Keith Breslauer:

We're constantly thinking about how to grow, how to develop our business over the long term because this phase of our business is really to create that multi-generational business. So that's what I've been spending the past five years trying to do and probably the next five to 10 years.

Nancy Lashine:

Hello and thanks for tuning in to Real Estate Capital. I'm your host, Nancy Lashine of Park Madison Partners. Capital is the lifeblood of the real estate industry, but the decisions on where and how it's allocated are driven by people and personalities. Who are they? What motivates them? What can we learn from their experiences? On this show, we introduce you to some of the real estate industry's most influential thought leaders and decision makers, and we talk about what is important to them, how they make critical decisions, who has influenced them, and a lot more.

Today's guest built a five billion-euro real estate fund management business from scratch and is known as a perpetual optimist. Keith Breslauer is a fellow New Yorker, born and raised on the far side of the river in New Jersey, and went to high school and college right here in Manhattan. Keith worked at Lehman Brothers and ended up starting one of the largest and longest standing independent real estate investment firms in Europe over 25 years ago called Patron Capital. And Keith managed to do all of this without losing his New York accent. We discuss the evolution of Patron Capital, the real estate opportunity in Europe today, the role of ESG, and Keith's guiding philosophies. Our conversation begins with Keith's view of why this is one of the most exciting opportunities in 25 years. Welcome, Keith. It's great to have you here.

Keith Breslauer:

It's fantastic, Nancy. I'm happy to do this. Happy to be with you. Yes, I've kept my New York accent. I try not to slur like I used to, but we're getting there.

Nancy Lashine:

Another 25 years. I've often wondered why you built Patron in Europe rather than building an investment firm here in the US. And recently, I heard you answer that question with the comment because you see fat chickens walking around Europe and you could shoot them. So I'm intrigued to hear more about that.

But let's back up a little bit. You said the current real estate cycle offers the most exciting opportunities you've seen in 25 years. And coming from someone who's worked through multiple cycles, that's a big statement. What's driving your optimism right now?

Keith Breslauer:

Let's be clear, sorry. If I go back over the course of Patron, let's say, there's always been some dramatic shifts that happen. Those dramatic shifts scare capital flows. Those capital flows, if they tie to real estate cycles, potentially create significant opportunity. Normally, the greatest opportunities I really think are the big distressed opportunity. That's kind of what I grew up in, how I started my career in '87, '88. And that really remains really the biggest story.

And I think the '08, the post-'08 period was a great opportunity because you had this huge amount of distressed credit. You had a lot of bad banks that were formally created by European governments. There was a significant unloading of those assets and therefore there was an opportunity. It was trickier because you really had no sense of supply demand dynamics, and therefore the classical real estate fundamentals was hard to underwrite. Today, it's different. I wouldn't really define it-

Nancy Lashine:

Weren't you also scared just about the fundamentals, like just the macro?

Keith Breslauer:

Yeah, so back in '08, it was super scary. So on one end, you got the capital flow argument, which made it really interesting. On the other end, if we had sellers who had to sell. And then on the fundamental point, it was really not obvious.

Nancy Lashine:

No.

Keith Breslauer:

At least at that point. And you needed a couple of years before things really picked up. And the big difference I think in Europe versus the US, I don't know the US that well, but at least from my friends who tell me, is that while the US picked up and got going and everyone got all excited and started moving forward until COVID hit, of course, Europe never really took off that much.

And then a really weird thing happened post-'08, which is many governments created, maintained, or extended very restrictive planning regulations associated with land conversion and building. So as a result of that is that much of the supply that you would have imagined in a boom with a low interest rate environment hit the market, didn't really quite hit the market as much and we just haven't seen it.

And a great example, Spain. Spain had this huge overbuilding in the pre-'08 period. It was a total disaster. Everything fell apart, got completely destroyed. Sareb got created a Spanish bad bank. And you fast-forward to today, which is a long time since '08, you really do not have the amount of supply or anything close to the supply that's been built. Meanwhile, the economy's great, immigration's positive, and there's huge demand.

So I wouldn't call this the best opportunity in 25 years, but it's a pretty good one because you have this scenario where you have these pretty strong demand-supply imbalances. You have a relatively benign interest rate environment, obviously maybe Z going down. But the flip side is, and I think when you first interviewed me it was pre the Trump announcements. We have this huge geopolitical uncertainty that exists because the Trump Tower plan and also European governments are operating. So it's tricky. And like in all things, it's a tricky environment right now. It's not obvious because of those macro movements, but the real estate aspect is actually quite interesting.

Nancy Lashine:

Right, interesting. Well, let's back up a little bit because you're talking about real estate environment in Europe. Much of our audience is based here in the US. So tell us a little bit about your background, how you got into this business, and ultimately how you started Patron in 1999.

Keith Breslauer:

Sure. So I grew up, my first major job outside of the businesses I had when I was in school was at Lehman Brothers and I was hired inside investment banking for the financial services group, which very quickly morphed into what they call mortgage finance or essentially being the banker for the trading floor. And part of all this was, this was 1987, '88, '89, real estate crisis was in full bore. Lehman Brothers was the advisor on what they called the Southwest Plan transactions, which were the pre-RTC, big SNL bailouts. And on the back of that, the firm, with a bunch of very smart people, decided that we should be using our balance sheet to invest in property and property portfolios and distressed assets.

And my job was really to be part of a team that did that. And I worked with a very good person, a guy named Mark Burton, who's one of the top guys at the time. And we worked with the trading desk pretty closely to use the firm's money to make some interesting attractive investments, which did very well.

Nancy Lashine:

And thank you for that, by the way, because those were the investments that we used as the track record when we launched the Lehman Opportunity Fund.

Keith Breslauer:

There you go. So it was a phenomenal business. We did really, really well. I spent a third of my time probably in Texas, Louisiana, and northern Florida. Then we did the Westinghouse trade, Pittsburgh. It was an incredible time, an incredible opportunity.

