CrowdStreet's Ian Formigle is joined by Malcolm Davies, Principal and Managing Director at George Smith Partners, to discuss the uptick in transactions in key markets like Phoenix and Denver, how the recent news of a vaccine has given investors, lenders and sponsors alike a timetable of when we could return to normal and how Amazon's recent entrance to the pharmaceutical business impacts a long-time player like CVS.
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.
00:00:04 Welcome back to StreetBeats for November 18th. I'm Ian Formigle, Chief Investment Officer here at CrowdStreet. As you may know, in this weekly segment, we talk about the capital markets debt, financing, what's going on out there in the commercial real estate world, and how we think that factors out into the macroeconomic perspective. And with me as always as Malcolm Davies, principal and managing director at George Smith Partners. So Malcolm, it was awesome to see you outdoors and in person last week, uh, for our socially distanced lunch. Um, but yep, it's like the first real thing I've done business-wise. It wasn't, that wasn't, you know, uh, a synthetic environment, I think literally since the pandemic began. Um, so it was, maybe this is the beginning of like, wow, life can start to actually move on.
00:00:52 Well, yeah, I think, uh, I, I am glad I, I picked my trip to PortAllander last week than, uh, than this week because I don't think, uh, it would've happened. Um, but I think as you and I have talked about, we're kind of living in a Allander of, uh, conflicting data and information. You know, we're, we're having issues with Covid spikes, uh, shutdowns and lockdowns. But then again, we've had some incredible news over the last couple weeks where, uh, we've had two, uh, incredible vaccines with massive efficacies. And so we have, we have kind of a vision of where to go, but in the meantime, we've got some things we've gotta deal with how to get there. Um, but yeah, no, it was great to see you and uh, it was great to actually, what I realized by, on these meetings, how much more you can get done, I think, in person. And so I do feel like business travel will come back just a matter of when.
00:01:41 So let's talk a little bit about, you know, the, the news. Obviously this news, I, I feel like, I don't know if it was coincidental or not coincidental, you know, but we're starting to see an uptick in, in velocity of all kinds of things. And so I'm curious to see what you're seeing out there in terms of transaction volume.
00:01:59 I mean, look, I think in reality is we've seen kind of a paid attention to a couple markets, you know, Phoenix and Denver, for example. Uh, the, the, the volume of refinances and closings, transactional closings, um, in Phoenix and Denver. Uh, this is, you know, from Real Capital Analytics, so I wanna give them credit here. Um, is is grown by 50% from September to October. Now that, that meant that, you know, and I didn't go a little further back in that data, but that meant July and August things were starting to really crank coming after that 4th of July holiday. So I think you're seeing people going, look, things are happening. We've got confidence, you know, more office transactions I think have been getting done as you, you and I have talked before, um, than previously. So it isn't just multi-family and industrial and let's not sugar coat still definitely driven by multi-family, but you know, just to see that confidence level has been great to see.
00:02:53 Yeah, absolutely. So same thing, uh, deal flow, definitely picking up. I feel like, and you know, again, given our, both of our, we have this kind of national outlook mm-hmm. <affirmative> every, and it's not just happening in one market, it's happening in all kinds of markets. You know, deal deals are starting to get done. You're getting more clarity around pricing. I, I think a couple things that stood out in terms of just in the last week or two that, you know, that stood out, one, you know, on the office trades and we've started to see like major office deals go down. Um, you almost surpri a little bit surprising to say, do, do we really need to go right now spend $938 a square foot for a, you know, an Amazon leased office tower in downtown Seattle. Um, but the Can Canada, Canada Pension fund in Hudson Pacific said yes.
