Faraz Cheema Explains Why Office Real Estate Is Trading at Deep Discounts in Manhattan and DC

Faraz Cheema (00:00)

So like that’s how we got into of the retail, ⁓ then how we pivoted, how we added limited service hotels is during the great financial crisis, we were essentially a bank sitting on money, just accumulating, accumulating. we were buying limited service hotels, which were about 40 cents on the dollar, which we haven’t seen that in today’s market where we were all hoping for these great deals, being sold penny on the dollars. ⁓

In some asset classes, yes, like Office for example, yes, you are definitely buying pennies on dollars. Industrial, good luck, you’re not getting it. Multifamily, we haven’t seen the crash. It depends on which market you are in, multifamily.

Cody Crabb (02:16)

Welcome back to the Real Estate Pros podcast by Investor Fuel. I’m your host, Cody Crabb. And today I’ve got Faraz Cheema with BKREA. Faraz sells commercial buildings in Manhattan, leads investment sales for his team, and also comes from a second generation family office with a 1.7 million square foot portfolio across retail, office, multifamily, and limited service hotels. Faraz, thanks so much for joining us. You’ve got kind of a unique collection of experience, so I’m excited to talk to you today.

Faraz Cheema (02:44)

Thanks so much for having me. Yeah, I know it was a mouthful when we had our pre-call.

Cody Crabb (02:49)

Yeah, he explained

what he did and I was like, can you simplify that even just maybe just a little further? Because I didn’t quite. So yeah, this is this is interesting because as sitting in both seats as a broker and also kind of someone with from a family office that actually owns deals or owns assets rather. How does that change the way you look at deals?

Faraz Cheema (02:56)

you

For one, I can be very realistic on what the pricing can be. mean, you know, like originally I’m from the DC area. That’s why I go back and forth with Manhattan and New York, which, you know, we didn’t get into yet. You know.

Cody Crabb (03:25)

you mean Manhattan to DC,

right?

Faraz Cheema (03:27)

Yeah, Manhattan and DC like I go back and forth. like ⁓ So for your listeners, like I broker in Manhattan ⁓ But prior to that, I was a broker in the DC, Maryland, Virginia area for a little over seven and a half years ⁓ That’s where all the family assets assets are right now in the DC, Baltimore MSA you know one one advantage of I would say there’s an advantage and then there’s a disadvantage. So the advantage is

you know, when you come to pricing on a deal and you’re talking to a seller, or a buyer, like why should they buy this price or why they should sell at this price is because you’ve been in that driver’s seat. ⁓ Now, here’s the disadvantage. The disadvantage is, and I think this is probably why I did primarily office in industrial in DC, because I’m sure like when you heard that intro, ⁓ there was no industrial and we just acquired

like we just acquired our first class a trophy office building in Tyson’s corner about I would say almost two years ago now but it was like 483,000 square feet but when you come from like the hotel retail world and like multifamily world you know like the flip side is you know when I’m dealing with buyers and they say you know how do I know like you won’t buy the deal before I will

Cody Crabb (04:52)

Yeah.

Faraz Cheema (04:57)

I’m like that’s a good question. I mean listen like like we are very location-based we do play in a certain price point like

we like to be in that mid-market space which is anywhere from 20 to 50 million dollars the only time we will do under that is if there is a good cap rate evaluation on it in a great location which you know we’ll do strip centers and like the fives ten million dollar range ⁓ the other thing we will do which we will go under that is which I did

mentioned in our pre-call like which I guess maybe we can segue to that first portion of like the family office so I come from my family office also we’re the largest privately owned check cashing operator in Maryland you know I yeah we at a peak we’re at 52 stores I forget what the count is now we’re somewhere in like maybe the mid 40s but you know we cash checks we don’t do the we don’t do the payday loan we don’t believe in

like

ripping people off ⁓ on the… No, but…

Cody Crabb (06:35)

I’m not going to say I was being

judgy, but I was a little bit like, it’s probably a payday loan place. So that’s good. Yeah.

Faraz Cheema (06:38)

Yeah, yeah, yeah, no, no, we don’t do it. No,

actually, actually, so how we started that business. So back when check cashing happened, when my dad started, it was like, you know, maybe like 5 % on average. He was the first person to do 1 % check cashing fees. He banked on the volume of customers to grow. like, you know, we probably do in the deposits maybe half a billion to 3.5

quarters of a billion every year in deposits. this was, yes. But now like to go to the real estate, because yeah, we’re not charging high rates. We’re charging actually very, very low rates. we were undercutting our competition. But basically, you know, I think it was our second location. My dad wasn’t looking to rent. He was looking to buy, you know, like a small retail pad.