Then '91 rolls around and Robert Maxwell dies. And everyone knows his daughter, but they don't really remember the dad. The dad was pretty interesting character, huge issues. Anyway, he dies, he falls off a boat. He owes Lehman Brothers and a lot of people a lot of money. And I am sent to London to help the London team figure out a way to get the money back because some of the collateral that we lend money on, I knew the company and I was kind of the firm's trusted banker, let's call it, for that business.

And I came to London and I saw a really interesting market where there was not a lot of people doing what we were doing. Actually, there was no one, other than a Goldman Sachs trader. And you had interest rates that were just huge and were slowly coming down, but which were still around 11 or 12%.

So I went back to my boss in New York and I'm like, "Wow, there's a big opportunity in London. Let me come to London to really help build a group there working within the securitization division and fixed income. And if it works, pay me well, and if it doesn't, fire me." So that's how I came to London. I came to London in '92. I started working here in '93. I got married and I moved my wife from New York to London and we built a life.

Anyway, five years go by and now we're talking about 1996, '97, and Lehman Brothers is going like gangbusters. Mark Walsh is building out his business. You got your fund, as you pointed out, the fund business is starting to get going with Ray Mikulich and all the various people [inaudible 00:08:53] involved and doing all that. And my job was I was asked to come back to New York to run the mortgage finance division, effectively globally, which was really an amazing promotion, but I felt really something I didn't want to do.

I loved Europe, I loved the opportunity set. I thought it was quite complex. I thought I could work harder than others. I thought it was perpetually interesting, despite kind of the same crappy real estate. It was just being done in different cycles and different markets and you could work through those markets and that was exciting.

So I convinced my lovely wife that I could sort of create something. I was a little scared because I really grew up pretty poor, and Lehman was my family really. So I did a joint venture with a fund. It worked well. It was supposed to be it would last a year, lasted a bit longer, but it gave me a bit more confidence to kind of do something on my own and I-

Nancy Lashine:

So you left Lehman and started this joint venture?

Keith Breslauer:

Yeah, so I left Lehman and I became the originator for Lone Star One.

Nancy Lashine:

Oh, wow.

Keith Breslauer:

So I was a European originator for Lone Star One, and I did it because John Grayken is an exceptional investor. He's extremely smart, very capable. I didn't really work with third-party capital before, it was always Lehman Brothers, and I really wanted to figure out a way to understand that world, which I never was part of. I was inside the mothership.

And I learned a lot. I really learned a lot. Good, bad, indifferent, but I learned a lot. And on the back of that, I say, "I really want to try to do this on my own." And I said, "Patron [inaudible 00:10:22]." And it wasn't really on my own. The principle was on my own at least to start it. But the [inaudible 00:10:26] was in order to get any kind of momentum or to grow, I need great people, I need great partners. And I then kind of embarked right away to try to find best of class or good people to help me build a company. And that was about almost 26 years ago.

Nancy Lashine:

Did you have a capital partner or did you start it on your own? How'd you get it going?

Keith Breslauer:

I had some money I made with Lone Star, which is great. Originally, I had a capital partner, a very good man who was backing the idea. I mortgaged my house at the time. I had Lehman shares. But hey, it was-

Nancy Lashine:

That was a good time still to have them.

Keith Breslauer:

It was [inaudible 00:11:01] share that it was doing really well. Anyway, and I didn't really have a lot of money. And we started doing a couple of investments that worked out well. And we did this huge investment out of the box with Royal Bank Private Equity, who gave us about 77 million pounds of equity at the time. And that became what we call the captive fund. They didn't need me to put up a lot of money. And on the back of that, we went to go raise funds.

But the process was so brutal that halfway through that process, that investor didn't really believe it was going to work. So he backed out. And I remain friends with him, [inaudible 00:11:36] good guys, and I still did something with him, but I ended up saying, "Okay, I could pull this off."

Nancy Lashine:

Wow, that must've been a tough evening though.

Keith Breslauer:

It was brutal and it was always brutal. So we try to raise $250 million at the time. We got to about 110 million. It was half of what we wanted, but it was great investors. And I said, "You know what? I really want to be in this business. This is a long-term play, we should start." And we did, and we started and that was what fund one was. So when we launched fund one, we have our cap to fund, which is that basically a one deal World Bank money. And we had fund one, and that's how we started.

Nancy Lashine:

Do you have investors from way back in those early days who stayed with you for a couple of decades?

Keith Breslauer:

The majority of our investors have been with us for 16 or 17 years. The challenge of the very first investors is that a lot of them grew quite dramatically. And indeed, remember this is around '02. So the 2002-

Nancy Lashine:

Yeah, they were fund investors then, but not now.

Keith Breslauer:

Yeah, so 2002 to '5 period, most of these people went really into lots of real estate funds. And then when '08 hit, some of them got really crushed and they just like, "We're done." So much so that there was a perception that Patron was all endowment and foundation, and that after '08 we lost the endowment and foundations and therefore we rotated to corporate pension plans. It's not true. We've had 40% maybe or more endowment and foundations. We now have 30. Okay? So they changed, but they were-

Nancy Lashine:

Sure.

Keith Breslauer:

Remember, the endowment foundations, as you know, were prepared to invest in early funds or first-time funds.

Nancy Lashine:

They were the market leaders on that. Yes.

Keith Breslauer:

Exactly. So we were able to work with them and that's how we grew the business.

Nancy Lashine:

So just taking this moment, for people who are listening who also want to start their own businesses, what would you say you learned early on about raising capital from institutional investors?

Keith Breslauer:

Well, I think the first key aspect generally about everything is just things take a lot longer than you think. So if you've got this great plan that lasts a year, double it. The simplest thing is if you could survive 2x of what you think is the plan, then that's a pretty good start. So that would be kind of a general point.

The second point is that institutional investors, specifically to your question, really want to be investing with someone they could trust, someone that is going to really have the highest respected fiduciary responsibility. And therefore, in all matters, make sure that, A, they invest wisely and make good returns, but also do everything else that is necessary to be a fiduciary. That's a key. If you cannot demonstrate that understanding and ability to carry out fiduciary duty, good luck. It's really key.

You don't have to be the best investor. You might be off by one or two points. You could try to be the best, but what's really important is, A, obviously a great investor, but also to think through what does it take to be a fiduciary, and make sure that you're working at kind of best of class. That would be a key aspect of it.

