DC: Yes, I was actually a wee lad in university or college at the time. I thought I was going to run for president of the United States one day.

DA: No.

DC: Yeah. 

DA: Really? 

DC: Yeah. Had extreme desire to run for political office. Statistically, the best case for that was becoming an attorney and inserting yourself into the political landscape that way. Those numbers were changing over time and I worked on a political campaign in San Diego where I was going to college and realized that the vast majority of fundraising dollars were coming in from real estate owners and developers. And I said, huh, I like real estate a lot more than I like law.

DA: Follow the money. 

DC: Yeah. Let’s go that route. If I still want to go run for office, I’ll just raise the money from all my buddies in the industry. So it seemed to be a logical choice for me. And from there, I got an internship at a consulting company that did housing market analysis and feasibility studies. And I just, like many people, caught the bug and worked my way up the corporate ladder for more than 20 plus years to the sweet, sweet. And then when I realized I was there, I was actually still not the boss. There was a board of directors. There was investors. There was pretty much all kinds of people still telling me what to do. And so at the age of 40, I left and started my own investment platform. And I’ve started two more since then. And I don’t know. I hope I can just slow down now and just keep growing the ones I have.

DA: Wow. I love that. And so I have to ask, what are your political aspirations today? Any change of heart or is there still some undertones?

DC: There are undertones. I mean, my degree is in political science. I am a student of politics and international relations and the economy. And I think all of that is very important for an elected official. However, that being said, I think trying to be a successful politician in today’s environment is pretty much impossible. And there’s almost no way to be a rational, centered person and get elected anymore. It is just extremes. And I’m not an extreme person. I don’t have extreme views. And so that will just keep me on the sidelines for the foreseeable future.

DA: Well, we clearly have a lot in common. I talk a lot about the extreme polarizing positions on any subject and how I seem to, not that I land in the middle just as a cop out, but because I honestly believe that’s a good place to be. So it’ll be interesting as this conversation unfolds today with our two perspectives, it should be a fun conversation. So just backing up. So, you know, you have these political aspirations, you thought about law, you ended up in commercial real estate, the largest asset class in the world. But why do you think in the end you were so uniquely suited for this opportunity? What do you think has contributed to your success? You know, skills, mentors, colleagues, books, what else? And if any of those?

DC: I think starting out on the analytic sides of things and starting with the data has been super helpful. So I am weirdly a little bit right brain, left brain where I can handle math and I’m also creative. I’m a good communicator. And I think being able to speak Wall Street and Main Street, because they are two different languages, has been super helpful in advancing my career. Certainly helped me as an investment manager now in being able to relay more and more difficult or esoteric concepts to the average investor. And so I found from early on that that helps having that root fundamental knowledge of what drives the economics of real estate, really what is those supply and demand inputs, whether it’s housing, retail, industrial, office, and understanding that at a very base level. And then luckily, I got on the ground training where I got parachuted into city after city after city for 48 to 96 hours, and I had to understand and digest how that market worked for whatever engagement we were doing at that time. So whether it was Honolulu, Hawaii, or Snowshoe, West Virginia, I had that same goal every time I was there. And I think that that really helped me where I can also understand and digest really kind of complex narratives, a lot of intertwining elements of a particular market and come up with a story on why something is or isn’t important.

DA: Right. Very interesting. Before we dive into a few questions that I’ve got for you, I’d love to just get a bit of background on the new business, on the Sentinel platform. Tell me a little bit about that. What does that look like? And what are you building?

