CrowdStreet’s Ian Formigle is joined by Malcolm Davies to talk about what’s happening in the capital markets: many retailers, including brands like Starbucks and Chipotle, are asking for rent relief, the future of office space, and how banks are pricing loans.
Ian Formigle, Chief Investment Officer
CrowdStreet
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.
Malcolm Davies, Founder & Sr. Managing Partner, Way Capital
Way Capital
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.
00:00:08 Hi everyone. I'm Ian Formigle, Chief Investment Officer here at CrowdStreet. Welcome back for StreetBeats for May 19th. This is our ongoing series of videos to keep the CrowdStreet community informed as every week. I'm back here with Malcolm Davies, principal and managing director at George Smith Partners. Malcolm, welcome back again.
00:00:26 Thanks for having me again, Ian.
00:00:27 Always a pleasure. Malcolm. As you know, on this segment, we're gonna talk about debt markets and capital markets. We're gonna look at what happened last week. We're gonna talk about what's going on this week, and we're gonna look forward to the week ahead. So, with that, Malcolm, let's dig right into it. What did you see last week? What are you paying attention to?
00:00:47 Uh, well, the most important thing last week is I did my second own haircut of this, uh, stay-at-home stuff. So, uh, hopefully I don't mess up this time, but, uh, you know, it is what it is and we've gotta do what we gotta do. So that was a important thing for me personally. But let's be serious. Uh, we had some stuff last week that we, we were working through, right? JC Penney's formally filed bankruptcy and spent some time on retail today. Um, you know, that that means that they're gonna close about 260 stores. Um, they're gonna spin off a real estate portion of that. That's gonna be interesting to see how that plays out. Brookfield announce that they're launching a 5 billion, uh, distress fund to save, um, certain retailers. Um, we also saw Starbucks. I mean, heck, Starbucks is asking for one year rent relief.
00:01:32 I just feel terrible. This is not right. Uh, you know, for landlords here, um, they, their balance sheets probably looking a little better than their landlords to say the, to say the least. Um, but look, we hit 40 million unemployed last week. Um, and the 3 trillion stimulus, $3 trillion, it's hard to even say that, um, was passed by the house. And if you recall, we talked about that a bit, um, did pass. Um, we can talk about a little bit more about how we think that's gonna pass the Senate, but frankly, the most important thing I think, is that we saw this, uh, this really positive thing come out yesterday for Moderna, um, about, uh, potential vaccine, um, optimism here. So, look, I'm very optimistic. It feels like there's some momentum coming on the health route, um, hopefully that that helps kind of come together with real estate. But, um, those are the things that happened last weekend. Yeah,
00:02:21 I agree. I mean, definitely with some of that news out there on a potential vaccine, uh, obviously the markets are loving that news right now. Rallying on that news, uh, retail was a very interesting place this last week. In addition to the Starbucks news, we obviously saw the same request coming out from SHieggelke Shack and Chipotle. Chipotle. You can understand on maybe a little bit more. SHieggelke Shack has been in high demand. I, again, I think those are, are examples of maybe some companies going for grabs. We'll see. But, um, you know, nonetHieggelkess, it'll be kind of interesting to see how that plays out. Uh, you know, retail collections now, we, we definitely have have data on that now. Uh, as we see, there's multiple sources reporting it out there. Everyone's converging on the low 60, 63% or so is what we saw in terms of collections, kind of across the country, across all types of retail.
00:03:13 Obviously grocery anchored centers are gonna be on the higher end. More lifestyle centers are gonna be on the lower end. Uh, what's gonna be interesting to see going forward is, you know, obviously month over month. Um, but also I think what we, we got some anecdotal evidence out there on the retail side this last week that was, that was a little bit more optimistic than we would've thought. Maybe, you know, at this point in May, and for example, retail as we knew going into Covid, uh, was a little bit more conservatively leveraged than other asset classes, particularly from an income perspective. And so, for example, we caught up with, you know, a couple operators recently saying that they are collecting about 65% of their rents. But the good news is, is that their debt coverage ratios going into Covid, were ranging between 2.5 and three, uh, you know, across different types of centers.
