Rapid Improvement in the Hospitality Sector with Zack Streit | Ep. 92

Anna Marie    00:00:05    

Welcome to this week's edition of StreetBeats. I'm Anna Marie Lieb, director of Investments at CrowdStreet, and I'm joined by Zach Streit, senior Vice President George Smith Partners. And on this episode of Street Beats, as always, we're gonna talk through all things capital markets and how it relates to commercial real estate. Um, Zach, it's, it's been a week for hospitality, or I'd say March has started off strong for hospitality. Yeah. Um, you know, occupancy has definitely spiked up. Um, I think it was a seven point increase, uh, this past week, um, with 59% absolute occupancy. Um, that, that, how about that meeting? Um, how about that? It, it's, it's huge <laugh> Brexit, percent of the 2019 bench benchmark. So things are improving in the sector. 

Zack    00:00:52    

I don't think anybody thought we'd get back to it, um, that quickly. I think everyone believed there'd be sort of some tipping point when enough, you know, vaccines, uh, are done and, you know, we can talk about the T s A numbers that probably relate to this. Yeah. 20 days in a row above a million, you know, 60 to 70% of pre pandemic levels. There's definitely a connection, but, but a big week, uh, in the hotel market and, uh, look, I just saw an article on the CBRE forecasting that occupancy for the second half of the year, you know, would be 55%, you know, and maybe higher. Um, so that's, that's amazing. Cause that's gonna include, you know, some, some down months where there's probably less travel. So, um, you know, amazing news for the hotel industry.  

Anna Marie    00:01:34    

Definitely. I know, I, as I was saying earlier too, I mean, I, I was reading that Texas sold more rooms last week than it has during any other week since late July, 2019. Um,  

Zack    00:01:46    

Unreal,  

Anna Marie    00:01:46    

Which is, which is unreal.  

Zack    00:01:49   

Malcolm and my partner used to do these was, um, we're doing a kind of a loan on an industrial property Yeah. In San Marcos kind of, you know, in the corridor between Austin and San Antonio, and he couldn't get a rental car  

Anna Marie    00:02:04    

Wow. Yeah.  

Zack    00:02:05    

Trip. So it just speaks to some of the incredible demand, uh, going on in that state.  

Anna Marie    00:02:09    

Yeah, definitely. I know. So, I mean, it's, so we we're slowly seeing also the group rooms come back, um, February, there's 1.5 million rooms sold. Um, you know, this compares to about two and a half million from last March. So still a long way to go, but, but it's starting to come back , which is great. Um, and as you mentioned, it seems like that that business travel's coming back. I know you, you were in Portland I believe yesterday, so, um, you know, people, people are moving around. Yeah. Um, and I think with that, you know, the hospitality deals are, are starting to, to kind of shake loose a bit. I know you're mentioning before kind of what, what you're seeing on the CMBS side in hospitality.  

Zack    00:02:44    

Yeah. So we're, we're marketing two deals right now. One for, uh, a perm loan, believe it or not, I'm, I'm still a little shocked to be saying it myself. Um, and we're, we're, we're getting traction. We actually have a term sheet, uh, for a permanent 10 year fix, CMBS loan, you know, non-recourse garden variety on a hotel, um, down in San Diego. And, um, you know, I, I think previously the conventional thinking was you couldn't get a permanent loan on hotels with, you know, without, you know, a pretty pristine, you know, trailing 12. And, and, and you can, and you know, Fitch and the rating agencies have essentially said, look, you know, take 2019, uh, NOI haircut it 20% size to between a 12 and a 14 debt yield. Um, and these deals are doable. So the, the term sheet that we got was about a 50 LTV, so still not  pushing leverage.  

Zack    00:03:39    

Sure. Um, but the rate was, you know, in the high threes. Yeah. So you're getting a 10-year rate nonrecourse sub 4% in the hotel deal. Um, you know, we know that even three months ago there was probably no bid here, let alone six months ago. So it's incredible to see how quickly the market are snapping back. So similarly, we're marketing a full service hotel, um, up in the Pacific Northwest, um, a full service hotel, let me just reiterate that. Not not select service, not limited full, and it's got a bunch of conference room space. Yeah. Um, the sponsors are picking it up at a pretty good basis. It's definitely a reset from where it was, and it is at a discount to what the sellers basis is. We're getting bridge, uh, bridge lender sort of debt fund quotes in 65% loan to cost, um, at, at, at a spread of 600 over.  

