Dave:
If you listen to this show often that part of what we do here is analyze the economy now so we can get a sense of the investing landscape in the future. And for me, I do this partly because it’s fun, I’m weird and I like this, but also I do it of course so I can make sure that my investments and hopefully yours stay optimized no matter the economic conditions ahead. While we of course don’t have some on the market crystal ball, our guest today comes pretty close today. Ben Miller, the CEO of Fundrise breaks down what he thinks will be the most powerful asset classes to invest in over the next five years.
Hey everyone, it’s Dave and this show is for all the analytical nerds like me out there and our guest has a lot of cred in that department. Ben Miller, as I said, is the current CEO of Fundrise. They’re a direct to investor platform with over 2.8 billion of equity under management. But what’s cool about Ben is that he’s worked in real estate development and his experience at Fundrise has him investing in commercial real estate in residential, also in debt, and he actually has a whole new asset class that he’s been taking on. So I’m really just curious to talk to Ben about what he’s investing in these days beyond real estate and within real estate and why he’s doing it. Ben’s been on the show a couple of times before, so if you’ve listened to any of his episodes, he is super knowledgeable and really in-depth thinker about finance investing and the economy in general. So let’s get into it. Ben Miller, welcome back to On the Market. Thanks for being here.

Ben:
Yeah, thanks for having me.

Dave:
Yeah, it’s been a while excited to talk to you specifically about some different asset classes and how you think they might be performing. So let’s just start with real estate. What’s your outlook for commercial real estate over the next few years?

Ben:
Few years? That’s a little easier right now. It’s pretty foggy. The jobs report came out, inflation came out today. I mean it’s definitely foggy mirror at the moment.

Dave:
Are you just concerned about financing interest rates or are we still working through some of the supply and multifamily or what are the sort of main variables you’re tracking right now?

Ben:
We were debating this at the team, at the investment community level. Is this one of the best times invest in real estate or actually are we better off investing in private debt in the debt side of the stack rather than in the equity side? The real estate market today is sort of more choppy than it’s been in a long time.

Dave:
Yeah, and I guess the question about commercial real estate right now is like are you going to miss the bottom? It feels like the bottom to me is at least still a couple months away at a minimum, and at least personally I invest in some commercial real estate. I don’t feel a sense of urgency like now is the time to buy given all the uncertainty out there. To me it just feels like it might be better to wait.

Ben:
Yeah, I mean I think the bottom was last year actually, I think October, 2023 was when treasuries hit 5%. I feel like that was actually the bottom and it’s gotten a little better since then. But yeah, the reason to buy real estate now would be because thinking about a long horizon and probably the best time to buy real estate for the next 10 years. But if you’re thinking more opportunistically, shorter term, more of capture the moment, I think there’s other things that might be better

Dave:
And is one of those things private credit

Ben:
On balance? Yeah, private credit and tech I think are pricing better. So we can do private credit for a minute. It’s sort of easier to price just to get a little complicated. But if you look at a apartment building, you can buy the equity as you said, for a five and a half cap maybe, and you can be in the debt at 65% loan to value or maybe 75% loan to value and be getting a double digit yield, 10, 11, 12% yield, maybe higher. And so you say, okay, do I like being at a 75% loan to value at a 12 or an 11 better than being in the equity where maybe I do better, maybe I do worse is certainly unclear in the debts a lot safer.

Dave:
Yeah, because the debt, you’re earning that 10, 11% and you have a pretty solid asset to fall back on with that loan to value ratio. But I guess you bet on the real estate, if you think cap rates are going to compress, like you said,

Ben:
I mean if you make the argument, which we certainly debate internally, you’d say, okay, well there’ve been oversupply, multifamily, that oversupply is hit rents, rents are flat, rents are soft,
Cap rates are a lot higher, interest rates are a lot higher, but everything is sort of against real estate at the moment. And if you sort of go more intuitive point of view, that’s a good time to buy things. And so some of those things are going to reverse. You can feel really confident supply is going to flip, it’s going to be undersupplied within 18 months, 24 months. There’s no starts are falling off a cliff, so there’s not going to be new supply. So you could feel good about rent growth and a world interest rates stay high, then there’ll be no new construction for a long time. So if you don’t get the benefit in interest rate, you’ll get the benefit in rent growth. There’s a good argument for it and it’s more tax efficient than debt debt. You have to pay ordinary income.

