CrowdStreet’s Ian Formigle is joined by Malcolm Davies, Principal and Managing Direction at George Smith Partners, to talk about the emergence of distressed deals, upticks in occupancy rates in states like Wyoming and Montana, and what a second stimulus package could mean for the economy.
Ian Formigle, Chief Investment Officer
CrowdStreet
CrowdStreet
Ian is a real estate professional and serial entrepreneur with 24+ years of experience in real estate private equity, startups, and equity and options trading. At CrowdStreet, Ian serves as the key decision-maker for all investments on its Marketplace, totaling over 400 offerings and some $13.7 billion of commercial real estate. Ian is the author of “The Comprehensive Guide to Commercial Real Estate Investing” and he is a contributing author at Forbes.com.
Prior to joining CrowdStreet, Ian was VP of Business Development for ScanlanKemperBard Companies, where he managed the firm’s alternative investment platform and served as a senior acquisitions officer on a team that acquired some $500 million of commercial real estate assets during his tenure. Previously, Ian co-founded and served as CEO of Clarus Property Ventures, a regional real estate private equity firm that focused on multifamily acquisitions. Ian began his career as an equity options market maker and member of the Pacific Exchange. Ian holds a BA in Economics and a BA in Political Science from the University of California at Berkeley and has held numerous securities licenses including Series 7 and 63.
Malcolm Davies, Founder & Sr. Managing Partner, Way Capital
Way Capital
Way Capital
Malcolm has over 25 years of experience as an award-winning capital advisor and developer, having advised and been involved with over $15B worth of total capitalizations, both in the equity and debt markets. Davies has utilized his expertise to lead developers and investors to structure and capitalize billions of dollars-worth of commercial real estate ventures. He has extensive experience in structuring transactions across the capital stack, including non-recourse senior and stretch-senior debt, mezzanine and preferred equity financings, and Co-GP and LP equity financing solutions for development, value add and stabilized projects.
Malcolm has vast experience in structuring various scenarios within the capital stack including non-recourse senior debt, mezzanine debt, and preferred & JV equity financings in the construction, value add, and permanent finance marketplace. Malcolm’s expertise as a developer has been instrumental in advising his clients through his real-world experiences in various stages of the real estate cycle, including the Great Recession.
00:00:06 Welcome back to StreetBeats for July 21st. This is our ongoing series of weekly short videos intended to keep you up to speed as to what's going on out there in the commercial real estate industry. Back for my weekly segments to talk about debt markets and what's going on out there in the world of c r e Finance is Malcolm Davies, principal and managing director at George Smith Partners. So Malcolm, welcome back for our weekly installment. For those of you who viewed this before you know the drill, we're gonna talk about some of the key events from last week in terms of economic events and capital markets. We'll discuss what's going on this week and we'll talk about the things that Malcolm and I are paying attention to in the weeks ahead. So Malcolm, let's get right into it. What are some of the key things that you saw going on last week that you think are important?
00:00:50 Yeah, I mean, look, I think big picture, you know, there's things I, I'll categorize it, you know, there's the macro world, there's morale, you know, there's medical advancement. Then there's the things that we see, you know, on, on the street and focusing on the street. You know, we've talked about this that we felt like as the year went on, we'll start to see some inklings about some of the asset classes, having some, um, opportunities for financing and things that will start to come out about because of maybe some levels of distress or things that we've gotta work through. So just in the last week, we've been hired on three separate transactions, all hospitality related, all various levels of distress with different types of business plans. Um, and frankly, we look at them and we've underwritten them and feel like they're all feasible with regards to a new business plan.
00:01:40 So, in that regard, I would say that as we started this four months ago, you know, hospitality financing was probably one of the more challenging elements, um, out there and retail. Um, we're gonna take this and go where the puck is going and believe that we, while we close these deals in September or October, that will be successful in our, in our endeavor. So that is something from the micro street level that we've seen. Look, we gotta pay attention to what's going on in the medical world. AstraZeneca, HA and Oxford had a good announcement yesterday. Um, I think we're all looking at, you know, a bridge or a pathway to getting to some level of a vaccine announcement. I'm still hopeful that can come in September, in October. It appears that we've seen some cool stuff in that regard. The other part is, look, the morale of the United States.
00:02:25 Look, we've had a tough few months for everybody and, um, we have a lot going on, but, you know, sports are back. So I actually watched, I love mls, so I know you are as well, but I mean, I've been watching MLS and, you know, baseball's pretty big. So that starts on Thursday, so hopefully that'll be a good thing finally on the macro. So the stimulus gotta get done, it's gotta get done. We are, we are, you know, especially with schools and we can talk about that not going back in a lot of places in the country, majority. Yeah. Um, we have to have a bridge to the vaccine, um, that stimulus has gotta get done. So we see some good inklings that that will occur. So that's something we're paying attention to. But what about yourself, Ian? What are you seeing out there?
