Zack Streit, Capital Markets Update | Ep. 84

00:00:04    Welcome  back to this week's edition of StreetBeats, where we discuss all things capital markets within the commercial real estate industry. Today I am joined by Zack Streit of George Smith Partners. Zack, welcome to StreetBeats and Happy New Year. 

00:00:16    Thank you Anna-Marie. Happy New Year to you too. Great to be back at it again.  

00:00:19    Definitely. Well, it's definitely, uh, a big week here in the US with the inauguration taking place tomorrow. We've got Janet Yellen, uh, going through, um, her getting confirmed today. Um, and you know, with that, I think there's kind of a lot of, uh, macroeconomic factors that, that kind of, uh, to be discussed there. I mean, I think Biden's 1.9 trillion stimulus plan that he's budgeting out, um, you know, I think there's, there's gonna be some, some effects in commercial real estate there. What are you seeing?  

00:00:49    Uh, huge. Uh, and so there's been a lot of conversation and questions that have come in around inflation and what does 2 trillion in stimulus mean for the real estate market? What does continued lower interest rates mean for the real estate market and oh, well, maybe they'll be higher taxes, but folks think it'll take him, I don't know, 18 to 24 months to actually pass that. Yeah, so, you know, what's the impact? I, I think a lot of folks have been saying, Hey, there's gonna be a massive increase in the money supply. There's gonna be more capital than there are deals, you know, using my, um, I guess, you know, powers of telepathy or crystal ball, which asset class is gonna be impacted. And folks have been saying multi-family. Yeah. And they've been saying that, um, you could see massive cap rate compression in multi-family because it's considered a super safe asset class along with industrial, but unlike industrial, it doesn't have a lumpiness.  

00:01:41    And so, you know, you're not gonna lose one tenant on a single tenant deal and have an entire building vacant. Now if you lose one tenant, um, you know, you'll, you'll refill it and you'll refill it relatively quickly. So that could be, that could be positive. So I would say watch for that and watch for that in a climate where agency lending is still 3% and we're gonna lock an agency deal tomorrow, and despite a 40 basis point increase or rally in the treasury market, we're stoking a lock right around 3% with seven years of IO on on really a fantastic loan. So if you can acquire stabilized multi and the high fours finance it at three, that's still an amazing spread. So, uh, I, I think inflation is one to keep an eye out and to figure out how is it going to impact the different real estate asset classes.  

00:02:28    No, I think so. And I think, you know, crowds REET two, I think we, we kind of have the same outlook on multi-family for sure. I mean, we were just discussing it earlier today, kind of our outlook for 2020 and how we kind of wanna allocate across asset classes and multi-family is gonna play, play a big part in there. And I think also it's important to, to think about when we look at multi-family and where we're coming in, in 2021, you know, it, it fared well through the pandemic, but also I think, you know, the pricing, if you compare it to maybe industrial or um, life sciences kind of those, some of those of those darlings kind of coming out of 2020, um, the pricing didn't increase the similarly to what we saw in those asset classes. So I think there, there's also kind of that value proposition kind of compounded on top of what you just went through to, to really, you know, bolster multi-family going into 2021.  

00:03:14    There, there, there could be a lot of room to run, and especially in the secondary markets where maybe rents weren't hit as hard, but you're still having huge population in migrations. Like I, from time to time look at like the U-haul studies and you know, where people going and it's not to California and they're going to the southeast, or we looked at United Van Lines and we saw it like Boise. And interestingly, we're number one and two for United Van Lines last year on where to move in in those areas all the more so,  yeah. Um, and also I think, you know, the, the numbers just came out too for kind of Q4 apartment demand. Um, and it was the best Q4 we've seen in two decades in terms of absorption. Um, you know, there was, uh, 70,000 unit net absorption in Q4 2020. Um, you know, Dallas Fort Worth was leading the charge there mm-hmm. <affirmative>, um, and not surprisingly, Chicago was one that actually saw net negative absorption and kind of was, was on the other end of, of, of the performance there. 

00:04:09    So  yeah. And, and for that to occur while 30 year home mortgages are at like 2.6 or 2.8%, which means it's really cheap to buy a house, it is amazing. Nobody would've forecasted that you'd have both a super strong apartment market and a super strong single family market. Generally there's some level of competition between the two. So definitely a story there.  

00:04:31    For sure. Um, well let's switch a little bit. I know as we were Yeah. Before we jumped on here, I know you were talking about some, some co-living deals that you guys are working on. Um, yeah. And then I also kind of mentioned the news of that came out this morning of quarters, um, kind of filing for bankruptcy there. So, you know, I think, I think there's an interesting story going on in that space. What's kind of your, your take on  

00:04:50    Things? Yeah, look, we, we love co-living. We're refinancing a deal up in San Francisco right now. A little, little tough from up market perspective, but one we think is gonna snap back and from all the metrics we've seen on co-living in San Francisco and LA and elsewhere, seems to have outperformed traditional multi-family with respect to occupancy, you know, with respect to rent declines and with respect to collections. From what we can tell up in San Fran down here in la, you're looking at a 500 basis point delta between occupancy and co-living properties and traditional multi-family properties. Nobody thought this asset class would be able to outperform traditional, let alone survive the way people were talking about it back in April and May of last year. And I think, I think the real story is who is the underlying tenant demographic? You've got young people with white colored jobs so they can work from home and they weren't, you know, subject to the layoffs that you saw in the hospitality or the restaurant sector.  