Dave:
That makes a lot of sense. I just want to make sure everyone’s following that when we look at multifamily, it’s pretty easy to forecast where supply is going because it takes several years to build and you need to file for permits. And so we’ve seen this glut of supply that’s been coming on for years. Everyone’s known it’s been coming and I think that’s why people have sort of been a little wary sitting on the sidelines a little bit waiting until things play out. But as Ben alluded to, we can all see that the pendulum’s going to swing back in the other direction because once people saw this glut of supply interest rates started to go up, new construction starts from multifamily, at least in most places across the country have just fallen completely flat. There’s basically nothing historically speaking. And so we’re going to be in this environment where as Ben said, there’s not going to be a lot of construction if interest rates stay high and depending on what you think about the residential market affordability for single family homes probably still going to be pretty difficult for the average person. And so there’s going to be at least in my opinion, be a lot of demand for rental properties and not a lot of supply, which as Ben said, could be driving up rent prices in the next couple of years.

Ben:
That’s the argument for it. And the argument against is I think simply like is there something better
That’s not that bad actually, right? So one, there’s growth from rents, which I feel like you’re going into a really strong market. If interest rates fall, the value goes up because cap rates will fall if interest rates don’t fall. You get it in rent growth, you get your growth in rent growth. If interest rates do fall, you get it in cap rate compression. So you have now a pretty good either way, you’re in good shape. And then if you’re worried about inflation, if you’re worried about government printing a lot of money in the old days, you would hold real assets, you’d hold commodities, real estate. Now people hold Bitcoin, but you hold it all for the same reason. And so the argument for owning an apartment building or owning real estate would be that you’re not going to be able to get that same price per square foot price per unit in the future. So I think that’s compelling. It’s just at the same time because debt markets are so distressed, you can lend into the market and get really good, really good returns, better than I’ve seen in almost a decade. I mean, both are great options.

Dave:
Yeah, I mean that’s a very encouraging take. I appreciate that. It could look pretty dismal right now and it has been pretty tough couple of years. All right. So it seems we’re in a uniquely good time for lending, but what specific sectors does Ben’s research tell him are the most investible? We’ll get into that right after the break. Hey investors, welcome back to my conversation with Ben Miller. Can you tell us a little bit more about the specific areas of lending that interests you?

Ben:
So God, what’s so fun being across asset classes and across sectors, you really can garner insights you might not otherwise have and you’re going to have better choices. And so we are an owner of about 20,000 residential units. We have own a few million square feet of industrial. We’re across the country. And so that gives a sense of what’s happening on the ground. But being a lender, you can sort of play that knowledge as an owner or as a credit provider. And one of the great fun things we did in the last couple of years was we went and started doing asset-backed securities.
So we do two kinds of lending. We do direct lending. We’re mostly apartment buildings. That was probably the most common execution. And we’ve done a few hundred million dollars of this where somebody’s going to build an apartment building, they had a loan, the term sheet from name your bank, bank of Texas or something, and they were going to get 70% or 75% maybe an interest rate. They were thinking the interest rate was going to be five or 6%. And now it’s like they’re going to get 55% bank cut back a lot and there’s a big hole now in their capital stack. 20% of the capital just disappeared because the bank paired back their lending. And so that 20% we’ve been lending is mezzanine debt or preferred equity, and you can get 13, 14% for that. Sometimes 16%. You’re talking about new construction, high quality apartment buildings that was going to be the lender’s last dollar. And we’ve done that handover fist. I mean, God, that’s the best thing you can get out there. Just you can’t get as much as you want.

Dave:
There’s just not enough good deals.