Nancy Lashine:

All great advice. So you started Patron, you raised your first fund. Tell us a little bit about how you developed your investment strategy. This is the first time that you really didn't have a boss or a balance sheet. So how did you decide what to invest in, where to look, what countries to look at? You had a very large playing field.

Keith Breslauer:

Right, so the theoretical basis is it's very difficult to fight beta. So you need to try to get good tailwinds behind you and you hope your alpha or your work [inaudible 00:15:08] will work. So that's kind of principle one.

The second question or second point was I grew up in a world originally where we were almost like a statistical investor. We would be buying thousands of loans or 100 pieces of real estate. The ability to underwrite individual transactions was very difficult in the old days, there was very little paper on it. And in many ways, you were betting that this huge discount you were getting was worth it.

And I think as the market evolved, a lot of that just didn't exist. So the opportunity set was much more what could you actually do on the asset? Can you really refurbish the property? Can you actually [inaudible 00:15:47] as an asset manager? So I would say in many ways, the very beginning of my career was more of a pure credit aspect, a statistical aspect. As my career developed over time, it became a more direct real estate story.

And when I set Patron up that bricks and mortar, that real estate fundamental was pretty important. It wasn't just about a fixed income dynamic, so much so that I really felt I needed to build an in-house development team. So we went out and brought on board direct project managers that could actually work alongside the investment partners to make sure that the local partner and ourselves were delivering the project.

Nancy Lashine:

How did you learn how to hire a team, hire good people, and build a culture? Because again, you were part of a very big culture before this, and that's not a skillset that real estate investors are typically taught. Tell us a little bit about that journey.

Keith Breslauer:

I think the reality is my background. So my dad was a real estate developer. He never had any money, he leveraged the hell out of everything. And every time there was this huge crash, he went bust. So he went bust in '73 and then went bust in '87. And from the age of 16 on, I had to... My parents were amazing people, so emotional support was huge, but financially, they had no money. My mom worked for the city and made no money.

So I really grew up with that sort of entrepreneurial dynamic. I had to start a company, I had to make money. So I made a little bit of money in high school and I made much more money in college with a business I created. I went to business school really quickly because I had a successful business at college and they let me come early as very young.

So when I joined Lehman Brothers, I never worked for some big giant organization. It was really the opposite. I could set up a team, I could run a small group, but can I be part of a large group? That was always a magic question. And I think the criticism throughout my career has always been, by my bosses, "Can Keith report to a boss?" That was always the question.

Nancy Lashine:

There's a business school case right there.

Keith Breslauer:

Yeah, exactly. So when you work in the land of distress, Texas, all the crazy crap going on, you really needed a very strong SWOT team to run that. And it was natural for me because I had a great boss. I had Mark Burton as a boss at the time. He was like the VP, I was the associate. I had a team of analysts and we just kind of went to work. And all the guys I worked for, whether it was Wes Edens who was on the trading desk or Rob Kaufman or these guys, they're like, "Keith, just keep going, man. As long as you don't screw up and you're doing the right thing and you're doing the right homework, we're fine."

So building the team to execute the strategy was more of a natural to me. What was not natural to me and ultimately was why I left Lehman Brothers in many ways, was I couldn't deal with matrix management. I just couldn't. You want me to report to one person, fine. But I got to report to 12 people and I don't know who does what, it's just not what I do. So that was really the challenge. So when I set Patron up, building a strong team is, I would say it's hard, but you got to do the right thing. I don't know any organization that the average tenure across the senior people is 17 years.

Nancy Lashine:

Yeah, it's extraordinary.

Keith Breslauer:

That's-

Nancy Lashine:

You said something just now that... You said your boss at the time said, "Just don't screw up." But you've also said about your team, and I think part of the genesis of the success and the longevity is that you make mistakes all the time and you just learn from them and move on. It's almost like a very Silicon Valley culture mentality. It's generally not a Wall Street culture mentality. That's unusual. Does that strike you as something? Did you learn that or you just kind of, that's just the way you are?

Keith Breslauer:

Well, everything is a nature nurture question. So [inaudible 00:19:37] sort of learned. My mom studied or was a big fan of a guy named Albert Ellis, which is Rational Emotive Therapy or CBT, Cognitive Behavioral Therapy. And the principles, at least she ingrained in me, is that... And my dad was virtually blind, okay? So the principles were it doesn't really matter what you got, this is what it is. Things happen. Move forward. Move forward. Positively move forward.

So for example, a couple of ago we were working on some investment, one of the investment partners did make a mistake. And it turns out that something in the contracts isn't working as this person thought it was. And as a result of which we potentially are going to lose a lot of money. Now, she kind of went into a panic and was trying to figure out what to do. And we talked about it and I said, "Listen, okay, it is what it is. The mistake was made. Here's what you did wrong. Okay, you're fantastic anyway. Lesson learned. Let's figure out how to resolve this."

It didn't cost us much money. It worked out and it's fine. But if I would have gone after and said, "You're an idiot, you're stupid," that's not how you behave. So my approach has always been essentially be very transparent, accept responsibility. I don't believe in the blame culture. It's a terrible style.

Nancy Lashine:

Terrible culture.

Keith Breslauer:

Terrible style. We made mistakes. We make mistakes all the time. We made big mistakes in the '05 to '07 period. Okay? They're my responsibility. The fact that someone brought it to me, was convinced of it, showed me the spreadsheet, did all the work, it doesn't matter. I made the decision at the end of the day. Right? That's the point.

So going back to the comment, I think building a great team culture is transparency, it's trust. It's really being fair. I think that's a hopeful point that we try to achieve. And yeah. And the reason why I like living and you're working in Europe, which relates to building a strong team, is the diversity. We have this huge range of cultures. I think someone figure out we had 23 cultures in the organization, different languages, different styles, different approaches, and that's what makes it exciting and interesting. And as long as you respect that, it's all good. So you can do whatever you want, but understand the high level principles that we're trying to achieve.

Nancy Lashine:

So you've raised your first fund, you went on to, you're now on fund seven.

