Optimism in the Capital Markets with Zack Streit | Ep. 104

- Welcome to StreetBeats Capital Markets, where we talk all things debt, equity, and what's going on in the economy. I'm Anna-Marie Lieb, Head of Multi-Housing, and I'm joined by Zack Streit, SVP at George Smith Partners. Zach, welcome back. It's been a few weeks.

- Thank you, it has been a few weeks. I kept having to push off Ryan, and I ended up getting to do it with you again, so I owe him lunch at least, but it's great to be back.

- Definitely, definitely. And it sounds like you've been very busy over these past few weeks, traveling up here to our neck of the woods in Portland.

- Yeah, yeah.

- You had a bunch of deals in here in Vancouver. How have things been?

- Things have been exceptionally busy on the capital markets front. You know, we're gonna talk a little bit about the Delta variant, but so far, that hasn't caused, you know, any pause or any expansion in spreads or rates. In fact, everything has come in, from the tenure to lender spreads continuing to compress. You know, stuff up in Portland and Vancouver, we're probably doing like five or six deals up in the Pacific Northwest. Many of them are hotel deals or deals with hotel components, and, you know, we're getting a lot of interest. I think part of the story of what's going on in the capital markets, isn't just continued interest in multi and industrial deals and spreads, you know, compressing even further, which they are. But now, the opening up of liquidity for hotel, retail, and office deals, which they are in a way that we didn't see six months ago. So, we're seeing, you know, new territory, really in all asset classes today, and I think this is part of the V coming out of COVID is that, you know, it was deeper for some asset classes than for others. And the ones that was less deep on came back fast, the ones that, you know, was a little deeper on, came back a little slower, but it feels like they are, you know, at least back in some forms or another. And the ones that came back early, there's just no shortage of competition on, and we can talk about it in more detail. So, it's kind of an exciting time and a hopeful time, with maybe a little bit of, you know, temperance due to the Delta variant, but largely, a lot of optimism about where we're headed in the next year or two.

- Yeah, definitely, and I think also even, just to piggyback on what you're saying about kind of the strength that's coming kind of behind on hotels, we're seeing that on the retail investor side as well. 

- And speaking of, I mean, let's, why not dive into the STR? I mean, so the past week it was great to see, so the average daily rate was above 2019 levels. 4% above, coming in at 1.1.

- Look at that.

- was close too, at 71%. And rev par was just down by four. And I thought what was interesting was Miami just crushing it.

- Off the charts.

- Off the charts, 52% above 2019 ADR, coming in at 237 with rev par. So, just under 50% above 2019 levels. So, you know, I think a lot of that has to do with everybody's getting out for the leisure travel. It'll be interesting to see, again, with the Delta variant kind of coming back and, you know, once schools come back in session, we don't see that much leisure travel in the fall. What's gonna happen with that group and corporate business. So, that's definitely something we'll be watching.

- These are mind-boggling figures and they're happening, to your point, without any international travel and they're happening with an absence of business and corporate travel also.

- Yeah.

- So, leisure, and I guess some pockets of corporate demand, are bullying this to levels that we didn't think we could hit so quickly, and in some cases to levels that we've never seen at all. So, that's like, to me, an unbelievable thing and, you know, a testament to resiliency and people's optimism on the future. Now, on that point, we were at the ALIS conference last week. They probably had about a thousand people, which is maybe a third of what they normally have. But, you know, they shotgunned this, tried to do it in July versus January. And then they had some late in the game attrition because of the indoor mask mandates and some bad weather, but people were happy to be together. And, you know, the main takeaways were a lot of optimism on terms of liquidity in the capital markets for hotels. We're marketing a bunch of deals, you know, on the bridge side, taking out high-leverage construction financing.

- Yeah.