Ben:
Yeah, I mean not that many people are starting those construction buildings, but we’ve done a few hundred million of it in the last couple, probably the last 24 months. And that’s something that we do, but it’s not enough. And the other thing we’ve done is actually, if you look at the asset-backed securities market, which is most people probably not that familiar with, it’s pretty similar. All you’re doing is lending to an apartment building or portfolio of apartment buildings and just for picking where you want to be in the stack. So you could be in the triple A, which is like if you safest part of the stack or you can be in the triple B or unrated, but you can actually get to the same place in the stack. We can be at the mezzanine place in an asset backed security. It’s just like liquid actually. So we can sell our piece. And we started doing that in summer 2022, the markets blew up and we started lending into that market. It’s been great. And then we started going and doing that for industrial. And so the aspect securities market has been great because interest rates have been high and capital markets have been fractured. So in general, you can get double digit yields for debt like risk. That’s amazing. And that was not true for a long time. When interest rates were zero, it was like half that.

Dave:
That’s totally flipped over the last few years. Lending through most of the 2010s was not that lucrative for interest rates just weren’t high enough. And now you’re talking about two different ways that you can make money in lending. And I just want to explain for our audience, if you’ve never heard of the stack, it refers to capital stack. It’s basically the different areas where capital comes from, particularly in commercial real estate. And usually you kind of visualize this from the bottom is the most senior debt, so that’s usually your biggest loan. And then up from there would be something like a mezzanine loan or a bridge debt. And then you have different levels of equity. And the reason you think of it this way is because the people at the bottom, the biggest debt holders get paid out first. So it’s the lowest risk position in the debt stack where Ben is talking about investing is that next step up, which is called mezzanine debt. And that’s basically still relatively low risk debt, but it’s a little bit riskier than being the primary first position lender on commercial real estate. But it sounds like if you’re making 14 or 16%, it’s worth that little bit of extra risk to be in that position on the stack,

Ben:
But it’s a temporary moment. There’s not that many deals like that. Obviously if you could get 14% or 16%, we would just only do that for sure, but there’s not enough of that out there in the world. That’s why the good thing about spec securities is a big market. So you can find good deals, they’re not going to be that high. They’re going to be probably, I guess how much leverage you put on it, but 12 or something. But it’s still 11, 12 still pretty good. And it’s liquid, which is different direct lending. You have to wait for the property to sell to get your money back. But when it’s securitized, I can turn around and go on a Bloomberg terminal and sell it and go do something else with the money. So funny because there’s such a separation between real estate people and securities market people. I’m a real estate person. I only started understanding the securitization market over the last couple of years and they don’t think about their real estate the way we do at all. Couldn’t be more different. I’ll give you a quick story because our team, we went down to Miami for the securitization conference, which of course has to be in Miami. Sounds super fun. Yeah, those guys really not a party.
And we go in the room to meet with these different trading desks. You’re meeting with RBS and Noura and different banks and they say to us, what label do you buy? And we go, we don’t know what you’re talking about. You’re running a huge five.
You don’t even know what they’re talking about. What label do you buy? And they’re like, aa, aa, single B, triple B. Be like, oh, whatever makes sense, whatever price per square foot and yield. And they’re like, what are you talking about? And I’m like, I don’t understand. What do you mean? What am I talking about? They’re like, well, everybody’s a label buyer. That’s their mandate. They have to buy a label. And I’m like, they have to look at price per square foot and whatever the market risks and stuff. And they’re like, no, no, no. They just buy a label and they pricing compared to other labels and stuff like that. And I’m like, well, how does that make any sense? They worry about the risk of the securitization and stuff and it’s like, no, they’re only thinking about it as the way you might think about spreads and pricing versus treasuries. It

Dave:
Sounds like a bond, right? Yeah,

Ben:
It it’s like they don’t think about credit. It’s just nothing like us. Nothing like a real estate person

Dave:
Because trusting the label, right? They’re just saying a B is X. We know the risk reward profile for that

Ben:
Label. The is the risk, and that’s all they have to know and they can go repo it and lever it up and I don’t trust the label. Right. Well, good for you for sure.

