originate real estate limited partnerships on behalf of high net worth clients of the firm. I'm coming back now to JMB Realty and Merrill Lynch Hubbard and Cane Weber Properties.

So I was part of that ether and I spent five years there packaging real estate into effectively securities to sell limited partnership interest to high net worth investors. So the sort of the little secret to my business is I took that early training and I turned it upside down, and the idea was there was billions of dollars of high net worth capital owning these Wall Street style syndications. I mentioned before about the timing as it relates to dot coms and why people thought that they were really sexy.

So the genesis of Madison was turning that business upside down and coming up with a liquidity solution to those investors. But I think much more broadly, one of the things that's so fascinating about the real estate business is you have to have a PhD in common sense. You have to know so many different disciplines from physical assets to finance, to marketing to legal disciplines.

You have to be a relationship person. One of the things that you, Nancy and I know really well is that people think the real estate business is about sticks and bricks, but it's all about people. And I think that's what makes the business so fascinating. People from all different walks of life, and I know this may sound a little trite, but one of the things that I do is I travel around the world meeting with my investors.

And whether I'm in Asia, the Arab world, Tel Aviv, Europe, all different parts of the United States, no matter what language people speak, no matter how they dress or what religion they practice, they all want exactly the same thing, great relationships with people they trust where they can invest money and have a reasonable chance of making profits over long periods of time.

And that's what energizes me. That's why I keep working and coming into the office. I feel like investing in some ways is a great equalizer and you can talk about anything with anyone over a board table when it all starts with investing and real estate. And I love that part of the business.

Nancy Lashine:

Yeah, the late Joe Roberts used to say, capital has no flag.

Ron Dickerman:

That's it. That's it. And that's exactly right of a very wise man.

Nancy Lashine:

And I think about you taking your Smith Barney experience and turning it upside down, having had a similar experience, I guess I was at Rothschild, Edgerberg and Tobin in those days, marketing those deals. Today you look at online marketing and all the digital platforms, the cadres in digital realty and all of those, and they actually seem like pretty interesting ways to market secondary interest or minority interests. I don't believe you're in that business. How are you thinking about that business?

Ron Dickerman:

We haven't been in that business. We've obviously been trying to streamline and create efficiencies in the way that we execute transactions. But I think one of the misnomers is that real estate is not a commodity. It will never be a commodity. It is the ultimate local business. And global capital flows impact what happens. And at the end of the day, trying to package real estate up as a commodity, it could be done in a mortgage-backed security with a credit rating, assuming that there's accuracy in underwriting.

But when you're talking about equity and you're talking about the relative attractiveness of sectors and geographies, every physical asset by definition is different. So at the end of the day, it isn't a business that lends itself to commoditization. So there may be a role for these online platforms, and we wish them success, but it hasn't been a methodology that we've utilized, mainly because we're looking to deliver alpha for our investors. And that alpha means it can't be a commodity. A commodity is beta, it's not alpha. So that's a little bit about how we've been positioning our strategy.

Nancy Lashine:

Totally see things the same way. I wonder if that's a vintage issue. One of my favorite things to think about, and it varies a lot depending upon where we are in the cycle, is if you knew then what you know now, how would you have evolved your business differently?

Ron Dickerman:

Yeah, it's a really fascinating question. I mean, obviously you would've stepped on the gas pedal. I remember a great story in 2009. I was in San Francisco and I was meeting with a billionaire, and I won't tell you who it is, but I'll give you a hint. He's now the governor of Illinois, and he walked into a room with me and said, "I just don't understand.

I have a billion dollars of liquidity and I can't buy anything. There's a huge bid ask spread, and it doesn't seem like the markets have capitulated." So of course, you and I know anything that you would've bought in 2009 in the current moment would've been an absolute home run. So you have to think of the cycles. You have to have confidence that the markets are going to recover. The fact of the matter is there's so much dry powder on the sidelines looking to support the commercial real estate business.

You have to know when to put your foot on the gas and you have to know when to tap the brakes. So I think one of the things that we've done here at Madison is that we've created a very viable culture of advocacy and skepticism. So we do that around our investment committee process, the way that we originate opportunities. We have a box. I tried to describe what that box is in terms of our secondary approach to the market. We've moved the goalposts around a bit.

We've talked about private, we've talked about public, we've talked about all different sectors and different geographies that we're looking to invest in, but we have really good sense about risk. And people ask me, okay, so you manage billions and billions of dollars for investors. How do you sleep at night? Isn't there a world where you just can't fall asleep because you're so concerned about loss of capital?

And my answer is, I sleep really well at night. And the reason is we use fundamental underwriting. We know our stuff. We do due diligence on the properties that we're investing in. We go through an exhaustive process in that regard. The investment committee process is meant to ferret out risks. We're very big into game theory. What could go wrong? What are the variables? What if one or two of them go wrong? What if all of them go wrong?

