Leisure Travel is Back | Ep. 105

- Hello and welcome to another edition of "CrowdStreets StreetBeats." My name is Ryan Strub, I'm the Head of Commercial Investments here at CrowdStreet. And today I'm joined by a regular guest, in Zack Streit, Senior Vice President over at George Smith Partners. Zack, how you doing?

- Good Ryan, I'm happy we finally got to do this together. You know, love doing them with Anna Marie but always fun to mix it up.

- Yeah, exactly, I mean we've been playing tag team here for the last couple of weeks. I think you've been traveling, I've been traveling.

- Yeah.

- Travel has definitely been kind of a theme for the summer here which has been nice.

- And seeing that it's back and seemingly resilient in the face of the Delta variant is I think, you know, huge. You just sort of lead us right into the conversation here. It's great to see that travel's still kind of hovering at 75% of pre-COVID levels or about two million passengers a day. You know, for a second there I kind of wondered if that was gonna change but it doesn't seem like that's losing any steam and you know, at least on our end, it doesn't seem like business travel is losing any steam. So super positive.

- Yeah, no, not at all. And obviously you know, business travel is still down a little bit, international travel you know, hasn't really come back yet.

- Completely.

- But leisure travel has come back you know, kind of full fledged here and I like the term that they've been throwing around which is kind of that revenge travel. I know personally, I didn't travel much in 2020 so I'm trying to get as many vacations in as possible, see family, see you know, everybody that I can. But kinda walk us through, you know, what you're seeing in the marketplace. You know, more on the capital market side. So we know travel's back.

- Yeah.

- You know, we know that people are traveling. What is that translating to deal flow?

- So deal flow has been incredibly strong. I think tons of lenders that we talked to are going to hit like, production records this year which is really incredible in the face of what we looked at last year. Our pipeline has just exploded over the last 60 days and I think you're seeing a return of capital into sectors that we hadn't previously seen before. I think that will really be the story of '21 in that you began to see a return of capital into multi and industrial last year. It's only been buoyed this year. I mean, you're seeing every bridge deal get done in the multi-family space at 3% or better. You know, we're closing one in the low three's that features a really big cash out at closing on an existing property that somebody owns and implementing a value add strategy. It's unusual to see that on a bridge but like, you're still talking about a rate in the low three's with the sponsor writing, I'm sorry, with the lender writing the sponsor a check or about to sign up a very high end deal here in Southern California that was built to condo specs, and we've done some sort of pre-signup leg work, let's say. And called a few lenders and said hey, you know, this has a super high basis per unit, are you comfortable with that? But also, it's getting really higher rents 'cause there was a switch in the strategy to go ahead and rent the thing out. And we've gotten numerous quotes that were in at 3% or better for it. So, that's only been buoyed. But I think you're also starting, and you know, and now with a 10 year down at 1.34 you're seeing Fannie deals get done at south of 3%, you're seeing HUD deals get quoted in the low to mid two's which is just phenomenal, if you're a long term borrower and can stomach HUD. But I think what else you're beginning to see is buoyed on that travel, and also with ADR at an all time high. I'll repeat it again, I said it to you three times before.

- Right.

- ADR is at 135 bucks a night, across the US. We've never seen that before, and that's without international travel, and without a lot of business travel. So you're beginning to see capital return to the hotel space, which has truly been unbelievable because everybody predicted doom and gloom for that space last year. And you're seeing capital return to the office space. On the hotel side, we were chatting earlier, we're working on a big hospitality deal, let's just say in the Northwest. We were shopping it earlier this year, had a couple quotes that weren't great, decided to pause, re-hit the market again probably a month ago, we already have one term sheet on it. We're expecting three more, and they're all great legit groups and this is a project with a very big hospitality component. Only one of the four groups bid this six months ago, their bid has strength and significantly or become a lot more attractive from the sponsor perspective. And now we have three other likely bids that will come in too that just weren't there before. So you're definitely seeing a restoration of capital into the marketplace, permanent financing's available for hotels again. We closed the CMBS loan in the mid three's with 10 years of IO on a hotel deal. And we're seeing a lot of bridge activity and some of it's pricing you know, as tightly as in the 400's over at low leverage and then call it the 500's to 700's over at higher leverage levels and lower debt yields. And that's amazing, you just weren't seeing this before. You're seeing it now. I mean, finally to round it out we're working on two light value add office deals. Suburban office deals, kind of a bad word last year and maybe the bad word in other real estate cycles that are out there. We should close one in the next week or so at 70% loan to cost and an all-in coupon at 4%, which is just unheard of for office. That bid, you know, I'm not sure existed six or seven months ago. Definitely didn't exist you know, in the middle parts of last year, and that's back and we started to work on a second deal that we think is going to price very similarly. And I think there's two parts to it. I think there's only so many multi and industrial deals out there. And so if you, as a lender are not winning those, are not winning enough of those to meet your allocations, you have to look elsewhere. But I just don't think it's a search for yield. I also think it's seeing travel, seeing hotel ADR, seeing that we added what, about a million jobs in July, 950,000 including about 400,000 in leisure and hospitality. So I think all of those things combined with low interest rates and government's commitment to you know, ensuring that you know, the economy remain strong as it can under the circumstances, is just triggering an explosion of appetite in the capital markets. And I think that's trickled through into the sponsor community in a big way. And that's fueling the appetite for risk. So it continues to be a really positive story and I think we will have a super strong back half of the year buoyed by that.