Zack    00:04:30    

Yeah. So again, like if there was even a bid on this three to six months ago, it was probably 10% or 11% to have seen spread compression comes so quickly in this space. Um, is it is amazing. Um, and, and, and, and we expect sort of, sort of more of that now. We've even seen one hotel construction deal get done. Canyon, you know, made I think it was about a 25 million construction loan, um, on a moxi in Charleston. Okay. That's amazing. I'm, I'm not sure that deal gets done six months ago. So you are seeing more than green shoots. I'm in this space already, so that's really exciting.  

Anna Marie    00:05:05   

Definitely. I mean, yeah, and I think it comes back to, it seems like people are, you know, being able to get there and agree on pricing at this point. Um, and especially I think, yeah. You know, now that the certainty is that, that the market's coming back. Um, similarly, I mean, we are, we're currently looking at a deal in Dallas that the sponsor's actually closed on. Um, again, this is also kind of the, the full service segment. Um, and, and this one, you know, has really attractive seller financing on it. They're, they're getting five year interest only starting at 1% trends up to five, and this is at a 65 ltc. Um, and pricing is about, you know, 15 to 20% discount to, to kind of pre covid in in that ballpark when you take into consideration that, that kind of favorable financing. So, um, it's, it's great to see that, that the deals are being done.  

Zack    00:05:49    

Yeah. I mean, liquidity has just seemed to have snapped back into the market Yeah. Uh, over the last month. Um, you know, in a way that we, we haven't seen in a long time. So leads for a lot of optimism going into the back half of the year. Um, you know, two, two other sort of anecdotes for us that I think are interesting on the capital markets front one, um, we put, uh, a pretty difficult, uh, construction loan into application in downtown LA. Mm-hmm. Um, a lot of folks thought that that market was, you know, like a no bid market before. Yeah. Um, it's really strong sponsorship, um, but it wasn't easy to do. And, and, and we're there, um, and we're hoping that we close in the next 30 days or so. And so I'll, um, kind of keep everybody posted. A lot of work was done up front on this deal, so it feels really, really good.  

Zack    00:06:37   

 But, you know, that's probably our first deal to get an app in downtown la. Um, since pre covid, it's not our first to close. We closed one during Covid that was at pre Covid, but I think it's our first new application, so it's incredible to see an urban core, you know, that was be set by some challenges, be financial again. Um, and then we are marketing, uh, a specialty retail deal. It's about a 25 million loan in a similar sort of urban core location in LA collections for it. Were a hundred percent in March. They haven't been a hundred percent for over a year. And we've gotten pretty significant debt fund interest, um, in writing a bridge loan on the deal, you know, at rates that aren't crazy that are probably in the 500 s over on it. This deal would've probably similar to some of the hotel bridge deals, been either no bid or been like kind of a 10% rate.  

Zack    00:07:27    

You know, if we were marketing this three to six months ago, what's also incredible to me is that the property was carrying an accounts receivable balance, um, up until a few weeks ago when the second round of PPP hit and almost overnight half of the receivable balance was paid off. Wow. And you know, the other half, you know, was kind of subject to sort of lease negotiation, just sort of amortized across, you know, future payments, you know, with an extension. Sure. At the moment we're not carrying any AR balance at all, so it's incredible just how quickly, uh, things have snapped back.  

Anna Marie    00:08:01    

Yeah, no, it, it's great to see. Um, and I think, you know, a lot of that has to do with, you know, the continued, um, stimulus to some extent, right? I mean, we, we just got the, the most recent round past and then there's the, uh, infrastructure, uh, the, what was it, 3 trillion potentially coming through that. Yeah,  

Zack    00:08:17    

Yeah.  

