Zack Streit, Capital Markets Update | Ep. 89

Anna Marie    00:00:05    

Welcome to StreetBeats Capital Markets, where we discuss all things happening in the debt and equity markets, broader economic trends, and how these affect commercial real estate. I'm Anna Marie Lieb, director of Investments here at CrowdStreet, and I'm pleased to be joined by Zack Streit, SVP at George Smith Partners. Welcome back, Zack.  

Zack    00:00:20    

Hey, Anna Marie, it's been, uh, been an event for two weeks since we did our single family, uh, foreign, um, uh, podcast or webinar.  

Anna Marie    00:00:28    

Definitely, definitely. I know we're, we're coming up on the one year anniversary of, you know, when Covid was declared a pandemic. Um, and it's interesting to look kind of where we've come and I think, um, you know, I think I'm feeling pretty positive about things. You know, I think we, we've seen the, the vaccines have started to, to roll out and I think it's been credible yeah. To see kind of that, that decrease, um, in infection rates, um, that, that we've kind of been seeing throughout the country. Um, you know, ma  

Zack    00:00:56    

Massive, I saw the stat yesterday from California that, you know, like a month ago we were at 50,000 infections a day and now we're down to 3,500. Yeah. And talk about a drop off a cliff that couldn't be more welcome.  

Anna Marie    00:01:07    

Definitely. Um, yeah, and, and again, I think, you know, Johnson and Johnson got approved since we last spoke. And again, this is the, the one shot seen, which is much easier to distribute as it's more stable. Um, and again, I think, you know, uh, Pfizer, Moderna and J&J, they've all kind of pledged that they're gonna inoculate at least, you know, 220 million of the 260 million eligible adults in the US here before May.  

Zack    00:01:31    

Yeah.  

Anna Marie    00:01:32    

Um, so things are really looking up. Um,  

Zack    00:01:34    

That means one day soon we might be doing these in person. How about that? How  

Anna Marie    00:01:38    

That, um, and I have to point out, I mean, both you and I are in an office today, right? So, so people are getting back into the office and I know you, you know, before we jumped on here, you were kind of talking through, um, some of the stuff you've been seeing in the office market, um, recently, you know, specifically kind of rents in LA and, and, and how that we actually saw a flight increase from 2019 and 2020.  

Zack    00:01:57    

It, it's an interesting thing, like I just look at our office building and it, it's still relatively empty, but the parking lot is getting more full and I'm seeing more people in the lobby and I think that's just sort of a sign of the times I expect that to increase. I, I read an incredible stat that average asking rents for LA office were actually higher at the end of 2020 than they were at the end of 2019, which sort of blows the mind marginally a couple percentage points higher, but that, that blows the mind. The article said this was largely due to content providers like Netflix, Amazon, Hulu, and that makes sense for the LA submarket cuz they're massive users. It, it also said that demand was down, but you know, much less than in New York and San Fran and had it down at 15% versus, you know, call it 55 or 70% respectively for those other markets.  

Zack    00:02:46    

So a little bit hard for me to balance how asking rents could be up, but demand is down, but that is the world we live in. But, you know, if, if, if that's even only partially true compared to some of the sort of doom and gloom scenarios and massive amounts of shadow inventory hitting the market. I mean that, that's really good. There was also two major office transactions that I, I don't think anybody would've predicted in this space. One I read about this morning that VERNADO and CPVIB refinance one park in New York City at 500 million loan and they locked in or they closed at a floating rate of LIBOR one month LIBOR plus 110 bps. So today that's 1.2% all in, that's obviously reserved for institutional transactions and money, but the fact that an office transaction could get done, um, on a floating rate basis at that type of rate, I mean that's as pre covid as it comes and then C B R E buying into industrious.  

Zack    00:03:41    

Yeah. And who would've thought that growth capital would be injected into a major co-working firm and C B R E also would've fo folded. Its sort of captive, um, co-working brand Hannah into that. Like that's a big deal. That's a $200 million deal when most of what you're reading about is sort of pain at WeWork and my former boss's boss's boss at Vernado Sand Mathrani like turning it around and you know, having to cut expenses. So I, I think there's some good news, um, on the office market and then, you know, there's the transaction we're working on with you guys in Boise that really picked up steam last week and could actually close this month. And so, you know, who thought that coming into 21, you know, we'd be there and I think this is very much about where the puck is going, so, you know, stay tuned because we don't know exactly where it goes, but some really optimistic data points.  

Anna Marie    00:04:30    

Yeah, definitely. Um, you know, I think the other thing we were talking about too is, you know, the, the movement we've seen kind of in the, the bond markets and the 10 year treasury, um Right. I think it hit a high of 1.6% last week. Um, kind of came back down. I think right now it's hovering around 1.4%. Yeah. Um, which again, these are levels we haven't seen since, call it February, 2020. Um, and so the, the two years, you know, still low at 1.2, so we, we kind of have that, that steepening of the yield curve, which, you know, generally is an indicator that the economy's kind of coming outta the recession.  