Dave:
Yeah. Well, I kind of want to explain just for a second, and I’ve never bought securitized debt, so I just, correct me if I’m wrong here, but Ben’s been talking about two different types of debt. There’s direct lending, I’m familiar with that. I do some of that myself. It’s basically just funding a very specific real estate deal, but this whole other side of real estate debt where loans are packaged together and sold on securities markets, they’re sold sort of stocks. For example,
This
Happens in the residential market as well. Fannie Mae and Freddie Mac buy up residential mortgages and those can get packaged and sold. And this happens in commercial real estate too. And so Ben is saying that he’s been buying these because they are good deals right now. But it sounds like, and this is sort of leads to my next question, that a lot of the people who buy these securitized assets, it sounds like they’re like hedge funds, they’re pension funds, they’re probably just huge buyers or are there individuals, just normal people, do they buy this stuff?

Ben:
Oh, no, no, you’re not allowed to buy it unless you are a qui A QIB.

Dave:
I don’t even know what that is.

Ben:
So it goes normal investor. Then there’s accredited, we have a million net worth, and then you have a qualified purchaser, which you have a 5 million net worth, and then a QIB is a hundred million dollars

Dave:
Net worth. Okay, so that’s how you get invited to the table.

Ben:
Yeah, it’s actually a hundred million of securities. It’s not even like if you a hundred million dollars in real estate, they wouldn’t count. You have to have a hundred million dollars of liquid securities. Banks and insurance companies are the big buyers of the aaas. It’s like a highly institutional product, but it’s massive. If you think about a building, there’s way more debt than there is equity in that building. So it’s in a way bigger market so far away from normal people and it’s so weirdly synthetic. They’re in the moving business, that’s what they say, it’s makers, takers and movers. And so their job is to move it, just move it along like, oh, a thousand people bought houses. They need mortgages. That mortgage gets packaged up and securitized, and so they’re just moving the moving business. They don’t really care what they’re moving. My analogy for this is that if they’re moving and the box says kitchen, they’re going to put that box in the kitchen. They don’t open the box and find that, yeah, what’s in the box doesn’t matter. They’re like, my job’s to move this stuff, don’t talk to me about what’s in the box. My job is not to look inside the box.
And so when I was trying to say, well, what’s in the box? They’re like, what are you talking about?

Dave:
Yeah, it’s such a weird position, especially you do direct lending where the whole business is looking in the box, right? That’s the whole job.

Ben:
Yeah. There’s no box, right? There’s just the forks and knives and stuff, right?

Dave:
Yeah. You see it all laid out there.

Ben:
It hasn’t been packaged. They package it, they securitize it. That’s the packaging
Anyways, but it’s so interesting. You can see when the market’s volatile normally, the market’s really efficient. There’s really no opportunity for people like me. If you were to go up and it’s all like a Amazon warehouse or something, everything’s moving really fast through it, but when something gets messed up, there’s a hurricane and everything’s backed up and supply chain’s messed up, that’s when you can go in and make good deals. So the supply chain in the financing market has been messed up for the last couple of years as it gets messed up, there probably won’t be much for us to do, but as long as it’s messed up, there’s good deals to be had.

Dave:
That’s a great way to look at it. And do you think for just normal people who aren’t quis, do you think the direct lending side of commercial real estate is still a good option for people looking forward at least for the next year or two?

Ben:
I think so. There’s supply and demand and that’s just how things are priced. And so the supply of money has been choked off in real estate, and that means that if you supply money to the sector, it’ll be priced well. This is what I mean by sitting across different places, different asset classes, even different geographies. Sometimes the supply and demand gets disjointed and when it does, things are mispriced,
But
Normally supply and demand is boring. It’s whatever it is. In 2017 or 18, the supply and demand for most of the economy was just humming along and then the pandemic hit in a way that hasn’t still normalized. There’s still lots of weird things out there.

