Revenge Travel and Pent-up Demand with Zack Streit | Ep. 97

- Welcome to StreetBeats Capital markets. Where we talk all things debt, equity, and economic trends. I'm Anna-Marie Lieb, Director of Investments, here at CrowdStreet. And as always, I'm joined by Zach Streit, Senior Vice-President at George Smith Partners. Zack, welcome back.

- Hey thanks Anna-Marie. Good stuff going on out there. So, making everybody happy.

- Definitely. You know, last week it was a huge week of kind of the economic numbers coming out.

- Yeah.

- Again according the strength of the economy, right? We saw a GDP for the first quarter showed a 6.4% annualized growth. Again, this is kind of in the slowing trend we saw at the end of 2020.

- Yeah.

- When the economy ended by 4.3%. Household income went on another tear recording a 21.1% increase in March. Again, this is largely due to the federal stimulus checks. That were going out in March, but you know, this is still the largest monthly increase we've seen since 1959.

- Huge.

- Spending was also up, increasing 4.2% according to the Commerce Department. And I think what was interesting here was that in terms of spending on services it was nice to see that this also saw an increase of 2.2% kind of indicating that things are opening up. People are getting out there.

- You know.

- You know, and spending on those services as well. Personal Savings also is continuing to increase this shot up by 27.6% in March. Again, the second highest rate on record behind last April when the first round of stimulus went out. Pay for workers also picked up for the first quarter of 2021. At a rate of 1% from the prior quarter. Again, this is the strongest quarterly increase we've seen since 2007. And lastly, CPI not unsurprisingly jumped to 2.7, 2.6% for the year ending in compared to March of last year, compared to one point that we saw in February.

- All positive. I'll give a little anecdote close to home. First week in probably six weeks that I haven't traveled. So it feels good and also feel a little antsy. But I took my wife to dinner last night. At a small restaurant in where we live in West LA and we had a reservation and we had to wait probably half an hour for an outdoor table. And this restaurant had now probably three times the number of outdoor tables that it used to. And the indoor tables were probably two thirds full. She didn't want to sit in there yet. I was ready to. But like it was incredible that on a Tuesday night at 8:00 PM you've got this kind of pent up demand. And I think it's in large part because of all the statistics you rolled off. In addition to that, you know, ambitious vaccination program announced today with Biden trying to get 70% of all adults one shot by July and 170 million, you know, to two doses by July. LA's in the yellow tier. You know, it should open up completely in June. So this is amazing. I wonder when our office will officially open again and what it will look like. and then TSA figures, over a million for almost 60 days now. I think it's 55 days and counting and it would have been like 65 but for two days that it dipped below. So still call it in the 65% of normal range, but just a huge, huge uptick from what we've seen. And again, all of this is I think fueled by the positive news. The amazing one to me, is the 10 year settling around 1.6%. Great for long-term financings. I think a lot of folks thought it was going to go higher. You were hearing forecasts of over two because of all of this optimism and sort of shifting over from, you know, debt into equities to try and capture some of the inflation but you know, the Fed sort of no nothing policy. And they're not tapering asset purchases seems to be keeping it at a 1.6% level. And short-term rates live or so far near zero. And people don't think those are going to change, you know, at least in the next year or two. Thereafter begins to get steep again. But like it, we're at a very good time right now. Where you can still get very cheap long-term financing and you've got a very rosy and positive outlook, in terms of growth and inflation that's on the horizon. So, you know, a macro time, I think it's a pretty good time to be an investor and across all asset classes. Which we can talk about in a minute. And maybe even in hotel deals, which, you know, who would have thought that we would be talking about that. You know, year end change from when the pandemic that was, you know, crippled the industry last year and was supposed to result in the tsunami of bad stuff happening. And then that didn't even happen.

- Yeah, definitely. And yeah, why don't we just dive into the hotels? I mean, we, there were some big transactions. We saw Host hotels and Resorts you know, made a $640 million purchase of the Four Seasons Resort in Orlando at Walt Disney world. And this is about, you know, it works out to a million a key, which would, you know, those are astronomical numbers that I don't think we were expecting to see at this point.

- No, luxury and staycation markets are hitting unfathomable numbers, right? The Montage in Healdsburg sold for $2 million a key. Ohana sold it, Sunstone bought it. Supposedly based on like a six cap based on 2025 NOI. I hear the Four Seasons now, is getting all offered 2 million a key. So now you've got two trades, you know, and three with the one you, you know, that are all in sort of staycation destinations. And you're hearing about, you know, very limited discounts if any, on extended stay, a little bit on limited service. Full service suburban still may be hurting a little bit but I was at breakfast this morning with the sponsors selling a boutique in West Hollywood. Right, and let me repeat that a boutique in West Hollywood and he's going to get $400,000 a key, and he's like that's a pre-COVID 2019 number. And we're ready to take that today. We've owned the asset for a long time. We've built up a lot of equity and this is an asset that, you know, has not a great trailing 12 and has been used as first responder housing. You know for much of the last year. I mean, amazing, right? We're in app and likely to close later this month. A CMBS loan, on a select service hotel asset down in San Diego. And right now, I think pricing on it is below its rate floor. But I think it's going to close on a ten-year IO at 3.6 or 3.7%. And so far, all is looking very, very good for that to happen. We have to deal in the Pacific Northwest on a full service hotel. You and I've talked about this a couple of times. We're at 70% loan to cost leverage non-recourse, on pricing itself is 6%. So it's unbelievable.

