CrowdStreet’s Ian Formigle is joined by Malcolm Davies to talk about what’s happening in the capital markets: the uptick in May’s retail sales and what that means for consumer confidence, how the Fed is buying corporate bonds, and what happens when the stimulus packages taper off in August.
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.
00:00:05 Hi everyone. I'm Ian Formigle, Chief Investment Officer here at CrowdStreett. Welcome back to StreetBeats for June 16th. This is our ongoing series of short videos intended to keep you up to date as to what's going on in the commercial real estate world. I'm back for my weekly segment with Malcolm Davies, principal and managing director at George Smith Partners. So Malcolm, welcome back.
00:00:26 Thanks for having me, Ian.
00:00:28 So, Malcolm, I gotta point out that today it looks like you are back in your office. So tell us a little bit about that before we get going.
00:00:34 Indeed. I mean, I don't know if anyone's caught that. My background has always been a virtual office, uh, but this is, uh, my real office and, uh, decided to come back in and, you know, most of the company is still not in the office, but we are trying to slowly reopen ourselves back to some level of normalcy, so it's nice to be back.
00:00:53 So with that, let's get into, uh, this week so viewers of this segment understand that we're gonna talk about what happened last week, uh, in the world of commercial real estate and debt markets, what we're looking at this week and what we are looking and tracking the weeks ahead. Uh, so Malcolm, let's kick off with last week. What are some of the data points that you're seeing out there?
00:01:12 Yeah, I mean, look, there's a lot of different stuff that's out there. I mean, one thing that's for sure, lenders are absolutely opening up their liquidity and spigots has put money out. What's the, what's the one challenge really to underwrite going forward has been, uh, a bit of a challenge and that that gap between the borrower's expectation and a lender's expectation of what something might be worth, even from an appraisal. Um, it, it affects really all things that it, you know, a creative equity returns and the like. So good news, lots of capital, it's available. Bad news is probably still need some, uh, pricing expectation and discovery for folks. But look, there are some signs of a v recovery that will point out. Home builder sentiment had the biggest monthly surge ever. Ta you know, they, they have a, the marker but 58. So granted they went down from the beginning of coronavirus, you know, to now to coming back. So you can see the consumer was obviously there. We saw a positive announcement I think last night or this morning at a therapeutic Dex methin. I can't say those words very well, but you know, that's, uh, you know, it's been helpful in, in, in recovery. So that might be positive while we wait for, hopefully a vaccine.
00:02:23 Yeah, you know, you bring up a lot of good stuff from the last week. I mean, I think also you, you saw some continued good news coming out in terms of some data points along the lines of, uh, you know, just today, uh, the retail sales obviously big jump, 17.7% was larger than most people expected. And you know, again, coming off of a, of a big downtick in April. So, but it's encouraging to see that there was uptake in May. The, the thing also that stood out to me in terms of the retail sales was when you looked at that percentage May versus February, well May was 92% of what we saw in February. Uh, so still down, but like not markedly down anymore. And I think there's, there's some cautious optimism that, you know, that consumers are getting back out there and actually, you know, doing some stuff, uh, spending some money making purchases.
00:03:11 And as we know, uh, the, you know, the economy is 70% the consumer. So anytime that we see positive trends on the consumer side, then then we start to get a little bit more optimistic possibly then to your point then, if, if we're seeing these positive, you know, nodes of data in terms of what's happening out there on the street, then you know, you gotta think lenders are looking at that, paying attention to that, and then starting to get a little bit more interested in, you know, leaning into a deal. Uh, whereas in April, you know, they were leaning out. And I think the other thing also, yesterday's data point was also helpful that you heard that the Fed is out there buying individual corporate bonds now, you know, again, just another leg of kind of this continued, um, government support of the economy. So, you know, we're still hopeful that that's gonna continue and kind of that will be, uh, you know, a factor that will kinda help us get through and so forth. But interesting, you know, obviously the market like it yesterday rallied at, at the end of the day.