And what does that mean for the potential for loss of capital? So we operate the business on a zero loss tolerance, and our loss ratios have been extremely low for that reason. But I guess what I'm building up to is I wouldn't take a lot back. I certainly would have accelerated the pace of investing at the time. But on the other hand, if you have a good culture of advocacy and skepticism, you're going to end up in a really good place.

Those that are too skeptical, they sit on the sidelines and they never do anything, and they can't grow their business and they can't deliver results to their investors. Those that are too much of an advocate get over their skis too fast, and that never ends well. So I think that's the hallmark of a great investment firm is to make sure that you promote that healthy culture.

Nancy Lashine:

Well. Yeah, you've just defined the hardest thing about investing, which is, as you said, knowing when to put your foot on the gas and when to put the brakes on. So you mentioned 2009 would've been a great time to just buy virtually anything. Do you think we're heading into a time like that?

Ron Dickerman:

No, I think this is a different paradigm. I think that what this really is, is 1972, 1973. So put yourself back there. I remember there was a war in the Middle East. There was an OPEC oil embargo to the west causing a big oil price spike. You had inflation. The Fed was acting aggressively. Gerald Ford, I was a little kid at the time, was wearing a button on his lapel that said, win, W-I-N whip inflation now.

Some of our folks went to the AFIRE conference about three weeks ago, and guess what? They were passing out win badges. So the fact of the matter is, this is not a replay of the global financial crisis. Things are not over leveraged and the markets are not oversupplied. This is a replay of 1972, '73 where the Federal Reserve was tightening aggressively. Jimmy Carter kind of messed it up. And then everybody knows all about Paul Volcker and Ronald Reagan.

That's where we are now. So we are in the bits of a secular repricing of commercial real estate brought about by inflation and monetary policy intervention. And keep in mind, this was a confluence of events. This was 10 to 12 years of loose monetary policy. This was Covid. Everybody remembers the Covid snapback in 2021 when the world emerged with vaccines. Everybody had saved money and wanted to live again. They wanted to get married, they wanted to travel, they wanted to go to restaurants, they wanted to buy cars.

And then of course, issues with the supply chain that triggered inflation. And then again, the world unfortunately caught on fire with the Ukraine with oil price shocks and everything going on. So inflation is sticky. It takes a while. In the 1970s, it took years to bring inflation down. So the Fed is acting rationally. Some people think they're acting too aggressively.

The Fed often raises rates until something breaks, and guess what? Something broke over the weekend and the government has stepped up and obviously done what they needed to do in order to fix some of those issues. But inflation is intolerable with 27 trillion of national debt and inflation impacts everyone. So this has been a very painful period. I just read this morning that Meta is laying off another 10000 people on top of the 19000 they've already dismissed.

It's a very difficult time. I do know that this time shall pass and that the real estate business will establish a new equilibrium with all the things that we look for, positive leverage, cap rates higher than borrowing costs, and the ability to lever real estate moderately to develop current dividend yield. And we mentioned before, the relative attractiveness of different sectors and markets, that will come back into the real estate business after this period of transition.

Nancy Lashine:

You mentioned the 1970s was kind of depressing from someone who lived through it and thinking about investment returns. Have you changed your investment requirements and profile as a result of having higher inflation, higher debt rates? Do you think you need an equity investor to be looking for higher returns than you were say five years ago when there was no return on debt and money was free?

Ron Dickerman:

Yes, you put your finger on it. That low interest environment alternatives to fixed income benefited real estate greatly. And if you believe that it's a higher for longer environment and that the two or the five year is going to be at four to 5% high quality corporate bonds could be at five to 6%, that informs the risk-free rate.

I see it very unlikely that people will seek out real estate investments, I guess what we call core real estate investments at say seven to 8% rates of return when the risk-free rate is at that level. So I do think there's going to be a repricing of commercial real estate, how it fits into diverse institutional investment portfolios, and I think it will trigger probably interest in the need for higher returning strategies.

So the markets need to develop an equilibrium before those opportunities exist. I think there's a lot of patience right now. Most of the firms that I know are kind of sitting on their hands or they're chipping away at little things. Debt strategies seem to be in vogue right now. We talked a little bit about gap financing before, but at the end of the day, real estate will emerge as a very viable, very healthy asset class for those that have the patience and understand how the asset classes are differentiated.

Nancy Lashine:

Ron, because you're so willing to jump in, I'm going to put you on the spot. If unlevered core has been, call it six to 7% over the last some probably decade and a half, what do you think unlevered core when the dust settles here, will reprice too?