00:03:35 Yeah. And did that deal. Um, so yes, it, it's got 10 years of remaining lease term. Yes, it's a hundred percent lease to Amazon. So it's basically like a 10 year bond right now. Um, but still that's a high asset value to pay and also for, you know, for what is a, um, a re that could be buying back at stock. So it's just interesting to kind of note that, that that's happening. We also paid attention to the fact that cousin's properties just took down a class a deal in Charlotte that's 608 do dollars a square foot, that's 9.2 years of weighted average lease term. So again, put leaning into paying, I mean, tho those trades are basically like at the top. Um, yep. Dallas, you know, Dallas is, yeah,
00:04:16 I mean we're doing, uh, we financed a big large institutional multi-tenant office project in, uh, in Tempe, Arizona. And, uh, we spoke to our client the other day and you know, he's got three leases out there right now, um, for I think a couple of the floors. And so reality is that's really good to see. Um, so there is some confidence levels not only in investor appetite for lease properties, but also ones that current owners are out there trying to get leased up. You know, it's still a struggle I bet, in reality compared to what leasing activity was before, but that means that this w f h you know, certainly people have this belief that they know people will come back to the office.
00:04:54 Yeah. Yeah, definitely. Um, just other things around the industry, you know, so we talked about office, talked about retail for a moment. You know, we did see the announcement LA this last week that the Simon Tubman deal is back on. Mm-hmm. <affirmative>, they've come to an agreement, it's now going to be, you know, it's an 18% discount or $43 a share, you know, compared to what they had previously negotiated pre covid. Um, you know, what was interesting there I thought was that we now have kind of a data point on what do two of the biggest players in the in retail industry think the appropriate discount on retail is, you know, in a COVID environment. It, you know, now we say it's 18%, you know, and, and you could say, well, okay, well Simon and Toman, those are gonna be best, you know, best in class assets, best locations, but there's also a mix of mall in there too, which is, you know, so they have a struggling format. So it's not like they're just like all the best grocery anchored centers out there. Like this is a real, this is a real data point for where retail just traded basically, you know, through a merger. But it get, it tells you exactly where, where the market's starting to feel on, you know, where retail's starting to price. So I think you take that going forward and say, okay, well now we're looking at other deals that we at least have a data point to kind of benchmark against.
00:06:05 Yeah. And previously there wasn't much. Um, but I think the part, the big picture part is, okay, deals I had that were, that hit covid, uh, I had a deal that close this morning that was a deal that I had to go through three appraisals on as we, as we were trying to close this in March, right? How many of those things we talked about are getting done now? People are putting back deals that fell apart in the early part of that, of la of this year. And then the question's gonna be in 21. Okay. Like I heard on a, on a, a webinar this morning, um, that was really well done about when they thought not, you know, you know, first responders and, and the most vulnerable obviously I think we're gonna look at a vaccine next month, maybe month after. But how about you and I, you know, when do guys like you and I get the vaccine? And so, you know, if it's sometime next summer, I mean you and o in our business, I mean, that's tomorrow. I mean, our decisions are being made today Yes. About deals they'll acquire next summer. And so we, we, we are really gonna start to look at ourselves and saying, okay, are we going into the roaring twenties?
00:07:06 Yeah, I I, I totally agree. I mean, we are now, and I think that was to me the, you know, the, the Pfizer news and Moderna News right now, the number one takeaway is this is giving us a timetable, you know, a absent, absent real, you know, efficacy rates on real trials that could hit the street relatively soon. We're all left guessing. Everyone knows that it's gonna come at some point, but when you don't have that real timetable to put it to, that's when you see like people shying away from the deal table rather than going in or just making real decisions. Now it, now I agree with you. If it's next summer, even if it's next fall, right, it's the thing we are now in a a, a definable number of months until normal people get to feel comfortable being out there and interacting with everybody day in to day and like getting back on a plane, feeling totally comfortable going to a mall and feeling comfortable, whatever it is you're gonna do, you can go into a crowd and feel comfortable. Like now we are talking about months not like this timetable of when Yeah. And to your point, yes, I mean real estate for our industry, this, these are multi-year decisions. So I think just that semblance of some finality and some hope there is all you need to start to kick things in. I think that's why we're seeing it. I think that's why you're seeing it. I think we're seeing the beginning of the next cycle really take form. Um, and probably gonna have some real momentum here coming into q1.
