CrowdStreet's Ian Formigle is joined by Malcolm Davies, Principal and Managing Director at George Smith Partners, to discuss what they're seeing in the capital markets post election day 2020 and what might be expected going forward, new trends that are emerging in the wake of COVID and what that means for bigger markets like San Francisco.
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.
00:00:03 Hi, I'm Ian from Chief Investment Officer here at CrowdStreet. Welcome to this special edition November 4th for StreetBeats. This is our post-election version of our weekly capital markets update. Uh, Malcolm and I talked about a couple weeks ago that we were going to wait strategically until after the election to try to get a little bit of a discussion going on what we saw last night. Uh, so Malcolm, welcome back to StreetBeats for this week.
00:00:28 Yeah, you know, it's, uh, it's the exact thing I told Anna-Marie last week we didn't want, which was a contested election. Uh, we wanted to have some, hopefully some surety, but, um, here we are, what at noon and Pacific Standard time, and we still don't have much clarity. Um, I will say we do have clarity, however, in California it looks on some of the propositions. We were, you know, obviously really tracking and paying attention to. Um, you know, the first one was Prop 21, which was about, um, you know, basically giving, um, rent, basically rent control in essence. Um, and, uh, that looks like it has, uh, failed to pass. So that's been great for, for the commercial real estate industry. And then also Prop 15, uh, which again was, um, you know, had to do with, um, you know, essentially resetting the taxes. You know, kind of like a Prop 13 element here that looks like it's, uh, not gonna pass either. But there was one that, that did pass, which is the Prop 19, which was if you're over the age of 55, you can sell your residence and transfer your property taxes to a new residence, uh, within, well, I think within the state, anywhere if you're over the age of 55 or if you lost your house on a fire. Um, so that, that, that, that, I thought that was interesting. Um, how about yourself up there in Oregon?
00:01:42 Yeah, you know, uh, we had a, a number of, uh, ballot resolutions here. You know, measures come up. Um, I, I think the big one for, I'm, I'm a resident, the county, uh, there was, you know, kind of a, a couple big things that passed, one that didn't pass, uh, the ones that passed, for example, is there was an initiative for, uh, universal Preschool for our, for our county. So that got passed, um, that's gonna turn into a tax for high, high income Yeah. In Multnomah County. So, um, so I think, you know, some of us have got that to, to recognize going forward. Uh, the one that was, you know, that did not pass was, uh, an infrastructure play that would extend the, uh, the max line down, um, along one of our main kind of boulevards heading south out of downtown into the suburbs.
00:02:25 So, I mean, I think if you roll it all up from a local perspective, it was, you know, in, you saw education measures get passed, uh, some of the infrastructure stuff not get passed to kind of pay for that, um, the, the, I mean, and other, otherwise it was everything else as you would expect it. So there's really, really no, no news, um, in terms of state, um, and, you know, senate races and all that kinda stuff. You know, I think the one thing that we, what I looked at when I'm just looking at the overall results is I feel like if there was one big winner out of last night, it was cannabis, you know? Yeah. We had, we had, we had legalization, right? Yeah. So what recreational use legalized in New Jersey, South Dakota, Montana, and Arizona. And then, uh, medicinal use approved in Mississippi. So I think just the next step in this kind of onward march towards, you know, kind of a nationalized legalization of cannabis, um, it would just, you know, the, the, the next step. So a, a, a couple more, you know, elections, couple more movements is what we're seeing. You might see something actually happen at the national level.
00:03:32 Yeah. You know, particularly with, uh, you know, again, we're trending one direction it looks like on the presidential race, and regardless of how the outcome of the presidential release, uh, goes, it looks like we're gonna have, um, you know, a split Congress and, and senate and presidency. So all the branches will have at least two of three. So that will be some checks and balances I think, going forward, um, in that sense. So that's probably the one thing we do know, as we sit here right now, there's gonna be a check and balance between all the parties.