- Building a lot of interesting offers, offers that didn't exist, you know, six months ago. We're starting to dabble in hotel-construction lending again. It's still early days for that, but we're getting quotes on stuff. You know, including the stuff that we'll be working on together, hopefully. So, that's kind of come back. Labor shortages everywhere. People can't hire in restaurants. They can't hire housekeepers. Cost of labor having gone up, to your point, Anna-Marie, making things harder and putting more pressure on the bottom line. But, interestingly, on the capital market side, no distress, or almost none. Even in, like, the big box conference hotels, there's, you know, isolated pockets, but nothing to really chew on. We were talking to some institutional equity guys there. They're like, "We're sitting on a boatload of dry powder "for distress deals and we're gonna have "to reallocate it 'cause literally just sitting there "and it doesn't produce any fees for us "because we can't deploy trades." Most of the trades that are happening are based on 2019 NOIs at cap rates that we hear at 2019 levels or 25 to 50 BIPS inside. So just, you know, an incredible turnaround in a short period of time and, you know, knock on wood, maybe we're not totally out from under it yet, but a lot of optimism in terms of where things are going. So, that was great to see.

- Yes, definitely. And I know Green Street, so they released, kind of their up-to-date cap rate data. You know, it was interesting to see that cap rates across asset classes have continued to compress. I thought, also, what was interesting was that even in office, we saw some compression over the last three months. In particular, Atlanta, Austin, Dallas, Charlotte, Nashville, kind of the Sunbelt region. 20 BIPS compression over the last three months. Obviously those markets, you know, there's probably a little bit of noise in there, but also, you know, not surprising that it's correlating to the markets, too, that've seen kind of the, the highest utilization rates as well, kind of coming back.

- So, it's not just those markets. It's anywhere that isn't in downtown urban core where folks aren't back. So, we're in-app on a light value add office deal in Southern California, let's just say, in a suburban location. Offices, probably 90-plus percent occupied.

- [Anna-Marie] Yup, yup.

- It's got an okay going in debt yield, but nothing to write home about. We apped that deal at 70% loan of costs, non-recourse kind of three interest only bridge deal with a very prominent debt fund that we've closed a lot of business with in the past, all in pricing on an office deal with, again, a slight value add, but a bet on being able to get higher rents all in pricing of 375, over with a floor of 4, so 4% up to 70% in Southern California. So this isn't Austin, it's not Boise, it's not Salt Lake. You're seeing that here. It's not downtown LA, it's a more suburban location, but to us, we just thought that was a screamer of a deal. And the one that won it was just the most prolific. And when we had a long relationship with, we had two others that were effectively right there also. So this wasn't sort of like such a needle in the haystack type of bid that easily could have done it. We just didn't have the strength of relationship with them. Hadn't closed as many deals that we just figured, all things being equal. You know, let's go with the one. So a lot of interest out there, a lot of money-chasing deals.

- And then maybe lastly to wrap it up, let's talk about the tenure here quickly. I mean, right, it was 16, 17, long ago, we're sitting at under 1.3, what is it like 1.26? I think last I checked. You know, what are your thoughts?

- You would have been a genius if you bought it at 1.7 with the, you know, 40%, you know, a gain on your money to get to 1.23 everybody thought at 1.7, it was going to shoot to 2.5 and, you know, look it's been fickle for sure and volatile for sure. But it would seem to imply that maybe the inflation that we saw for the last six months really is transitory.

- Exactly the bond markets are pricing out, you know, even some might say heading towards deflationary and things might be cooling down, which also, you know, probably some of that has to do again with the Delta variant.

- And maybe, this is the part I'm not sure on. Is it Delta variant is the fear trade or supply chain issues easing and like lumber crashing that has fueled some of this also, and you know, and other commodities beginning to price more reasonably. So it's worth watching. All I know is if you're a perm borrower and you can borrow on this TMBS markets or the Fannie markets sub 3%, which you can, again, across asset classes, multi we've done a few retail deals that have gone sub 3%. We've done a hotel deal that priced in the mid threes on the CMBS market. It is again an incredible time to lock a perm loan because you're going to get like a historically low rate and a historically low spread. So it's worth thinking about.

- Yeah, no, couldn't agree more. Well, Zach, I appreciate the time today.

- Likewise, great to be back.

- Yeah, great to see you, great to be back. And to everyone out there, thanks for tuning in and we'll see you again in a couple of weeks.