00:04:07 And so when you have that much debt coverage ratio going into Covid, even 65% of collections, well, you're well above, you know, a 1.0 to cover your debt. You're, you're covering it 1 6, 1 7 even right now. So that led, you know, some of these operators to look at their situations and say, well, we can pay our, or we can service our debt. We're going to continue to servicing. When we looked at the possibility of forbearance and what that looked like, the, you know, the penalties were too extreme. And so we're gonna, we're gonna muddle through and muddling through means they're gonna, you know, maybe see some of their restaurants, you know, not make it, but they're working through the rent roles. A lot of their key tenants, they're, they're coming to terms on deferrals, putting those into place, and then they expect to kind of come out of it, you know, the other side call it summer of next year.
00:04:58 So it was kind of interesting to start to see that we, we have a lot of operators out there in the retail space that are, that are able to navigate right now and with a path to stabilization next year. Malcolm, let's talk about office for just a minute. I thought there was a couple of interesting pieces of news. Uh, you know, as we know, office is gonna to trail some of the other asset classes and some of the disruption that's going to occur. I think we got two snippets of information that might be there. One, we did see that SoftBank wrote down WeWork to 2.9 billion, I think, is that, if that, if that number serves me correct. That's right. And so, you know, um, so we're starting to see that disruption starting to occur. Not much of a shocker that WeWork valuation should be, you know, tremendously lower than it was, uh, this time last year. And then the other thing that we also saw is that the Wall Street Journal reported, you know, a large office project in Brooklyn, 500,000 square foot creative office deal. So we're gonna start to see some of that, and we're gonna start to need to see some of the, the, you know, some office disruption to some degree occur a little bit to start to work to the other side. And I think, you know, we're just starting to see that action start to take place.
00:06:07 Yeah, I think it's gonna be interesting to see on the office market. You know, some, some folks believe that, um, we will need more space because of the social distancing requirements. Um, you know, but it remains to be seen how it will actually get done, um, in a lot of these highrise properties where high occupancy, uh, lots of elevator served, uh, how you get all the folks up teach floor. So, um, it'd be interesting to see how that gets done, but there's certainly gonna be some adjustments I think there, um, to pay attention to.
00:06:34 Yep. Already starting to see more demand for suburban office space, uh, popping up around the country too. Uh, so, you know, some of these movements that we were all expecting to, uh, begin to occur are actually now occurring. So interesting. You know, kind of Liebing edge news in, in office. Uh, well, Malcolm, we did talk about a little bit of the, you know, kind of looking ahead, you know, any final thoughts on what you're looking to in the next couple, few weeks?
00:06:58 Yeah, look, I think we're, we're really keening in on a few things that, of strategies of how deals are actually getting done right now. Um, you know, one of the challenges is matching, um, our, our borrowers expectations on pricing and leverage with the markets, right? And that's a challenge we've had since the start of covid, but I think one of the, the green shoots that we're recognizing is banks that are well capitalized, they're much better positioned this time than they were during the great recession. Uh, and my suggestion for folks is that when we talk about an opportunity in getting a financing done, um, you know, we talk about the first thing is look, of course we want to go non-recourse, typically low leverage. Um, but if you aren't, you aren't excited about the pricing, uh, in that situation, we kind of move to the next step, which is to do a little bit of top end recourse, um, where the bank banks generally love the fact that you're standing behind your financing request, you believe in your opportunity.
00:07:51 Um, so we'll go that direction, uh, and frankly, the next step will go is we'll actually talk about deposits. Um, one of the greatest things that banks love more than anything is deposits. So if, um, you're willing to offer, uh, a little bit of recourse and some deposits at a financial institution, um, we are quite successful right now in being able to get you the pricing and the leverage that you're looking to, uh, to, to accomplish being very creative to equity returns. Um, obviously that's a little, you know, not as great as doing non-recourse, which is available on, on things like, uh, multi-family and the like. But um, it is something that I wanted to pass along to everybody that, you know, in all asset classes, frankly. Um, if you are willing to do a little bit of both, um, there's a lot more financing available to you, um, then there would be otherwise. So, uh, biggest news I think we'd wanna share.
00:08:40 Right. Well, Malcolm, we've covered a lot today. I think that's probably a wrap for, for now. So thanks again for joining us. Always love to hear the data points in terms of what's going on out there.
