Commercial Mortgage-Backed Securities with Zack Streit | StreetBeats Ep. 38

00:00:04    Hi everyone, this is Ian Formigle, Chief Investment Officer here at CrowdStreet. Welcome back to StreetBeats for July 1st. This is our ongoing series of videos intended to keep you up to date as to what's going on out there in the commercial real estate industry. So for my weekly segment, we talk about debt markets, what's been happening out there and what we expect to happen in the weeks ahead. And to join us this week is the second, uh, installment of our special guest, Zack Strip, uh, senior Vice President at George Smith Partners. So, uh, Zack, thanks for joining us.  

00:00:35    Thanks, Ian. Thanks for having me. I'm sure Malcolm loves having me pitch in for him.  

00:00:39    So, uh, one quick note before we dig into the material for today is that, that this series of videos is really intended just for you, for the you and the viewer. And so on that note, please let us know your thoughts. If there's ways that we can prove upon them, if there's other topics of conversation that you would like to know about, Lieb a comment for us, uh, on this page below. And also feel free to subscribe, uh, below so that you'll, you'll be alerted as to all for all the videos going forward. So, uh, with that, Zack, let's get into some of the statistics and some of the data for last week. So what, what were you seeing out there since we last spoke that was interesting to you?  

00:01:17    Yeah, thanks. Uh, thanks, Ian. I think on a macro level, probably the most interesting topic to maybe, um, address initially is, is sort of the spike in infection rates and, um, kind of all of the kind of media reaction and, and even like some hysteria that you're seeing over this. Um, and, and you know, by no means we want to downplay the spike in infections. You're seeing 'em, um, across the country and, and you're seeing initiatives, uh, occur regulatorily to try and address it. You know, face mass are required. In California, uh, we talked about how Governor Brown's requiring them in Oregon at least, um, in indoor places. Beaches and bars are closed in LA County and South Florida. And then I think they're about five states that we, we discussed that had closed their bars, um, at least for July 4th and maybe onwards of California, Florida, Texas, Arizona, and Colorado.  

00:02:10    So, you know, all of this is, is definitely meaningful and it's, it's important countermeasures. Um, but I think, you know, there, there was a graph that I wanted to share that I'm gonna pop up on the screen here that shows both the infection rate, um, and the death rate, the mortality rate. And I think the mortality rate hasn't been getting enough airtime. So maybe we can give it, um, you know, a few seconds of airtime here. So, so, you know, I think this graph is incredibly understated and incredibly important to the commercial real estate markets and frankly, the broader finance markets. What you're looking at here is a comparison, um, of the infection rate, uh, which is kind of the orange line right here, um, and the mortality rate, um, which is the blue line here. And you can see a pretty big divergence between the two.  

00:02:55    You can see a big spike in the infection rates, which is what we're seeing, seeing and how, how kind of state governments are responding to it. But the mortality rate is actually looking significantly more positive. Um, and that means that, you know, folks aren't dying at the same clip that they're getting infected. And, and I'd love to see this get more airtime because I think that a graph like this instills more confidence, um, in the markets. And so I think it's something that we should watch going forward because even if the rate of infection does spike, if we can keep mortality low, I think that's gonna be a real confidence booster to the C R A markets, um, into the back half of the year.  

00:03:30    Well, so you have a good segue there cause I wanna, I do wanna talk about consumer confidence because that was an interesting, uh, update from this last week. So we saw the consumer confidence index posted and it hit I think 98.1 when the, the consensus was about 90.8. So a big spike, I mean, month over month, that was huge. Uh, my recollection is that May was down in the high sixties or so, you know, in that range. So huge jump month over month in consumer confidence. So we are seeing people start to feel better about getting out there, spending some money, doing things a little bit more normally. So I think to me, when some of the things that we, we look at week over week, that was notable and it stood out. So Zack, let's turn attention to this week. So what's some of the things that you're looking at that are happening right now?  

00:04:17    Yeah, so, you know, it's interesting. We live in a world of more disparate information than I'd ever seen. You know, last week you saw Steve Schwartzman from Blackstone come out and say, Hey, V-shaped recovery. I was a little less excited about the news I saw from Barry Sternick this week where he was forecasting some pretty serious doom and gloom for New York City. And he was talking about office buildings potentially losing 40% of their values. Residential rents plummeting 25%, you know, a third of hotels going bankrupt. So we definitely live in interesting times where, you know, two titans of the industry can have very different views on, you know, the macro economy, um, you know, and the c r E markets, you know, and then the other items, I know Ian, you had thoughts on it too, is, is the sort of resurgence of the CMBS market.  