Dave:
There’s just a lot of volatility on both sides. It totally different asset classes. And to your point, yeah, a couple years ago, supply of money super high and it was doing fine. Now there’s still a lot of demand for that money, but since the supply has declined so much as Ben has pointed out, you can charge a premium essentially for supplying that money, whether it’s a mezzanine debt or if you’re just providing primary mortgages, it’s just people will pay up for it

Ben:
If you want to make a whole loan. That’s also, that’s usually a bigger check. But anyway, so that’s in a way in what Fundrise been trying to do at Fundrise is say, okay, there’s most people invest in stocks and bonds, maybe real estate, but then only maybe buying single family homes typically. And there’s a whole world of investments out there that typically big institutions do alternative assets. And so I’ve been trying to figure out ways to democratize access to the best alternative assets, and those are real estate and private credit and venture capital. There might be another one, but if you all look at the Fortune 500 or something, it’s mostly those people, tech, finance people, real estate people make up most of the Fortune 500.

Dave:
And that brings me to my next question, which is why Ben and Fundrise are investing more in venture capital. We’ll get to that after the break, plus the questions on Ben’s mind about the future of the economy. Welcome back to On the Market. Let’s jump back in, and you have been spearheading a venture fund, which to be honest, I was surprised to hear because I’ve known you for a couple of years now, and as a very knowledgeable about real estate credit markets, what inspired you to go into the venture space?

Ben:
So the business case is normal. People can’t invest in venture capital. Venture capital historically has had one of the best returns, if not the best return, blah, blah, blah. So it’s really good. So why don’t people invest in it? You’re not allowed to. It’s only for accredit investors, institutions, and then also it’s really hard to get the good deals. There’s not that many great companies. How many great tech companies are there in the world that are private? Maybe a thousand, maybe a hundred.

Dave:
The established ones? Not that many. Yeah,

Ben:
Yeah. How many real estate properties are there? A hundred million, right? Yeah. There’s so many buildings in America that could be well priced, could be good, but there’s only a hundred tech companies you’d want to own maybe less than a hundred. So it’s a really, really small space. It’s typically insiders who knows who. I’ve been building software and building a tech company for now 12 years, and I’ve spent a lot of time with venture capital, and it’s rare you meet somebody in any sector where you’re like, wow, this person’s really blows me away. Most people, they’re just smart people, but they’re just selling you money. Venture capital has a sizzle to it. They’re more like bankers than they are tech founders in reality.

Dave:
Yeah, that makes sense to me. Yeah.

Ben:
Yeah. It’s just like their MO is that they went around taking credit for companies that they invested in, so invested in Facebook, I helped build Facebook, and you’re like, no, you didn’t,

Dave:
But not making day-to-day decisions. Certainly,

Ben:
Yeah. They don’t drive. They don’t make things happen, right? Yeah. Anyways, you need governance. I’m not against that. It’s just like the credit of creating something from nothing goes to the founding team anyways, so I just thought we should probably be able to get access to good companies and people should be able to invest in these great companies, and we went to the SEC and we created something that didn’t exist before, which was a venture fund anybody could invest in. There’s never been a venture fund that people could invest in that were normal people, and we made it happen. And then people said, well, can you get good companies? And we went out and we got, I’ll just say, I’ll argue are the best companies in the world if you were to go list the top 10 best companies in the world, maybe 80% of our fund is the top six or seven, and it was a lot of luck and some execution, and those companies are mostly AI companies at this point. Who’s the best AI company? Who’s the second best AI company? Who’s the third best AI company? We own all of them, and AI is going to be probably the most transformative technology of our lives. If it’s not, I’m going to be shocked. I’m with you on that.

Dave:
I don’t really understand how it will be transformative, just that it will be very transformative.

Ben:
Even that, I think you could probably guess and be mostly right actually this point, which is that it’s going to be a person doing work that people do.

Dave:
I guess the second order effects are what sort of confused me. What does that mean for people? What do lives look like and how does it impact society? Is hard for me to wrap my head around.

Ben:
Yeah. Yeah. I don’t think I had an email address until I went to college. I think my first email address was in college and I was like, what is this crazy thing? I worked for a tech startup in the late nineties to the early two thousands. I worked in tech startup and people were like, what’s the internet going to be like? What’s the second order effects of the internet? Everyone was so wrong. There’s no predicting it, but they were massive.