DC: Yeah. Well, we started in 2019. So it feels new to me, but we’ve been doing it for over half a decade. But really, it did not start out with the idea to build this investment management platform for real estate. It started as me looking for a way to park me and my partners, a little extra capital we had in some net lease assets. And so as we were exploring opportunities in the commercial real estate sector, we started with things like Starbucks and Walgreens. And frankly, I didn’t find them to be very compelling opportunities. I didn’t think there was a good risk adjusted return. I almost felt like those assets were only there for 1031 exchanges or other tax efficiencies available to investors that didn’t want to pay capital gains tax. And so as we moved up in price range to the middle market opportunities, $5 million to $35 million, we found that the market was not nearly commoditized the same way it was at those lower levels. So all of a sudden there was arbitrage opportunities. Assets were mispriced. And we just said, wow, this is pretty interesting here. Our background, our level of diligence, our analytical skills will pay off here because we’re not competing against less disciplined investors. And in most situations, the brokers are not assessing the risk of the individual assets appropriately either, at least in our opinion. So just like that, we were off and running. We closed our first deal, which was an Amazon facility in Huntington, West Virginia in March of 2020. The entire country was closed down. It was not the best time to start a company. And we were one of a handful of transactions over $10 million that closed across the entire country that week. So we started off with a bang and we thought, hey, look, if there’s one company that’s going to survive COVID, not knowing what we knew at the time, it’s probably going to be Amazon. So we bought an Amazon facility. And ever since then, we’ve just really been looking for good value-oriented acquisitions, all of them stabilized assets. So we’re creating cash flow from day one. And our opinion is let’s out earn the general return of the market from an income perspective. And then if we buy right, we’ve got additional profit potential upon disposition. And we’re not one of those groups that just says, we’re going to sell in five years because I have no idea what the market’s going to look like in five years. I don’t know what it’s going to look like six months from now. But what I do know is if I buy good assets at a great price, I’m in a better position than most.

DA: Right. Well, I take the same view in terms of not being able to project too far into the future. And that’s actually really one of the reasons why I started this podcast, was just to speak to people like yourself and understand what’s going on today. We’ll talk a little bit about maybe a couple of years down the road, but more importantly, what’s happening today in the trenches in the real world. And so I’m looking forward to getting your perspective. You know, today, I’m super interested in just how commercial real estate is continuing to evolve. Obviously, we’ve gone through just an unbelievable period of time. We think that people’s needs are changing. Technology is certainly impacting commercial real estate. You know, we think the core of business has shifted. It used to be simply build and they will come. It was all about just renting space. And we believe that has changed. We believe experience is now becoming a huge driver of the way people connect and engage in commercial real estate. And ultimately, we think the real winners are going to be those that really understand that that the business is fundamentally changed. We think a lot about experience. We think a lot about technology and see where the two intersect. So I’m just curious on your thoughts across the different asset classes that you’re buying into. You know, what are your thoughts on the commercial real estate industry, your business in particular, in terms of adapting to this transformation?

DC: Well, I think you make a great point that the market is always evolving. I always find it fascinating when I talk to other real estate investors and they use the same playbook cycle after cycle after cycle, even if the market changes and they wonder why their returns are not optimized. It’s evolve or die, in my opinion, when it comes to making intelligent investments, especially in real estate. And so you need to obviously understand macroeconomics and how that’s affecting. The big right now is that interest rates remain elevated. Inflation is super stubborn and that is impacting every asset type in commercial real estate. So even though we have great macro fundamentals for multifamily and single family investing in the US because we are woefully short on housing, those elevated construction costs coupled with elevated interest rates makes it really difficult to be able to build anything with a real yield on cost. And so ultimately, how are you getting to a return that makes sense for what is ultimately a risky proposition in development? You’re not. And that’s why you’re seeing investment volume go down. That’s why you’ve seen housing starts for both rental and for sale go down. And it’s really a problem because we’re kind of in this stagnant environment when it comes to housing where we’re not building the units, people need more housing. And now we’re seeing what is alternative. You see multiple households moving into one single property. You see multi-generational housing where families are no longer leaving the nest as quickly as they once did. And you look at builders trying to figure out other ways to adapt and be more affordable, whether that is modular housing or even the build-on-site robot concrete laying. We’re looking at every which way we can to make housing more affordable and more readily available. And then as it relates to other asset types, you look at office, office is dead, long live the office. Everybody was pronouncing that there’s no need for anybody to ever go back to the office again. And within 24 months, you have half of the Fortune 500 stating that you have to return to the office at least four days a week. And most notable, Jamie Dimon, the chair of JPMorgan Chase, gave a pretty explicit, profanity-laden explanation of why people need to get back to the office. And a lot of people don’t agree with that because they say, well, I’m just as productive as at home. And that is such a myopic view of the situation because if I’m the owner of the company, you might be as productive at home for your individual tasks, but you aren’t adding as much value to the organization as you would if you were in there. Because I’m not only concerned about your job, I’m concerned about your connectivity to your team and your ability to help nurture the next generation of leaders in this company. So I think it shows exactly how unaligned some of the employees are when they say, I’m just as productive as home. You are putting a death sentence on the next generation of leaders if you continue to take that mindset.