00:08:28 N no question. There was one thing that I think you, you, we had talked about earlier about, uh, Amazon and getting into, uh, medi the me prescription medication business, um, and you know, what effect that would have on the CVSs and the Walgreens of the world. What, what's your assessment there?
00:08:43 Yeah. Um, that makes us cautious on the space to be totally honest. I mean, we had looked at, you know, probably fir first and foremost even before the Amazon announcement. I think when we looked at, you know, a Walgreens or a cvs, you know, the, the cap rates that, that had been applied to those properties. And sometimes, you know, outer secondary could be even tertiary locations are really low. So you're really banking on the credit of the tenant and the long-term viability of that tenant remaining in place. I mean, if you take a, a highly tertiary location, it's a Walgreens that deal trades sub six cap, it's five five. And I mean, hey, maybe it's not like the four four caps are gonna trade closer into major metros, right? But in these tertiary locations, when the cap rates get that low, you basically have to assume that that tenant is, you know, Walgreens is remaining in there indefinitely.
00:09:32 If it doesn't and you're repurposing it, there's no tenant switching costs you can absorb to make that deal, make any sense anymore. The price per per square foot is gonna plummet. Your, your next tenant is gonna be a regional, it's not gonna be a national and it just, you're, you're never gonna make it up. So we'd always been cautious on that space. And then now when you see this news, it just kind of makes me more cautious on it and saying, Hey look, you know, if we're, if we're looking at this kind of stuff, we have to feel really, really comfortable about maybe what's around it. Is it part of a package? Is it, is it in a shopping center with something else attached to it? It can no longer be the thing that you're banking your investment thesis on.
00:10:10 Yeah, it's a, it's a catastrophic type situation that can occur. And, and, um, but this is, goes with what the world is changing. And so real estate is, you know, we are, we sometimes think of ourselves as slow moving, but we're trying to be faster. Yeah. Because the mo the world is moving much faster and I think coming out of this innovation that had been started pre covid had been worked through during Covid coming out the other side, I think the ex we're gonna accelerate with a lot of innovation on the other side. So we'll see how it all goes and plays out. The last part of it, I think for today is now that the vaccines seem to be about as legitimate as it gets, um, will lenders and borrowers work together on assets that are what we call troubled today. And it remains to be seen.
00:10:52 Uh, I think the theory being if you're within 12 months or 18 months of being able to service your debt, um, after, you know, from, let's call it December or January 1st, I have feeling that lenders and borrowers will probably work together if it's gonna take longer than that or that, you know, you may never come back or whatever may be, uh, that's where I see some challenges, um, and some headwinds. But it's gonna be interesting and fascinating to see how this turns out, but couldn't be more thrilled. Here we are on November 18th, uh, and you know, on March, you know, 13th I would, there's no way I would've said we'd have a vaccine by now.
00:11:25 I totally agree and, and and agree with you that 2021 is gonna be very interesting in terms of the sHieggelkeout, what happens with those retail and those hospitality assets? You know, I think the Walker and Dunlap, you know, loan portfolio status, like, you know, we discussed this offline, says it all, multi-family forbearance, less than 1% industrial forbearance, just over 1% retail, 40% hotel, 70%. So we, we've now defined that distress in this downturn is really gonna be confined first and foremost to those asset classes. And then very anecdotal everywhere else, honestly, like multifamily, just, I think we've now gotten to the point to say distress isn't coming to that sector ever. Um, there was some, there was some wondering it
00:12:06 May, it may never be, it may never come because even one year challenged the government will come to subsidize it. So, you know, the reality is there's a lot of subsidies either from unemployment to, to tenants, right. Unemployment checks that come in or on the other side that the, the debt is so cheap that you're able to service it no matter what. Right. So, or at least with a significant amount of occupancy issues or, or, um, you know, without lack of rent collection.