00:08:51 Thanks, Ian. And, uh, you know, you, you got good data points yourself, my
00:08:54 Friend. I got a couple every now and then. Uh, that's good. Every dog has its day, so. All right. Well, thanks everyone for tuning in for this week's installment of StreetBeats. Uh, we look forward to coming back to you next week with more updates and more happenings, what's going on out there in capital markets. And in the meantime, everyone stay safe.
00:00:26 Thanks for having me again, Ian.
00:00:27 Always a pleasure. Malcolm. As you know, on this segment, we're gonna talk about debt markets and capital markets. We're gonna look at what happened last week. We're gonna talk about what's going on this week, and we're gonna look forward to the week ahead. So, with that, Malcolm, let's dig right into it. What did you see last week? What are you paying attention to?
00:00:47 Uh, well, the most important thing last week is I did my second own haircut of this, uh, stay-at-home stuff. So, uh, hopefully I don't mess up this time, but, uh, you know, it is what it is and we've gotta do what we gotta do. So that was a important thing for me personally. But let's be serious. Uh, we had some stuff last week that we, we were working through, right? JC Penney's formally filed bankruptcy and spent some time on retail today. Um, you know, that that means that they're gonna close about 260 stores. Um, they're gonna spin off a real estate portion of that. That's gonna be interesting to see how that plays out. Brookfield announce that they're launching a 5 billion, uh, distress fund to save, um, certain retailers. Um, we also saw Starbucks. I mean, heck, Starbucks is asking for one year rent relief.
00:01:32 I just feel terrible. This is not right. Uh, you know, for landlords here, um, they, their balance sheets probably looking a little better than their landlords to say the, to say the least. Um, but look, we hit 40 million unemployed last week. Um, and the 3 trillion stimulus, $3 trillion, it's hard to even say that, um, was passed by the house. And if you recall, we talked about that a bit, um, did pass. Um, we can talk about a little bit more about how we think that's gonna pass the Senate, but frankly, the most important thing I think, is that we saw this, uh, this really positive thing come out yesterday for Moderna, um, about, uh, potential vaccine, um, optimism here. So, look, I'm very optimistic. It feels like there's some momentum coming on the health route, um, hopefully that that helps kind of come together with real estate. But, um, those are the things that happened last weekend. Yeah,
00:02:21 I agree. I mean, definitely with some of that news out there on a potential vaccine, uh, obviously the markets are loving that news right now. Rallying on that news, uh, retail was a very interesting place this last week. In addition to the Starbucks news, we obviously saw the same request coming out from SHieggelke Shack and Chipotle. Chipotle. You can understand on maybe a little bit more. SHieggelke Shack has been in high demand. I, again, I think those are, are examples of maybe some companies going for grabs. We'll see. But, um, you know, nonetHieggelkess, it'll be kind of interesting to see how that plays out. Uh, you know, retail collections now, we, we definitely have have data on that now. Uh, as we see, there's multiple sources reporting it out there. Everyone's converging on the low 60, 63% or so is what we saw in terms of collections, kind of across the country, across all types of retail.
00:03:13 Obviously grocery anchored centers are gonna be on the higher end. More lifestyle centers are gonna be on the lower end. Uh, what's gonna be interesting to see going forward is, you know, obviously month over month. Um, but also I think what we, we got some anecdotal evidence out there on the retail side this last week that was, that was a little bit more optimistic than we would've thought. Maybe, you know, at this point in May, and for example, retail as we knew going into Covid, uh, was a little bit more conservatively leveraged than other asset classes, particularly from an income perspective. And so, for example, we caught up with, you know, a couple operators recently saying that they are collecting about 65% of their rents. But the good news is, is that their debt coverage ratios going into Covid, were ranging between 2.5 and three, uh, you know, across different types of centers.
00:04:07 And so when you have that much debt coverage ratio going into Covid, even 65% of collections, well, you're well above, you know, a 1.0 to cover your debt. You're, you're covering it 1 6, 1 7 even right now. So that led, you know, some of these operators to look at their situations and say, well, we can pay our, or we can service our debt. We're going to continue to servicing. When we looked at the possibility of forbearance and what that looked like, the, you know, the penalties were too extreme. And so we're gonna, we're gonna muddle through and muddling through means they're gonna, you know, maybe see some of their restaurants, you know, not make it, but they're working through the rent roles. A lot of their key tenants, they're, they're coming to terms on deferrals, putting those into place, and then they expect to kind of come out of it, you know, the other side call it summer of next year.