00:03:06 Yeah, so I agree with you. What we're, some of, what we're looking at is very similar. I, I do think that the story of this week has been, this past week really has been, you know, the emergence of some of the distress that we felt was going to come to the commercial real estate market. Um, so similar to what you just saw Malcolm on your side, we just saw two deals that really kind of stood out to us go into our pipeline. One, uh, is a discounted note purchase opportunity. It's on an office deal, uh, two building office complex that we're looking at. And then two is our first r o or foreclosed asset, you know, opportunity conversion, uh, in this case of a limited service hotel into extended stay with a group that has a great track record of doing that and actually owns about 24 of 'em right now.
00:03:52 So, you know, and that, that type of deal flow simply was not in our pipeline, right? You know, this time last year, not at all. And so to me, that, that shows that we are beginning the kind of the dissent into some of the most forms of the distressed and opportunistic deal flow that will ultimately come out of this cycle. It's the kind of stuff that we always knew that would emerge. And we know that that deal flow is risky, but it also presents, you know, the greatest upside coming on the backside. We're also starting to see a shift in patterns in terms of where people are going. Uh mm-hmm. <affirmative>, you know, as, as we talked about on this segment previously, we were seeing those drive to beach destinations in the south and the southeast really being the outperformers. Now that we've seen those locations spike in terms of covid counts, yeah.
00:04:37 We're seeing that recede, the new beneficiary kind of, of the national kind of hospitality migration trends are the wide open spaces. They, you know, you're seeing Wyoming and Idaho and Montana mm-hmm. <affirmative> see massive uptakes in occupancy as people still want to get out there and, you know, explore the country and do something, but also are looking to do it away from a crowded beach and maybe into a little bit more of the great outdoors. So that's something that's interesting to note as well. Um, also, I think you're really spot on that this, this week kind of getting into like what is going on this week? Ah, man, we gotta pay, like it's every day paying attention to what might occur in terms of the secular second stimulus package. Yep. We have 26 million unemployed people that are receiving $600 a week. That's about to evaporate in another week or so. And I listening to a podcast last week, I think an economist really put it into perspective that that translates into about 80 billion a month of demand for our economy.
00:05:37 Well, I think there's also this, the harvesting of their, uh, of everyone's gained. So there was an extension right to the latter part of the end of the year from having to deploy it by the June 30th of this year. And, you know, like you, we've seen this kind of uptick, so to speak, in, in opportunity zones. Um, we've done, I think seven or eight of these transactions, multi-family, uh, or student housing seems to be the one that most are focused on right now. But when you think about that as an investment thesis, you know, there's nothing greater than the ability of like taking on a project, holding that investment, um, you know, getting positive cap gain treatment throughout the next 10 years. But also, you know, if you're able to refinance your equity later in years three or four, put that back in your pocket, you can redeploy that capital but still keep the game based upon that investment.
00:06:26 So you have it, but you, you're getting the positive, uh, elements of that. So I think in that regard, we're definitely seeing that. Um, we've been to, um, you know, we, we believe there's a lot of positive elements there, um, going forward. Look, multi-family is by far the strongest asset class. You have to have a roof over your head, um, you know, in all different areas. We're certainly paying for attention to workforce housing, you know, with, with that unemployment. Um, it's a, it's a big number, right? Look at, look at the, the numbers right now as it relates to, you know, school's not going back, right? How difficult is that gonna be if you don't have the means to be able to take care of your children and work at the same time? I think that is something that is staggering for us to figure out.
00:07:07 So we're, we're gonna have to, you know, understand how this is gonna play out the service sector. We've seen the economy shift. You talk about going out to Idaho, Wyoming and, and the likes. Um, well that's the shift where people are spending money. You know, maybe they, they're not going out to as many restaurants or bars or nightclubs, sporting events, concerts, you know, these are places that are really struggling, that are filled with a lot of those jobs that are unemployed. So, you know, you know, that's gonna be the challenge. We've gotta stay afloat till we get to this vaccine. Um, and I think that's the key right now between now and July 21st to that August 7th, we really have to pay attention to that stimulus. Um, and I'm hopeful that, you know, we can pay attention and get it done. Can't imagine they would go on recess without getting it done.