DA: I think you raised a great point and zeroed in on the right zone of conversation, which is the employee is just looking at it from one very narrow aspect. And I think that the employers are hopefully looking more holistically. And to your point, it’s not just about the productivity. It’s not just about the work that you do.

DC: Yeah, that’s right. And I think that’s really not enough of the conversation right now because that is the ultimate driver is not just productivity. It is leadership development. It is establishing a culture where you are going to have high employee retention. And right now we’ve moved in this post-COVID environment where people don’t want to go to work because they want flexibility in their life more than they can actually focus on being productive at home. Go to a pickleball court on a Tuesday at 11 a.m. Let me know how productive all those people are because those are your work from home employees. And that’s only one little small part of the office sector. But you’re already seeing a lot of fundamentals in the office sector return to where they should be. When it comes to retail, which we also invest in, that actually had a resurgence pre-COVID. So retail actually got hammered pretty hard in 2017, 2018. And then the clamps got put on resurging demand during COVID. And now post-COVID, we’ve seen that demand for retail is really spiked, especially for obviously essential services, but in addition for experiential type of outdoor shopping, things like that. And retail also has a multi-modal capacity. Talk about the evolution, right? You go into a Target, you can go in there to shop, you can go in there to pick up something you had already ordered online. You can come sit in the car. It’s a de facto distribution center for them. So that shows how the retailer’s business model is changing and how these sticks and brick locations actually have more utility today to them than they ever did.

DA: If you think we’ll ever get to a point in time where instead of predicting that a particular asset class or market segment is now over, we will just accept the fact that nothing is ever over and that things change and they evolve. And the question is, what will be next? What will it look like as opposed to it won’t exist?

DC: I would love for us to have that type of mentality, but we are click-baity reactive as a species. So I think we’re probably moving further away from that than we should, even though we have more information to make intelligent decisions.

DA: I think you’re right. I think you’re right. Listen, moving forward, I think people sort of expect this one-stop seamless and more personalized experience and also digital experience that ultimately we need to connect our customers to everything that a building has to offer and using technology to do that, helping to create connectedness, fostering productivity, and just making it easier for people where they work, where they live, where they shop. So we believe customer experience and engagement in buildings can be improved sort of one interaction at a time, looking at the whole spectrum of the way people engage and just sort of checkmark, checkmark in terms of all the opportunities to improve. What are your thoughts on how we can deliver better experience across asset classes? I mean, I’m obviously very focused on office, but you’ve got investments in a number of categories. How can technology enable better delivery of service and experience to your customers?

DC: No, I agree with you. Better living through technology. That’s really what it comes down to. All your wants and needs are stored on your device, right? I know it gets a little bit brotherish when people want to talk about that, but at the end of the day, it does make your life a little bit more efficient if you know all of the resources around you. And look, I’ll make this very overly simple, right? When I first started my career as a real estate consultant and I was doing a assignment in Snowshoe, West Virginia, I had to drive from the Pittsburgh airport and there was not a GPS for a car. There was not my phone to help me. There was a map book that got me perilously close to being lost about a half dozen times as I drove through dark woods at night. Now today, people take for granted exactly how much more efficient we are across those things. And so it’s a combination of efficiency, practicality, and ultimately an enhanced lifestyle in my opinion when it comes to utilizing technology across the board. Now granted, some of that can be used for overt marketing purposes where maybe you see a lot of things you don’t want to see, but I’ve always been of the opinion that I’d like more information than less. So let me as the consumer make the decision and then have the opportunity to filter from there in.