00:04:00 Yeah. And that, that would suggest, you know, eventually cooler heads prevail. And I think the markets are kind of liking that prospect. I mean, obviously to your point, if, if we end up with a Biden presidency, but a Republican controlled Senate, you know, we know that there's not gonna be massive changes in the years ahead. That all will be incremental. Um, it'll probably look a lot like about, you know, the second term of, of Obama's presidency. Right? Same, same situation.
00:04:25 So we, we had, we had recovery then. So hopefully we'll have a nice recovery coming outta this
00:04:30 Recovery. Yeah. So let, let's talk about that because I think the, the other big news of last week, aside from what happened last night is, you know, we, we got some great, you know, na, national Economic News last week in terms of Q3 numbers. So I was really pleased to see those numbers come in, you know, 33% on an annualized basis, roughly 7%, you know, absolute growth in G D P and q3. Uh, you know, I I I thought there was two a couple things that really stood out in that regard. You know, the first was, aside from a great number posting on the board, that that quarter, you know, was really more to start to roll it up to the, to the annual number and saying, Hey, we are now tracking towards a roughly three and a half percent drop in G D P for 2020. Which I think if we were to rewind to April, we would think that was a monster win relative to what we were expecting, you know, this time last year.
00:05:19 Yeah, no, and I think, you know, I think we've talked about this previously, but it's setting, its the stage up a bit, you know, for seeing stuff happening in 21 and ultimately proceeding going on forward to 22, 23. Um, but it's a lot better than we, I think, thought it would be if we started this when we started this in March. Um, pretty remarkable, to be honest with you. I, I'm very proud of the resiliency of the American consumer and, uh, our, our, our economy. Um, but look, I mean, we've talked about some other stuff. I mean, you know, I, I travel to Reno and Boise over the last two days. Um, I feel like I'm back to my old self and going out and traveling. Um, I know that everybody isn't quite there yet. Uh, I will tell people I feel absolutely safe on an airplane.
00:06:00 Uh, everybody's wearing masks. It might be the best place to be, frankly, cuz everyone's wearing a mask. Uh, but the reality is, uh, you know, what I thought was really interesting is to see, you know, again, the growth, but travel isn't actually getting back. It's bumping right now, and, you know, it's really come down over the last, uh, few days and week. Um, so we, we were seeing something good. I don't know if it's because, you know, we are seeing some spiking cases as well. Yeah. So, again, it's very choppy. Um, you know, and it's very difficult to kind of ascertain where we are. Um, but that's definitely stuff that we've been paying attention to. Uh, but how about Sian?
00:06:34 Yeah. You know, on the TSA checkpoint, you know, kind of numbers, you know, week over week, I, I was looking at the same thing, you know, the last time that we spoke, you know, we were, we were talking about, you know, daily counts that were penetrating into the 40 plus percent range, you know, of where they stood the same weekday last year, you know, and that was a meaningful spike up from the mid thirties. Yeah. The bummer was we've dropped down ba back into the mid thirties.
00:06:58 Right.
00:06:58 Hard, you know, what I would say is that right now, in terms of a one to two weeks worth of data in that regard, kind of hard to know if there's noise or if there's some signal there from the perspective of, well, we just had Halloween and we, and last night we obviously just had the elections. I mean, historically speaking, those are kind of two events that, that people wanna be around, right? They wanna be at home, they wanna be with their families, um, and, and their friends to, you know, to get together and, and, you know, watch those things, you know, take place. So I I, I don't know at this, what I'm gonna be interested in watching is do we, do we see this, you know, mid thirties trending to low 30% year over year numbers and TSA checkpoints continue throughout November. I, if it does, then that I would, I would start to buy into the theory that you're starting to see people pay attention to the national spikes and, and Covid numbers, and they're, they're starting to kind of lock themselves down a little bit more, um, from national mobility.