00:07:52 Yeah. You gotta think that they're gonna pass something. I mean, we, if you look at the unemployment rate, you know, the, the advanced unemployment rate just ticked up, uh, about 60 basis points last week. Uh, you know, what that's starting to tell me is that this 11% unemployment rate, I think we're at, at, we're at about, at real unemployment now, right? Yeah. It's not, we, we still had 1.3 million, uh, initial jobless claims last week. You know, for context, 200,000 is your, your typical weekly number in a normal. So we're, we're still seeing people lose their jobs right now and, you know, a absent real recovery, I just don't see us getting down into the eight, 9% even range even, uh, and until something changes. So that's something looking forward to pay attention to. I think it just, just stresses again, the importance of getting a second stimulus package passed.
00:08:39 Uh, also looking at multi-family trends coming up. You know, there's a study put out by the Covid 19 eviction, uh, defense project, which, you know, speculates that, you know, one in five, potentially renters are at risk of eviction by the end of September. Right? The stimulus burns off and there's really nothing behind it, you know, so again, absent some sort of like magic, you know, downtick on unemployment, you know, we're going to start to see some un you know, some distress come to multi-family. We've looked at it from the perspective of we're very acutely watching the workforce housing side. We're much more believers right now in the higher B and class A. Sure. Cause those are predominantly, you know, populated by the people that are still working from home really. So, you know, this, this next few weeks is really, really critical. Well, I think unless you've got anything else, I think that's our, that's great. A covered a lot of staff. So thanks again for joining. As always, Malcolm. Uh, we'll look forward to doing it again next week. We're gonna be paying attention to, you know, this. Hopefully we're gonna come back with some decent news about some sort of stimulus package that just got passed. That's the key thing for the next week. Let's all hope it gets done. And in the meantime, everyone out there stay safe.
00:00:50 Yeah, I mean, look, I think big picture, you know, there's things I, I'll categorize it, you know, there's the macro world, there's morale, you know, there's medical advancement. Then there's the things that we see, you know, on, on the street and focusing on the street. You know, we've talked about this that we felt like as the year went on, we'll start to see some inklings about some of the asset classes, having some, um, opportunities for financing and things that will start to come out about because of maybe some levels of distress or things that we've gotta work through. So just in the last week, we've been hired on three separate transactions, all hospitality related, all various levels of distress with different types of business plans. Um, and frankly, we look at them and we've underwritten them and feel like they're all feasible with regards to a new business plan.
00:01:40 So, in that regard, I would say that as we started this four months ago, you know, hospitality financing was probably one of the more challenging elements, um, out there and retail. Um, we're gonna take this and go where the puck is going and believe that we, while we close these deals in September or October, that will be successful in our, in our endeavor. So that is something from the micro street level that we've seen. Look, we gotta pay attention to what's going on in the medical world. AstraZeneca, HA and Oxford had a good announcement yesterday. Um, I think we're all looking at, you know, a bridge or a pathway to getting to some level of a vaccine announcement. I'm still hopeful that can come in September, in October. It appears that we've seen some cool stuff in that regard. The other part is, look, the morale of the United States.
00:02:25 Look, we've had a tough few months for everybody and, um, we have a lot going on, but, you know, sports are back. So I actually watched, I love mls, so I know you are as well, but I mean, I've been watching MLS and, you know, baseball's pretty big. So that starts on Thursday, so hopefully that'll be a good thing finally on the macro. So the stimulus gotta get done, it's gotta get done. We are, we are, you know, especially with schools and we can talk about that not going back in a lot of places in the country, majority. Yeah. Um, we have to have a bridge to the vaccine, um, that stimulus has gotta get done. So we see some good inklings that that will occur. So that's something we're paying attention to. But what about yourself, Ian? What are you seeing out there?
00:03:06 Yeah, so I agree with you. What we're, some of, what we're looking at is very similar. I, I do think that the story of this week has been, this past week really has been, you know, the emergence of some of the distress that we felt was going to come to the commercial real estate market. Um, so similar to what you just saw Malcolm on your side, we just saw two deals that really kind of stood out to us go into our pipeline. One, uh, is a discounted note purchase opportunity. It's on an office deal, uh, two building office complex that we're looking at. And then two is our first r o or foreclosed asset, you know, opportunity conversion, uh, in this case of a limited service hotel into extended stay with a group that has a great track record of doing that and actually owns about 24 of 'em right now.
00:03:52 So, you know, and that, that type of deal flow simply was not in our pipeline, right? You know, this time last year, not at all. And so to me, that, that shows that we are beginning the kind of the dissent into some of the most forms of the distressed and opportunistic deal flow that will ultimately come out of this cycle. It's the kind of stuff that we always knew that would emerge. And we know that that deal flow is risky, but it also presents, you know, the greatest upside coming on the backside. We're also starting to see a shift in patterns in terms of where people are going. Uh mm-hmm. <affirmative>, you know, as, as we talked about on this segment previously, we were seeing those drive to beach destinations in the south and the southeast really being the outperformers. Now that we've seen those locations spike in terms of covid counts, yeah.