DA: You raise a great point. I think it all comes down to the relevancy. If I’m being delivered information, content, programs, services that enhance my life, that are valuable, that are meaningful, I think I’m going to want to continue to receive that. As soon as you bombard me with content that is no longer relevant and has no meaning, I’m going to want to shut it off. So I think it puts the onus on us to make sure that what we’re giving them is exactly what they need and want.

DC: Right. And you see that on a very basic level, even with social media, you look at influencers or popular figures in social media, once they start straying from their core messaging of what brought the audience there to begin with, their readership, listenership, viewership, whatever you want to call it, it goes down almost immediately. So I think as a society, we are becoming adaptable to understanding that, hey, we are going to go to what we prefer. And if you can’t deliver things of value, we go elsewhere.

DA: Somewhere else. Brilliant. Brilliant. Well said. Along with others, I really believe that we’re in a bit of a period of reinvention in commercial real estate. But when there’s reinvention, there’s opportunity. And I suspect as an investor, that’s what you’re zeroing in on every day. So if budget were not an issue, right? If you had a war chest, what new initiatives or acquisitions would you undertake to position your business for success over the next, and here’s where I will project into the future, three to five years, what would you do now to position your company for success if you didn’t have those financial constraints?

DC: Well, I would invest even heavier in AI than we already are. My goal with AI is not that it’s going to replace anybody in my company. It’s going to make every person in my company a superhero. So we are already looking at ways to integrate AI into our acquisition, to our financial modeling, to our asset management, accounting, distributions, investor communication. And so I want to do more with less. And that’s what technology provides to me as an operator. Whether that is something as simple as making sure it’s integrated into our own operating platform and the technology we use as it relates to asset management in the portfolio, or even to the building level, as I’ve discussed with you previously, I think that’s a super important part of it. The more you can enhance that experience for the tenant, whether they’re office or retail, or even industrial, the better off you are for the stickiness and longevity of that building. And that’s really the game with real estate is you do not want the friction costs of people leaving your building, no matter what the use is.

DA: Yep. Yep. Agreed. Agreed. I think that’s a great opportunity. Let’s take a short commercial break. We’ll be back in just a couple minutes.

COMMERCIAL BREAK

DA: And now I’d like to welcome back to the show Dennis Esterna, Managing Partner, Chief Investment Officer at Sentinel Net Lease. Again, thank you so much for joining me today. We’re having a fantastic conversation, and there’s more to come. So guest after guest on this podcast, you can now count yourself included, has echoed the same sentiment that each and every person who enters the building, or any building, is now viewed as our customer, no longer just the person who signs the lease. That was sort of very much the pre-pandemic world. Today, all that has changed. And so I think that dramatically changes the nature of the business. We now have to be concerned with every single person and their experience and relationship to the building. And so I think it’s an incredible opportunity for all of us. And I also think the opportunity to think about experience from the perspective of hospitality, and not just class A buildings, not just the flight to quality, but all class of buildings, no matter how old, no matter how big, we can all think about hospitality as a driver of joy in building. So love to get your reaction on this thinking, and any thoughts you have on what that means for the commercial estate industry.