Keith Breslauer:

Yeah.

Nancy Lashine:

Is that right? And you've remained one of the last independent real estate investment management firms in Europe. So many firms have taken capital from outside sources, have merged into other sources, have disappeared. What's it like? How is it different in 2025 than it might've been in the early 2000s or in the last 25 years, running a firm that's independent and not part of a very large balance sheet shop?

Keith Breslauer:

it's much harder. It's really hard. So why is it hard? What changed? First of all, the amount of capital that has been accumulated in investors groups has dramatically increased, right? The creation of sovereign wealth funds, that huge amount of pools of capital that are looking for investing has just grown. The concept of a superannuation scheme in all these different countries where enormous savings has been accumulated in these pots of capital is huge, and that capital is looking to invest. So that is a very serious, interesting aspect.

So to tap into that capital, to raise a fund, to the extent that you're an independent manager or you're a small fund or you're small group, becomes harder and harder to do because these people are so big, they just simply can't concentrate on small managers. So people like Blackstone, to their credit, have figured out a way to capture that because they offer a range of products. They go to firm X and they say, "We'll be your CIO effectively, or we'll do some version of it and we'll take over a bunch of funds." And Blackstone has been a genius at that. They are fantastic at capturing that story. So that's one aspect is that the large capital pools have been created and getting that's hard.

Second dynamic, of course, is regulations. So regulations have increased over time, whether it's FCA like the supervisor regulator, or ESG, anything to do with ESG has really become a big story. So my compliance costs for regulation, whether it's generic regulator or ESG, is significant. For example, in Europe now we have regulatory capital that's been implemented for investment advisors. That capital is far bigger than most small businesses could afford. So it's essentially dead capital as cash in the business. So there's been a combination of pressures which create a challenge in the group.

And then the third, of course, is that as the market moves and cycles turn and everything else, being dedicated to a specific continent or a specific area might make it very challenging. So I think I've shared this before with you. When I went to raise fund seven, if you count the amount of Zoom meetings I've been or in-person meetings, it adds up to about 760 meetings for raising fund seven.

Nancy Lashine:

Oh my gosh.

Keith Breslauer:

And that's in 18 months, of which 580 were new investors, which roughly 300 were unique investors, of which we got 15. That's the math.

Nancy Lashine:

That's the math. Yeah.

Keith Breslauer:

That's the math. So if you want to go, and going back to your earlier question about setting up a business and doing all this, you want to go into a business and do the kind of strategy that we've done, which is a closed-end limited partnership, a diversified fund strategy, it's brutal. It's brutal.

So going back to the question, can we survive as an independent manager in this market? I think at our size, we're a bit small. We're not terribly small, but we're a bit small because we have a big team and lots of overheads, et cetera. I think we need to be a bit bigger, not dramatically bigger, but a bit bigger. And we're constantly thinking about how to grow, how to develop our business over the long term because this phase of our business is really to create that multi-generational business. So that's what I've been spending the past five years trying to do and probably the next five to 10 years.

Nancy Lashine:

So let's switch gears to talk about, in the same vein, you've lived through at least three distinct market cycles. What are you seeing in terms of investment opportunities now that either rhyme or are just significantly different from previous cycles? And where are you seeing the most exciting opportunities?

Keith Breslauer:

I think there is a general trend and then let's call it a specific point. The general trend is that, I was going to say for whatever reason, but more specifically, I do think it's increased planning restrictions. There is a significant demand-supply imbalance in lots of stuff out in Europe, either driven by planning restrictions preventing from those assets being created, like agricultural land not converting into residential land or greenbelt land into residential land or stuff doesn't get built or, because of COVID, things got delayed. One reason or another, is just not a lot of supply.

And demand, while economic growth is generally anemic, is actually pretty good because many people have quite a lot of savings. Their unemployment is extremely low, and therefore we're seeing economic, despite the perception that the world has ended, we see economic activity which has helped supply that demand or provide the demand dynamic to that supply.

So you have no supply, you've got good to lots of demand. So that's a classic real estate dynamic. It happens all the time. We're back in that cycle for most assets. Well, for example, high-end PBSA, which are the big towers, there is lots of supply now in the UK. Certain cities like Leeds and other cities might have too much supply of the high-end stuff. And therefore, there's an interesting question about whether that imbalance has now been corrected and [inaudible 00:27:20] even more extreme.

So we see across Europe that same story. We're looking for those demand-supply imbalances.

Nancy Lashine:

And sorry, is that across all three major asset types? Or how are you thinking about it in terms of [inaudible 00:27:33]?

Keith Breslauer:

That's across all asset classes, but depending on which class and which country. So residential and industrial in Spain is interesting. Residential and to some degree maybe retail is interesting in Portugal, from a demand-supply imbalance. UK resi, very interesting, still student housing a bit, healthcare very interesting as well. That's the demand-supply imbalance argument.

Then you get to the specific point, which is where their situation is a credit problem. Maybe not because they overlevered, but rates have gone up and we have this whole issue with [inaudible 00:28:03] trust, what happened? Where is there a credit problem combined with the new thing, which is this ESG requirement? So as all real estate, well, as the European real estate guys and people now complying with environmental regulations, let's call it the Energy Performance Certificate or EPC rating of A, B or C is a pretty important dynamic in pretty much most asset classes in real estate in Europe today.

Nancy Lashine:

And when you say ESG, you're really talking about the E, right?

Keith Breslauer:

The E. The most people are obsessed with the E. We'll talk about the S and the G. But the E, driven by carbon emissions or anchored in carbon emissions is really the important dynamic. And commercial real estate and residential real estate all have to reflect that in their value and their creation.

Now, yes, under the new world in America, people going against it, they don't care as much. I've been to investors in the USA have never heard of EPC. Yes, the taxing guys want to see how bad your performance been by adopting ESG. But I just read an article in the Financial Times yesterday or today, one of the big New York pension boards have required or re-implementing this ESG requirement. So it is definitely here to stay, it is definitely serious.

And why it's so relevant, it's the first external metric or event that drives obsolescence. So historically, obsolescence in real estate would be building's old or someone created a cooler design or something more interesting or the new fad. Now it's worse than that. Actually, your building doesn't comply with any venting, or you're building, the heating emissions is wrong.