00:04:37 We're seeing that recede, the new beneficiary kind of, of the national kind of hospitality migration trends are the wide open spaces. They, you know, you're seeing Wyoming and Idaho and Montana mm-hmm. <affirmative> see massive uptakes in occupancy as people still want to get out there and, you know, explore the country and do something, but also are looking to do it away from a crowded beach and maybe into a little bit more of the great outdoors. So that's something that's interesting to note as well. Um, also, I think you're really spot on that this, this week kind of getting into like what is going on this week? Ah, man, we gotta pay, like it's every day paying attention to what might occur in terms of the secular second stimulus package. Yep. We have 26 million unemployed people that are receiving $600 a week. That's about to evaporate in another week or so. And I listening to a podcast last week, I think an economist really put it into perspective that that translates into about 80 billion a month of demand for our economy.
00:05:37 Well, I think there's also this, the harvesting of their, uh, of everyone's gained. So there was an extension right to the latter part of the end of the year from having to deploy it by the June 30th of this year. And, you know, like you, we've seen this kind of uptick, so to speak, in, in opportunity zones. Um, we've done, I think seven or eight of these transactions, multi-family, uh, or student housing seems to be the one that most are focused on right now. But when you think about that as an investment thesis, you know, there's nothing greater than the ability of like taking on a project, holding that investment, um, you know, getting positive cap gain treatment throughout the next 10 years. But also, you know, if you're able to refinance your equity later in years three or four, put that back in your pocket, you can redeploy that capital but still keep the game based upon that investment.
00:06:26 So you have it, but you, you're getting the positive, uh, elements of that. So I think in that regard, we're definitely seeing that. Um, we've been to, um, you know, we, we believe there's a lot of positive elements there, um, going forward. Look, multi-family is by far the strongest asset class. You have to have a roof over your head, um, you know, in all different areas. We're certainly paying for attention to workforce housing, you know, with, with that unemployment. Um, it's a, it's a big number, right? Look at, look at the, the numbers right now as it relates to, you know, school's not going back, right? How difficult is that gonna be if you don't have the means to be able to take care of your children and work at the same time? I think that is something that is staggering for us to figure out.
00:07:07 So we're, we're gonna have to, you know, understand how this is gonna play out the service sector. We've seen the economy shift. You talk about going out to Idaho, Wyoming and, and the likes. Um, well that's the shift where people are spending money. You know, maybe they, they're not going out to as many restaurants or bars or nightclubs, sporting events, concerts, you know, these are places that are really struggling, that are filled with a lot of those jobs that are unemployed. So, you know, you know, that's gonna be the challenge. We've gotta stay afloat till we get to this vaccine. Um, and I think that's the key right now between now and July 21st to that August 7th, we really have to pay attention to that stimulus. Um, and I'm hopeful that, you know, we can pay attention and get it done. Can't imagine they would go on recess without getting it done.
00:07:52 Yeah. You gotta think that they're gonna pass something. I mean, we, if you look at the unemployment rate, you know, the, the advanced unemployment rate just ticked up, uh, about 60 basis points last week. Uh, you know, what that's starting to tell me is that this 11% unemployment rate, I think we're at, at, we're at about, at real unemployment now, right? Yeah. It's not, we, we still had 1.3 million, uh, initial jobless claims last week. You know, for context, 200,000 is your, your typical weekly number in a normal. So we're, we're still seeing people lose their jobs right now and, you know, a absent real recovery, I just don't see us getting down into the eight, 9% even range even, uh, and until something changes. So that's something looking forward to pay attention to. I think it just, just stresses again, the importance of getting a second stimulus package passed.
00:08:39 Uh, also looking at multi-family trends coming up. You know, there's a study put out by the Covid 19 eviction, uh, defense project, which, you know, speculates that, you know, one in five, potentially renters are at risk of eviction by the end of September. Right? The stimulus burns off and there's really nothing behind it, you know, so again, absent some sort of like magic, you know, downtick on unemployment, you know, we're going to start to see some un you know, some distress come to multi-family. We've looked at it from the perspective of we're very acutely watching the workforce housing side. We're much more believers right now in the higher B and class A. Sure. Cause those are predominantly, you know, populated by the people that are still working from home really. So, you know, this, this next few weeks is really, really critical. Well, I think unless you've got anything else, I think that's our, that's great. A covered a lot of staff. So thanks again for joining. As always, Malcolm. Uh, we'll look forward to doing it again next week. We're gonna be paying attention to, you know, this. Hopefully we're gonna come back with some decent news about some sort of stimulus package that just got passed. That's the key thing for the next week. Let's all hope it gets done. And in the meantime, everyone out there stay safe.