CrowdStreet’s Ian Formigle is joined by Malcolm Davies, Principal & Managing Director at George Smith Partners, to talk about how lenders are creating more liquidity for themselves, May collections, and retail bankruptcies.
CrowdStreet
Ian is a real estate professional and serial entrepreneur with 24+ years of experience in real estate private equity, startups, and equity and options trading. At CrowdStreet, Ian serves as the key decision-maker for all investments on its Marketplace, totaling over 400 offerings and some $13.7 billion of commercial real estate. Ian is the author of “The Comprehensive Guide to Commercial Real Estate Investing” and he is a contributing author at Forbes.com.
Prior to joining CrowdStreet, Ian was VP of Business Development for ScanlanKemperBard Companies, where he managed the firm’s alternative investment platform and served as a senior acquisitions officer on a team that acquired some $500 million of commercial real estate assets during his tenure. Previously, Ian co-founded and served as CEO of Clarus Property Ventures, a regional real estate private equity firm that focused on multifamily acquisitions. Ian began his career as an equity options market maker and member of the Pacific Exchange. Ian holds a BA in Economics and a BA in Political Science from the University of California at Berkeley and has held numerous securities licenses including Series 7 and 63.
Way Capital
Malcolm has over 25 years of experience as an award-winning capital advisor and developer, having advised and been involved with over $15B worth of total capitalizations, both in the equity and debt markets. Davies has utilized his expertise to lead developers and investors to structure and capitalize billions of dollars-worth of commercial real estate ventures. He has extensive experience in structuring transactions across the capital stack, including non-recourse senior and stretch-senior debt, mezzanine and preferred equity financings, and Co-GP and LP equity financing solutions for development, value add and stabilized projects.
Malcolm has vast experience in structuring various scenarios within the capital stack including non-recourse senior debt, mezzanine debt, and preferred & JV equity financings in the construction, value add, and permanent finance marketplace. Malcolm’s expertise as a developer has been instrumental in advising his clients through his real-world experiences in various stages of the real estate cycle, including the Great Recession.
00:00:29 Yeah, it's, it's crazy. I, we, it's amazing that we just talked about that. We've been doing this for eight weeks, so great to be back.
00:00:36 It's good to be back. Uh, it's good to catch up again. So, as our, for our typical format, we're gonna talk about what happened in the last week, uh, what's happening this week and what's happening the week in, in the week ahead from a debt perspective. Uh, so Malcolm, let's go ahead and dig into it. Uh, what did you see happening in the debt markets last week, uh, that you think's important and relevant?
00:00:57 I think the first thing we saw was, um, the first issuance of performing and non-performing note sales that are on the, on the asset levels. You've seen it in the public markets, you've seen trades of assets, you've seen some large portfolios that were sold, but you're starting to see individual loans being sold. And I think that itself, um, will create some liquidity for the financial system. So as much as we see some stuff, it's, it's good for some lenders to create more liquidity for themselves by selling some performing loans, which will help them, again, start reassuring other, uh, financial loan obligations to others, uh, going forward.
00:01:37 Yeah, I'd agree that's an important aspect of what's going on, because I think as, as we saw for these first eight weeks or so, you know, more or less everything's been kind of in a holding pattern and, you know, as ultimately, as we all know, and I guess if we think about it, like an economist thinks about it, that ultimately markets have to clear, uh, there's things that are going to have to occur before we're ultimately going to kind of settle, um, reset, find our base, and then be able to move on. So I think, I think this is the first signs of that we are starting to see some market clearing activity, uh, with obviously more to come.
00:02:11 Yeah, and, and these were primarily in hospitality. You haven't really seen the retail ones yet, but I think you'll, you should expect to see some of that coming. You know, some other things that happened this week. Obviously the agencies are obviously still lending, you know, rates being in the three to three and a half percent range. Life companies are out there lending at 4%. Big things about the, you know, from a macro perspective, look, the P P p, we've talked about it every week almost. The second tranche is completely exhausted. Um, and, you know, unfortunately, I think we're gonna see some numbers this week, uh, on unemployment. You know, we've seen the numbers of 30 million, 30 million people unemployed. So those are some things that, you know, we kind of last week and this week,
00:02:51 When we look at this week now, uh, with what you're seeing going on there, uh, out there and some deals getting quoted, you know, we all, we always talk about that week, week over week participation in the market. So, you know, this week, where are you pegging it?