So the supply, all of a sudden, is now even more restricted or parts of supply that you thought was available is now no longer available. So that creates even a greater imbalance. So now the question is do you have a scenario where someone borrowed money in the low interest rate environment? Now rates have gone up. They burst a bit, maybe they blew a few covenants, but on top of that, they have an ESG requirement. So they have an old building, they levered it, not too high, but they have a leverage. And now you have to refurbish the building. And if you don't, the tenant leaves. What happens? So that's where the opportunity is coming.

So about a third of our active investments that we have made so far have been in that world, where there's some refurb requirement, there is a credit issue. The borrower doesn't have the money to pay the loan or doesn't want to do both the loan and the refurb. And as a result, there's an angle.

Nancy Lashine:

When I think about that, what's different there between in Europe than what's happening in the US, even if people did care, like in New York City, you have to comply with the new environmental regs starting in two years time, but rents can't go up to accommodate the increased cost. Tenants won't pay for it. Are you saying that in Europe you don't have that issue, tenants will pay for it? Or because of the supply-demand factors, you can just get the higher rent?

Keith Breslauer:

Well, as a good perspective, I don't know the exact number and there's a lot of debate what the right number is. If you're an EPC A, B, or C building located in a good location in central London, that vacancy for property like that is sub 5%. If you're an EPC D, E, F or worse building and you're slightly off location, the vacancy's probably north of 20.

So what's happening, in a sense, is you don't have this emergence of... We're not a growing economy, we're anemic growth at best. So you don't have these new people showing up that much. If you remember the last boom, you had all the tech guys showing up taking space, or the WeWork guy, Adam Neumann ran around taking all of his vacant space. Today, what we have is existing tenants leaving their old kit and moving into the new kit. So prime secondary bifurcation has really become the story. So going to your question, the higher rents are being paid on that prime space because there's not a lot of it. The secondary space is getting decimated because either rents are falling or the tenant's just walking out the door.

Nancy Lashine:

So you just raised another point, which I think everyone only in the last few weeks, two weeks probably here has been thinking about, which is growth in Europe has been a lot lower than growth in the US. And as a result, in part, US investors have tended to stay more in North America, both in terms of the equity markets as well as the real estate markets. So do you see that with what's happening now with the Trump administration, do you see that potentially changing or is that way too soon to make any predictions about?

Keith Breslauer:

No, I don't think it's too soon at all. The question, it was a lot of... Let's unpack this. Okay, so the first thing is the US a more dynamic economy than Europe? Generally, hands down. It's not even a debate. Okay, so that's easy. And there's all kinds of reasons why, but that's the case.

Second question is has it been perceived as a strong opportunity for global investors to invest in the US real estate market? 100%. Particularly the past four or five years, US, US, US, US, right? Why? Because growing economy, dynamic positive economy, net positive immigration, not a lot of supply post '08.

Nancy Lashine:

Strong dollar.

Keith Breslauer:

A lot of it picking up, strong dollar, et cetera, or solidly improving. So the currency dynamic's a very good question, so I'll get back to, but the general sense is that America was better. Or the other point was that the distress story was regional banks made so many loans on commercial real estate deals or real estate deals. Maybe there's an opportunity to pick up stuff cheap because a lot of that stuff will default, hit the wall and there'll be an opportunity.

What happened? Not a lot hit the wall, like got pushed, so that opportunity didn't happen. Growth now seems to be faltering and the whole Trump story has now scared a lot of people. So what's happened is that we, in the past, let's say last fund seven, we got no new American investors or very few. We had a lot of existing guys we had but no new ones, but we got all our new money out of Europe, Canada, and Asia. That's really where it came from.

And now going forward, what's happened is in light of what's been going on, there's a general sense that the tariffs will increase inflation in the US and drive deflation in Europe. Why? Because the Chinese are basically going to move their goods into Europe. And there's some crazy stat, I have no idea whether it's accurate, I read it somewhere, that instead of five boats sitting in port to get into a harbor now in Europe to deliver goods, it's now like 90 boats because all the boats that were going to the US are now waiting offshore to start bringing in.

Nancy Lashine:

Can I replace my coffee with a scotch, please?

Keith Breslauer:

Yeah, exactly. So I think central banks and policymakers are going to have a really difficult time because are we going to have a deflation shock in Europe? Or is it permanent? Right? What's going to happen?

So the prediction of interest rates now in Europe and in the US are coming down by at least three times, so maybe 75 to 100 basis points. But the general sense is that Europe actually could be really interesting because you have unemployment that's low, you have all these things I talked about earlier, but at the same time you also have the potential for a Euro to go get strong as well.

Nancy Lashine:

So unpack Europe for us a little bit. You have a lot of assets in Spain, I know you've bought some businesses there. You have assets in Poland and Sweden and the Netherlands and France. So how do you think those various opportunities look today? Do some countries seem more attractive than others? Are you scared away from some countries today?

Keith Breslauer:

So 50% of our activity's in the UK and Germany. It's a really simple reason why, it's a big market, there's a lot going on. Each city is huge, there's lots of stuff. There's a lot of financial leverage as well, so it creates opportunity. So we really have historically and to this day spend about half our time there.

About a third of our opportunities in Spain and Portugal and to some degree are Ireland. Why? We've done a lot there. We have a big office in Barcelona. We've been there for 22, 23 years. We have a great team there. So it's very much focused on that. And about 20% on the other markets, so whether it's Netherlands [inaudible 00:36:19] Nordics. The reason why we're not so active in those other markets are either small or we have a lot of domestic competition or there might be other groups. So Nrep and [inaudible 00:36:29], who are strong managers, very, very good. They're very good in Nordics, we don't want to compete with them. But on the Spanish side we have a very big presence and we do quite a lot of work there.

So I think at a high level point, to unpack Europe, let's bring it back to a macro level. You have positive immigration, you got a strong economy, you have low unemployment, you have finally a coalition government that's stable. That seems to be the Spanish story. Portugal has many of those traits, although it's a lot smaller. So that's kind of the growth.

