Hans Hansson is the president, principal, and founding partner of Starboard Commercial Real Estate, the largest privately owned and locally-based commercial real estate firm in San Francisco. He joins us today to discuss how the institutions are impacting the industry and how we can still find value in the market. With a long career in the business, he has survived downturns in his long career and he talks about what areas and assets should we focus on and what mistakes to avoid. He believes that a recession is a perfect time to grow and every entrepreneur should be ready to seize opportunities.
[00:01] – [05:27] 38 Years in the Business
- Get to know Hans and what made him become an office leasing agent
- How the business has changed over the years
- The personal touch in business has faded away quite a bit with the advent of email and text
- Industry consolidation is happening
- 70% of the industry are now institutional players
- Individuals can still acquire but once they reach a certain size, they will be competing with institutions or entities backed by institutions
[05:28] – [09:05] On Off-Market Opportunities
- To compete with institutions and to prepare for the looming recession, Hans and his team are looking for candidates to sell
- What is the Delaware Statutory Trust?
[09:05] – [19:22] Thriving in Uncertain Times
- Nonprofits often lose out on opportunities but they find better deals in down markets
- Retail and hospitality are bouncing back while multifamily remains strong
- Hans gives his views on the office sector
- The biggest mistake that people make is that they do nothing during a down cycle
- Everyone should be building their foundation in a down cycle to prepare for the up cycle
[19:23] – [20:59] Closing Segment
- Reach out to Hans!
- Links Below
- Final Words
Tweetable Quotes
“Off-market opportunities… We’re focusing in on a couple of buyers, and then on these sellers that are faced with some long-term vacancy that could be extended for a while and see if we can mix and match those.” – Hans Hansson
“The guys that know what they’re doing do know the market will come back. Now’s the time to build your foundation for that next business over and over again.” – Hans Hansson
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Connect with Hans through HansHansson.com! Check out his book, Stop Selling Yourself Short, on Amazon.
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Want to read the full show notes of the episode? Check it out below:
[00:00:00] Hans Hansson: It’s the old fractional interest play that occurred, you know, 15 years ago, except with more protections. So in this case, you can choose to go a higher cap rate that would give you a higher return with more risk, or you could take a lower cap rate. Take lows just the same as any other investment.
[00:00:30] Sam Wilson: Hans Hansson is the president of Starboard Commercial Real Estate. They are the largest locally owned commercial real estate company in San Francisco, and they specialize in office retail and industrial investments. Hans, welcome to the show.
[00:00:42] Hans Hansson: Thank you so much for having me. Hey, the pleasure’s mine. Hans, there are three questions I ask every guest who comes in the show: in 90 seconds or less, can you tell me, where did you start? Where are you now? And how did you get there? Well, like anybody that gets in real estate oftentimes is by accident. I had always wanted a political career. I saw myself as being the president of the United States and it didn’t quite work out that way. But somebody I talked to that I value dearly when I was trying to figure out what to do with myself, they said you should become an office leasing agent downtown. And I said, what is that? And they go, well, go find out what it is and do it. And I’ve been doing it since 1984.
[00:01:18] Sam Wilson: Wow. That says not every day you get career advice that someone then followed. ’84, let’s see, that’s 38 years ago. Somebody told you that, is that right?
[00:01:27] Hans Hansson: That’s correct. Correct.
[00:01:29] Sam Wilson: Wow. That’s awesome. Some things have changed since 1984.
[00:01:34] Hans Hansson: Well, it has and it hasn’t. The fundamentals of the business hasn’t changed. How we do business has changed for sure. I mean, when I started, nobody was allowed to do a phone call. You had to visit everybody in person, and then we went, you had to do phone calls, nobody could do it by email. And now, you know, the question is, do you do texts, do you do email? And the personal touch that, you know, I was forced to learn and always have applied myself to, that’s kind of gone by the wayside and that’s unfortunate, but that’s, kind of where we’re at.
[00:02:07] Sam Wilson: It is where we’re at. And it’s funny you say that even with investors, you know, it’s something that, text is kind of expected at this point. I’m at the point now, you know, investors are texting me and it’s like, I probably would never have texted you first, but I guess if you’re texting me, whatever. We’ll just have this conversation via text that wouldn’t have been the way I’d have gone about it. It’s funny how things like that have changed. You say things have relatively, the things have changed and yet things have stayed the same. What things do you feel like have dramatically changed, outside of maybe technology uses, but what things have changed in the market themselves over the last 38 years? And how are you taking advantage of where we are in today’s cycle?