00:04:05 Look, I think one of the things we're tracking and we talked about last week is just, you know, we're reopening everywhere. Um, I think we're all recognizing that there are some growth in cases in certain places that have reopened, um, how much more that is. I mean, I think one thing we would always expect is that there will be more cases if you reopen just o it's just an obvious thing that would occur. Question is how much does that grow or not? And so we're, we're certainly paying attention to both of that. I do think that, you know, August, we talked about this before, you know, August is the time when the P P P and the, and the, you know, discovery recovery plans and all the different stimulus system put out kinda starts to taper off. Are we gonna catch up to August with our employment numbers?
00:04:45 Um, and hopefully we will. I mean, you know, we, in my town where I live here in la, um, you know, all the restaurants now can sit outside. So those restaurants are now at full, you know, I call it full occupancy from a tables perspective because they're now having those same amount of tables, 50% on the inside are now 50% on the outside. So hopefully you can see that part, and I think that's something we're paying attention to. Last thing is, you know, I was reading this, but you know, the mortgage, uh, the outstanding obligations on, on mortgage mortgages in the United States is more than 50% than it was in the last recession and, you know, higher. So, you know, we wanna make sure that we pay attention to this hopeful, you know, dynamic of are we gonna be distressed remarkably into q3, q4 or will we be recovery? And I'm hopeful that we can be, recovery just remains to be seen. Frankly, it's still a bit, um, to be known.
00:05:35 Yeah, yeah. No, no, I mean, totally agreed. So, you know, I think some of the stuff that we're looking at as well is, you know, this continuation. So again, we have some more data from last week in terms of hotel occupancies again, jumped up a little bit. Yeah. Uh, so, you know, now we're up to 39.3% nationwide. I think what we're looking at this week and going week, are we gonna continue to, to see that occupancy trend, you know, trend up in, you know, this week and the weeks ahead. That's obviously something that we're watching every week. Uh, you know, also of note within the economy class, economy class actually hit 50% occupancy, uh, for the first time since the pandemic hit. And so, you know, can we see further gains in the drive to destinations that we've been seeing? And, you know, and, and with that said, I mean, as you pointed out, the, the challenge in all this right now is that reopening during a spike in cases.
00:06:27 So, you know, it's gonna be that consumer sentiment right now as we're reopening while we're seeing some cases spike, which to your point, we had to know that we're going to occur. I guess what we don't quite know yet is how are people gonna react to that, um, as they want to get out and interact. But then as these cases continue to spike a little bit, and I totally agree with you that August is gonna be a huge month for really showing us kind of where we stand. Uh, you know, I think as Andy Florence, the CEO of CoStar pointed out recently, and he's calling it the quintuple witching hour in terms of all of this stuff kind of burning off the P ppp, as you mentioned, the stimulus, the, the bonus checks, all of those things ending at the same time that we're gonna see these earnings coming in and the earning season that will be reflective of q2. And what's that all gonna mean? I mean, it's, we're, we're driving to this kind of, this really pivotal point in the year, and it'll be really interesting to see what happens, uh, when it occurs.
00:07:25 Yeah. You know, I think, um, like you said before, I don't think we, I don't think as a society we can handle the shutdown again, right? So it'll be hard in, in, you know, hopefully, you know, I've been using a mask when I go in any establishments. We're getting used to these things that will help commerce continue to progress, that will help obviously our retailers and our, and our hospitality owners. But you, again, you are still still seeing some issues, right? I mean, you had retailers that continue to file bankruptcy. You had 24 hour finish just happened yesterday, closing 130, um, 130 stores. So, you know, look, I, I like the hospitality numbers, frankly, because if you can get to 50, 60% occupancy, um, if you're not over levered, you can handle your debt service. And that's all that matters right now. Um, it's all about being in defense and the distress will be less if those folks can get to a, a number of occupancy. So we'll see.
00:08:17 Yeah, absolutely. I agree. We'll see. So I think that's a wrap for today. Uh, so Malcolm, thanks again for joining us this week. Uh, we'll look forward to seeing you back here. You gonna be in the office again next week?
00:08:30 You know what, I am actually gonna be da da da on an RV trip, so I'm gonna have to take a week off, I think next week. And, uh, okay. Hopefully you can do it too. Or I can have someone stand in. But, you know, I finally, I've been looking forward to this for a long time in my life, so I finally convinced my wife.