England has a strong government. I don't necessarily agree with a lot of the policies, but they have a strong government. They are trying to do something, particularly with planning in respect to the UK, but it's a single government.

Germany finally has a coalition government that hopefully will stay together. And they realized that they're very weak because of the decoupling of China or the fact that China is building cars now in a very serious way. So Germany has this infrastructure spending planning and now it's at 500 billion. They have a defense spending plan of 500 billion. That's a trillion dollars or trillion euros into the market to help revitalize their economy.

So each country has a slightly different story. They're each slightly different cycles in terms of where they are. And our job is to try to figure out which point we want to enter the different markets.

Nancy Lashine:

When you buy assets, are you buying platforms? Does that include the people to operate the assets? Or are you just buying the assets? How do you manage to asset manage a portfolio that's as geographically diverse as it is?

Keith Breslauer:

Well, I think about 80% of our business are direct assets or portfolios that we do with a local partner and ourselves doing a lot of active work. So we call it a hybrid manager, let's say. We're not quite an allocator, we're not really an owner-operator, we're somewhere in the middle. So that's about 80% of our businesses. Those are direct assets, single investments, [inaudible 00:38:24] et cetera.

Between 10 and 20% of our investments over many years have been in entities in which we buy it for real estate value, but we have an operational platform that might add value. So for example, the simplest example's hotels. We buy a hotel with a management contract as opposed to a lease and we're able to improve the asset, improve it over time and then exit.

The more complicated example would be Punch Taverns where we basically do a take private of a public company that owns 3,000 pubs. We refinance it, restructure it, sell down half the pubs, et cetera. And then we take that and after a while, after we've been able to grow them, sell that onto Fortress.

Nancy Lashine:

That sounds like a lot of work.

Keith Breslauer:

It's a lot of work. It's a great, great point. That is a great question. So the question of one of our investors say is, "Well, wait a minute, you're doing like PE trades, but with real estate, so you don't got a lot of growth and you're only making blank. It's a lot of effort for what?" Well, in the 26 years of operations, our PE business, our operating entity kind of business, which is like 30 to 40% of our business in the end, made a 19, and our real estate made maybe an 11.

Nancy Lashine:

Say that one more time.

Keith Breslauer:

We've had a pickup of between 600 and 800 basis points on the operational risk versus the direct asset over 25 years. Part of it is because when the markets flip and they go negative, real estate really has a big trouble, but the operating entities still have operating income, they have cashflow, they have performance. Part of it is when we went to sell these businesses, we made a lot more money because someone paid us for the platform, even though we didn't buy the platform, so even though we didn't provide money in relation to the platform.

So bottom line is it worked for us and we're very happy. But we've done Punch Taverns, we've done Motor Fuels Group, [inaudible 00:40:08] Wishford School Group. We've done lots of things, other hotel groups, et cetera.

Nancy Lashine:

So the obvious question is why only 10 to 20% of your total assets?

Keith Breslauer:

Excellent question. Hard to do. Hard to find and hard to pull off. So the hit rate is very low. It takes forever. The complicated, requires lots of people, blah, blah blah. So go back to your earlier question. When we do an operating entity type style investment, the team inside the entity is running the investment, but we're buying it for asset value.

Nancy Lashine:

My goodness. Your business sounds like so much fun. You love it, don't you?

Keith Breslauer:

I love it. I love it.

Nancy Lashine:

Yeah. Yeah.

Keith Breslauer:

I don't like HR, but I like everything else. I love the investment business. I think it's interesting, it's exciting. You're always learning. You're always picking up new things. There's always some cultural twist that's freaking you out a bit.

The hard part is that I have older children. I have a daughter in private equity. I have another son who's working on the VC side. I got another daughter who's at Columbia Business School and she was in the beauty area. She worked at Amazon and she did very well. The growth there is like staggering, right? So you're like, "I'm in this boring real estate class which doesn't really grow and every five years is this disaster that wipes everything out." So I think it's some of the reasons like why am I doing this? But it's interesting and it's always interesting.

Nancy Lashine:

It's been a tough five years, Keith, so I think a lot of us in real estate are feeling that way. But just remember the next two have got to be better.

Keith Breslauer:

It's been a tough 36 years. Okay?

Nancy Lashine:

You've done okay. You've done okay. Five billion in AUM, a great team and a great track record.

Keith Breslauer:

The team is more important. The team is fantastic.

Nancy Lashine:

So talk to me about this. Beyond the positivity, which you talked about earlier, and allowing people to be human and make mistakes and learn from them, how do you motivate your team and build culture? Especially, I'm going to add to that, given you're in such a multicultural situation. It's not like you're all a bunch of bros that came from the same background.

Keith Breslauer:

Well, what are the common characteristics across my partners and the team? They're smart, they're intellectually curious, and they have high energy. That's the key requirements. What motivates them? Well, they're motivated like all things in life, they want to do well. They want to build good families. They want to enjoy their jobs. They want to be respected for what they do. We try to do that all the time.

I think about, it's an interesting thing. So I give about 10 hours a week to charity, including the weekends. And my wife and I try to give about 10 to 20% what we make away every year. Now, the interesting thing about giving away money, or not really money, but helping people is it's hugely positive, huge. And despite the shit in the world, despite the challenges that we all have, despite all the problems that we have, sometimes little tiny things make a massive difference in your day-to-day life.

So I share that with the team. So we, for example, have a lot of conference rooms, a bunch of little ones as well. And a very good friend of mine set up an organization which is one of the larger, more successful post-traumatic stress treatment centers for veterans, British veterans, and key workers, right? Based in the south coast. Didn't have an operation [inaudible 00:43:26]. I said, "You got to have London guys." Said, "Do you need a location? I will offer you our conference rooms. To the extent we're not using, you can use them for therapy."

So I'm sometimes sitting in one of my big conference rooms and having a big meeting. We're dealing with some disaster that's happening on an investment because something went wrong. So everything's glass and outside my window, it's like I see the legs [inaudible 00:43:47] I see the arms. I see someone sitting out in our waiting room chairs, got tattoos everywhere. And he's an SBS guy who's done eight tours in Afghan, who had a serious personal problem. And because of the work of this charity and because of the work of us helping him, and we help him as well, he's not suicidal anymore. He's back with his family, he's got a job.

