New Federal Policy on Inflation Rates with Zack Streit | StreetBeats Ep. 55

00:00:03    Welcome back to StreetBeats for September 1st. This is our weekly series covering all things capital markets, uh, where we discuss the debt markets, finance, and what we're seeing in the commercial real estate SEC sector as well as ongoing trends. I'm Anna Maria, Allander Li, uh, the Director of Investments here at CrowdStreet, and today we're joined by Zack Streit, senior Vice President at George Smith's Partners. Hi Zack. Thanks for joining us and  

00:00:25    Great to be back here.  

00:00:27    Yeah. How are things going on, on, on your end? Kinda what are you seeing in the, the debt markets and, and kind of what did you see last week?  

00:00:34    Yeah, so, so it's interesting I think from, um, from a macro perspective, um, you know, we're definitely sort of focused on, um, pressure on Congress for a new bill, um, and, you know, will a government shut down and sue, um, if there isn't one? Uh, what does the absence of a new bill mean for the airline industry? Uh, what does it mean for the multi-family industry with respect to unemployment insurance? So I think that's kind of a big area. And then obviously there's the election that's kind of looming behind that. And then also from a macro perspective, um, I think we've been pretty focused on the reopenings in certain states, so I know for, for both of us there's been movement. I know Kate Brown, um, governor up in Oregon, um, lifted restrictions on Multnomah County, so that's big. And then Governor Newsom here in California came out with sort of a, a color coded set of regulations that I think we're still trying to figure out and digest with respect to how the major counties and cities, um, kind of could reopen going forward. I know there's a big push after Labor Day in New York City to try and get folks back in the city and back in the office. So I think, you know, from a macro perspective, that's, um, that's some of the stuff that we're looking at.  

00:01:46    Yeah, no, definitely. I mean, right, if we look at kind of the, the rent payments for, for August, you know, it's came in around 92.1%, which, you know, was down from 94% last year for, for the month of August, and a little bit of a decrease from the 93.3% we saw in July. So still, you know, pretty, pretty strong considering everything. But again, you know, part of that is, you know, due to the, the stimulus that's been out there. So, you know, I think it's important that, you know, the lawmakers in Congress, as you say, kind of get to the table to, to work through something. So, you know, we avoid, you know, uh, a housing crisis, potentially. Other trends we've been tracking, you know, as always we're looking at the, the s str R data. Yeah. Um, for hospitality, um, last week occupancy actually decreased, uh, for, for the first time in, I think 18 weeks now. Yeah. Um, a week over week. So we were down to 48.8% nationally. Um, a 1.2% decrease. Um, ADR was also down to a hundred down from 1 0 1 the previous week. Right. Um, and you know, I think largely that's due to, you know, kids are getting back to school and areas where schools have reopened. Um, so there's been a little less leisure travel. So, you know, part of that may be kind of seasonality.  

00:02:57    Yeah. I, I then that might be a good into sort of the real estate capital markets. I think that, um, you know, we've seen that slight decline in occupancy, but I think that, you know, we've sort of seen it, you know, hover between 45 and 50 for a few weeks now, maybe even longer. And I think that's, that's interesting and definitely a welcome sign, you know, versus the low of where it was down at 15 or 20%, which was, you know, definitely rough. But I, I also think we're not back at 70 or 80% and I think one of the things that we're starting to see, um, that we've seen over the last month or so is some real cracks in the hospitality market. Um, and, and we've started financing some distress hotel acquisitions, um, both hotels that we're being acquired, you know, call it between 30 and 40 cents, uh, or 38 to 40% discounts to what, uh, previous, uh, owners the sellers were into it for, or in some cases they're R e o, but you're sort of netting to that same kind of basis.  

00:03:55    And we're seeing hotels that will remain hotels and we're seeing some hotels that will be converted to senior housing. Sure. And we're seeing some recapitalization transactions where sponsors need to bring in sort of relief capital into their deals to sort of extend runway. We weren't really seeing this type of activity in the second quarter as much. I think we're firmly seeing it now. And I think part of the reason we're seeing it now is, you know, PPP is worn off. Um, but you've also sort of seen a recovery cuz we've gone from the occupancy lows, you know, to being around 50% now. Right. But I think sort of reality setting in that, that, you know, corporate and group travel hasn't recovered, you know, leisure travel may slow a little bit with the school year starting and, and you know, now we're sort of at an inflection point where, you know, we kind of, you know, ha have some insight into what's occurred and what might occur and transactions are kind of beginning to restart it. I, is it crazy to me to actually see it, but I think transaction volumes in the hotel space were down like 90% in the second quarter. Yeah. Which is, is just an unbelievable number. Um, and I think it's why we didn't see a lot of this activity then, but we're, we're kind of starting to see it now and look, it's, it's, it's rough. And then, you know, this is also sort of the opportunity that, you know, some folks have been looking  

00:05:10    For. The big story kind of out of last week was definitely, um, you know, looking at the news that came out of the, the Federal Federal Reserve, um, announcing that they're gonna be yeah, allow inflation to remain above the 2% target. Um, which, you know, you can kind of see is a policy shift on, on their side. And, and you can kind of, um, take from that that, you know, rates are gonna stay lower for longer essentially. Um, yeah. So I think that that's gonna be a big, big boon for, for commercial real estate. Um, it's gonna further kind of prove it out as kind of that inflation hedge, um, where previously, you know, you may have been worried about, you know, the, the debt rates increasing, but, but that's, you know, potentially not, not happening, or at least not in the, in the near term, we don't think, um, and know, so it's gonna put you, it's gonna put, you know, some downward pressure on, on cap rates given that, you know, you look at cap rates, it's kind of the risk free rate plus, plus a risk premium. So if rates are staying low, cap rates should, should stay low as well. So how, how are you guys kind of viewing on that from, from the debt side?  