[00:02:46] Hans Hansson: Well, first of all, I’m a commercial real estate broker. So back when I first started, you know, the business was basically 70% local independent firms, 30% regional firms with no national firms. And this spans between the eighties and nineties today. It’s basically 70% institutional players, CBRE, Cushman & Wakefield, the big guys that are now New York Stock Exchange companies and are certainly diversified real estate companies and not just brokerage. And 30% of the business remains in the independent brokerage chains like myself. So, the sandbox of business is definitely very clear. My sandbox is high-net-worth individuals, startups, nonprofits, local business, the families, investment trusts, and the institutional guys pick up the Apples and the Oracles and all those other larger players. So the industry is very clear now on who has what, and again, our niche, our road, which is the independent tenants that we represent are clients that we represent, there’s certainly a lot of them. So there is still a future for our business, but it definitely is consolidated down.
[00:04:00] Sam Wilson: And when you say consolidated down, what you mean is that the brokerage houses have consolidated a lot of this. When you say independent versus, you know, institutional, you’re thinking more on the brokerage side?
[00:04:13] Hans Hansson: On the brokerage side. But as a result of that, what has also happened on the investor’s side is that again, when I first started, 70% of all businesses were owned by local businesses, and so forth. That too has switched over to kind of that 70, 30 realm where now 70% of all businesses is institutionalized and it just keeps on going down, you know, in our market, the San Francisco Bay Area, institutional New York- funded firms started buying multifamily apartment buildings. Those typically were owned by families or high net worth individuals. And now they’ve consolidated that down into an investment play for an institution. So that business has kind of gone away. You’re now even seeing in a residential, where equity firms are now buying single-family homes and institutionalizing the single-family home market. So, you know, the days where individuals can control and garner wealth through acquiring, it can still happen for sure. But the challenges are when you reach a certain size, you run smack dab into the investment guys that are going to be by backed by these institutional players. It’s a tough, it’s a tough group to compete against.
[00:05:28] Sam Wilson: Yeah, it really is. So what are you telling your families, your family offices and people maybe, and again, your family office is maybe not smaller, but maybe compared to an institution, it is smaller. How are you helping them find value and opportunity right now?
[00:05:44] Hans Hansson: Well, even though, you know, there’s signs of recession, even though there’s interest rates that have gone up, even though there’s an uncertainty of what cap rate we should use to turn values, the reality is that there’s still very, very little inventory available to purchase on the commercial side. And I’m talking about all aspects, including office, which has been decimated the most by COVID. So to develop a strategy where you work with somebody like myself that will look for off-market opportunities or candidates to purchase because maybe they have a high vacancy going on and we know the owner, we know they’ve been sitting on it for a while and they could be candidates to sell. We are doing more, what I would call off-market opportunities, working, focusing in on, strategically, a couple of buyers, and then focusing in on these sellers that are faced with some, you know, long-term vacancy that could be extended for a while and see if we can mix and match those. So, as an example, I recently did a deal. We represented this building since the late 1980s. This woman is now in her eighties. She’s by herself. She’s got a son in overseas and she was generating about $40,000 worth of income on this commercial office building with retail on the ground. And now the whole building is vacant during COVID. And she’s looking herself at the eighties and going, you know, I have no income coming and this was her sole source of income during the life of this building. And so, we talked to her and in years past, when we’ve talked to her about selling, she never thought about selling. Her belief is you hold, you never sell, but we convinced her that we could move her asset into a different investment vehicle, protect her on 1031 exchange and move her into a different asset class. And sure enough, she did that. We were able to successfully sell the project to a nonprofit. Nonprofits are definitely buyers right now. They are seeing opportunities that were not presented in them before. And so we were successful in selling the building to them. And then we moved this lady into something that’s becoming more popular and that’s what’s called the DST investment. It’s Delaware Statutory Trust Investment. This is where you can move your asset into this, protect yourself onto a 1031 exchange, enjoy the benefit of real estate without owning it, or you’re owning it but without managing it, and then get a set return. So everybody’s in it. American Express is in it, Goldman Sachs is in it, and then Morgan Stanley. You’ve got what’s called sponsors that are building this. It’s the old fractional interest play that occurred, you know, 15 years ago, except with more protections. So in this case, you can choose to go a higher cap rate that would give you a higher return with more risk, or you could take a lower cap rate, and take low risk, just the same as any other investment. In her case, she chose a lower cap rate for safety purposes. And now she’s enjoying cash flow again, protected by 1031 exchange. And we were able to sell the property. We are doing more and more of that, and that’s becoming a much more popular vehicle for the people that just say, you know what, I’m too old, I don’t want to do this anymore. I don’t want to go through another cycle. I just want income. And that’s the way they’re doing.