Cody Crabb (07:10)

Sounds like that gamble paid off. That smile.

Interesting.

Faraz Cheema (07:38)

I wouldn’t even say a pad. I would say it’s like more like a urban Because I would say it’s like two retail buildings stuck together in a semi pad type situation You know, would say maybe half our locations are in places we lease and the other half we own ⁓ So back to what I was saying like anything under that five million it might be pad sites or small script centers I mean, I’ll give you one example like in Gaithersburg, Maryland

There was an 83 % occupied strip center. It wasn’t up for sale, but we reached out to the tenant, sorry, the landlord broker. He said, look, is the guy willing to sell? He was, and we bought it at like $7 million. We got 100 % occupied because we put all three of our businesses in. It fits the demographic. We a cell phone store in there. We put a check cash in, we put a laundromat. 100 % occupied.

Cody Crabb (08:34)

Hmm.

Faraz Cheema (08:36)

So like that’s how we got into

of

the retail, ⁓ then how we pivoted, how we added limited service hotels is during the great financial crisis, we were essentially a bank sitting on money, just accumulating, accumulating. we were buying limited service hotels, which were about 40 cents on the dollar, which we haven’t seen that in today’s market where we were all hoping for these great deals, being sold penny on the dollars. ⁓

In some asset classes, yes, like Office for example, yes, you are definitely buying pennies on dollars. Industrial, good luck, you’re not getting it. Multifamily, we haven’t seen the crash. It depends on which market you are in,

Same with limited service hotels, but Office was the only one in this cycle that really saw pennies on the dollar versus the last cycle where everything was pennies on the dollar. ⁓ No, so then after that, imagine you buy like limited

Cody Crabb (09:28)

Yeah.

Faraz Cheema (09:37)

service hotels like 40 cents on the dollar. They appreciate your refi. You know, now we’re buying bigger shopping centers, 50 to 150,000 square feet. I got into brokerage in 2016 after grad school because I knew the family office wasn’t going to keep me busy enough and I needed something else to do.

Cody Crabb (09:43)

Hmm.

Faraz Cheema (10:37)

And I originally got the license because like if I bought those deals under like five, 10 million.

Cody Crabb (10:37)

you

Faraz Cheema (10:42)

and usually there would be a co-op commission. I didn’t expect that I would be ⁓ a great broker. And before leaving DC, I was doing about like 50 to 70 transactions a year. But no, I remember, I was talking to my dad and he suggested being a broker, because I would learn everything on the sell side. And there might be asset classes that we weren’t in that we may eventually get into.

Cody Crabb (10:54)

huh.

Faraz Cheema (11:11)

which you know, like it’s funny, like I remember I sold him, I sold him a vacant retail pad, which he then, you know, put his stores in. Then the other deal I sold him was a, it was 21 units of multifamily with eight units of retails and the demo we typically would put our businesses in. He didn’t really have much multifamily back then. The multifamily he would have would be ⁓ anywhere he bought in Baltimore that had multifamily.

me in top because again it’s all urban so it’s not like pad sites or strip centers so he would buy it purposely for the retail and rent out the apartment at the top as like but again like his primary concern was the retail space for his business because look we had this conversation before doing this podcast how owner users will typically pay more you know because they care about the location they need it more for business ⁓ functionality than an investor will. ⁓ No I sold

him that building at a 10 cap on auction. He got a loan for close to three million dollars. He made it from like a C building to a B class building. He added three more units. He ⁓ occupied the two spaces on the retail ⁓ from three million. It’s probably worth seven and a half million right now. And, you know, based on like, you know, maybe slightly increasing cash flow, but you know, the class rating went up. It’s not as junky as it was before. ⁓

But yeah, and then how we got into Office was, again, ⁓ Office was the only one trading really pennies on a dollar. ⁓

Cody Crabb (12:50)

Yeah.

