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What Happens When the Stimulus Runs Out with Malcolm Davies | StreetBeats Ep. 39

CrowdStreet's Ian Formigle is joined by Malcolm Davies to talk about what happens when the stimulus package timeline runs out. 

by Shawna Wright-Smith
July 09, 2020 ·

CrowdStreet’s Ian Formigle is joined by Malcolm Davies, Principal and Managing Direction at George Smith Partners, to talk about the efficiency of the debt markets, the recent spike in forbearance, and what happens when the stimulus package timeline runs out. 

Ian Formigle, Chief Investment Officer
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

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.

00:00:04    Hi everyone. I'm Ian Formigle, Chief Investment Officer here at CrowdStreet. Welcome back to StreetBeats for July 8th. This is our ongoing series of short videos, uh, intended to keep you up to date as to what's going on out there in the commercial real estate world. And so for this week, we are very excited to have Malcolm Davies back. He's back from the road. So, uh, Malcolm, welcome back to Civilization  

00:00:28    <laugh>. Thanks, Ian. I mean, it was, uh, you know, for all the folks out there, I took, uh, I took the family, I took the advice of all, everything you're reading, and I took him on an RV trip.  

00:00:36    Well, cool. Well, great that you had an awesome trip and we're excited that you're back. Uh, so for the, for those of you who are, you know, accustomed to watching this series, you know that we're gonna talk about what's going on in the debt markets. We're gonna cover some of the stuff from last week. Talk about things that are happening this week, and also then look to the weeks ahead. Uh, so Malcolm, I know you were still on the road last week, but let's get into some of the things that were happening this last week. There was some data that was, you know, to drop. I, I think to start it right off, to me, the biggest news of last week was the, you know, the jobs report. 4.8 million jobs added 11.1% unemployment. So again, a surprising month of jobs, data. Um, what are some of the stuff that you're seeing out  

00:01:12    There? Yeah, I mean, look, I mean, that's an important one that I'm just, if you look at it and you say, wow, that's, it's amazing relative to where we've been doing this. We started and we were, what, up almost 20% I think at some point. So that's positive for us. What we're paying attention to is, is the debt markets, right? How much more efficient are the debt markets becoming they are. Um, and that's, we are seeing that with pricing. So CMBS spreads are down to 1 0 5. Just to give people some perspective. In the height of our dislocation in the market, we are up to 375. So, you know, we're seeing things get, um, you know, obviously cheaper. The spreads coming in, that means there's more competition. I mean, means there's more lenders out there. Um, and there's a lot more confidence in the market. So that's great for us to see.  

00:01:53    Yeah. Uh, you know, some of the stuff that we're paying attention to week over week is that, you know, uh, it's good to see that on the N M H C, you know, rent collection numbers, months starting off for July, very strong, 77.4% of rent has been collected. Uh, it's down from about 79.7%, same time last year. But this is definitely the best start to a month since the beginning of the pandemic. So I think that's important to note. Uh, you know, we also track the, the star, you know, s t r da week over week data again in the hospitality sector. Another great week of recovery. You know, we saw occupancies now hit 46.1% nationwide. That's up from 43.7% nationwide week over week. And, you know, you saw weekend occupancies hit 54.1%, uh, which is the first time that we've seen that really kind of really substantively push punch through 50%. Um, so there, you know, real good data coming out there on terms of, you know, people getting back out there and staying and, you know, the economy sector and drive to destinations continue to Lieb the way, but you're starting to see a little bit of pickup at the upper end of the market as well. So, you know, some good, some good data out there in terms of how at least some of the sectors are performing.  

00:03:02    One thing I wanted to bring up was just, you know, how to, how the world is going to be as we reopen and how we have jobs and people coming back to the office and if they come back to the office, when will they come back to the office? But I, you know, I was, I went on a mountain biking excursion in Moab with my son, and on that excursion there was, um, uh, two women who were traveling around the country, had full-time employment in the Midwest. And, um, you know, they, I said, what are you doing? And they said, well, Monday through Thursday, we, we popped down with a laptop and we work from where we're, wherever we're at. So I I, it went from W F H, which is work from home to now W f a work from anywhere with wifi. So as long as you've got that, yeah, that's amazing to me. So, you know, I, I, I, I, I was, I commended them and I said, that's really cool. And they, they've been doing it for a month and said, it's been going great. So we'll see what we can do in the future. But I'm, I'm optimistic.  

00:03:54    That's pretty awesome. When Moab is your office, you are a, like,  

00:03:58    Amazing, amazing.  

00:04:00    Uh, the other thing that also, you know, that I, that we're paying attention to out there is you're seeing a spike in forbearance, particularly in the senior housing sector, right? There was a, another, another news story came out this week. You have a Blackstone Brookdale jv, it's a billion dollar portfolio, it's 60 locations around the country, and, you know, they're in forbearance. And, you know, I think the thing that's really important to note about forbearance for people that aren't accustomed to really kind of the ins and outs of it are that that's, that's essentially translates right now into three months of debt payment relief. Yes. And you're seeing the government say, Hey, we can extend that like another three months, but at some point that doesn't get extended. And so then the question is, when does it not get extended and what's the state of those properties and those markets?  