We've done that with 23 people. We've transformed The Royal Marines Charity from a relatively small organization, or we helped transform is a better way to describe it, to a major group with 25,000 members. Okay?

Nancy Lashine:

Wow.

Keith Breslauer:

That's cool stuff, man. That's what I like doing. So if, going back to the building of this culture, it's really important that the culture feels like we're passionate about what we're doing, it's exciting about what it is, and at the same time, we're making a difference. But don't forget the job, the job is to make money for investors.

Nancy Lashine:

So just going back to ESG again. So do you add any of those social do good by doing well into your investments for the fund or is this all outside of the fund?

Keith Breslauer:

100%. So E is already given because we're [inaudible 00:44:58] and all that stuff, but the S is very important to us. It's very important. It's unfortunately not measured by a lot of people. It's not really considered a priority and no one knows how to deal with it.

So this has gone to an extreme. So the extreme version of this is that Big Society Capital, which is now called Better Society Capital, called us up and said, "We got this idea. We're going to send you a white paper." I knew the chairman. And the white paper said, "There's a lot of women in England who are battered, suffering domestic abuse, who do not have permanent housing, and they only have refuge housing and they have children or their families. And we have to come up with a solution. Keith, can you help?" And I said, "Listen, I'm done. I have no more money. I can't do any more charity. So if I could come up with an investable product or we could think of one, we'll figure it out."

So we worked closely on it, we came up with an idea, a very good team internally figured this out. We ended up partnering with a group called Resonance, which is already doing homeless related real estate charities. And we set up a fund called the Women in Safe Homes Fund or WISH. And the basic premise was simple, let's invest in buildings or homes, rent it to charities who are paid by the government to look after these people, and generate an equivalent market rent and maybe create a core plus return of seven to 9%.

We did it pro bono. Resonance gets paid, we did it pro bono. I put a lot of money into it as well. Punchline, we raised 33 million euros. We've housed 122 families. It's unbelievable. Unbelievable.

Nancy Lashine:

Wow.

Keith Breslauer:

Now, the crazy part is no one really cares. So we care. It did the job. I go to investors and go, "This is a great idea." And the reality is like, "Why do I care? Why [inaudible 00:46:38]?"

Nancy Lashine:

Well, no, in the US there's a pretty substantial business now, it's called impact investing, and that's the kind of idea that could get picked up by some of these impact funds.

Keith Breslauer:

I've had a lot of discussions. I've done so much impact work. So now I got the affordable housing for the veterans in England calling me up. I have a meeting later tomorrow with the OVA, the Office of Veteran Affairs. The problem ultimately is it's not scalable. So if you're in the business of raising lots of capital and you're in the business of deploying capital and making money for investors and for the company, it's hard to do this unless you have a social mission.

So going back to your American example, I graduated University of Chicago Business School, now called Chicago Booth. It has a social enterprise center called the Rustandy Center. I'm very closely involved, I'm on the advisory board. They did the paper to review our product to see if it worked. When we went to see if it's comparable in the US, there's only charities that do it. Why? Because the US charities fund a lot of this stuff, but there's nothing like it here.

So to go back to kind of the cultural point, so three people in the team worked on it. Effectively, I told them that bonuses would not be affected by it and it wasn't. And they did a great job, fantastic job. And we did great stuff and we helped a lot of people. So it's that kind of thing that says... So going back to your S question, S is very important to us. It's just very hard to metricize it necessarily other than, for example, how many people locally worked on this place or how many jobs you've given, et cetera, et cetera. But it's a bit of a challenge.

Nancy Lashine:

I'm listening to you and I'm thinking, "How the heck are there only 24 hours in your day and seven days in your week?" Because you've done so much and there's a leveraging effect, right?

Keith Breslauer:

Yeah, it's huge leveraging effect. So there's a couple points. I have zero inherent skills, zero. I'm genetically kind of screwed. My butt is too big relative to my arm strength, and I love climbing, so you can imagine how bad that is. Nothing is without challenge, okay? It's always hard for me, always.

I have one thing that I've always had. I have energy. And that, and my mother taught me how to focus the energy. That was the key. In the old days, I used to get thrown out a lot of school. I've been able to learn how to focus it, and that's helped.

So I think it's important, as I've gotten older in life and I've made a lot of mistakes personally, professionally, whatever, that to try to give back in some way with that energy is important. And building a business is exciting and doing it. And I'm excited. I'm trying, we're trying now to make Patron more of a multi-generational business. We might have a strategic partner in the near future. We might take on capital, we might do something. But what we're trying to do is capture the opportunity, and the opportunity is being the nexus between these large capital pools and specific opportunity sets in Europe. So that's what's exciting about it.

Nancy Lashine:

It's amazing. And I can see how you wouldn't have the kind of competition in Europe that you might have if you were here, sitting in New York.

Keith Breslauer:

Well, in fairness, the Europeans are a little, I'm not sure they're tamer, but we all know how hard it is, so we all kind of work together. So my very close friends would be deemed in the US as my competitors. Aref Lahham, who runs Orion, and Bruce Bossom and Van Stults are fantastic guys, and they're great friends of mine. A lot of the managers that are here and have been working here a long time, I grew up with them and they're just great people.

So do we compete? Sure. Is it as active like New York, we're going to rip each other's heads off? I don't think so. But it gives you a bit of a perspective. Which is one of the things [inaudible 00:50:14] I go to your conference, when I go to that Columbia Real Estate Forum, I go there to get inspired. I listen to you guys talk. I'm like, "Wow, man, we're sleeping. There's so much more to do." Anyway.

Nancy Lashine:

No, I'm only sleeping because I've listened to you because you're exhausting. But it's really, really fun. So I love, you're obviously an independent thinker. What is something that you believe that others would generally disagree with you about?