[00:09:07] Sam Wilson: Got it. Got it. That’s really cool. I love that. I want to ask a question about something you said, you said nonprofits are buying now and they’re finding opportunity. In what regard does a nonprofit find it beneficial to buy now maybe that a for-profit company is not? I guess, but if that’s even the right question.
[00:09:29] Hans Hansson: Well, again, given the nature of the fact that the market’s very competitive as I started by saying is even though the market’s, you know, softened a lot of areas, they’re just still not a lot of property available, but a nonprofit typically would get beat out on deals. Because, you know, frankly, the for-profit guys can offer more money can renovate the spaces differently and they’ve got just a different budget. So nonprofits are usually kicked down the sidelines, so to speak. However, in down markets or in a market like this where office space is uncertain, the nonprofits, this is their market, always has been where they can take advantage of locking in lower rental rates on office face for lease, and then looking for buildings that they can buy. Oftentimes nonprofits can get grants. In this case, a philanthropist actually bought the building for this nonprofit, and this is their market. This is their chance where they can grab and they know it. We’re doing right now. We’ve got three nonprofit deals going on now on the for sale side. One of which is interesting because we just sold the building to an investor who’s going to have to do a fair amount of work to the building and lo and behold, a nonprofit had looked at the building but didn’t jump on it fast enough. We got into contract right away. And they’re now offering a million dollars more than we just closed on the building less than a month ago because they were all teed up to do something, but then the opportunity went away before they could react. That’s the problem with nonprofits, they do tend to be slower, so they’re going to actually pay $1 million more for this building less than four weeks after close and my guy’s going to do it. He’s going to flip it because they are poised and ready to go to buy a building. That’s very, very hard for them to find. It’s also a building that fits into the area they want to be in. And so our guy’s going to be enjoying a nice profit and the nonprofit will find a building that, you know, fits what they need.
[00:11:25] Sam Wilson: That is incredible. I love that there’s so many nuances, I think, to real estate and commercial real estate that it’s always just fascinating to watch the different ways this gets taken down. Tell me this. What are some opportunities, or is there an opportunity in any particular asset class that you’re seeing right now that people should be paying attention to?
[00:11:47] Hans Hansson: Well, that’s, again, leading to the fact that there’s really nothing available, the retail market is definitely bouncing back. And even shopping centers are seeing new interest and, you know, just even six months ago, you know, Westfield, the largest owner of shopping centers in the United States, announced they’re pulling out of the United States altogether and putting all of their assets on the market. That was certainly a bad sign for the industry, but you know how things are coming back. And there’s definitely renewed interest in retail, both neighborhood retail, leading to large regional shopping center retail. Hospitality has definitely come back. Multifamily has always been strong even in market sectors where they saw a freeze or lowering of rents. That market remains strong. The market that still is struggling is obviously the office market. And this is again where this discussion that we had earlier about institutional players. We’re kind of seeing two different markets. We’re seeing the institutional market where the institutional market has made no attempt to lower rates at all in the San Francisco Bay Area to try to meet current market conditions. They’re holding firm on rates. They’re offering larger tenant improvement packages. They’re offering free rent incentives, but they’re not touching rent. And yet the independent and local owners are definitely becoming more competitive on the rental structure. So the spread between what I would call institutional A quality space and B and C quality space that disparity of rents is growing every day, as rents are softening on one side, but the institutional guys aren’t moving at all. Why? Well in the San Francisco area, one of the problems we have os a lot of our assets traded just before COVID hit. So we have new owners, they bought it at a certain coupon rate with a certain rate attached to it. And every dollar that they go down means a tremendous adjustment on value for the overall asset. So they’re just simply not doing it. Now, eventually Wall Street will say, look, you got to be real to the marketplace. You can’t be 50% vacant and say that we’re 95% occupied waiting for a tenant. So eventually this will get caught up as it has at other down cycles. But right now there’s been no challenge to the institutional guys to lower value. So in terms of opportunity, I would say the secondary office markets are probably a place that will come back and could offer some real opportunities. I would say the downtown office sectors B and C markets would be more dangerous because I don’t think the rental rates have flattened enough yet to determine how far down we’re going to go. If you’re a long-term holder, when I say long-term, at least 10 years, these are cycles and the market will come back. But it’s still, the tea leaves cannot be read yet when it comes to downtown core office. But secondary outlining area markets, that’s an interesting place to be because if hybrid is going to take hold, then your suburban marketplace where somebody says, you know what? I don’t want to go back downtown, but I can’t stay in my house all day. Let’s have an office close to my house, you know, in a suburban market where I live, I don’t have to commute. I can still have an outdoor office. I still don’t have to be with a ton of people. I can see that happening. I can see larger operations now doing satellite offices which means that instead of having everybody in one block, they’ll start having pods of offices throughout secondary markets. So the suburban market office space, your pricing tends to be lower, that you have opportunities to buy things away from the institutional marketplace and go back to that high net worth investment trust, people that are playing in the smaller marketplaces when I say smaller 25 million or less. That is a place where this potential value add for somebody today.
