Zack Streit, Capital Markets Update | Ep. 85

00:00:04    Welcome to StreetBeats Capital Markets, where we discuss what is happening in the commercial real estate, debt, equity, and financing markets. I'm Anna-Marie Lieb, Director of Investments here at CrowdStreet. Today I am joined by Zack Stra of George Smith Partners. There's been a lot going on in the past couple of weeks since, since we last tuned in here. Um, you know, I think, yeah. Um, as always, top of mind is the, the upcoming, you know, the work on the stimulus bill that, that's being proposed. Um, you know, what, what are your thoughts there? Um,  

00:00:32    Hey, everyone's, everyone's watching it. I think the markets are bullish on it. Um, and I think that folks believe, and that it's priced in, that it's going to be much closer to 1.9 trillion than 600 million. Yeah. And, and that there's going to be a continued support for low interest rate, um, and, and, and just propping up of the economy generally. So I think you're seeing a lot of liquidity, um, come back into the system as a result of this. I think if folks only thought it was gonna be 600 million and, you know, wavering on continued government intervention, you wouldn't see like CMBS deals, you know, getting done at the lowest spread on Triple A's or CMBS 2.0. Then that, that, that we've seen post great financial crisis. You wouldn't see agency deals closing at a 3% rate Yeah. After there's been a 40%, um, run up in treasury rate. So I think there's a direct link there and, and I, I think the next bill is going to get done probably in the next month or so, and I think it has folks feeling pretty good.  

00:01:38    Yeah. No, I agree. And I think, you know, it's, it's definitely a point in time where, you know, I think it's, it's needed. Um, I mean, if we, at the recent, um, national multi-family housing, um, their rent payment tracker, you know, as of January 20th, um, renters have paid 88.6% of, of rent. Uh, yeah. This compared to, you know, December, um, where we had 89.8% paid. And if you look back to a year ago, you know, we were at 91.1 and, and kind of, since we look at the pandemic, we've kind of been sitting at, at 90% getting paid by this, uh, point of the month. So this is, you know, it, it seems like we're starting to trend downwards on that. Um, and, and you also couple that with, you know, Moody's currently estimates that there's approximately 70 billion in back rent debt outstanding, um, at the end of 2020. So, you know, these numbers are starting to add up and, um, you know, I, I think the, the stimulus, you know, is, is gonna go a long way to, to ensure we can kind of get through to the end of the pandemic here. Um, but, but it needs to get done. So fingers crossed we, we get there.  

00:02:43    Yeah. I look, I, I, I think so too. There's definitely a bit of a downward trend here. Um, hard to tease out of it how much is just, you know, the most recent spade of lockdowns, which seemed to be loosening. It was nice in LA to see kind of out people, you know, outdoor dining again, which they couldn't do previously, and maybe that helps inject, you know, more money into renter's pockets where they can pay. Yeah. The other question that I wondered about, um, and I hadn't parsed the numbers enough, is to know like what concentration of some of that background and some of that weakness and collection comes from the really, um, I guess challenged Urban Cores right now, the downtown, you know, New York City, downtown San Francisco, downtown la So it'll be interesting to, you know, track, um, performance there and, and if it starts to rebound with more vaccines on the horizon and, and, and, and lockdowns beginning to, uh, unlock, for lack of, lack of a better way of putting it Yeah. In order that has a positive, positive impact. But it's definitely something to note.  

00:03:49    Yeah, no, and, and I think that, uh, um, you know, um, if we're kind of where we're we're at in the year, you know, there's a lot of those kind of survey sentiment or sentiment surveys coming out. Um, I know one that, that I've been tracking throughout is kind of also the, the small business, um, survey that, that was started kind of at the pandemic, kind of surveying small businesses in terms of, you know, their sentiment, how things are looking, and then kind of when they think things are gonna return to normal. And I think the, the theme there throughout the pandemic is that it's kept pushing out. And again, when it was released this, this time around, you know, I think previously people were hoping, you know, by summer, you know, things might get back to normal. I think that's been pushed out now to kind of q3, q4.  

00:04:30    Yeah. Which I think in our conversations, that's kind of where we've been seeing it, um, going on. Um, but I think a lot of that also has to do with kind of the, the vaccine rollout that we've discussed and kind of the timing there, whether, you know, are we going to be able to get, you know, that 80% mark vaccinated by the summer? I think if we go in the trajectory we're on now, that probably flows a little bit into q3, but hopefully with Biden's a hundred day plan, you know, things start picking up and we can kind of stay on track for that, that summer vaccination. But, um, you know, it's, it, it'll be interesting to, to see how, how that, that unfolds and, and, you know, the, it can't be, um, understated, the, the importance of of impact.  

