CrowdStreet’s Anna-Marie Allander Lieb is joined by Malcolm Davies, Principal and Managing Director at George Smith Partners to discuss recent consumer spending, the rise in occupancy rates, and how lenders are considering recourse loans before doing a deal.
Anna-Marie Allander Lieb, Director of Investments
CrowdStreet
CrowdStreet
Anna-Marie Allander Lieb is our Director of Investments, sitting on CrowdStreet's Investment Committee while also managing the team responsible for identifying and reviewing potential offerings for the Marketplace. Prior to joining CrowdStreet, Anna-Marie worked for the Tax Credit Investment Group at PNC where she specialized in underwriting innovative tax credit equity and debt financing solutions for Historic Tax Credit, and Low-Income Housing Tax Credit investments. Anna-Marie started her real estate career in Boston where she was a member of the CBRE New England Capital Markets Team. Anna-Marie holds a B.Sc. in Economics with a concentration in Real Estate from the Wharton School of Business.
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.
00:00:04 Welcome back to StreetBeats for August 17th. This is our weekly series covering all things capital markets where we discuss debt markets, finance, and what we're seeing in the commercial real estate sector, as well as any ongoing trends. I'm Anna Maria, Allander Li, um, the Director of Investments here at CrowdStreet. Um, and I have the pleasure of filling in for Ian for MIG while he's out on vacation. Uh, well deserved this week. Um, as always, we're joined by Malcolm Davies. He's the principal and managing director at George Smith Partners. So Malcolm, why don't we jump right into it. Um, what are some trends that you saw last week?
00:00:35 Hey, Anna Maria. I mean, it's been a interesting summer, right? So we're paying attention to lots of things, conflicting data all over the place. I mean, home builder sentiment is at a record high, which, you know, you look around and going, why is that? Um, you know, SFRs uh, sales jumped 17.2%. Jobless claims though drop below 1 million. So our unemployment rate is, seems to stabilize now or down at 10.2%. You know, part of it though is like what's driving some stuff about consumer spending? You know, I paid attention to that, you know, the president signed a deferral of the student loan interest payments till December 31st. You know, not having 40 million people making student loan payments certainly has a effect on their ability to spend in the economy. So something we really haven't seen or I haven't paid attention to, and frankly, the TSA traffic counts. We, this is the highest, yesterday was the highest traffic count day on TSA since March 18th. So maybe there's some level of travel still down, you know, some, something about 65%. But definitely those are things that we've seen. And yeah, I'll get into a little bit, a little bit about each asset class, but just definitely, you know, here we are in the, in the dog days of summer, uh, figuring out, you know, what's going on going into the fall, which we think is gonna be quite busy.
00:01:48 Yes, no, definitely. Um, and then, yeah, in terms of kind of what we've seen on the, the S T R reports, um, and hospitality, you know, we've continued to see the, the increases there. We've got another 1% increase over occupancy last week, so we're up at 49.9%. Um, RevPAR also continued to, to increase, um, up to $50 and 37 cents. Um, it's about a dollar 41 from the previous week. Um, and again, so occupancy, you know, has risen now 16 of the last 17 weeks. Um, you know, even though that growth has slowed some, I know sst r you know, and gave a slight downgrade to their forecast, um, last week, you know, really citing that they haven't really seen the recovery that they thought they'd see at this point in terms of that group and business travel, which, you know, is expected. Um, and so for the q3, they're forecasting about a 40% year of year decrease from what you know, was seen last year. Um, but you know, that's still a big improvement from what we actually saw in Q2 where we were 57% below what, what we saw the year before.
00:02:47 Yeah, I mean, we've, we've paid attention to, you know, if you can get to about a 60, 65% occupancy, we, we think that, that the level of distress might be significantly less than most people expect, right? In the hospitality sector remains seen. Regulators obviously have been very accommodating to lenders right now in our retail and hospitality sectors by allowing them to do, you know, interest fee, interest fee, deferrals, uh, forbearance agreements and the like. The question is how long will that last? Okay. And, and the recovery come ahead of that rather than having these challenges or issues. You know, we talked a little bit earlier before we jumped on about recourse versus non-recourse, and I think there's been no more appropriate or apparent time about a lender's appetite to do a deal today versus, you know, and with recourse versus non-recourse. Yeah. You know, if you're an equity investor, you're thinking about the future.