DC: I love the saying that you don’t get a second chance to make a first impression. And I think that’s very true with anything you do, especially if you have someone walk into your building. And if your building is well maintained, if it’s got anything that makes their experience a little bit better or nicer, they’re going to remember that. And that’s free marketing. You’re living inside that person’s head, and who knows who they might tell about the benefits of that building. So obviously with some of the class A buildings that are more technologically efficient, that goes a long way, right? You’ve got first, you’ve got great build-outs, you’ve got automated key fobs, you’ve got great security, you’ve got self-serve food options, things like that. And a lot of these things you can incorporate into older buildings. It’s just a function of, is there going to be an ROI there for you? What is your real plan for the building? But there’s obviously even very simple stuff, such as just having an iPad at the front of the building that’s affixed to someone so people can understand where’s the directory? Where am I going for that? Where’s this dentist office located? That’s always a horror of mine if I walk into an older medical office building and I see a director of 600 different companies, and I can’t even remember what the name of my doctor was, or I can’t remember the medical group. So just having something as simple as that automated directory goes a long way. I think overall, it’s being forward-looking enough to realize that you want your tenants to stay, every customer that walks in to talk to those tenants, regardless of the building type, is going to remember what that experience was like between walking into the parking in the building even. Is your parking automated? Do you have an easy system to get in and out of? I will tell you whether it’s an office building or a big industrial facility, if you’re getting swiped in and the reader on the way out doesn’t work, and you have to hit that little red button, say, please, God, help me. I’ve got 20 cars parked behind me. These are things that can be fixed with good technology, but people just aren’t willing to reinvest. That shows and ultimately, I think, impacts the opinion that people have of those properties. So a very simple thing that can be fixed, but just not enough people take the effort.

DA: Right. I think there are so many different touch points within the overall customer journey within real estate, to your point, that can be looked at and reconsidered, and not everything is expensive. There are a lot of things that we can do to enhance the experience, deliver a higher level of hospitality, and to your point, make people tell their friends, and they tell their friends, and we could do a commercial about that. We all bring our different backgrounds and perspectives and areas of expertise to this whole subject of the world of office and particularly the future of work. What else are you thinking about? I know that we’ve discussed some of your office assets. I’m just curious what we haven’t addressed in this conversation so far in terms of what you’re thinking about as critically important to the industry, particularly this notion of return to work and having offices just part of a much larger workplace ecosystem. We’ve got ESG, we’ve got IoT, we’ve got ROI, we’ve got M&A. What else is in your head? What are you thinking about?

DC: I am thinking about what does the office supply look like five or ten years from now, because what we’re talking about is filling up the existing offices that we have, because we are not really building a lot of office anymore, as most people probably know, and come 2026-2027, we will be at historically low delivery of new office in this country. What you’re seeing at the same time is we are actually knocking down office building and repurposing office building at record levels at the same time. We are actually reducing the overall supply of office in this country for the first time in a long time. And by doing so, you have to wonder what are the fundamentals going to look like if all of a sudden 20% of the office space is no longer available and companies continue to grow. Let’s be honest, we’re already seeing it now when companies have initiated their return to work. Well, they’ve done their return to work, but they’ve reduced their office footprint. Now they realize they don’t have enough space. Who could have thought that if I somehow was trying to cram the same number of employees into half the amount of square footage, it wasn’t going to work?

DA: Because at the same time, the purpose of space and the types of spaces are being designed completely differently, right?

DC: Right. That’s right. Now you’re looking for a different utility of that space. You’re seeing a lot more collaborative spaces. You’re seeing smaller workstations in some elements. It’s really about come to the work, do your base-level stuff, but make sure you’re there for the team environment in those collaborative spaces. Now that’s not all practices of all companies everywhere, but that’s just a general trend we have seen going on. I look at it and I look even today of the buildings that haven’t been knocked down. There are hundreds of millions of square feet in the United States that are 1970s and 1980s vintage that have occupancy below 50%. Those buildings are essentially zombie buildings. Their owners are not reinvesting into that. Do you really count that 60%, 65% that’s vacant among all those buildings as rentable space? I suppose so because it’s available for lease, but the reason it’s not being leased up is because they’re old, tired spaces. The owner doesn’t have the ability to reinvest capital into that space. The new tenant certainly isn’t going to. I think you see a resetting of the market in terms of its overall market size. I would be shocked in the next five to six years if you didn’t see office occupancy go back up above its historical norms because we’ve been so supply constrained for such a long period of time, and we’re going to continue to knock these older buildings down.

DA: Do we need those zombie-like buildings that are here today five years from now, or do we just need investment in net new real estate?