00:05:08    It, it can be understated. There's a lot to be said for the fact that I think there are 25 million people or 26 million people in the US have now been vaccinated. And by whole numbers, I think that that leaves the world. And then the question in my mind is, well, where is the tipping point? You know, if you could hit between a hundred, 150 million by q3, there's gotta be some number in there where, where people, um, feel safe. Yeah. And where the capital markets, you know, feel like, okay, in the hotel, uh, space, for example, travel's gonna resume, you know, maybe not that much group, but leisure for sure. Yeah. You know, and, and, and, and then when does that, that opening up happen? But, but I think you're right. I think it's probably sometime in q3, maybe q4, depending on how they roll it out. But hey, look, at least we're putting a box around it now. I think two months ago, let alone six months ago, we never would've been able to do that. So yeah, that's, that's interesting and positive  

00:06:06    For sure. Um, you know, another one of those sentiment surveys that that came out was NHCs, um, quarterly survey of apartment conditions. Um, yeah. Which looks at, you know, a few factors. Um, one that they looked at is kind of market tightness. So, you know, defining kind of a tight market is one with low vacancy and rent increases that we see within kind of multifamily housing. Um, if you looked at kind of the results for, you know, Q4 as compared to the end of q3, you know, it's still pessimistic, but improving, um, similarly sales volume, I mean, that, that was pretty positive, I would say in q3. Yeah. Um, still positive now, but, but kind of trending a little downwards, which maybe reflects a little bit of the slow slowing, um, of the recovery. Um, you know, similar sentiments in, in kind of the, the equity financing index. And then I thought it was interesting to see the debt financing indirects. Again, this scored is 73, so basically 50 is kind of a neutral point. So 73 is pretty positive, but for q4, um, it, it kind of dipped down to pessimistic at, at 49. So, so Zack would love to kind of hear your thoughts on that. Yeah.  

00:07:16    Well, look, I, I've heard more than once, um, over the last six months or even nine months, that debt is the new equity and, and there is some truth to that. Um, pre pandemic, uh, I would hear the phrase a lot that debt is a commodity that it's easy to find. I don't think that was ever entirely true, but the markets were so liquid and active that there was just a belief that you could get it. Yeah. Um, now it's tougher. Uh, we're actually working on a ground up, uh, micro-unit deal in downtown LA, for example. And all the equity is spoken for, um, it's raised and it's been raised, um, for a while now, and it's struggled on finding debt, uh, you know, supply issues in downtown la covid issues there, um, et cetera. Um, but we're seeing this more and more on transactions where it becomes difficult.  

00:08:06    All that said, um, there's some very positive things going on in the debt market, which leaves us to be bullish on multi-family first, that you could still close an agency loan at 3%, like I mentioned earlier, is huge. Yeah. Um, the CLO market is back. Um, and, and this was a contingent or a cohort within the sort of debt fund space, um, that impacted transitional multi-family lending. And it, it, it was essentially absent, it dried up in March of last year, and there was a lot of fallout from deals and a lot of sponsors scrambling, get transitional debt fund deals done within multi-family and other asset classes. Um, it's now back and you can borrow on transitional multi just using that as the bellwether at south of 4%, uh, and getting full leverage between 75 and 80% loan to cost. That's, that's amazing that, that's basically pre covid leverage and pricing for transitional, multi and industrial deals.  

00:09:02    Um, it'd be a little bit more expensive on office, but we're doing a bridge value add light office deal actually with you guys, um, in Boise mm-hmm. <affirmative>, and we're an app south of 5% on, on an office deal that's got 35% vacancy. So there definitely is a little bit of a search for yield and there definitely is appetite to get stuff done. Um, so I think, you know, I think that's positive. Um, I also think that, you know, agencies are rock solid in the multi space, but to the extent that they fill allocations for later in the year, which often happens, sure, you've got a very competitive C M B S market right now. You have a CMMBs market that can price in the twos, uh, sometimes on deals, 10 years interest only, which you didn't have before. Maybe they don't always compete with leverage on agency, but if the agency caps bill or if there's an oddball deal that can't get done, you've actually got a backstop there. And this is also good news more broadly for the commercial space generally. So yes, definitely there's a little bit of near term bearishness, which we haven't seen before. I don't know if that's filtered into the actual sort of transactional market From what we see there still seems to be a lot of interest, um, in multi-family on the deals we're marketing, but, but we're aware of it and, and, and look, it, it, you know, we'll fight through it. It's what we do.  