00:03:37 You're taking in equity kind of quote unquote bet, but your, your thesis is, I get a huge upside, right? If it goes well and I'm willing to take a risk because, you know, frankly, maybe the downside isn't so good a lender is just looking at it and saying, Hey, here's some money. I get a fixed return and I want to get it back. Exactly right. How do you solve that in a market that's just really choppy, up and down recourse. And, um, I can tell you, you know, we've done some hospitality to multi conversions, you know, where the lenders from non-recourse to recourse were spreads on that were 500 basis points and the cost of capital,
00:04:13 In terms of your comment on recourse, we're seeing the same thing. I mean, all kind of the, the loans that, that we've seen, um, and term sheets coming through recently, you know, it's, the rates have been pretty okay at around 5.5% all in. But again, it's, it's kind of gone to that full recourse, which we did not necessarily see, you know, uh, pre covid.
00:04:33 And I would tell you one thing we've talked about previously a bit here, is that multi is such an attractive assay class for lenders that they are driving rates down significantly because they're not looking to lend on any of the other asset classes, maybe except for industrial. But industrial is not really, um, it's a smaller, you know, there's just not as much profile. There's not as much opportunity to get industrial loans, which they would love. So we've been doing deals in a construction bridged permanent and multi, and the rates are incredibly low relative to what I feel like sometimes the risk might be. Mm-hmm. <affirmative>, um, you know, where we're doing a 250 unit bridge loan without any, any leasing activity quite yet coming off a, you know, A A C F O. Sure. And we're able to get loans in the 4% range, you know, so to me that's an interesting perspective that people would rather take a, a bet on a fully unoccupied multi-family asset over, you know, some office building that has 70% or 80% of the tenants signed up on leases, um, just simply because of what they don't know is, is gonna happen in the future, you know, with office.
00:05:37 Yeah, no, there's, there's definitely some uncertainty there. I mean, we saw, you know, this, this week, the news that r e i, they're putting their, uh, building they've been working on for two years, they're, they're huge headquarters, you know, up for sale. Um, and again, are kind of following the trends that we've seen, you know, from announcements such as, you know, Twitter and Facebook. You know, they're really embracing that, that kind of online working environment and, and maybe instead of moving from that large headquarters to, to getting kind of multiple office spaces throughout, um, located throughout to kind of accommodate, you know, workers who, who wanna work from different locations. Um, so that's definitely kind of a trend that, that, that we're seeing.
00:06:13 Well, I think we're all just paying attention. We're all trying to figure out where the trends are. I think, you know, you know, as far as CrowdStrike goes, the equity investors that come to the marketplace are certainly recognizing the opportunities today, um, you know, in a low dollar basis per, per transaction. The question is how can we make sure that lenders step up and are creative to the equity returns? You know, it's very difficult when you look at a deal and you say, okay, well the debt is 10%. Right? That doesn't work for the equity investor. So recourse does solve that, and I think you are seeing sponsors now saying, well, let me take that opportunity to provide that accretive debt to my, to my equity investor, and I'll be willing to stand behind it. And I think lenders there are going, okay, we'll, we'll make the loan in that situation.
00:06:58 Definitely. And I think, you know, that's definitely value add for the investors too, to see that additional alignment from the sponsors as well. So, um, no question the the investor side, you know, that that's, you know, kind of a plus when, when you see that recourse, um, on their end,
00:07:10 N n no question, they're definitely standing behind the project
00:07:13 Going back to multi-family. I mean, in terms of the, the trends we've seen there, I think, you know, August numbers so far are looking pretty okay. I would say we're about 1.9% below where we were last year for, for the same period. But if we look at, you know, how rent collection was in July, you know, where we're actually above that at, you know, August sitting at 79.3% versus the 77.4 that we we saw in July.
00:07:38 Yeah. I mean, one thing that we pay attention to there is, you know, unemployment benefits that have been provided, you know, the fact we didn't get a deal, but yet we have some, you know, executive orders and alike, and hopefully unemployment continues to go. But between unemployment, P P P and student loan deferrals, you know, how much effect does that make for the multi-family collections? I bet you it's been very helpful, you know, in multi-family collections. So that's probably the last thing we're paying attention to, is we think that going into the fall, um, we're gonna have a lot more visibility about things and what stresses do we have or we do not have, you know, coming onto their side, the, the resiliency of the economy has actually been remarkable at the stock market. I mean, often, um, you know, so cert and certain industries are doing better than ever.