00:08:45 Right on. Okay. Well have a great trip. Uh, but we will, we'll not see Malcolm next week, but we'll wish him well on his trip, uh, around the country. So yeah, get out there and, and I guess explore and roam and, and then I'll, I'll look forward to seeing you back here next week. And in the meantime, for everyone out there, stay safe.
00:00:26 Thanks for having me, Ian.
00:00:28 So, Malcolm, I gotta point out that today it looks like you are back in your office. So tell us a little bit about that before we get going.
00:00:34 Indeed. I mean, I don't know if anyone's caught that. My background has always been a virtual office, uh, but this is, uh, my real office and, uh, decided to come back in and, you know, most of the company is still not in the office, but we are trying to slowly reopen ourselves back to some level of normalcy, so it's nice to be back.
00:00:53 So with that, let's get into, uh, this week so viewers of this segment understand that we're gonna talk about what happened last week, uh, in the world of commercial real estate and debt markets, what we're looking at this week and what we are looking and tracking the weeks ahead. Uh, so Malcolm, let's kick off with last week. What are some of the data points that you're seeing out there?
00:01:12 Yeah, I mean, look, there's a lot of different stuff that's out there. I mean, one thing that's for sure, lenders are absolutely opening up their liquidity and spigots has put money out. What's the, what's the one challenge really to underwrite going forward has been, uh, a bit of a challenge and that that gap between the borrower's expectation and a lender's expectation of what something might be worth, even from an appraisal. Um, it, it affects really all things that it, you know, a creative equity returns and the like. So good news, lots of capital, it's available. Bad news is probably still need some, uh, pricing expectation and discovery for folks. But look, there are some signs of a v recovery that will point out. Home builder sentiment had the biggest monthly surge ever. Ta you know, they, they have a, the marker but 58. So granted they went down from the beginning of coronavirus, you know, to now to coming back. So you can see the consumer was obviously there. We saw a positive announcement I think last night or this morning at a therapeutic Dex methin. I can't say those words very well, but you know, that's, uh, you know, it's been helpful in, in, in recovery. So that might be positive while we wait for, hopefully a vaccine.
00:02:23 Yeah, you know, you bring up a lot of good stuff from the last week. I mean, I think also you, you saw some continued good news coming out in terms of some data points along the lines of, uh, you know, just today, uh, the retail sales obviously big jump, 17.7% was larger than most people expected. And you know, again, coming off of a, of a big downtick in April. So, but it's encouraging to see that there was uptake in May. The, the thing also that stood out to me in terms of the retail sales was when you looked at that percentage May versus February, well May was 92% of what we saw in February. Uh, so still down, but like not markedly down anymore. And I think there's, there's some cautious optimism that, you know, that consumers are getting back out there and actually, you know, doing some stuff, uh, spending some money making purchases.
00:03:11 And as we know, uh, the, you know, the economy is 70% the consumer. So anytime that we see positive trends on the consumer side, then then we start to get a little bit more optimistic possibly then to your point then, if, if we're seeing these positive, you know, nodes of data in terms of what's happening out there on the street, then you know, you gotta think lenders are looking at that, paying attention to that, and then starting to get a little bit more interested in, you know, leaning into a deal. Uh, whereas in April, you know, they were leaning out. And I think the other thing also, yesterday's data point was also helpful that you heard that the Fed is out there buying individual corporate bonds now, you know, again, just another leg of kind of this continued, um, government support of the economy. So, you know, we're still hopeful that that's gonna continue and kind of that will be, uh, you know, a factor that will kinda help us get through and so forth. But interesting, you know, obviously the market like it yesterday rallied at, at the end of the day.
00:04:05 Look, I think one of the things we're tracking and we talked about last week is just, you know, we're reopening everywhere. Um, I think we're all recognizing that there are some growth in cases in certain places that have reopened, um, how much more that is. I mean, I think one thing we would always expect is that there will be more cases if you reopen just o it's just an obvious thing that would occur. Question is how much does that grow or not? And so we're, we're certainly paying attention to both of that. I do think that, you know, August, we talked about this before, you know, August is the time when the P P P and the, and the, you know, discovery recovery plans and all the different stimulus system put out kinda starts to taper off. Are we gonna catch up to August with our employment numbers?
