Zack Streit, Capital Markets Update | Ep. 91

Anna Marie    00:00:04   

Welcome to StreetBeats Capital Markets, where we discuss all things related to the debt and equity markets, as well as greater economic trends and how these affect the commercial real estate markets. I'm Anna Marie Lee, director of Investments at CrowdStreet, and I'm pleased to be joined by Zack Strait, SVP at George Smith Partners. Zack, welcome back. Kind of going back to, to last week when we were pretty positive, I think the, the positive kind of news keeps coming. Um, you know, Friday we hit the 100 million doses administered in terms of vaccines in the us. Um, Biden announced that, you know, he's expecting that all adults, uh, will be eligible to get a vaccine by May 1st. Um, and, you know, uh, covid cases are, are continuing to trend down. I think there were 38,000 new cases, um, in the US reported on Sunday, and this is the, the first time we've been below 40,000 since October. Um,  

Zack    00:00:53   

It seems like herd immunity isn't like this academic sort of concept or theory anymore, that it's actually coming. And, and I saw a stat that said like 70% of adults surveyed said they would get the vaccine. So that's about 175 million Americans. Yeah. And, and the thinking is that that will occur by June or before, and that means that everybody who wants a vaccine can get one. You know, when we're already sitting here in the middle of March that that's a stones throw away. That's before the end of the second quarter. Unbelievable.  

Anna Marie    00:01:23   

Yeah. No, and I think, you know, a lot of this also is, is reflected in kind of, we've seen, we're seeing kind of in the, the hospitality industry that, you know, it seems like travel's starting to, to pick up and people are really thinking about kind of and, and executing on, on planning those vacations and whatnot. You know, if we look at the, the T s A checkpoints, which I don't think we've touched on in a few weeks, but No,  

Zack    00:01:44   

No, it's been a while.  

Anna Marie    00:01:45   

Yeah. Um, you know, last Friday there was 1.36 million people, um, yeah, one three security, 1.34 million people on Sunday. And these are two of the busiest days we've seen since March, 2020. So people are,  

Zack    00:01:56   

I think they were saying that they're only like 20% off of 2019 numbers. Yeah. Which is fine, is a big reduction, but, you know, being 80% off or 90% off, I mean, the swing back is just unbelievable.  

Anna Marie    00:02:08   

Yeah, completely. Um, and again, JetBlue was reporting that in terms of kind of bundle flight and hotel vacation packages. Um, they sold more of those last week than they ever have before in, in any given week. So, um, yeah. You know, people are itching to get out.  

Zack    00:02:25   

I, I think so. I mean, I was playing tennis with a buddy of mine who works at Blackstone this weekend and he just said, Hey, I think 2020 is the year of the pause. Yeah, I think he's right. We're about one year out from when Powell drop rates to zero and the Dow crash and, you know, it seems like we're, we're, we're, we're back. We're starting to come back and you know, there's some sort of like Rip Van Winkle effect and you know, I've been reading that due to the stimulus, like you could see 7%, you know, year over year, like economic growth in q4, which would be the fastest pace of growth since 1980. Um, so I don't know, I think think fasten your seat belts. I think the sort of, you know, twin effect of post covid and a massive stimulus, um, and travel, um, is really gonna heat up the economy, um, on near term. 

Zack    00:03:11   

Yeah. And, and we're start, we're starting to see it, uh, we're starting to see it in the financing markets. I was telling you just before this that, um, the c l O market's incredibly active. The warehouse market is back and incredibly active. The anno market is incredibly active. We actually just got hired to place, uh, our second eNote, or maybe third now on behalf of a, a, a debt fund. Um, and it's interesting, usually we take deals to them, but sometimes they hire us also, especially as the market, um, you know, for REOs has, has recovered and you're hearing about bridge debt financings, um, that are going in the threes now. Uh, a colleague of ours is shopping an office deal, um, that's about 80% occupied in a suburban location. It's about a $40 million loan, and they're getting quotes in with all in coupons around three and a half percent.  

Zack    00:04:00   

Wow. There was probably no bid on that deal or, or if there was a bid, it was much, much wider, four to 500 basis points wider, you know, six months ago. Yeah. And that kind of compression is crazy. We're hearing about multi-family all in rates now that are below 3%. I was on the phone with a buddy of mine at a debt fund. He said he was bidding on a 50 million multi, and he was building at Lior 2 75 with a 25 basis point floor. That's 3%. So I said, okay, you're gonna crush the market. And he's like, actually Zack, I think I'm gonna lose this deal. Wow.  

Anna Marie    00:04:31   

Yeah, no, we,  

Zack    00:04:32   

We, nine months ago, those same deals were going for 6% all in, now we're at three. So the compression's been crazy.  