Faraz Cheema (12:51)

You know, we bought this deal in Tyson’s corner or underneath 3,000 square feet Peak evaluation was around like $260 a foot which was 120 million, you know, we paid these are 72 or 78 dollars for I can’t remember off top my head, but ⁓ It was definitely in the $70 a foot range Valuation was 34 million. We paid 2 million in closing costs. There’s four partners in the deal when the partner is ⁓ It’s also a GP like he’s a

GPLP

role so like he has like a we all have like 25 % stake in the deal But like he’s like one of the guys that brought the deal in like he’s like the GP running it But no, we didn’t have any debt on that deal ⁓ Which again, that’s the tricky thing with office because like since office plummeted Getting debt for office was tricky ⁓ But yeah, and I guess we could wrap it up before you ask your question like how did I end up in Manhattan from DC? ⁓

Cody Crabb (13:30)

Hmm.

Yeah.

Yeah.

Faraz Cheema (13:51)

So, alright, so know your audience is more on the investor side, but in the brokerage world, everybody knows who my boss is. So my boss is Bob Knakal. He’s probably known as like probably the most successful broker in Manhattan, if not one of them.

Cody Crabb (14:00)

Definitely, yeah.

Faraz Cheema (14:13)

maybe in the entire world. He’s sold more buildings than anybody else in Manhattan. ⁓ I think the actual count is now 2,401 buildings as of today. ⁓ It always goes up like every week or two, like another building. If I remember right, it’s like 24 billion in sales. ⁓ Bob just got fired from JLL.

like the start of 2024. That’s a whole nother thing which if you ever want Bob on your podcast, you can tell the whole story. But basically Bob was getting more famous than his old company. And they just want to go separate ways. Bob was primarily a development and multifamily broker.

Cody Crabb (14:46)

Mm.

Gotcha.

Faraz Cheema (15:43)

And he was getting out of multifamily ever since like the new rent regulation rules and everything. He was primarily focusing on development. But

you

Manhattan office really took a plummet because, you know, pre-COVID, vacant space in Manhattan, you know, depending on the publication was anywhere from 48 to 52 million square feet. It hit a peak of over 100 million square feet of vacant office space, which only six MSAs in the country even have 100 million square feet of office. ⁓ And he needed somebody from a capital markets background, ⁓ primarily in office. Again, I was in office in industrial,

Cody Crabb (16:02)

Mm-hmm.

Mm-hmm.

Faraz Cheema (16:21)

but there is really no industrial Manhattan. So it’s like, great, you can be office, which works out great too because, ⁓ you know, the buildings I sell will always have like a retail component, which I did have the background in. Some of the buildings will sell as mixed use with office, retail, multifamily, which again, I do have a use. ⁓

But it’s, yeah, I mean, listen, like when one of the legends of the industry starting his new firm, I didn’t have anything tying me down to DC. I took the leap and yeah, I made the jump and I’ve been in New York in June 1st will technically be my second year officially at the firm. did start a little bit prior to that, but officially June 1st will be my second year.

Cody Crabb (17:02)

⁓

Faraz Cheema (17:10)

But the reason I go back and forth, one is the family office, two, all my family’s down there. Three, if you’ve ever been to Manhattan, can, the rent in Manhattan is ridiculous. pay, listen, I have a good deal in Manhattan, about 4,000 a month for a one bed. Yeah, that’s a good deal. Average rent in Manhattan is 4,500 a month right now.

Cody Crabb (17:32)

Yeah. Yeah. See, and I’m,

I’m over here in Salt Lake city and I’m looking at the rents like, wow, that’s, that’s getting up there, but yeah, that’s nothing compared to that.

Faraz Cheema (17:40)

Wha-wha-well…

Well, my home in DC is like more than 10 times the size of my one bed and I like my space but but no, I I mean listen like I mean listen like I always joke about like it’s taxes and stuff which is partly true but like Listen, all my family’s from DC like like the the family office is there like brokerage is a very fun hobby for me but like that I make very good money at but ⁓

No, I mean look at the end of the day like I’m the oldest of five I have you know three nephews a niece like you know my dad 71

You know, I gotta be hands on for the family. So, and people will always ask me like, do you actually go back and forth every week? Or like the people that do know me is like, are you still doing that? And I say, yes, I’m doing that every week.

Cody Crabb (18:31)

Yeah.

Well, yeah, that’s I mean, that’s I find that pretty the leap is pretty interesting. I what made you trust the opportunity enough to think, yeah, I can go into ⁓ brokerage in Manhattan, all places.