Anna Marie    00:08:18    

Which, which should be be interesting to, to see the effects kind of trickle down and flow through.  

Zack    00:08:24    

Yeah, I mean that's, that's the one two punch here. You've got about 2 trillion in stimulus and another two to 3 trillion in infrastructure. I think, you know, all the liquidity is a really positive sign for the real estate capital markets. You know, I think the one area of concern that folks are talking about, um, and to this point, it's not stopping deal flow at all. Um, it's just what's going to happen in the treasury market. You know, you, you've seen the 10 at one seven, um, so it's definitely high. They're split thinking as to whether it will continue to go higher or whether it will come back back in. It hasn't seemed to have impacted short-term rates at all. Li I bor still at nearly historic lows, so we're, we're kind of at an interesting time. It's something to watch. If it spikes to three, I think that is gonna put a bit of a dampener on the markets, but I don't personally see that. And for sure if it comes back in, uh, which I think it might, um, you're just gonna see more, more continued deal flow. But even with that spike and it's about a hundred basis point spike since, call it November December of last year, sure. We aren't seeing any dampening effect. So really interesting.  

Anna Marie    00:09:27    

Yeah, definitely. Um, and I think lastly, you know, just touching on the, you know, our ongoing conversation of, you know, what's, what's gonna happen with office and, and how are our companies approaching this? I know CrowdStreet, we were excited to announce last week that we're opening, um, a second office in Austin and actually moving our headquarters there. Um, you know, which I, I, I think is, is great news and, you know, we'll still continue to, to keep the, the Portland office, but you know, I think it speaks to the strength of Austin. I mean, it's definitely one of our top markets in terms of, you know, where our investor base is, where our real estate sponsors are located. Right. Granted as our number two market in terms of best places to invest in our 2021 report. And I think a lot of that, you know, goes to kind of cost of living the strong job growth there, you know, and again, also the, the favorable tax state, um, you know, you in terms of not having any personal income taxes, um, you know, went a long way in kind of making that decision for us.  

Anna Marie    00:10:22    

And I think, you know, a lot of other groups are kind of as they're potentially looking to move or kind of looking at those, um, factors as well. Um, you know, I think the other, uh, group that I saw in terms of looking new kind of office space leasing activity was, you know, I read that SoftBank is reportedly looking for a hundred thousand square feet in Miami, you know, so Florida another favorable tax state there. Yeah. Um, but you also have the, the companies who are, you know, instead stepping away and, and kind of looking to sublet space, right. The, we said JP Morgan, they're marketing their 700,000 square feet in New York. So definitely an area that that's still in flux in terms of, you know, the effects of the work from home. Um,  

Zack    00:11:06    

Hey, I, I, I love Austin. Uh, it's a very, very fun place to go out in. There's also a lot of energy in the market, so, we'll, we'll come, we'll come meet you. It'll be really interesting to see what the back half of the year looks like for the urban course. I think, you know, if the T r and T S A are predictors, uh, I think you're gonna see folks coming back to the office. The question on, uh, you know, on, on, on the major West Coast markets. And the question is what does that look like and when, and then how does that sort of stimulate more activity? And, you know, some of this flow into secondary markets was pre covid o that probably continues just to get bigger, does it not? It'll be something the capital markets will wanna look at, but you know, I would say if they're distressed opportunities in those West coast markets, you know, jump on 'em because similar to the, you know, distress in the hotel world, that didn't really materialize, but if you were lucky enough to get something, you probably are looking pretty good right now.

Zack    00:11:56   

I'd say that same phenomenon, um, exists.  

Anna Marie    00:11:59    

Yeah, I couldn't agree more. And I think that's, you know, definitely crowd street's thesis on it too. You know, if, if you can't get something at those core markets at prices that make sense. Um, you know, I think like we believe that, that those will coming back, so most likely a, a good bet.  

Zack    00:12:15    

Sweet.  

Anna Marie    00:12:15    

Yeah. Well, thanks again, Zach.  

Zack    00:12:17    

Awesome. Yeah, thank you.  

Anna Marie    00:12:20    And, uh, we'll see everybody again in, in two weeks from now.