00:04:44    And then that could, you could all of a sudden see more distress come into the certain sector. But I think to go right back to the whole issue around why August stimulus is so important, is that like the, the, the clock is running out on this, right? We're about to have hit expiration, go to zero on the time, and if we don't have some money, you know, back in the pockets of some of these borrowers and some of these businesses, then, you know, come September, October, things might start to look like April or May again, if, if they're not kind of, you know, refreshed.  

00:05:15    Well the, the opening and shutting has been very difficult for a lot of these folks. And, and, um, you know, that was the surprise when I was gone. I mean, I, you know, it wasn't like we were ramping to see where everything was gonna go. We had some closings of occur and, you know, those are, that's problematic. Like I think it's, at the end of the day, if we get this last round of stimulus, what I'm hoping for is that that gets us through to some good, um, announcements as it relates to therapeutics and advancement in, um, vaccine, um, you know, hopeful vaccines later this year. So if that can do that, then ultimately we've worked as a society to get back to where we can. Unfortunately, what this has done is, is a, as accelerated the challenges in the retail sector. There's no question, you know, some of these, some of these retailers were having some struggles pre covid and Covid has made, um, you know, accelerated their challenges and exacerbated them much faster. Um, so we'll see how that, that gets done. I'm also paying attention. One thing that I'm, you know, property taxes are very important to state governments and, you know, values are dropping and they have dropped a bit, right? We, I think we can agree that most values are, are not necessarily where they were before.  

00:06:24    No, absolutely. So I think one, you know, speaking of office, one thing that we're starting to pay attention to and look to moving forward is that, you know, we saw some also news come out that you're seeing that some of the major HVAC companies out there, like, like the trains of, of the country are beginning to engineer new HVAC systems that are gonna incorporate more fresh air into their air filtration systems. You have the, the, I think it's the American Association of Heating that's come out and now said that, you know, if you can infuse 20% fresh air into your recirculating system, that you're gonna ha you're gonna have a dramatic effect in terms of, you know, dissipating particles of coronavirus and things like that. So I think what we're gonna, I think what really look forward to is watch for some of these, you know, CBD offices to start proactive in re you know, retooling their HVAC systems to be more covid resistant, right?  

00:07:17    Like, that's something that we're definitely paying attention to. And then I think other than that, you know, we're also paying attention to some things in the, you know, looking ahead, obviously we've got United Airlines talking about the possibility of laying off half its workforce that could have an effect, you know, in the months ahead. Uh, we're al we're also interesting to notice the shifting, you know, travel patterns. You know, we've, we've now seen DFW become the number one airport in the world for busyness, um, pushing right past Atlanta to, to claim the spot right now. Now that's a temporary, you know, crown. We'll see. Um, you know, but we also see that, you know, we see that engine of the Texas economy always continue to be pretty resilient. Part of me is wondering if we're starting to see a shift and we say, could DFW take the crown and hold it post Covid? That obviously would have a pretty, that would've another kind of beneficiary effect for that economy. You know, local Texas,  

00:08:11    No question. I mean, I think you're gonna see movements. I mean, my, my wife's sister on her family just picked up, moved to Idaho, right? Um, uh, you know, I you're how much, how much flow of people, uh, moving from primary markets to secondary markets or places where they can be outdoors and live life, but still have the same job because they don't need to be back in the office. You know, all the sectors are interesting. I mean, we've talked abouts. Multifamily feels pretty good. Industrial feels pretty good office, you know, here and there, you know, depending suburban office, yes. CBD maybe not so much. Um, you know, obviously our retail and hospitality and frankly, I, you know, if I was to look at hospitality or retail, I'm more concerned probably with retail. Um, you know, with, with hospitality coming back again though, you know, I can't tell how much stimulus is helping us and feeling decent about the world.  

00:08:58    So I, I do have that in the back of my head. Um, and you know, we talk week to week. How about how many lenders are in the market? Um, I can only tell you that it's, I'm busier and busier and busier than I was before. And we are closing deals more and more now than we were obviously in March, April, um, when we started this. So in that regard, you know, things are coming back to some normalcy, but we've got some time. Um, you know, to be back to ni 2019 levels will probably not be this year. But, you know, I think, you know, we can see the strength and the, and hopefully the confidence be there, uh, later this year. You  

00:09:33    Know, I think with that, that's a wrap for today. So, uh, Malcolm, it's great to have you back in the saddle with us and, you know, we look forward to doing again next week. And so for everybody out there, um, hope you had a great 4th of July holiday weekend. And until we see you next week, stay safe.