00:07:51 So I think that's something that's interesting, you know, as we, as we get in the next couple weeks, also, just looking at other countries, I mean, you gotta think that the UK's month long mandate of a shutdown is also making everyone around the country start to think about, you know, what are we doing right now are, or like, for example, like, do we have a shutdown coming again? Who knows? Um, but even just kind of that, that psychological aspect of what's happening in the UK and France and Spain right now, you know, probably is sinking in a little bit and, and making us question what's going on.
00:08:22 Yeah, no, no question. So, we'll, we'll see. But, you know, one of the things I thought was interesting is about markets, right? Where, where are markets going? And, you know, I've talked a little bit about, you know, this, this one's more about, you know, the election and the economy, but like the, the financial markets, the debt markets, um, certainly wanted to see what was gonna happen here with this election. I think we are getting some clarity. Um, we're not concerned today as we sit here about the financial markets not, uh, reacting well and not closing deals and the like. So that's really a big positive. But we're also seeing trends. You know, I, like I mentioned to you, I, I have two new clients that brought me to Reno and to Boise, um, in those two markets, you know, these are growth markets. We see the opportunities. I think we were talking earlier about, you know, other markets, even in the greater macro perspective, right? Like if you talk about the Bay Area, I'd love to get your thoughts further about how you see potentially the San Francisco and the San Jose markets play out as we come out of Covid.
00:09:16 Yeah. You know, this, this last couple weeks has been really interesting in that regard, and it's given me the, just this opportunity to look at California and think about it strategically from an office perspective. Um, you know, from the standpoint of, um, I had my U L I product council meeting, you know, a couple weeks ago, talk to a couple of my colleagues in there who are based in the Bay Area about what's going on in the SF office market. Also had an opportunity to catch up with a very, uh, esteemed broker, uh, down in San Jose for the, for that and talk about the Silicon Valley office market, you know, and there was a couple things that were standing out, and it's making me think big picture. I mean, we're looking at the possibility of some opportunities on deals, you know, in San Jose.
00:09:55 So I stepped back this last week and I was really trying to kind of put the Bay Area through a 10 year lens and think about it in terms of like, momentum and what's happening. A and some of the data that I was analyzing was giving, getting me more bullish with the, the prospect of watching momentum shift over the next few years out of San Francisco, increasingly back down towards, you know, Silicon Valley and San Jose. So, you know, a couple things standing out. Yes. Right now, you know, multiple data points seem to con con concur that, you know, the SF office market is getting hit extremely hard. We've talked even previously on, on this segment about, you know, the Pinterest deal. And when you pay 90 million not to lease office in San Francisco, that tells you that something's going on. The number that I've been hearing out there, you know, kind of just at the ground level is 20 plus percent vacancy rates being real.
00:10:49 You know, we obviously keep seeing the sublease fi vacancy spikes. That's gonna continue. Couple other things that stood out in San Francisco. One was that, you know, kind of coming out of the pandemic, that market is going to be really focused on health and wellness. And that could to my, in my opinion, could create a bifurcation in the market where newer assets that are better able to adapt to the new demands. New demands being, you know, the latest and greatest in terms of HVAC, you know, the new systems that can pull out covid particulates and things like that, uh, as well as touchless elevators. So there's gonna be this new, new emphasis placed on how safe and how healthy am I in that building? And if I can feel healthy and safe in that building, I can office there. If I can't, it just won't.
00:11:32 And price probably doesn't really even matter, right? You're, you're, you're not going to say, well, for a 20% discount, I think I'm gonna like, be okay. Not feeling safe. No, I think safety is, is paramount. And the companies that can, are the, that are gonna do the office deals can afford to pay the differential to make sure their employees feel safe. So what I'm concerned about right now from kind of the existing stock is that older stock of, of real estate in San Francisco could see meaningful drops in rents. While, because we know it's gonna be a weak market next year, we know that there's gonna be, you know, a lot of buildings that are, that are leaning in and trying to get tenants. So part of me is wondering if the new buildings are the ones that are gonna get the tenants to the chagrin of the older buildings that are gonna kind of sit there and languish with super high vacancies. I think that's a wrap for today. Uh, thanks everyone for tuning in. So Zack and Anna-Marie are gonna catch up. We're gonna talk a little bit more about what's happening in, in November. We're obviously looking towards the end of Q4 right now. We should have some interesting updates. Then, uh, in the meanwhile, everyone stay.