00:04:58 So it was kind of interesting to start to see that we, we have a lot of operators out there in the retail space that are, that are able to navigate right now and with a path to stabilization next year. Malcolm, let's talk about office for just a minute. I thought there was a couple of interesting pieces of news. Uh, you know, as we know, office is gonna to trail some of the other asset classes and some of the disruption that's going to occur. I think we got two snippets of information that might be there. One, we did see that SoftBank wrote down WeWork to 2.9 billion, I think, is that, if that, if that number serves me correct. That's right. And so, you know, um, so we're starting to see that disruption starting to occur. Not much of a shocker that WeWork valuation should be, you know, tremendously lower than it was, uh, this time last year. And then the other thing that we also saw is that the Wall Street Journal reported, you know, a large office project in Brooklyn, 500,000 square foot creative office deal. So we're gonna start to see some of that, and we're gonna start to need to see some of the, the, you know, some office disruption to some degree occur a little bit to start to work to the other side. And I think, you know, we're just starting to see that action start to take place.
00:06:07 Yeah, I think it's gonna be interesting to see on the office market. You know, some, some folks believe that, um, we will need more space because of the social distancing requirements. Um, you know, but it remains to be seen how it will actually get done, um, in a lot of these highrise properties where high occupancy, uh, lots of elevator served, uh, how you get all the folks up teach floor. So, um, it'd be interesting to see how that gets done, but there's certainly gonna be some adjustments I think there, um, to pay attention to.
00:06:34 Yep. Already starting to see more demand for suburban office space, uh, popping up around the country too. Uh, so, you know, some of these movements that we were all expecting to, uh, begin to occur are actually now occurring. So interesting. You know, kind of Liebing edge news in, in office. Uh, well, Malcolm, we did talk about a little bit of the, you know, kind of looking ahead, you know, any final thoughts on what you're looking to in the next couple, few weeks?
00:06:58 Yeah, look, I think we're, we're really keening in on a few things that, of strategies of how deals are actually getting done right now. Um, you know, one of the challenges is matching, um, our, our borrowers expectations on pricing and leverage with the markets, right? And that's a challenge we've had since the start of covid, but I think one of the, the green shoots that we're recognizing is banks that are well capitalized, they're much better positioned this time than they were during the great recession. Uh, and my suggestion for folks is that when we talk about an opportunity in getting a financing done, um, you know, we talk about the first thing is look, of course we want to go non-recourse, typically low leverage. Um, but if you aren't, you aren't excited about the pricing, uh, in that situation, we kind of move to the next step, which is to do a little bit of top end recourse, um, where the bank banks generally love the fact that you're standing behind your financing request, you believe in your opportunity.
00:07:51 Um, so we'll go that direction, uh, and frankly, the next step will go is we'll actually talk about deposits. Um, one of the greatest things that banks love more than anything is deposits. So if, um, you're willing to offer, uh, a little bit of recourse and some deposits at a financial institution, um, we are quite successful right now in being able to get you the pricing and the leverage that you're looking to, uh, to, to accomplish being very creative to equity returns. Um, obviously that's a little, you know, not as great as doing non-recourse, which is available on, on things like, uh, multi-family and the like. But um, it is something that I wanted to pass along to everybody that, you know, in all asset classes, frankly. Um, if you are willing to do a little bit of both, um, there's a lot more financing available to you, um, then there would be otherwise. So, uh, biggest news I think we'd wanna share.
00:08:40 Right. Well, Malcolm, we've covered a lot today. I think that's probably a wrap for, for now. So thanks again for joining us. Always love to hear the data points in terms of what's going on out there.
00:08:51 Thanks, Ian. And, uh, you know, you, you got good data points yourself, my
00:08:54 Friend. I got a couple every now and then. Uh, that's good. Every dog has its day, so. All right. Well, thanks everyone for tuning in for this week's installment of StreetBeats. Uh, we look forward to coming back to you next week with more updates and more happenings, what's going on out there in capital markets. And in the meantime, everyone stay safe.