00:12:31 Totally agree. So yeah, I, I, I think, you know, that's, uh, I think on that the takeaway is, you know, the new market, the new cycle, it's emerging and we're, we now have some real clarity on what's, what's gonna start happening cuz it's, it's starting to get it pictures coming into focus. Right? Yep.
00:12:49 Well, happy Thanksgiving, Ian. Yeah. And uh, happy Thanksgiving's, everybody else out there as
00:12:53 Well. Happy Thanksgiving to everyone else out there. Um, we'll see you back on the next one. And until then, everyone stay safe.
00:00:52 Well, yeah, I think, uh, I, I am glad I, I picked my trip to PortAllander last week than, uh, than this week because I don't think, uh, it would've happened. Um, but I think as you and I have talked about, we're kind of living in a Allander of, uh, conflicting data and information. You know, we're, we're having issues with Covid spikes, uh, shutdowns and lockdowns. But then again, we've had some incredible news over the last couple weeks where, uh, we've had two, uh, incredible vaccines with massive efficacies. And so we have, we have kind of a vision of where to go, but in the meantime, we've got some things we've gotta deal with how to get there. Um, but yeah, no, it was great to see you and uh, it was great to actually, what I realized by, on these meetings, how much more you can get done, I think, in person. And so I do feel like business travel will come back just a matter of when.
00:01:41 So let's talk a little bit about, you know, the, the news. Obviously this news, I, I feel like, I don't know if it was coincidental or not coincidental, you know, but we're starting to see an uptick in, in velocity of all kinds of things. And so I'm curious to see what you're seeing out there in terms of transaction volume.
00:01:59 I mean, look, I think in reality is we've seen kind of a paid attention to a couple markets, you know, Phoenix and Denver, for example. Uh, the, the, the volume of refinances and closings, transactional closings, um, in Phoenix and Denver. Uh, this is, you know, from Real Capital Analytics, so I wanna give them credit here. Um, is is grown by 50% from September to October. Now that, that meant that, you know, and I didn't go a little further back in that data, but that meant July and August things were starting to really crank coming after that 4th of July holiday. So I think you're seeing people going, look, things are happening. We've got confidence, you know, more office transactions I think have been getting done as you, you and I have talked before, um, than previously. So it isn't just multi-family and industrial and let's not sugar coat still definitely driven by multi-family, but you know, just to see that confidence level has been great to see.
00:02:53 Yeah, absolutely. So same thing, uh, deal flow, definitely picking up. I feel like, and you know, again, given our, both of our, we have this kind of national outlook mm-hmm. <affirmative> every, and it's not just happening in one market, it's happening in all kinds of markets. You know, deal deals are starting to get done. You're getting more clarity around pricing. I, I think a couple things that stood out in terms of just in the last week or two that, you know, that stood out, one, you know, on the office trades and we've started to see like major office deals go down. Um, you almost surpri a little bit surprising to say, do, do we really need to go right now spend $938 a square foot for a, you know, an Amazon leased office tower in downtown Seattle. Um, but the Can Canada, Canada Pension fund in Hudson Pacific said yes.
00:03:35 Yeah. And did that deal. Um, so yes, it, it's got 10 years of remaining lease term. Yes, it's a hundred percent lease to Amazon. So it's basically like a 10 year bond right now. Um, but still that's a high asset value to pay and also for, you know, for what is a, um, a re that could be buying back at stock. So it's just interesting to kind of note that, that that's happening. We also paid attention to the fact that cousin's properties just took down a class a deal in Charlotte that's 608 do dollars a square foot, that's 9.2 years of weighted average lease term. So again, put leaning into paying, I mean, tho those trades are basically like at the top. Um, yep. Dallas, you know, Dallas is, yeah,
00:04:16 I mean we're doing, uh, we financed a big large institutional multi-tenant office project in, uh, in Tempe, Arizona. And, uh, we spoke to our client the other day and you know, he's got three leases out there right now, um, for I think a couple of the floors. And so reality is that's really good to see. Um, so there is some confidence levels not only in investor appetite for lease properties, but also ones that current owners are out there trying to get leased up. You know, it's still a struggle I bet, in reality compared to what leasing activity was before, but that means that this w f h you know, certainly people have this belief that they know people will come back to the office.