00:00:28 Yeah, you know, it's, uh, it's the exact thing I told Anna-Marie last week we didn't want, which was a contested election. Uh, we wanted to have some, hopefully some surety, but, um, here we are, what at noon and Pacific Standard time, and we still don't have much clarity. Um, I will say we do have clarity, however, in California it looks on some of the propositions. We were, you know, obviously really tracking and paying attention to. Um, you know, the first one was Prop 21, which was about, um, you know, basically giving, um, rent, basically rent control in essence. Um, and, uh, that looks like it has, uh, failed to pass. So that's been great for, for the commercial real estate industry. And then also Prop 15, uh, which again was, um, you know, had to do with, um, you know, essentially resetting the taxes. You know, kind of like a Prop 13 element here that looks like it's, uh, not gonna pass either. But there was one that, that did pass, which is the Prop 19, which was if you're over the age of 55, you can sell your residence and transfer your property taxes to a new residence, uh, within, well, I think within the state, anywhere if you're over the age of 55 or if you lost your house on a fire. Um, so that, that, that, that, I thought that was interesting. Um, how about yourself up there in Oregon?
00:01:42 Yeah, you know, uh, we had a, a number of, uh, ballot resolutions here. You know, measures come up. Um, I, I think the big one for, I'm, I'm a resident, the county, uh, there was, you know, kind of a, a couple big things that passed, one that didn't pass, uh, the ones that passed, for example, is there was an initiative for, uh, universal Preschool for our, for our county. So that got passed, um, that's gonna turn into a tax for high, high income Yeah. In Multnomah County. So, um, so I think, you know, some of us have got that to, to recognize going forward. Uh, the one that was, you know, that did not pass was, uh, an infrastructure play that would extend the, uh, the max line down, um, along one of our main kind of boulevards heading south out of downtown into the suburbs.
00:02:25 So, I mean, I think if you roll it all up from a local perspective, it was, you know, in, you saw education measures get passed, uh, some of the infrastructure stuff not get passed to kind of pay for that, um, the, the, I mean, and other, otherwise it was everything else as you would expect it. So there's really, really no, no news, um, in terms of state, um, and, you know, senate races and all that kinda stuff. You know, I think the one thing that we, what I looked at when I'm just looking at the overall results is I feel like if there was one big winner out of last night, it was cannabis, you know? Yeah. We had, we had, we had legalization, right? Yeah. So what recreational use legalized in New Jersey, South Dakota, Montana, and Arizona. And then, uh, medicinal use approved in Mississippi. So I think just the next step in this kind of onward march towards, you know, kind of a nationalized legalization of cannabis, um, it would just, you know, the, the, the next step. So a, a, a couple more, you know, elections, couple more movements is what we're seeing. You might see something actually happen at the national level.
00:03:32 Yeah. You know, particularly with, uh, you know, again, we're trending one direction it looks like on the presidential race, and regardless of how the outcome of the presidential release, uh, goes, it looks like we're gonna have, um, you know, a split Congress and, and senate and presidency. So all the branches will have at least two of three. So that will be some checks and balances I think, going forward, um, in that sense. So that's probably the one thing we do know, as we sit here right now, there's gonna be a check and balance between all the parties.
00:04:00 Yeah. And that, that would suggest, you know, eventually cooler heads prevail. And I think the markets are kind of liking that prospect. I mean, obviously to your point, if, if we end up with a Biden presidency, but a Republican controlled Senate, you know, we know that there's not gonna be massive changes in the years ahead. That all will be incremental. Um, it'll probably look a lot like about, you know, the second term of, of Obama's presidency. Right? Same, same situation.