00:04:45 Um, and hopefully we will. I mean, you know, we, in my town where I live here in la, um, you know, all the restaurants now can sit outside. So those restaurants are now at full, you know, I call it full occupancy from a tables perspective because they're now having those same amount of tables, 50% on the inside are now 50% on the outside. So hopefully you can see that part, and I think that's something we're paying attention to. Last thing is, you know, I was reading this, but you know, the mortgage, uh, the outstanding obligations on, on mortgage mortgages in the United States is more than 50% than it was in the last recession and, you know, higher. So, you know, we wanna make sure that we pay attention to this hopeful, you know, dynamic of are we gonna be distressed remarkably into q3, q4 or will we be recovery? And I'm hopeful that we can be, recovery just remains to be seen. Frankly, it's still a bit, um, to be known.
00:05:35 Yeah, yeah. No, no, I mean, totally agreed. So, you know, I think some of the stuff that we're looking at as well is, you know, this continuation. So again, we have some more data from last week in terms of hotel occupancies again, jumped up a little bit. Yeah. Uh, so, you know, now we're up to 39.3% nationwide. I think what we're looking at this week and going week, are we gonna continue to, to see that occupancy trend, you know, trend up in, you know, this week and the weeks ahead. That's obviously something that we're watching every week. Uh, you know, also of note within the economy class, economy class actually hit 50% occupancy, uh, for the first time since the pandemic hit. And so, you know, can we see further gains in the drive to destinations that we've been seeing? And, you know, and, and with that said, I mean, as you pointed out, the, the challenge in all this right now is that reopening during a spike in cases.
00:06:27 So, you know, it's gonna be that consumer sentiment right now as we're reopening while we're seeing some cases spike, which to your point, we had to know that we're going to occur. I guess what we don't quite know yet is how are people gonna react to that, um, as they want to get out and interact. But then as these cases continue to spike a little bit, and I totally agree with you that August is gonna be a huge month for really showing us kind of where we stand. Uh, you know, I think as Andy Florence, the CEO of CoStar pointed out recently, and he's calling it the quintuple witching hour in terms of all of this stuff kind of burning off the P ppp, as you mentioned, the stimulus, the, the bonus checks, all of those things ending at the same time that we're gonna see these earnings coming in and the earning season that will be reflective of q2. And what's that all gonna mean? I mean, it's, we're, we're driving to this kind of, this really pivotal point in the year, and it'll be really interesting to see what happens, uh, when it occurs.
00:07:25 Yeah. You know, I think, um, like you said before, I don't think we, I don't think as a society we can handle the shutdown again, right? So it'll be hard in, in, you know, hopefully, you know, I've been using a mask when I go in any establishments. We're getting used to these things that will help commerce continue to progress, that will help obviously our retailers and our, and our hospitality owners. But you, again, you are still still seeing some issues, right? I mean, you had retailers that continue to file bankruptcy. You had 24 hour finish just happened yesterday, closing 130, um, 130 stores. So, you know, look, I, I like the hospitality numbers, frankly, because if you can get to 50, 60% occupancy, um, if you're not over levered, you can handle your debt service. And that's all that matters right now. Um, it's all about being in defense and the distress will be less if those folks can get to a, a number of occupancy. So we'll see.
00:08:17 Yeah, absolutely. I agree. We'll see. So I think that's a wrap for today. Uh, so Malcolm, thanks again for joining us this week. Uh, we'll look forward to seeing you back here. You gonna be in the office again next week?
00:08:30 You know what, I am actually gonna be da da da on an RV trip, so I'm gonna have to take a week off, I think next week. And, uh, okay. Hopefully you can do it too. Or I can have someone stand in. But, you know, I finally, I've been looking forward to this for a long time in my life, so I finally convinced my wife.
00:08:45 Right on. Okay. Well have a great trip. Uh, but we will, we'll not see Malcolm next week, but we'll wish him well on his trip, uh, around the country. So yeah, get out there and, and I guess explore and roam and, and then I'll, I'll look forward to seeing you back here next week. And in the meantime, for everyone out there, stay safe.