00:10:26    Definitely. Um, yeah, and kind of along with that, um, in your point to kind of the, the equity financing in the sentiment there, CrowdStreet, um, you know, we just had our investor survey, um, completed. You know, we had 12 over, over 1200 respondents, um, that participated in the survey. Um, and you know, I think it points to a strong 2021 for, for the retail investment. Yeah. You know, 90% of respondents, um, you know, were planning to make at least one commercial real estate investment this year. Um, you know, which, which is huge. Um, and along with that almost 30%, um, of the respondents we're hoping to make for or more new investments into commercial real estate. You know, and I think we, we've kind of seen that as we've, you know, started off 2021, um, you know, the offerings that that we've had have been very successful and kind of have gone up and down pretty quickly. Um, so, so that's kind of e exciting to, to see moving forward for sure.  

00:11:21    You guys crushed 2020. Um, and I can tell you there isn't an equity conversation that me or my partner Malcolm have where we don't mention you guys and say, you know, Hey, if, if you haven't been talking to the folks at CrowdStreet, you should just look at what they did last year in terms of their total production and look at the type of institutional sponsors that they're now able to raise capital for on their site. And you know, a lot of folks don't know that and they're still learning it. And I think that's the opportunity for you guys to grow. But you know, for us, you're a household name in the space, you know, along with any other JV equity capital source right now. And, and, and like I said, um, I, there were two conversations I had yesterday with folks that called us saying, Hey, you know, we need help, um, with equity on our projects.  

00:12:06    You know, one is a value add multi guy in the southeast. And I'm like, okay, that's a no-brainer of a strategy. And the other was, uh, you know, doing kind of a ground up multi-family development, um, in Southern California, tougher right now probably, but still, uh, you guys came up in, in both instances. And so I think, I think 20 one's going to continue to be a good year. And I think that's especially true because in the traditional equity space, folks are still kind of figuring it out. Yeah. There, there's still a lingering belief that maybe there's going to be a lot of hospitality distress and retail distress first half of the year, and folks will want to capture that. Um, and so, you know, with that uncertainty out there, it can affect allocations and, and, and where folks are putting their money and kind of keeping powder dry. So, um, we're always big proponents and big supporter and I think, you know, from your sentiment and from what we saw in 2020 one's gonna be a big year for you guys.  

00:13:00    Yeah, no, uh, definitely we are, we're excited for it. And I think, you know, to your point there with, you know, some of the larger institution institutional players, you know, perhaps waiting for, you know, some of that distress and the hospitality and office sector kind of, when we looked at what investors were looking for, you know, top of mind was multi-family leading the way in terms of kind of asset classes that investors were interested in with, you know, um, industrial kind of close mind with, you know, the retail and office or hospitality and, and retail and office kind of on, on the lower end of the spectrum in terms of interest. Sure. Sure. And I would also say, you know, for, for deals, I think, you know, our investors are getting, they are, you know, getting sophisticated and, you know, I think they're, they're really looking for sponsorship and, and kind of those institutional le level sponsors that, you know, we brought in 2020 and we'll continue in 2021.  

00:13:50    And that's kind of the number one factor that they're looking for with kind of the business plan and kind of market, um, coming in number two and three there. So, um, definitely a lot of interesting data there. I know we, we've kind of posted that, that survey online, so if anyone's interested in there, I would say, you know, go, go check it out. There's a lot of great, great information, um, to be had from it. Zack and I were talking here for, for next week for, for those tuning in, I think we wanna do a focus on one of the sectors that, you know, I think is gonna be booming in 2021, kind of the single family, um, residential, uh, space, while it's kind of the build to rent. Um, so, you know, we'll be excited to come back in a couple of weeks and, and do a deep dive there for, for those tuning in.  

00:14:38    What, what, what a story of an asset class, getting flooded with institutional capital in a way that a lot of people didn't think. And we can go into some of the deals that were done. Yeah. You know, capital for bill to rent, capital for the actual rental, the existing rental product. But, uh, I'm excited to do that on our next episode.  

00:14:56    Definitely. It'll be, be a good one. So tune in, uh, in two weeks time and until then, uh, stay safe and, and we'll speak soon.