00:05:49    They're all relatively young, so they're a little bit more covid resistant and they don't wanna live in mom and dad's basement and they want that sense of community, however limited it might be. However, they might shrink it and do things a little bit differently now than they were doing it before. But that resiliency is amazing. And I can tell you that, um, there's already been a very big uptick in inbound inquiries, um, at least for this San Francisco co-living operator that we're working with, um, in terms of, you know, um, new, new new rental applications, um, and just, you know, folks wanting to make rental inquiries. Yeah. So that's, that's amazing and we wonder if that isn't, you know, vaccine related, um, and maybe a bellwether for the future. So I think, I think some of the compression we were talking about earlier and some of the general inflation that could impact multi-family, I don't see why as a sub-sector of multi it wouldn't also impact co-living, especially as the story gets told on this sort of niche kind of emerging sectors resilience.  

00:06:48    Yeah, no, I agree. I think, you know, I think we definitely see value in, in co-living, um, you know, for the PO points you mentioned, but also I think, you know, a as you think about it too, it's just the, the, the idea that you're offering kind of an affordable, you know, space to rent in kind of these, you know, I think location is key, right? It's gotta be kind of in those in demand locations that has, you know, the, the retail, the entertainment aspects and the transportation nearby to kind of accommodate someone who, you know, maybe can't necessarily afford the class a apartment in, in that neighborhood. But, but the co-living kind of provides the amenities that they're, they're looking for. There are a hundred percent would wouldn't advise sponsors to build these in like super suburban or tertiary locations. They've gotta be kind of in core locations, but if they are, um, I think there's phenomenal upside and I think there's phenomenal spread.  

00:07:38    Yeah, definitely. Um, you know, another aspect we were talking about is hospitality is gonna be super interesting I think in to watch and see what happens in 2021. You know, I think the, the TSA numbers are gonna be telling, kind of seeing as travel picks up. You know, I think probably first back is, is gonna be the, the leisure side of things for sure. Um, and, and once the vaccine rolls out and, and things open up is we're gonna be, you know, a boom and everybody wanting to, to, to jump out and, and get traveling. Um, you know, it's, it's definitely an interesting story to see unfold.  

00:08:11    So we're having folks ask us, and I'm reading in, in, in, in some of the newsletters, you know, is hospitality the fire sale? It never happened. Is P P P 2.0 gonna help folks, you know, survive the winter, so to speak? Um, will banks offer more flexibility or continued flexibility in light of the vaccine and wanting to avoid the back bad optics of a foreclosure? There's this concept of revenge travel out there, a roaring twenties, like you said, that leisure travel's gonna gonna kind of come back and I've been reading articles that folks can't secure wedding venues for the next 12 months. Yeah. Which I never would've thought would've been the case here. Um, we recently sourced an 85% loan to cost non-recourse bridge financing term sheet, um, to refinance a construction loan for a hotel that is completing, um, in Phoenix. Uh, I think six months ago you would maybe get like, I don't know, 30 or 40% loan to cost, not 85% loan to cost if you could even find that bid, um, on this type of asset.  

00:09:11    Um, and so to have made up that kind of ground in such a short period of time and being able to find non-recourse sort of debt fund, you know, bridge lenders re-enter the space is a really good sign. It's not a super cheap loan, it's not 2019 pricing, but it's also not so incredibly expensive that like it boggles the mind and you, and you couldn't get it. I would say it's pretty risk adjusted for what it is right now. Um, you know, on the other hand, we're marketing a distressed hotel note right now. Um, and there's been a lot of interest in the capital markets and I'm hearing more about some transactions that have occurred very quietly in the space. So maybe there's a little bit more distressed activity than is reported. Seems like things are kind of happening under wraps. Yeah. But not a lot. And I wonder how long can there be a 20% c m bs delinquency rate in hotel, um, and hospitality without more foreclosures in distress trade. So we sort of have some competing interest here. I'm very hopeful that the former outshine the ladder cause I think all of our hotel clients have really had an extraordinarily difficult period of time. Um, and I'm hopeful that we're closer to the end of it than the beginning  for sure. Um, kind of another aspect in, in terms of hospitality that, that we were kind of following on on our side this week was the announcement outta New York that they're potentially considering putting, um, you know, requiring permits to for hotel development throughout the, the Manhattan, New York City area. Um, again, it's, it's kind of early in the stages in terms of getting voted through, but um, that being said, you know, a similar uh, proposal was enacted on a couple of, um, you know, markets within New York, such as Midtown East, um, in 2018. And we saw there that since 2018 no new supply Yeah. Um, has, has kind of come online since that was implemented. And then you kind of couple that with the fact that if you look at New York City as a whole, in terms of hospitality, right, 30% of, of the hotels already Yeah. Kind of closed down. And, you know, I think the expectation is obviously not all of those are gonna come back. So in terms of kind of the supply balance moving forward, it'll be interesting to see how that plays out, um, within the hospitality sector there.  

00:11:19    A hundred percent. I mean, you know, no new supply hotels going offline. I don't know, maybe light at the end of the tunnel. It, it, it's a really interesting place. I just, I hope folks can get through sort of, you know, the next few months, which will be difficult. Yeah. And, and who knows could we could be there. Definitely.  

00:11:36    Well, Zack is always appreciate the time today. Thanks for, for tuning in. We'll be back, um, in two weeks from now with, with the next episode of, of StreetBeats Capital Markets.  

00:11:47    Awesome. Look forward to it. Take care.  

00:11:49    Thank you. Take care.