Faraz Cheema (18:53)

you

So in DC, would say like the transaction sizes I was doing was like one to 10 million. That was like the sweet spot I was doing. In New York, it’s like the like now I’m doing like 20 to 100 million, which is which is crazy because like depending on your market, like, okay, like back to what I was telling you in DC, like where we bought like typically 20 to 50 million, that’s considered like private capital middle market. But

But in Manhattan, 20 to 100 million is actually middle market. It’s not really institutional. Like in DC though, 50 million, even maybe $40 million deals, you start becoming institutional. And I’m sure like in Salt Lake City, the bar might be lower where it could be like maybe what? 20, 30 million is institutional. Yeah, So, but I knew Bob was like, if there was anybody

Cody Crabb (19:44)

Hmm. When you put it that way, yeah, that makes a lot of sense.

Faraz Cheema (19:53)

⁓

I would want to work with it’d be Bob. Bob is considered a legend in the brokerage community. I mean again like in before I left DC I was closing 50 to 70 transactions a year. ⁓ And it was it’s not an easy thing to do because unless you’re doing corporate service tenant rep which you know I’ll explain your audience like that’s like when you represent a company that have multiple offices around the country and you’re like their broker representing their spaces that they’re they want to lease or

your triple net broker, which you know, like those are the ball greens the Chick-fil-a’s and McDonald’s, know, you could do that anywhere in the country other than that like, you know what I do in DC is Completely different what I do in New York like that. It’s a whole new book of business You know, usually it takes a year or two to get the momentum going I mean my first deal I closed was nine months in the business. It was twenty one point three four million

I have three deals under contract this year and I’m working on a few other deals. So I went from one deal at 21 million to now my three deals. It’s 12, 31 and 14. No, 17. So what does that equal? I don’t have a clue. You would think like for somebody that like, again, because I do all this math on Excel. All right, 12, 17, 31.

Yeah, 60 million. So I basically tripled my production. But I mean, look, like my average production back in DC, you know, I would say I was probably doing $30 million.

the deals every year. But again, like smaller price points. like, you know, it was more volume. The only thing I do miss about the smaller price point stuff is closing a deal every week or two. Like, no, sorry, not every week or two, like every week or maybe even two deals a week. It was like an adrenaline rush versus like when you’re doing the bigger deals, like, okay, just close. Well, it’s funny because like these three deals are all closing at like roughly the same time.

Cody Crabb (21:54)

Yeah.

Faraz Cheema (22:03)

But so like it’s but you’re not you saw like like that lack of dopamine head verse like closing constant constant constant and again like as a family office, you know, we’re not an institution We’re only buying like maybe one to three deals a year. We’re not syndicating. We’re not ⁓

Cody Crabb (22:07)

Yeah, yeah.

Faraz Cheema (22:22)

We’re not trying to raise money. We’re using all the cash flow from all our other investments to buy additional investments. And we just keep that circle going. So we have a really good property management team. I’m on the asset management team. Asset management, I would say, like the guys who actually… We were talking about putting the models in, what you’re projecting,

but you can go in at first like your property management, your leasing team, I think is doing like all the really hard work. Yeah, yeah, yeah. So, but yeah, like I think that brings it full circle and yeah, that’s how I went from family office to broker to ⁓ yeah, now a broker in Manhattan, but still doing the family office stuff in DC.

Cody Crabb (22:58)

The heavy lifting,

Yeah, I mean,

I think that’s actually a good, ⁓ I think that that kind of duality is actually a good way to look at it. I mean, you don’t just look at deals on paper and decide based on that. You’ve been on multiple sides of this. ⁓ And I think that you’re able to, that’s probably part of why you’re able to be successful in both of these sides is because you get this additional perspective and stuff too. ⁓ For us, thanks so much for giving us some time today. If people want to…

⁓ Find you or connect with you or if they want to learn more about BKREA, how can they do that?

Faraz Cheema (23:51)

I would say you could always reach out to my socials. LinkedIn would be, out of all the socials, reach out to my LinkedIn. There’s not many Faraz Cheema’s out there. You can probably find me really easily. Or you can send me an email faraz, it’s F as in Frank, A as in Apple, R as in Rooster, A as in Apple again, Z as in Zebra, at BKREA.com (faraz@bkrea.com).

Cody Crabb (24:15)

Gotcha,

gotcha, cool. Yeah, I recommend reaching out if you’ve got some questions for him or if you wanna work with him. It sounds like it would be great to work with. And once again, thanks for hopping on today and audience, thank you so much for listening in as well. If you feel like you got something out of today’s episode, please give us a like, subscribe, comment, all the things and make sure you follow us as well so you don’t miss another chance to hear awesome conversations like this. For us, thank you so much for your time today. This has been a real pleasure.