Zack    00:05:03   

 Look, I it's an interesting thing, like you are at 70 basis points on the 10 year, um, you know, just two months ago and now you're up at I think 1.4% today. So, you know, the, there's been a bit of a rally from the number you hit. Um, and there's an impact in the market for sure. We, we closed, um, an agency deal 10 year fixed, uh, maybe about a month ago at 3%. I'm guessing today that same deal is 3.3 or 3.4 just cuz we're in a moment in time. But you know, if we close it before Christmas we might have been at 2.7%. Yeah. Um, so, so there is definitely an impact on the bottom line. But when you step back and look at historical context, I mean if you could close an agency deal 10 year fix with 10 years of IO at three and a half percent, it's incredible.  

Zack    00:05:48    

Yeah. And, and I say take that and run, we were marketing another perm loan on a multi deal in Pasadena stabilized. We got a 10 year IO quote on a very thin debt yield deal at 3.9%. So that was a little alarming to us cuz Wow, that could have been 50 to 75 bips wide. You know, CMBS can be a little mercurial at times and we're probably not gonna take that deal. But again, stepping back historically you can lock, uh, 10 year IO deal at 3.9%. Like that's, that's pretty good. Clearly it has to work for the sponsor's number in that situation, but you know, sub 4% for that long is historically incredible.  

Anna Marie    00:06:28    

Yeah, no, for sure. Um, and then, you know, I think the other thing that kind of came out that I was looking at was just thinking kind of about transactions volumes. I know kind of real Capital analytics, um, you know, issued their report that kind of showed that we saw quite a steep drop in transactions in January. It fell 58%, um, yeah. Year prior. Um, and that was kind of coming off of December where we were kind of hitting all time highs, you know? Yeah. Deal volume increased 8% year over year. Um, and we broached kind of 80 billion in the commercial real estate kind of sector according to rca. Um, you know, I think from crabtree's perspective we kind of saw a bit of a similar trend. I think December was a huge month for us. Um, you know, we had a historic month in terms of funding on the marketplace. Um, January and February we're a little, little slower, but March is, is picking up and looking to be right. Kind of where, um, we saw December, um, in, in terms of kind of again that, that funding number. And I think a bit of that was, you know, people were getting their deals done in December after that kind of lagging q2, q3, um, 2020. Um, and now things are starting to pick up. Zack, what are you using on your end?  

Zack    00:07:39    

Look, I mean, the fact that you had record numbers in December of 2020 and, and it largely came from, call it two of the five major asset classes, right? It came from multi in industrial, it didn't really come from hotel retail. Um, and office is is amazing. So there was probably going to be invariably, um, a little bit of an ebb and I think that, you know, we felt it too, but there's no shortage of optimism kind of in where we began on, you know, distribution of the vi uh, of the vaccine, um, you know, infection numbers coming down. Um, you know, an interesting like small anecdotal data point is we're about to hit the market on a retail deal. I know, uh, interesting that those are getting done. Yeah. And, and you saw the P P P actually hit the accounts receivable, so it it still has, you know, a couple hundred thousand dollars in addition to what I'm about to mention, but about a hundred thousand dollars was paid off by four tenants that received their P P P in the last two weeks.  

Zack    00:08:34    

Yeah. One of 'em wrote like a check that was over 50 grand. Um, you know, and these are sort of smaller restaurants, specialty, uh, retail property kind of here in, in, in urban la. So it's amazing to see that, and that could be a continued lifeline of some of these properties. The combination of that, you know, reopening outdoor dining here and, and maybe at some point indoor two, um, you know, could be a real boon. So, you know, I think the combination of a lot of cheap money for multi continued appetite for industrial maybe P P P hitting retail and then these positive metrics and news out of office, it, it could make for a really interesting 21 and, and a pretty amazing snapback.  

Anna Marie    00:09:14   

I agree. I agree. It's, we're, we're gonna be watching it closely. Um, you know, I think to your point, kind of in terms of consumers getting out and dining, I mean, open table numbers, were up this, this month. Um, I think they've crept up to kind of the highs we saw in the summer, so that that's great. Kind of seeing more people get out there. Um, yeah. You know, so I know, you know, we've got the, the next stimulus, you know, getting close to, to getting signed and coming out, which I think also is gonna kind of further, further boost things, um, from that perspective. So, um, a lot of things to watch and, and kind the trends moving forward, but I think overall feeling pretty optimistic as to, as to where we're at currently.  

Zack    00:09:52    

De definitely same. And, and we feel it from our clients too.  

Anna Marie    00:09:55    

Yeah. Well, Zack, as always, thank you so much for, for the time today and Sure. Our viewers up there, thanks for tuning in  

Zack    00:10:02    

Likewise  

Anna Marie    00:10:03    

In a couple weeks.  

Zack    00:10:04    

All right. Take care. Bye-bye. Anna Marie.