Ron Dickerman:

I think it needs to be higher than that. I think it probably needs to be higher by several hundred basis points. So core had a bit of a run over the last couple of years where it even outperformed the numbers that you just described. But I think it's going to need to settle in a high single-digit rate of return for it to be attractive versus other, what I'll call lower risk fixed income alternatives.

Nancy Lashine:

One of the people who was really instructive to me when I started out in real estate in the early 1980s said, "Cap rates are always nine, Nancy." And I haven't said that or thought about that in a long time, but that would definitely shock a lot of folks to think about it that way.

Ron Dickerman:

Yeah, I mean, this is on the other side of the ledger, but I believe for many months now there's no such thing as a four cap and that caps have got to start settling. Obviously it differs by asset class from kind of five, five to seven, five to eight. But I think the key to look for is the positive relationship between cap rates on real estate and borrowing costs, that they have to maintain the positive spreads that we've seen historically. And we're far away from that right now. So this comes back to the capitulation and the secular pricing of commercial real estate, which is going on right now.

Nancy Lashine:

Well, since we're talking about generational changes, let me ask you another personal question. Are any of your children working in your business?

Ron Dickerman:

So not in my business at Madison, but I have two of my four children in commercial real estate. One is in private equity here in New York, and the other is an entrepreneur. He's discovered industrial outdoor storage, which is a fascinating outgrowth of the industrial business, the rise of home delivery through industrial and has been making a really interesting business opportunity out of it.

Nancy Lashine:

Last question for you. What advice would you give for young people who would like to actually start their own real estate business?

Ron Dickerman:

I'm so excited for young people that have chosen real estate as a career path. I really enjoy speaking with them, mentoring them, giving them advice. And I would say the first is you've picked the right business. It's the best business in the world. And I would say the other thing is that you need to be a global citizen. That what's happening in the real estate business, it's no longer the ultimate local business. It's not what's going on on that street corner.

It's what's going on around the world that's going to impact your ability to make money in the real estate business. So my first thing is get on airplanes, get to know markets, read the Wall Street Journal, understand everything going on with exchange rates, interest rates, geopolitics, it all impacts commercial real estate because it's about capital flows. Then the other element is live, work, play is how do people use real estate today and how are their habits changing?

And the other thing I guess I would also say is the broader your approach when you're young, the better. It's really hard to know the art and the science of investing. I mentioned my first experience when I worked as an investment banker at a firm called Smith Barney that doesn't exist anymore. I was 22 years old, and I remember I used to prep the investment committee memos.

And we would sit around for days with my managing directors kind of role playing about all the questions that this very seasoned investment committee might ask. And we would come down with a list of three or four things. It would take us days to really focus in on the risks. And I remember being absolutely mesmerized where I'd walk into the investment committee, my memo would be open to page 22, which was the number one issue that we had identified.

And the old seasoned guy at the table would say, tell me about that. And I would say, how did he know that? And the answer is, he knew that because he's seen a hundred deals like it, and he's been around the block a couple of times. So I come back to this idea of mentoring, just get to know seasoned veterans of the real estate business and talk to them.

And then I would say the last thing, and I'm going to stop is be skeptical. One of the things that happens with young people is they hear something and say, oh my gosh, doesn't that sound interesting? And I promise you, if you hear something that sounds too good to be true, it's too good to be true. And just because someone bought an office building down the street, and it sounds so terrific, you have to get under the hood.

You have to do all the work. You have to understand all of the risks, and you have to understand all of the numbers. And then and only then will you be ready to make an investment. And the last part is you can't be afraid of failing, is that learn from your mistakes. And we have an adage here at Madison that we're human and we make mistakes, but we only make that mistake once, we never make the same mistake twice. And I think that thesis has served us well, and we've learned a lot over the last couple of decades.

Nancy Lashine:

Wow. Phenomenal advice. I'm reminded as I listen to you, those are the sins of commission, but there's also the sins of omission. You have to be willing to jump in as you have so many times and just try it, because oftentimes it's the things that you don't do that are the biggest mistakes. It is so great to have you, Ron. Thank you so much for doing this. Thank you for all your thoughts and for being so open with everybody, and we wish you the best of luck. It's going to be a sobering and wild ride over the next few months.

Ron Dickerman:

Yeah, it sure will. Thanks so much for being interested in talking to me, Nancy. You do such a great thing for the industry here, and love to follow up with you if anybody has questions or if I might give any advice to any of the young folks.

Nancy Lashine:

Thanks so much, Ron. Take care.

Ron Dickerman:

Okay, thank you, Nancy.

Nancy Lashine:

I hope you enjoyed this episode of Real Estate Capital. Before you go, I have a quick favor to ask. We've put a lot of thought and effort into this show and making sure we bring you insights from real estate leaders that you don't normally find in the mainstream media.

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