00:05:03    It's definitely back, um, folks are quoting deals, um, deals have been pricing at interesting levels. Um, but there is, um, you know, some circumspect that's required for it for sure. BP buyers are looking more diligently at rent rolls. There is still risk of kick outs occurring. Um, and there's an overall pickiness to it, but the fact that we have a secondary market that is beginning to function now, um, is going to go a long way. I think. Umm curious to hear your thoughts, um, in terms of restoring liquidity into the debt markets for the back half of the year.  

00:05:39    Yeah, no, totally agree, Zack, and you know, I was on a call yesterday and he was commenting on that same phenomenon. You know, C M B S is coming back, they're definitely seeing the activity pick up. Uh, the recent auction that went off, you know, was went off in terms of well above expectations, right? Spreads came in, you know, they said there might have been a little bit of pent up demand there knowing that there's, there wasn't gonna be as many auctions going forward. And so, uh, that might have had something to do with in terms of the strength of that auction. But nonetHieggelkess, when you see an auction go off like that and it was massively oversubscribed, now you're gonna see demand, you're gonna see more confidence come in, and then therefore more demand, you know, coming in more interest from other, you know, lenders to come in and start quoting and for the, you know, the wheels to start turning it again on cmbs. And we ultimately do need that because CMBS is a, is a critical lender for non-residential type product. So, you know, it is, it's not been a coincidence that for these last three months, essentially the deal flow that has been getting done is all multi-family for the most part. Yeah. Handfuls of, of other transactions, but for, for the most part, multi-family. So let's, let's move forward. Let's talk about what you're looking at for the weeks ahead.  

00:06:51    Yeah, I mean, I, I think the single most important item that we're all gonna be focused on in, in July is second stimulus bill. Um, you had Powell and Minuchin telling Congress this past week, they're going to do everything they can aid the economy. Um, you've had a stimulus bill that's been proposed by the house, but probably won't get any traction, you know, in the senate, um, or from the president. But there's a belief out there and maybe even a pricing expectation built into the market that we are going to have, um, an ex stimulus bill and that it's probably going to happen in July or August and certainly before the Labor day recess. Um, and, and it should do, you know, good things for the economy. Big questions about it are, is it going to, you know, as a threshold matter, um, extend the unemployment benefits that are in place that a lot of folks have said, Hey, this is why multi-family collections in part are so strong because there's a very strong kind of unemployment fallback here.  

00:07:52    Yep. Totally. Great. Similarly, I think the upcoming stimulus package, you know, stimulus package number two is the upcoming data point to look out for, uh, you know, again, rumors on the street that's gonna get done in July, go into effect in August, more or less pickup where the first stimulus package falls off. And that would be a huge jolt of adrenaline again, for, you know, for particularly multifamily market. You know, you've got data out there that suggests that there's 8.9 million unemployed renters out there. So obviously if we continue that stimulus package unemployment benefits that the outsize to unemployment benefits that we're seeing, you're, you know, you now have June collections, which look exactly like June collections last year. So the multi-family market today is operating as if there is no pandemic. Yeah. But you only have confidence in that continuation of that trend provided that we still see more stimulus later this year if we can get it.  

00:08:51    Well, on that note, I think that's a wrap for today. So Zack, uh, thanks again for joining us. Um, uh, have a great 4th of July and for all the viewers out there, enjoy the vacation, the time off, and we will look forward to coming back after the holiday. So well actually, well first we have to say, Zack, thanks for, you know, joining us for this couple of series of, of two, you know, episodes. Uh, really appreciate your input. Probably have to have you come back again with, with, with Malcolm on some sort of a future. Get you guys both on here. I think that would be fantastic. We'll talk about that. <laugh>, <laugh>,  

00:09:25    I appreciate you and these big shoes to fill for sure. Literally in metaphorically, but we've done a few stuff together that's been fun. So, um, always happy to help.  

00:09:33    All right, we'll, we'll probably do something like that in the weeks ahead. And in the meantime, everyone out there enjoy the 4th of July holiday and stay safe.