00:06:10    So I, I agree with you. This is a massive shift in Fed policy and, and, and certainly I've never seen anything like this in my lifetime where they basically said, we are gonna turn a blind eye to inflation for a little while. And, you know, even if it grows significantly, we're sort of gonna offset it by, you know, um, how stagnant it's been to date. Um, I don't think that could be underscored enough because, you know, it's, it's the equivalent of like taking off the boxing gloves, you know, after they've run interest rates down to zero and, and flooded. The market with liquidity is a very clear sign that like they're going to do everything they can to shore this up. I think you're seeing, um, ramifications of this already and I think you're seeing it most acutely within the residential space broadly. Um, and so, you know, first I would touch on just the home market, which I know isn't really our focus, but the home market is just on fire.  

00:07:04    Um, in places, in secondary markets, in places like Lake Tahoe, you know, for tax reasons, folks leaving California in the Bay Area, but the Palm Springs home market is on fire and it's typically not on fire during this time of the year when the weather's on fire. Um, but it still is because people are looking, you know, at, at cheaper cost of live, of living in, in nicer places. And I think, you know, in addition to, you know, the tax play into secondary markets, if you know that you have interest rates that are low for a long time and you can get a great home mortgage and you think that if, if you have to sell 'em three to five years, maybe that buyer can still get a great home mortgage, there's gonna be a lot of liquidity that trickles into the, into the space and keeps people happy.  

00:07:46    I think you're also seeing an impact on the commercial side in the multi-family market. Um, sure. No question that the agencies have been sort of the tail wagging the dog and ever since they sort of recovered, call it late April, early May, they've been an incredible source of liquidity into the multi-family market. And I just think with, you know, interest rates lower for longer, which seems to be the mantra coming out of the Fed, it's safe to assume that the agencies are going to be there and they're going to continue providing liquidity, um, into the multi-family markets. And this is doubly true because I think the federal government is looking to privatize them, right? So you've got, you know, two positive forces at play. What that's, you know, resulting in is, is just, um, a lot of debt capital market interest in multi-family construction loans, um, and multi-family bridge loans, um, even on the equity side and kind of opportunity zone equity spaces and then to a lesser degree and a smaller space that we spent a lot of time in recently, a single family for rent.  

00:08:48    So what about, kinda looking ahead to, to next week, what are you, what are you keeping your eye on? I know, you know, we discussed kind of the trying to find a solution on the legislation in terms of increasing the stimulus and, um, you know, unemployment benefits. Um, but, but what else kind of are, are you looking at?  

00:09:04    Yeah, I mean, um, I think those are the macro items. Micro, I'm, I'm, I'm really curious about office reopenings. This has been, you know, a topic of big debate, you know, work from home, you know, how how prevalent will it be? Is there a structural shift in office and away from urban cores, you know, or not? Um, I've noticed that a lot of office deals that are being marketed recently now seem to have a life science component. Yeah. Um, which, which I get it's smart. Um, we, we closed a deal that was kind of an office r and d life science deal back in April. We started at pre Covid. The lenders honored it post covid and we were quite lucky that it had Abbott Labs as a tenant in it. Um, and so, you know, that, that, that definitely sort of helps.  

00:09:48    Yeah, definitely. It is, it is a big trend we're watching too. I think we, we've kind of coined on the investment team that, um, you know, the life sciences space is like the new creative office,  

00:09:59    <laugh> <laugh>.  

00:10:00    Um, but yeah, definitely as you mentioned, I mean, right, JP Morgan, they, they announced that, you know, their corporate and investment banking are gonna be moved to that kind of cycling between, you know, working at home and, and working in the office. And then we also saw, you know, Pinterest announced this week that their Yeah. Their loan in San or their, their lease in San Francisco, 490,000 square feet. And I think  

00:10:21    That for a mere 90 million yeah.  

00:10:23    Termination fee was, was astronomical. So, you know, it's definitely something we're watching too, and it'll be interesting to see how that unfolds over the coming months.  

00:10:33    Yeah.  

00:10:35    Well, Zack, appreciate the, the time today. Um, as of like, it was, it was great kinda covering all, all the topics, um, you know, appreciate your, your insights and, you know, I hope the, the viewers enjoy tuning in this week. Um, and, you know, hope we're all staying healthy and safe out there. Um, and we look forward to connecting again next week. And, uh, happy Labor Day.