Dave:
That’s sort of how I feel here. It’s like we know it’s going to be massive, predicting it as just futile, so nation that we just can’t guess,

Ben:
But it’s going to be massive, you know, want to be part of it. There’s probably massive economics available if you can figure out how to be part of the best of it, and so that’s what we’ve been doing. Our list of investments are just like, I mean, the funny thing is that most people hadn’t heard of these best companies. You’ve heard of some of them, but you’ve heard of Databricks. Most people haven’t heard

Dave:
Of Databricks. Yeah, I’m a data science guy though, so

Ben:
Yeah. Yeah. DBT. Then we also invest in DBT if you’re a data science guy. Yeah, I know that we

Dave:
Use it. Yeah.

Ben:
Yeah. DBT is awesome. We use it too. Invested in DBT. Andre Andre is the top defense AI company. They’re more than that. Canva. We invested in Canva, ServiceTitan invest in ServiceTitan, and then Anthropic and the other big AI company, which they don’t like me, the big one. I keep the biggest one. Yeah, yeah, them too. It’s awesome.

Dave:
Yeah. Wow. Congratulations on doing that. I think it’s cool on a couple levels, obviously AI is super exciting, but what you said earlier, just democratizing this whole asset class that is not available to people. You have to be super wealthy. To invest as an LP in a venture fund typically, and making that available to people I think is just very admirable. It’s kind of very much in line with what we’ve always tried to do at BiggerPockets. It’s like try and make something that’s hard for people to wrap their head around and get in on and make it accessible to normal people, so it’s super cool

Ben:
And hopefully it’s going to have good returns.

Dave:
Yeah, that too. Yeah, of course. That too. Even cooler when it works. I do have just one last question for you, so we’re sort of turning the clock here on 2024. I won’t make you make predictions, but what are your big questions heading into 2025, about the economy?

Ben:
I mean, my question, I think the question on everybody’s mind who’s sort of in the markets is that there should have been a slowdown from high interest rates. There really hasn’t been. It defies all expectations. I mean, there are some explanations, there’s lot of government spending, there’s a lot of immigration. Those things drive growth and prevent a downturn. But my question is essentially, will the economy land with low interest rates, low inflation, high unemployment, everything is coming together, everything. It’s like it’s a perfect 10. I’ve never seen that in my life.

Dave:
Does it almost make you nervous? You’re like, what am I missing, kind of

Ben:
Thing. Yeah, it’s like of all the things to predict, you can predict. I went through nine to nine and saw the stock market bubble blow up. I went through oh eight, went through the pandemic. It is just nothing in my life would predict a perfect 10 economy, and that it’s blowing my mind and it makes me nervous. It makes me like, well, this can’t be possible,

Dave:
And you feel that people’s sentiment is low. I feel like a lot of people feel that it intuitively doesn’t really make sense,

Ben:
But I mean the facts are that it’s been the case and it seems like most of the risk, the longer it goes on, the less likely it is to unravel.

Dave:
That’s a good way to think about it.

Ben:
People are working their way through. I mean, the problems that existed in 2002 when Silicon Valley Bank blew up and real estate companies were stressed, time is great. Timeless people work through problems and people have had a lot of time, and AI really hasn’t hit the economy yet. The growth that is going to come from AI is going to be just enormous. It probably doesn’t really hit the economy for another 24 months or so,
But
It’s coming. There’s so many positive things happening in America today. It’s really extraordinary. If you know what’s happening in other countries, we’re so lucky.

Dave:
That’s totally true.

Ben:
Yeah. I just feel more nervous when things are going well than when things are going poorly. I know that feeling, Matt.

Dave:
Well, it probably makes you a good steward of other people’s money not being overconfident. Alright, well, Ben, thank you so much. This has been a great conversation. Really enjoyed speaking with you today. If you want to learn more about Ben or any of the stuff he’s talked about that Fundrise is doing we’ll, of course put the link in the show notes or you know where to find [email protected]. Ben, thanks for joining us.

Ben:
Yeah, thanks for having me.