DC: I think you need investment in net new real estate because ultimately the cost to renovate those buildings, it still has enough things lacking. It’s putting lipstick on a pig. You’ve got 40-year-old building systems. You’ve got 25-year-old roofs, decades-old HVAC systems. I think you’re better off getting rid of that old supply, especially in suburban markets. If you’re talking about you’re in Manhattan, yeah, I can understand. It’s going to be difficult to knock that down and rebuild. You’re probably going to repurpose. Let’s be honest, most of those things built in the urban cores are built to last. A lot of them have been there for 70 or 80 years and continue to be renovated from the inside out.

DA: Right yeah, Interesting. We’ll have to regroup in about 30 or 40 years, you and I, and just see how relevant this conversation really was.

DC: Yes, you can call my wife. She’ll tell you where I’m buried.

DA: I’ll put a note in our calendars. Our closing speed round is an opportunity to get to know you, Dennis, a little bit better on a personal level as well. Looking back, what is one piece of advice that you wish someone had given you when you first started your career?

DC: Just go for it. If you have a hunch on something, it’s not going to totally bankrupt you, give it a shot. I would have started as an entrepreneur probably 10 years earlier.

DA: There you go. Great advice. A favorite book or podcast that has positively impacted your approach to work or life? Anything you’re listening to or have read recently?

DC: I listen to The Rest is History, which I find phenomenal. It’s not a business-related podcast, but I find you can learn a lot from understanding the pros and cons of leaders of the past and understanding how previous generations handled problems. For me, it’s just very insightful. It makes me take a very practical approach to life where I don’t think the world is on fire at all times.

DA: Yeah very cool. Name one way in which technology has improved how you live or work.

DC: Absolutely. I will tell you just from even using AI, it has made me massively more efficient in terms of getting through my daily grind. I get about 500 emails a day from various brokerage companies and sellers of real estate in the country. By utilizing AI efficiently, I get through that in about 10% of the time I used to.

DA: Very cool. This is an interesting question. As commercial real estate continues to evolve, what skills do you think are going to become sought after by building operators in order for the industry to remain vibrant and relevant? What does the industry not have today that it likely will need tomorrow as we continue to deliver this new product of experience and customer service?

DC: I think it will be continued building-level intelligence. Not just intelligence in the building, but also assessing the building itself. We’re already starting to see some interesting things when it comes to due diligence and property-level reporting in terms of conditions where drones utilize AI software to spot check the condition age of certain units within the building, whether it’s HVAC, condition of the roof. I think that’s going to go turbo mode over the next few years where a manual property condition report might have taken three weeks before by utilizing different systems into the building, things that monitor water pressure, things like that. I think it’s going to revolutionize your risk mitigation on due diligence. I think it’s also going to help from a risk management perspective when it comes to having different maintenance and reporting systems within the building, whether that’s something as simple as something that taps into the flow of the water or the HVAC unit so you can start to normal disturbances when they happen that allows you to be more proactive than reactive. Anyone that owns a building knows the last thing you want to do is have to react to something after it’s already broken.

DA: Right, right. For sure. If you were not doing what you’re doing right now, what would you be doing instead?

DC: Assuming I was a higher caliber athlete, I would be a retired center fielder for the Chicago Cubs.

DA: Okay. Clearly, that’s been percolating there. That didn’t just fly out of your head right now.

DC: I gave it a go all the way through college, but there’s bigger, better guys out there.

DA: Yeah. Amazing. Listen, Dennis, thank you so much for joining me on the program today. It was a very lively and engaging conversation. This went super fast. I feel like we just started and it’s already over. Thank you so much for joining me. I learned a lot. I’m looking forward to sharing this episode with our listeners. I’m looking forward to continuing to stay connected and finding an opportunity to collaborate.

DC: Thanks so much, David. I really appreciate it.

DA: All right. Take care now. 

DA: That’s a wrap on today’s episode of TEN. I want to thank Dennis for joining me on the program. If you enjoyed this episode, don’t forget to subscribe and leave a review. It helps others find the show. Thanks for listening. Until next time, I wish you all continued success in building community where you work and live.