- No, I completely agree and it's been really interesting for us. Like, obviously every asset type is a little bit different. Industrial it seems like, you know, there's no way that we'd be as competitive as we want to be, you know, any deal that we participate in, we usually end up being you know, kinda the second, third, or even fourth place bidder in that. We have won some deals which is great, you know, get some exposure there. The office side for us, I would say has been more market specific. And so you know, kinda following the trends of who's returning to work, who's actually utilizing the offices. Obviously the sunbelt states for us have been a little bit more robust as you do see people kind of come back. You know, there's different areas to that, still definitely see, you know, kind of that flow of workers back into the office. So that job creation is great, but that utilization rate has always been key.

- Yeah.

- And then on the multi, or sorry, on the hospitality side, you know, what's really been interesting for us is the new construction that's come back. So hospitality was one that I think from CrowdStreet's perspective, and from everybody's perspective as we did research kind of going into COVID, you know, we really thought that we wouldn't see 2019 levels being hit until 2024+ and so to see us already, you know, surpass some of those 2019 levels in terms of ADR, occupancy, RevPAR has really been incredible. And that kind of you know, bifurcates into two different sectors right? So you have the existing product which I think everybody thought there was gonna be this massive distress stories for, which did not come, right? I think they had enough PPP loans and funding that kinda got them through those, you know, kind of those burdensome times. And then you know, as we look forward to new construction you know, we've seen lenders, and you and I have worked on projects together, you know, lending for new construction, hospitality is definitely starting to come back. Maybe it's not as robust as some of the other asset types but it's definitely there and definitely still liquid.

- And that's an important point. And the project that I mentioned, Northwest is a construction component, has a big construction component to it. It's under construction now, the project that we're gonna work on, call it in the mountain states is a ground up deal, there's another deal that we're working on down in Scottsdale, it's a ground up hotel deal. We're definitely seeing lender appetite returning for the ground up hospitality space. It's to your point Ryan, not everywhere, not all markets are created equal. Probably not all hotel types are created equal, whether it's luxury, select service, et cetera. But where you can tell a good story about a strong and resilient market you know, that might be underserved for specific hospitality product type, lenders will respond. And we're starting slowly to see equity respond as well, which is sort of I think, how you guys are getting comfortable backing that project. So that's amazing to see because it was a different story six months ago. I don't think there was equity, and you know, there largely wasn't debt and if there was debt, it was extremely conservative on both, for on proceeds and it was you know, extremely high on pricing. And it's great to see that come back and I just think that's, you know, optimism about the future.

- Yeah I think proceeds, rate, and then obviously reserves were the other one you know, that really kind of hit that performer pretty hard, so definitely excited to see that come back in full swing. And then Zack, you had mentioned this at the top of the call.

- Yeah.

- But one thing that I think was really kind of insightful to watch here over the past couple months has been the 10 year.

- Yeah.

- And it's funny because you kinda have to look at holistically over the course of 120 days, right? So this week for example, the 10 year, I believe right now is 134, you know, up about 15 basis points from last week. But when you look at it compared to the you know, 60, 90, 120 day you know, it's still 30 basis points below you know, kinda where it was hovering there. And at that time, you know, we all thought that the 10 year couldn't go down, it had to go up. So you know, kind of, what are you guys tracking on that side? And you know, what does that mean for interest rates and loans getting done here over the next couple of months?

- Yeah so, the 10 year has been an incredible story. I mean, you back up you know, was it three or four months ago, you hit a high, or you know, not a record high, but a high of 170 and everybody thought the 10 year was gonna shoot to 250 or 300, and you were gonna have a tremendous problem refinancing any deals, or getting new financing 'cause all the bridge guys, you know, price on the perm, and the perm prices on the 10 year. You saw the opposite occur. I mean, it dipped, to your point from like, 170, 116, it rebounded to 134. You saw you know, Fannie spreads, you know, sub 3% again, it has zero impact, the volatility from 116 to 134 on the bridge market, you can still borrow you know, at sub 3% on good multi's or maybe like, 3.5% all in floating on something that's even got a little bit of hair to it. Tremendous appetite there. So you know, look, there's the question of is inflation transitory? Right, that's been a lot of the conversation kind of at the federal government level. How many months of a million dollars of job creation do we need to see before maybe they start tapering purchases or raising rates? You know, it's really unclear but I think a lot of the fear related to inflation and rising rates, has sort of gone away. And so far, the market's not pricing in any of it. So I think we're really optimistic into the back half of this year and next year to be really strong. Clearly things don't stay low usually forever, or maybe they do, and you go the way of Japan or something like that. It's tough to say but at least near term it feels like a lot of those concerns have eased, and I'm hearing less concern about, my gosh we're at 134 and tomorrow we're gonna be at, you know, 180 or 190. So it's generally a really good story for the markets. It's also, by the way, fueling CMBS deals getting done at sub 3% rates, including on retail. Our friends closed retail deals recently, both were grocery anchored, both went you know, 10 year IO, you know, fixed rate, CMBS at rates that were sub 3% so truly remarkable.

- Sure, well Zack look, I really appreciate the conversation. Always appreciate the insight, great to connect with you here. And obviously, we'll be having a lot of these conversations both you know, on camera for "StreetBeats" but also over the phone just as we work through deals together. So great to see you again, really appreciate the time.

- Likewise bud.

- And looking forward to standing here very soon.

- All right.

- Take care, talk to you soon Ryan.

- All right see you.

- Bye.