Anna Marie    00:04:37   

Yeah, no, we've definitely been seeing the same on the multi-family deals that have been coming through the pipeline, that kind of the the financing rates. Yeah. I've been kind of in that, that 3% range, which, you know, it, it's unheard of. You know, I think we can safely say that, um, you know, the V shape recovery as well in its way. Um, and it, well,  

Zack    00:04:54   

Well, I, I can't think of a point in my career where you could borrow on multi-family bridge at the same, or maybe even at a slightly lesser rate than you could lock a 10 year perm loan in. Yeah. And right now that's the case. Yeah. So just gotta makes your head spin. Mm-hmm. <affirmative>. So <laugh>, hey, find a bridge deal. It, it's amazing.  

Anna Marie    00:05:15   

Gotta gotta take advantage for sure. Um, and then, yeah, I think, right. The other kind of big news this week was the, the announcement between Blackstone and in Starwood Capital, um, per extended state America, um, hotel brands, uh, for 6 billion. So again, they're acquiring 567 properties. Um, you know, in addition, the company also franchises in additional 82 properties, um, about two, two-thirds of their hotels are located in kind of the top US metro areas. Right. Um, and I prefer for those listening in, you know, the extended stay is, you know, this mid-priced hotel chain that really focuses, you know, on guests that are staying for a week, um, or longer, you know, they're offering kitchen facilities in a little more space in your typical hotel room. Um, right. Really saw this, you know, uh, type of hotel this, this asset class within kind of the, the hotel market, you know, performed very well during Covid. You know, I think the, the e ESA report of that, they were averaging 74% occupancy for all of 2020. You compare that to, you know, um, all asset classes within hospitality. Oh. Um, that was, you know, hit 44% for, for the year,  

Zack    00:06:24   

Comes to show you why that deal got done in this sector first.  

Anna Marie    00:06:27   

Yeah, no, for sure. And I think, I mean, this is, uh, a area of the hospitality side that Crabtree's been excited about. Yeah. Um, we were lucky enough to, to be able to place an investment with our opportunistic funds series one, um, into an extended state America that was located in Houston. And that one similarly, you know, we saw 76% occupancy for Q4 2020, um, and it was yielding almost like a 14 point a half percent, um, cash yield, um, so far, um, on an annualized basis. So that's definitely, that's,  

Zack    00:06:58   

It's, it's unbelievable. One, one quick hotel anecdote for you. We were marketing a distressed hotel note, um, probably end of last year. It was a 20 million loan, it was a 2019 debt fund origination. Yeah. And we ballpark quotes probably in the, call it 70 to 75 cents on the dollar range. And we got about five quotes in all from reputable sponsors that we knew that were strong and that knew the market well, a asset was located in Southern California. Um, and the lender decided, you know what? I just, I wanna hold on for a bit. I'm gonna try and foreclose and see what happens. Yeah. Um, we found out last week that the hotel sold was never foreclosed on. Oh. And it sold, the sponsor sold it. They did take a loss on the equity, but they got some of their money back. Not all of it.  

Zack    00:07:44   

Um, it sold at like 140% of par or that, that equivalent. Yeah. So, you know, there's still losses in hotel land and this was, um, kind of a, a, a lower quality, full service hotel. Um, there's still losses in hotel land, but like, you know, the fact that on a 2019 debt fund origination, um, that was distressed where the borrower stopped making interest payments that, you know, you could get paid off in full, including all your default interest. Um, you know, and the borrower still pocketed, you know, some of his initial equity back is just unbelievable.  

Anna Marie    00:08:16   

You can see the light at the end of the tunnel for hospitality. And I, I think with that, you know, we're, we're seeing more deals coming into our pipeline, you know, um, in terms of some opportunistic, um, purchases from, from various sponsors that are, you know, now's the time to kind of take advantage of, of that pricing because, you know, as, as fundamentals improve in the hospitality sector, you know, it may be harder to come by. Um, so again, we're seeing kind of, uh, discounts to pre covid pricing anywhere from 10 to to 30% right now, kind of looking at, at the deals that have come in. So, um, it's,  

Zack    00:08:49   

And those might look really good like a few months from now. I never thought we'd be saying that, but you know, to me, in addition to being the year of the pause, like a big lesson that we learned from last year is just the burden, the hand. And it's hard to time and it's hard to note cuz nobody has a crystal ball, but I don't know, it just looks to me that over the last year, so if you've had something and it's been pretty good, you, you take it. Um, and, and look, if better is possible, you know, then great. Um, but if it isn't, then better you took it then missed on the opportunity. Well, Zack has always appreciate good stuff. Yeah. Likewise. Next time we can talk about when the first in-person conference will be, uh, which, you know, we all think is gonna happen pretty soon, but we can, we can kick the can down the road a couple weeks.  

Anna Marie    00:09:33   

Definitely. All right. Thanks so much.