00:04:25 So we, we had, we had recovery then. So hopefully we'll have a nice recovery coming outta this
00:04:30 Recovery. Yeah. So let, let's talk about that because I think the, the other big news of last week, aside from what happened last night is, you know, we, we got some great, you know, na, national Economic News last week in terms of Q3 numbers. So I was really pleased to see those numbers come in, you know, 33% on an annualized basis, roughly 7%, you know, absolute growth in G D P and q3. Uh, you know, I I I thought there was two a couple things that really stood out in that regard. You know, the first was, aside from a great number posting on the board, that that quarter, you know, was really more to start to roll it up to the, to the annual number and saying, Hey, we are now tracking towards a roughly three and a half percent drop in G D P for 2020. Which I think if we were to rewind to April, we would think that was a monster win relative to what we were expecting, you know, this time last year.
00:05:19 Yeah, no, and I think, you know, I think we've talked about this previously, but it's setting, its the stage up a bit, you know, for seeing stuff happening in 21 and ultimately proceeding going on forward to 22, 23. Um, but it's a lot better than we, I think, thought it would be if we started this when we started this in March. Um, pretty remarkable, to be honest with you. I, I'm very proud of the resiliency of the American consumer and, uh, our, our, our economy. Um, but look, I mean, we've talked about some other stuff. I mean, you know, I, I travel to Reno and Boise over the last two days. Um, I feel like I'm back to my old self and going out and traveling. Um, I know that everybody isn't quite there yet. Uh, I will tell people I feel absolutely safe on an airplane.
00:06:00 Uh, everybody's wearing masks. It might be the best place to be, frankly, cuz everyone's wearing a mask. Uh, but the reality is, uh, you know, what I thought was really interesting is to see, you know, again, the growth, but travel isn't actually getting back. It's bumping right now, and, you know, it's really come down over the last, uh, few days and week. Um, so we, we were seeing something good. I don't know if it's because, you know, we are seeing some spiking cases as well. Yeah. So, again, it's very choppy. Um, you know, and it's very difficult to kind of ascertain where we are. Um, but that's definitely stuff that we've been paying attention to. Uh, but how about Sian?
00:06:34 Yeah. You know, on the TSA checkpoint, you know, kind of numbers, you know, week over week, I, I was looking at the same thing, you know, the last time that we spoke, you know, we were, we were talking about, you know, daily counts that were penetrating into the 40 plus percent range, you know, of where they stood the same weekday last year, you know, and that was a meaningful spike up from the mid thirties. Yeah. The bummer was we've dropped down ba back into the mid thirties.
00:06:58 Right.
00:06:58 Hard, you know, what I would say is that right now, in terms of a one to two weeks worth of data in that regard, kind of hard to know if there's noise or if there's some signal there from the perspective of, well, we just had Halloween and we, and last night we obviously just had the elections. I mean, historically speaking, those are kind of two events that, that people wanna be around, right? They wanna be at home, they wanna be with their families, um, and, and their friends to, you know, to get together and, and, you know, watch those things, you know, take place. So I I, I don't know at this, what I'm gonna be interested in watching is do we, do we see this, you know, mid thirties trending to low 30% year over year numbers and TSA checkpoints continue throughout November. I, if it does, then that I would, I would start to buy into the theory that you're starting to see people pay attention to the national spikes and, and Covid numbers, and they're, they're starting to kind of lock themselves down a little bit more, um, from national mobility.
00:07:51 So I think that's something that's interesting, you know, as we, as we get in the next couple weeks, also, just looking at other countries, I mean, you gotta think that the UK's month long mandate of a shutdown is also making everyone around the country start to think about, you know, what are we doing right now are, or like, for example, like, do we have a shutdown coming again? Who knows? Um, but even just kind of that, that psychological aspect of what's happening in the UK and France and Spain right now, you know, probably is sinking in a little bit and, and making us question what's going on.