00:03:04 Yeah, I mean, look, I think we were at 15% last week. I'm gonna take a stretch and say we're getting closer to 15 to 20%, you know, things that, you know, we're looking forward to on the, on our, our business is, you know, bridge loans coming out of construction and leasing up. How is the market looking at those opportunities? We've seen some pleasant responses on some deals we took into the market last week, I think I spoke about. Yeah. Um, other things that people are paying attention to, again, is the May collection. Um, look, it's May 5th. So, um, you know, some folks have a pretty good indication of what they've collected. The numbers look positive. So, um, we will again, see what that looks like. But I think that's something that we're paying attention to. But there's some stuff, look, I mean, big picture, we're reopening.
00:03:47 Uh, you know, there's no question, you know, each state by state is figuring out ways to get folks back to work, um, safely, right? How do we do that? I think we're all gonna try to pay attention to that and will the customer come? Um, so that's important that I think it's something that for all of us to pay attention to. But look, there are some things that we all need to pay attention to. I mean, Salla report, CoStar projects, you know, 150 billion in CMBS defaults over the next two years. Um, something to pay attention, that's 13,000 loans. But again, big picture bankruptcies. You know, we talked about this a bit last week. We saw some retailers that went bankrupt, uh, j Crew, Gold's, gyms, um, you know, these are two semi institutional groups we've seen for years. So we certainly are gonna see some more retailers and, you know, look, cruise lines, which we know has been an industry that's been really hurt in this, uh, in this circumstance with Covid. So, uh, look, I think the end of the day we're very optimistic from a financial market perspective coming out. I think, and I'm hopeful that may will be kind of the, the bottom of things.
00:04:50 So Malcolm, let's turn our attention to the week ahead. Um, what are you looking for and what are you, what are you gonna be looking for the upcoming week?
00:04:57 Look, I, again, I mentioned it's all about, you know, how are the consumers gonna react to opening? Uh, you've seen a bit of it in Georgia, you know, I'd like to know if people are going into the salons and the like, and, and businesses are actually, um, acting and doing things. So commerce is really important to see, but at some point we have to start generating the income from productivity from folks that are working. And so I think that's the big thing. That's, that we're all gonna pay attention to bankruptcies collections. And for us personally, it's about how the market's reacting, you know, to the deals that we are pushing out in the market. And so
00:05:33 The bankruptcies that we're starting to see across some major retailers, you know, and users across the country, is going to make its way into transactions. Uh, that's gonna change the context of those transactions. Uh, the ability for the current operators to stay in them at the current pricing.
00:05:48 Yeah, we're gonna see valuation resets in essence, right? I mean, if money costs more money to borrow, you know, it costs more money to borrow. Um, you know, how does that that affect certain things? And so one thing we are paying attention is, may not be right now, but going into q3, into q4, is construction costs for development projects that will be looking to kind of restart the process. And I think how does that look going to the latter part of this year? We still have to remember it takes two years generally to build something. So, you know, if you're delivering 2023, um, late 22, 23, 24, that could look relatively good. The problem is, you know, how is the underwriting to, you know, your rents, your NOI to your development costs? So I'm really paying attention to AlAllander values and construction costs for those projects.
00:06:39 Totally agree. Well, I think on that note, that's, uh, gonna be a wrap from today. So, uh, Malcolm, thanks again for joining us. It's a pleasure to always do this every week. I look forward to doing this in the weeks to come, hopefully maybe in better scenarios. But, um, this has, this has been a great format. We should keep it going. Uh, so thanks everyone to tuning in. We'll look forward to coming back to you next week, uh, with another update and some news. And in the meantime, everyone stay safe.