[00:16:09] Sam Wilson: Got it. I love it. Thank you for breaking that down for us. Tell me this. Rewind the tape through your last 38-year career and what is a mistake that you feel like you’ve seen repeated over and over that maybe could have been completely avoided?
[00:16:26] Hans Hansson: Well, this is my fourth downturn. And this COVID attack reminds me a lot of the 1989 earthquake that hit San Francisco, where the market just crashed. There was a tremendous amount of uncertainty as to whether the next earthquake was going to hit. And it kind of walled around for about two to three years before it finally stabilized. And then something new came out. What happened in our market in the early nineties, something called fiber came into play and something called the internet, the worldwide web came into play. That industry caught on in San Francisco and a lot of our warehousing and offices were converted into this creative tech space and then it went on to another cycle. So I envisioned that this would happen again in this cycle, I think that people will go back to offices, but they may go back in a different environment. It’s very, very clear that the conventional office of the past has been converting itself even before COVID into more what I would call, I call it more attributed to an airport. Where you look at an airport, leisure area, offices are starting to look a lot more like that than they are traditional desk, desk, desk, office, office, office. Right. So I can envision that happening, but I would say if there’s a mistake that I have made, and I think others have made is when I look at who has really made it in business, and I think of one particular guy that it really is probably under the radar screen. One of the richest guys in the bay area that nobody knows. A self-made man, he told me a long time ago. He says you use every down cycle to do all your improvements so that you’re ready for the next cycle. So what he does is he takes down a building, he does his improvements. He knows that to do improvements in San Francisco, between permits, getting your design, and so forth is at least 12 to 18 months. And if you look at all the historical cycles, that’s typically what the cycle is, 12 to 18 months. So by renovating that building and getting it up and running he is ready to go for the next cycle. So what he does is he renovates during the down cycle, he buys or leases the buildings when they’re at an up cycle, and then takes his money out, so he has cash to buy for the next cycle. So that is the right thing to do. And yet the mistake I see over and over again is in uncertain market, everybody just retrenches and does nothing. They don’t jump into the pool, whether it’s cold or hot and just start swimming, they wait. And that’s the problem. Because the guys that know what they’re doing do know the market will come back. Now’s the time to build your foundation for that next business and over and over again, the richest people that I know have always taken advantage of that. The ones that aren’t are not that rich.
[00:19:23] Sam Wilson: Awesome. I love it. Absolutely love it. Hans, thank you for taking the time to come on the show today and really give us just kind of your breakdown of where opportunity lies, mistakes we can avoid, things that you’ve seen change. We’ve talked also about Delaware Statutory Trust. We’ve talked, you know, the nuance of even nonprofits, you know, coming in as buyers and just how that segment of the market can present its own unique opportunities. And just where things are for you guys there in the San Francisco and surrounding markets. I appreciate your taking the time to come on the show today. If our listeners want to get in touch with you or learn more about you, what is the best way to do that?
[00:19:59] Hans Hansson: hanshansson.com, H A N S, Hanson, H A N S S O N . com. I also have a book that I wrote that you might find interesting, Stop Selling Yourself Short. You can find that on Amazon. It gives you a lot of good tips on how to survive and grow in your real estate career, both as an investor and as a broker. And love to have a chance to talk to anybody that would like to reach out.
[00:20:25] Sam Wilson: Awesome. We’ll make sure we put all of that there in the show notes. Hans, thank you for coming on today. I do appreciate it.
[00:20:31] Hans Hansson: Thank you. I appreciate you inviting me.