00:08:22 Yeah, no, no question. So, we'll, we'll see. But, you know, one of the things I thought was interesting is about markets, right? Where, where are markets going? And, you know, I've talked a little bit about, you know, this, this one's more about, you know, the election and the economy, but like the, the financial markets, the debt markets, um, certainly wanted to see what was gonna happen here with this election. I think we are getting some clarity. Um, we're not concerned today as we sit here about the financial markets not, uh, reacting well and not closing deals and the like. So that's really a big positive. But we're also seeing trends. You know, I, like I mentioned to you, I, I have two new clients that brought me to Reno and to Boise, um, in those two markets, you know, these are growth markets. We see the opportunities. I think we were talking earlier about, you know, other markets, even in the greater macro perspective, right? Like if you talk about the Bay Area, I'd love to get your thoughts further about how you see potentially the San Francisco and the San Jose markets play out as we come out of Covid.
00:09:16 Yeah. You know, this, this last couple weeks has been really interesting in that regard, and it's given me the, just this opportunity to look at California and think about it strategically from an office perspective. Um, you know, from the standpoint of, um, I had my U L I product council meeting, you know, a couple weeks ago, talk to a couple of my colleagues in there who are based in the Bay Area about what's going on in the SF office market. Also had an opportunity to catch up with a very, uh, esteemed broker, uh, down in San Jose for the, for that and talk about the Silicon Valley office market, you know, and there was a couple things that were standing out, and it's making me think big picture. I mean, we're looking at the possibility of some opportunities on deals, you know, in San Jose.
00:09:55 So I stepped back this last week and I was really trying to kind of put the Bay Area through a 10 year lens and think about it in terms of like, momentum and what's happening. A and some of the data that I was analyzing was giving, getting me more bullish with the, the prospect of watching momentum shift over the next few years out of San Francisco, increasingly back down towards, you know, Silicon Valley and San Jose. So, you know, a couple things standing out. Yes. Right now, you know, multiple data points seem to con con concur that, you know, the SF office market is getting hit extremely hard. We've talked even previously on, on this segment about, you know, the Pinterest deal. And when you pay 90 million not to lease office in San Francisco, that tells you that something's going on. The number that I've been hearing out there, you know, kind of just at the ground level is 20 plus percent vacancy rates being real.
00:10:49 You know, we obviously keep seeing the sublease fi vacancy spikes. That's gonna continue. Couple other things that stood out in San Francisco. One was that, you know, kind of coming out of the pandemic, that market is going to be really focused on health and wellness. And that could to my, in my opinion, could create a bifurcation in the market where newer assets that are better able to adapt to the new demands. New demands being, you know, the latest and greatest in terms of HVAC, you know, the new systems that can pull out covid particulates and things like that, uh, as well as touchless elevators. So there's gonna be this new, new emphasis placed on how safe and how healthy am I in that building? And if I can feel healthy and safe in that building, I can office there. If I can't, it just won't.
00:11:32 And price probably doesn't really even matter, right? You're, you're, you're not going to say, well, for a 20% discount, I think I'm gonna like, be okay. Not feeling safe. No, I think safety is, is paramount. And the companies that can, are the, that are gonna do the office deals can afford to pay the differential to make sure their employees feel safe. So what I'm concerned about right now from kind of the existing stock is that older stock of, of real estate in San Francisco could see meaningful drops in rents. While, because we know it's gonna be a weak market next year, we know that there's gonna be, you know, a lot of buildings that are, that are leaning in and trying to get tenants. So part of me is wondering if the new buildings are the ones that are gonna get the tenants to the chagrin of the older buildings that are gonna kind of sit there and languish with super high vacancies. I think that's a wrap for today. Uh, thanks everyone for tuning in. So Zack and Anna-Marie are gonna catch up. We're gonna talk a little bit more about what's happening in, in November. We're obviously looking towards the end of Q4 right now. We should have some interesting updates. Then, uh, in the meanwhile, everyone stay.