00:04:54 Yeah. Yeah, definitely. Um, just other things around the industry, you know, so we talked about office, talked about retail for a moment. You know, we did see the announcement LA this last week that the Simon Tubman deal is back on. Mm-hmm. <affirmative>, they've come to an agreement, it's now going to be, you know, it's an 18% discount or $43 a share, you know, compared to what they had previously negotiated pre covid. Um, you know, what was interesting there I thought was that we now have kind of a data point on what do two of the biggest players in the in retail industry think the appropriate discount on retail is, you know, in a COVID environment. It, you know, now we say it's 18%, you know, and, and you could say, well, okay, well Simon and Toman, those are gonna be best, you know, best in class assets, best locations, but there's also a mix of mall in there too, which is, you know, so they have a struggling format. So it's not like they're just like all the best grocery anchored centers out there. Like this is a real, this is a real data point for where retail just traded basically, you know, through a merger. But it get, it tells you exactly where, where the market's starting to feel on, you know, where retail's starting to price. So I think you take that going forward and say, okay, well now we're looking at other deals that we at least have a data point to kind of benchmark against.
00:06:05 Yeah. And previously there wasn't much. Um, but I think the part, the big picture part is, okay, deals I had that were, that hit covid, uh, I had a deal that close this morning that was a deal that I had to go through three appraisals on as we, as we were trying to close this in March, right? How many of those things we talked about are getting done now? People are putting back deals that fell apart in the early part of that, of la of this year. And then the question's gonna be in 21. Okay. Like I heard on a, on a, a webinar this morning, um, that was really well done about when they thought not, you know, you know, first responders and, and the most vulnerable obviously I think we're gonna look at a vaccine next month, maybe month after. But how about you and I, you know, when do guys like you and I get the vaccine? And so, you know, if it's sometime next summer, I mean you and o in our business, I mean, that's tomorrow. I mean, our decisions are being made today Yes. About deals they'll acquire next summer. And so we, we, we are really gonna start to look at ourselves and saying, okay, are we going into the roaring twenties?
00:07:06 Yeah, I I, I totally agree. I mean, we are now, and I think that was to me the, you know, the, the Pfizer news and Moderna News right now, the number one takeaway is this is giving us a timetable, you know, a absent, absent real, you know, efficacy rates on real trials that could hit the street relatively soon. We're all left guessing. Everyone knows that it's gonna come at some point, but when you don't have that real timetable to put it to, that's when you see like people shying away from the deal table rather than going in or just making real decisions. Now it, now I agree with you. If it's next summer, even if it's next fall, right, it's the thing we are now in a a, a definable number of months until normal people get to feel comfortable being out there and interacting with everybody day in to day and like getting back on a plane, feeling totally comfortable going to a mall and feeling comfortable, whatever it is you're gonna do, you can go into a crowd and feel comfortable. Like now we are talking about months not like this timetable of when Yeah. And to your point, yes, I mean real estate for our industry, this, these are multi-year decisions. So I think just that semblance of some finality and some hope there is all you need to start to kick things in. I think that's why we're seeing it. I think that's why you're seeing it. I think we're seeing the beginning of the next cycle really take form. Um, and probably gonna have some real momentum here coming into q1.
00:08:28 N no question. There was one thing that I think you, you, we had talked about earlier about, uh, Amazon and getting into, uh, medi the me prescription medication business, um, and you know, what effect that would have on the CVSs and the Walgreens of the world. What, what's your assessment there?