Keith Breslauer:

I don't know that, it's a good... It's probably quite a few things, but ignoring politics for a second. I think from a business perspective, I think there's been a lot of arguments over time that Europe is just too difficult. That if you want to build a scalable business, the US is the home market. That's where you go. Big market, lots of opportunity, et cetera. I think that's a fair argument. It is a fair argument to say real estate is just too tough in Europe. Why don't you go do more of that private equity point, like you said, or the operating entity point. Okay. But I enjoy it and my team enjoys it, and we have a great time and it's all great. So I think that's kind of one different aspect, different point.

I think some people might say, "This charity stuff, I'm spending a bit too much time on it. What's the point of that?" And I've had someone make comments like that, shockingly, even though I've limited to 10 hours, but it's what I do. God put me on this planet to do that. So I'm okay with that, that's my responsibility. Some people have a responsibility to make a billion dollars and be the greatest guys and do all this great stuff. Okay, fine. I like helping people.

So I think the other, do I have views that people disagree with? Of course. Am I comfortable with most of those views? Sure. Am I always learning and trying to figure out either how to be better or maybe there's something I got wrong? Yeah, of course. That's kind of the great lesson of maturity is that wisdom versus intelligence. I'm much wiser than was, I always thought I was a smart, hot shot, young whiz kid, and I'm no longer that point. I'm now, I should be hopefully wiser.

Nancy Lashine:

You've read Arthur Brooks' book From Strength to Strength. That's his thesis, yeah. I had to read it twice because I couldn't remember what I read the first time.

Keith Breslauer:

I was listening to Peter Attia the other day on one of those stupid podcasts. He's going on about how his cognitive decline is happening, but he's a wiser person. Okay. I think we have a lot, life has, we have a lot of experience. We've been through a lot. I've been through a lot. My first real estate crisis, '73, when I was a kid. My dad, we were bust and the house was almost taken away.

Nancy Lashine:

Wow. That was early. Yeah.

Keith Breslauer:

That was the oil crisis. I remember as a little kid, the mortgagee, sorry, the sheriff padlocking my home door because my father defaulted on the home mortgage and my mother had to beg the bank to let us stay there.

Nancy Lashine:

Holy moly. Wow.

Keith Breslauer:

Yeah, I've seen it. I've seen it, many variations of it. [inaudible 00:53:14] learned anything necessarily new? I think a lot. But I think what's interesting about all these cycles, there's a lot of similar stories about history, but there's also some differences.

Nancy Lashine:

Yeah. The things that rhyme.

Keith Breslauer:

Yeah. So there you go.

Nancy Lashine:

Tell me, as we get to wrapping up here, if you could have dinner with anybody tomorrow night, dead or alive, who might that be?

Keith Breslauer:

It's a huge list.

Nancy Lashine:

Well, you can have a dinner party. That's okay.

Keith Breslauer:

I haven't thought about that, so I'm going to have to come back to you on it but-

Nancy Lashine:

Okay.

Keith Breslauer:

... it's a lot of people. Right now, I would love to have dinner with Niall Ferguson, who I've met a couple of times. He's an amazing historian. I think he's fantastic. He's an interesting person.

I would like to, from a historical context, I think there's some amazing people that I would have loved to be... Theodore Roosevelt is a huge hero of mine. I would have loved to be with him. I'd like to be out in the West with him because I love mountains and the outdoors. I would love to be with him in an outdoor venue and experience.

From perhaps a religious perspective, I think meeting Maimonides and what he went through as a doctor in Egyptian's court and what he went through in terms of his faith and his perspective is huge. So I have a huge list of people that I would want to do.

I tell you interesting thing about [inaudible 00:54:31] more recent, not discovery, recent point. The interesting thing about understanding history, like World War II history or World War I history, it's quite unbelievable when you watch a colorized film versus growing up with the black and white films because you realize that what they went through and what they were dealing with isn't that much different. Right?

So this whole thing about tariffs right now, what's everyone talking about? What happened in the '30s. Why did the tariffs work? Trump, referring to McKinley, is McKinley... What happened? What happened? What didn't happen? How does one think about it?

So I think the interesting dynamics of history is that actually not a lot changes. So we're trying to always try to, I think going back to your question, meeting people that could provide a real-time life perspective on what happened would be very interesting.

Nancy Lashine:

Oh, man. Well, maybe we should have a virtual dinner party. We can have ChatGPT create the characters, that'd be fun.

Keith Breslauer:

Exactly. Exactly.

Nancy Lashine:

Keith, you've been amazing. Any parting words or thoughts for the people listening?

Keith Breslauer:

I just think, well, I have a general point, which I've touched on it quite a bit already. I think that we all have challenges in life. We all have been through lots of tough things. I have a father who passed away young, I had a mother who's got very severe dementia. Yeah, I have a lot, I just had a friend of mine who passed away. Shit goes wrong, things happen.

But we're blessed in so many ways, and I think it is really important as a person to give back. It's really important to share and to help and to try to do what you can to kind of make the world a bit of a better place. And not necessarily to go into these sort of silos and these areas of conflict and creating more problem. I think there's a lot to be, across face, across types, across personalities, that's what makes it interesting. That's what makes life great.

So I think my parting thought would be, I think we got to always think a little bit about that. I think as real estate investors and as real estate managers, we touch local communities in a very serious way. We impact the local markets in a big way, and I think figuring out a way to help make that environment a bit better is something we have responsibility to do.

Nancy Lashine:

Keith, it's so obvious when talking to you why you've built such a substantial growing business with great continuity because of your energy, your optimism, and just your love of people. So I'm inspired. I hope those listening are inspired as well. I really appreciate you sharing your thoughts today. Thank you so much for your time.

Keith Breslauer:

No problem. Thank you again, very much appreciate it.

Nancy Lashine:

I hope you enjoyed this episode of Real Estate Capital. Before you go, I have a quick favor to ask. We put a lot of thought and effort into this show and making sure we bring you insights from real estate leaders that you don't normally find in the mainstream media. So if you're enjoying this show, please remember to follow it on your favorite podcasting app so you never miss an episode. We'd also love for you to share it with others or give us a review on Apple Podcasts so others can find us. Thanks again for tuning in. For more information about our firm, please visit our website at parkmadisonpartners.com.