00:08:24 Uh, but frankly, you know, we still have a bit of a challenge. You know, we, we hope that we continue to see vaccine, you know, advancement going into the fall, uh, and then testing, you know, you start to see more announcements about testing mm-hmm. <affirmative>, um, you know, and I think if we can have rapid testing, you know, we can really get through some of these challenges that we're faced today. So hopefully the economy continues its growth, but it doesn't, you know, Sutter, before we get there with all the other stuff that we're trying to work through.
00:08:50 Well, Malcolm, uh, appreciate the time today. Um, as always, um, for, for your insights, um, and to the viewers out there, uh, appreciate you tuning in. Um, hope you're all staying safe and look forward to speaking again next week.
00:00:35 Hey, Anna Maria. I mean, it's been a interesting summer, right? So we're paying attention to lots of things, conflicting data all over the place. I mean, home builder sentiment is at a record high, which, you know, you look around and going, why is that? Um, you know, SFRs uh, sales jumped 17.2%. Jobless claims though drop below 1 million. So our unemployment rate is, seems to stabilize now or down at 10.2%. You know, part of it though is like what's driving some stuff about consumer spending? You know, I paid attention to that, you know, the president signed a deferral of the student loan interest payments till December 31st. You know, not having 40 million people making student loan payments certainly has a effect on their ability to spend in the economy. So something we really haven't seen or I haven't paid attention to, and frankly, the TSA traffic counts. We, this is the highest, yesterday was the highest traffic count day on TSA since March 18th. So maybe there's some level of travel still down, you know, some, something about 65%. But definitely those are things that we've seen. And yeah, I'll get into a little bit, a little bit about each asset class, but just definitely, you know, here we are in the, in the dog days of summer, uh, figuring out, you know, what's going on going into the fall, which we think is gonna be quite busy.
00:01:48 Yes, no, definitely. Um, and then, yeah, in terms of kind of what we've seen on the, the S T R reports, um, and hospitality, you know, we've continued to see the, the increases there. We've got another 1% increase over occupancy last week, so we're up at 49.9%. Um, RevPAR also continued to, to increase, um, up to $50 and 37 cents. Um, it's about a dollar 41 from the previous week. Um, and again, so occupancy, you know, has risen now 16 of the last 17 weeks. Um, you know, even though that growth has slowed some, I know sst r you know, and gave a slight downgrade to their forecast, um, last week, you know, really citing that they haven't really seen the recovery that they thought they'd see at this point in terms of that group and business travel, which, you know, is expected. Um, and so for the q3, they're forecasting about a 40% year of year decrease from what you know, was seen last year. Um, but you know, that's still a big improvement from what we actually saw in Q2 where we were 57% below what, what we saw the year before.
00:02:47 Yeah, I mean, we've, we've paid attention to, you know, if you can get to about a 60, 65% occupancy, we, we think that, that the level of distress might be significantly less than most people expect, right? In the hospitality sector remains seen. Regulators obviously have been very accommodating to lenders right now in our retail and hospitality sectors by allowing them to do, you know, interest fee, interest fee, deferrals, uh, forbearance agreements and the like. The question is how long will that last? Okay. And, and the recovery come ahead of that rather than having these challenges or issues. You know, we talked a little bit earlier before we jumped on about recourse versus non-recourse, and I think there's been no more appropriate or apparent time about a lender's appetite to do a deal today versus, you know, and with recourse versus non-recourse. Yeah. You know, if you're an equity investor, you're thinking about the future.
00:03:37 You're taking in equity kind of quote unquote bet, but your, your thesis is, I get a huge upside, right? If it goes well and I'm willing to take a risk because, you know, frankly, maybe the downside isn't so good a lender is just looking at it and saying, Hey, here's some money. I get a fixed return and I want to get it back. Exactly right. How do you solve that in a market that's just really choppy, up and down recourse. And, um, I can tell you, you know, we've done some hospitality to multi conversions, you know, where the lenders from non-recourse to recourse were spreads on that were 500 basis points and the cost of capital,
00:04:13 In terms of your comment on recourse, we're seeing the same thing. I mean, all kind of the, the loans that, that we've seen, um, and term sheets coming through recently, you know, it's, the rates have been pretty okay at around 5.5% all in. But again, it's, it's kind of gone to that full recourse, which we did not necessarily see, you know, uh, pre covid.