00:08:43 Yeah. Um, that makes us cautious on the space to be totally honest. I mean, we had looked at, you know, probably fir first and foremost even before the Amazon announcement. I think when we looked at, you know, a Walgreens or a cvs, you know, the, the cap rates that, that had been applied to those properties. And sometimes, you know, outer secondary could be even tertiary locations are really low. So you're really banking on the credit of the tenant and the long-term viability of that tenant remaining in place. I mean, if you take a, a highly tertiary location, it's a Walgreens that deal trades sub six cap, it's five five. And I mean, hey, maybe it's not like the four four caps are gonna trade closer into major metros, right? But in these tertiary locations, when the cap rates get that low, you basically have to assume that that tenant is, you know, Walgreens is remaining in there indefinitely.
00:09:32 If it doesn't and you're repurposing it, there's no tenant switching costs you can absorb to make that deal, make any sense anymore. The price per per square foot is gonna plummet. Your, your next tenant is gonna be a regional, it's not gonna be a national and it just, you're, you're never gonna make it up. So we'd always been cautious on that space. And then now when you see this news, it just kind of makes me more cautious on it and saying, Hey look, you know, if we're, if we're looking at this kind of stuff, we have to feel really, really comfortable about maybe what's around it. Is it part of a package? Is it, is it in a shopping center with something else attached to it? It can no longer be the thing that you're banking your investment thesis on.
00:10:10 Yeah, it's a, it's a catastrophic type situation that can occur. And, and, um, but this is, goes with what the world is changing. And so real estate is, you know, we are, we sometimes think of ourselves as slow moving, but we're trying to be faster. Yeah. Because the mo the world is moving much faster and I think coming out of this innovation that had been started pre covid had been worked through during Covid coming out the other side, I think the ex we're gonna accelerate with a lot of innovation on the other side. So we'll see how it all goes and plays out. The last part of it, I think for today is now that the vaccines seem to be about as legitimate as it gets, um, will lenders and borrowers work together on assets that are what we call troubled today. And it remains to be seen.
00:10:52 Uh, I think the theory being if you're within 12 months or 18 months of being able to service your debt, um, after, you know, from, let's call it December or January 1st, I have feeling that lenders and borrowers will probably work together if it's gonna take longer than that or that, you know, you may never come back or whatever may be, uh, that's where I see some challenges, um, and some headwinds. But it's gonna be interesting and fascinating to see how this turns out, but couldn't be more thrilled. Here we are on November 18th, uh, and you know, on March, you know, 13th I would, there's no way I would've said we'd have a vaccine by now.
00:11:25 I totally agree and, and and agree with you that 2021 is gonna be very interesting in terms of the sHieggelkeout, what happens with those retail and those hospitality assets? You know, I think the Walker and Dunlap, you know, loan portfolio status, like, you know, we discussed this offline, says it all, multi-family forbearance, less than 1% industrial forbearance, just over 1% retail, 40% hotel, 70%. So we, we've now defined that distress in this downturn is really gonna be confined first and foremost to those asset classes. And then very anecdotal everywhere else, honestly, like multifamily, just, I think we've now gotten to the point to say distress isn't coming to that sector ever. Um, there was some, there was some wondering it
00:12:06 May, it may never be, it may never come because even one year challenged the government will come to subsidize it. So, you know, the reality is there's a lot of subsidies either from unemployment to, to tenants, right. Unemployment checks that come in or on the other side that the, the debt is so cheap that you're able to service it no matter what. Right. So, or at least with a significant amount of occupancy issues or, or, um, you know, without lack of rent collection.
00:12:31 Totally agree. So yeah, I, I, I think, you know, that's, uh, I think on that the takeaway is, you know, the new market, the new cycle, it's emerging and we're, we now have some real clarity on what's, what's gonna start happening cuz it's, it's starting to get it pictures coming into focus. Right? Yep.
00:12:49 Well, happy Thanksgiving, Ian. Yeah. And uh, happy Thanksgiving's, everybody else out there as
00:12:53 Well. Happy Thanksgiving to everyone else out there. Um, we'll see you back on the next one. And until then, everyone stay safe.