00:04:33 And I would tell you one thing we've talked about previously a bit here, is that multi is such an attractive assay class for lenders that they are driving rates down significantly because they're not looking to lend on any of the other asset classes, maybe except for industrial. But industrial is not really, um, it's a smaller, you know, there's just not as much profile. There's not as much opportunity to get industrial loans, which they would love. So we've been doing deals in a construction bridged permanent and multi, and the rates are incredibly low relative to what I feel like sometimes the risk might be. Mm-hmm. <affirmative>, um, you know, where we're doing a 250 unit bridge loan without any, any leasing activity quite yet coming off a, you know, A A C F O. Sure. And we're able to get loans in the 4% range, you know, so to me that's an interesting perspective that people would rather take a, a bet on a fully unoccupied multi-family asset over, you know, some office building that has 70% or 80% of the tenants signed up on leases, um, just simply because of what they don't know is, is gonna happen in the future, you know, with office.
00:05:37 Yeah, no, there's, there's definitely some uncertainty there. I mean, we saw, you know, this, this week, the news that r e i, they're putting their, uh, building they've been working on for two years, they're, they're huge headquarters, you know, up for sale. Um, and again, are kind of following the trends that we've seen, you know, from announcements such as, you know, Twitter and Facebook. You know, they're really embracing that, that kind of online working environment and, and maybe instead of moving from that large headquarters to, to getting kind of multiple office spaces throughout, um, located throughout to kind of accommodate, you know, workers who, who wanna work from different locations. Um, so that's definitely kind of a trend that, that, that we're seeing.
00:06:13 Well, I think we're all just paying attention. We're all trying to figure out where the trends are. I think, you know, you know, as far as CrowdStrike goes, the equity investors that come to the marketplace are certainly recognizing the opportunities today, um, you know, in a low dollar basis per, per transaction. The question is how can we make sure that lenders step up and are creative to the equity returns? You know, it's very difficult when you look at a deal and you say, okay, well the debt is 10%. Right? That doesn't work for the equity investor. So recourse does solve that, and I think you are seeing sponsors now saying, well, let me take that opportunity to provide that accretive debt to my, to my equity investor, and I'll be willing to stand behind it. And I think lenders there are going, okay, we'll, we'll make the loan in that situation.
00:06:58 Definitely. And I think, you know, that's definitely value add for the investors too, to see that additional alignment from the sponsors as well. So, um, no question the the investor side, you know, that that's, you know, kind of a plus when, when you see that recourse, um, on their end,
00:07:10 N n no question, they're definitely standing behind the project
00:07:13 Going back to multi-family. I mean, in terms of the, the trends we've seen there, I think, you know, August numbers so far are looking pretty okay. I would say we're about 1.9% below where we were last year for, for the same period. But if we look at, you know, how rent collection was in July, you know, where we're actually above that at, you know, August sitting at 79.3% versus the 77.4 that we we saw in July.
00:07:38 Yeah. I mean, one thing that we pay attention to there is, you know, unemployment benefits that have been provided, you know, the fact we didn't get a deal, but yet we have some, you know, executive orders and alike, and hopefully unemployment continues to go. But between unemployment, P P P and student loan deferrals, you know, how much effect does that make for the multi-family collections? I bet you it's been very helpful, you know, in multi-family collections. So that's probably the last thing we're paying attention to, is we think that going into the fall, um, we're gonna have a lot more visibility about things and what stresses do we have or we do not have, you know, coming onto their side, the, the resiliency of the economy has actually been remarkable at the stock market. I mean, often, um, you know, so cert and certain industries are doing better than ever.
00:08:24 Uh, but frankly, you know, we still have a bit of a challenge. You know, we, we hope that we continue to see vaccine, you know, advancement going into the fall, uh, and then testing, you know, you start to see more announcements about testing mm-hmm. <affirmative>, um, you know, and I think if we can have rapid testing, you know, we can really get through some of these challenges that we're faced today. So hopefully the economy continues its growth, but it doesn't, you know, Sutter, before we get there with all the other stuff that we're trying to work through.
00:08:50 Well, Malcolm, uh, appreciate the time today. Um, as always, um, for, for your insights, um, and to the viewers out there, uh, appreciate you tuning in. Um, hope you're all staying safe and look forward to speaking again next week.