- Yeah

- And then we've got, you know, mezz lender and even equity investors that want to come in, you know, into that deal. We launched our first hotel construction deal. Sort of, I would say upper upscale luxury sort of deals and SLS down in Scottsdale. I didn't think we would be doing that just yet but for us, you know, deal's going to take a little while and it's about where the puck is going. And we just feel like that market is incredible. And it has really rebounded. I mean, heck I was there a month ago I paid $400 a night, for a room, at the Scott. It was a Wednesday night, it was Spring Break and Spring Training. And it was great hotel. Awesome reposition on the common areas, but it was slammed. And so I just, you know, I think we've heard about a few distress trades and maybe there'll be a few more from here on out, but gosh, when you're talking about million and 2 million a key numbers, you're talking about Disneyland reopening in Anaheim. You know, I think it's a pretty, it's the strongest outlook that we've had in a year and change. So that's really positive.

- Definitely. I mean, right. You look back at again, kind of those economic indicators are going over earlier, you know, with the increased savings people having kind of been kind of at home, you know, people are dying to get out and take their vacations. And I think we're seeing that demand. And I think really, you know, it's seems like it's driving the hospitality recovery a lot quicker than what we expected.

- Revenge travel. My wife and I are going to Cabo in a few weeks and it's the first time we've traveled. And it's exactly that. And we're paying a crazy rate that we never thought we would have to pay but she really wants to go with the two kids. And I feel like I'm not alone in that. I feel like a lot of this is representative of the broader trend.

- Yeah I know, and I agree, and I think it's gonna be interesting to see how it plays out. But I would expect that, you know, RevPAR getting back to kind of 2019 levels. I wouldn't be surprised if it happens before the 23/24 kind of projections that STR has out there. Just given the momentum we have gone.

- I think so, you know, in talking to this appraiser yesterday, he was saying it, you know, we had thought the recovery would be leisure, corporate transient, and then corporate group.

- Yeah.

- which you kind of the conventional wisdom. And he's like, I think that's shifted. I think the recovery is going to be still leisure first. Which we're pretty much already have seen. Corporate group, And then corporate transient. Thinking that like on the group side, people really want conferences. I spoke at my first in-person conference about a month ago now. And I think there's pent up demand for more of it. And I really think they're gonna start in earnest back half of the year, but it takes time because there's a lot of planning that goes into them. But I really see that recovery next year not the year after. And then, you know, his view on corporate transient was interesting. He's like, look that one-off traveler, you know, may or may not go, may or may try to replace it by zoom. I don't know. We do a lot of that last minute travel to go meet with sponsors and walk properties especially in like Key West coast markets whether it's Salt Lake or Vegas or my partner Malcolm was down in Phoenix yesterday. And so, you know, we're already doing that but I could see that. It was interesting for him to sort of cement that theory. And I think it goes to what you were saying about there's going to be a lot more group next year and a lot more in person conferences that are then.

- Yeah, and I think even on the transient side, I mean, I think there's something to be said again about that in-person interaction. Whether it's, you know, meeting a sponsor or walking a property or, you know, in other aspects, you know, just getting deals done. And getting to know those partners in person versus zoom. I think it's gonna come back.

- Oh, so important. I mean, we're already doing it. We don't know how to run our business in any different way. I mean, I was in Orange County Monday. So that isn't a flight, but I had four meetings down there and they were all in-person and it's just about building the relationship that way. So I agree that too may come back faster than expected. And if you believe Jamie Diamond and that he's really canceling his zoom account.

- Yeah. And do that on a mass scale, maybe it happens like everything else and the recovery from this pandemic faster than we think.

- Yeah, no for sure. And then I think, you know, in terms of, what we've been seeing a lot in talking kind of on a daily basis at the kind of CrossStreets investment team is lumber. You know.

- Yeah.

- We do a lot of development

- The monkey wrench in the wheel.

- And lumber pricing has just gone off the charts, right? Currently pricing is sitting at close to almost 1600 per thousand board feet at 1575.

- Four to five x.

- What you typically see at this point in the year.

- Yeah. And just to put that into perspective. We started out he wanted about an average of 890. So we saw a spike last summer, kind of dip back down and out now it's spiking again.

- Yeah.

- And you know, part of this, it's one driven by obviously the mills got shut down during COVID. So there was a bit of a backlog of supply. And then there's the right. We saw the surge in new home builds and new home starts and kind of that hot market, which is also kinda driving up prices to continue to kind of support this cost for lumber. So it's definitely something we're paying attention to as we were looking at deals, making sure contingencies is there. We've even talked to some sponsors that are considering pausing on developments until they see lumber prices settle down. So it's definitely something that's interesting to watch unfold.

- Cost escalation is a massive issue. It's a good problem to have, but it is a big problem. And then two interesting points sort of flow from what you said. One is, you know, I have had a conversation with a sponsor on a live deal and he said, you know, hey is there any talk about, you know, lenders lending lumber flow, in terms of, not buying it out as part of the GMP. And we're live on a few deals where I, where that could become an issue. So let's, you know, let's revisit that in future sessions and just see if they give leeway on that, my sense is that they will but if it flows in the wrong direction that's going to be a capital call time for the sponsor.

- Yeah.

- It's gonna be a rebalancing. So, you know, while they'll give you the optionality of hopefully, you know, prices moderating. Which I think will happen because it's been such an incredible spike. And I think it's a moment in time kind of thing, but that's an interesting one. And then another one is I had a similar conversation with a production home builder and it's hit them hard. You know, you're adding, it could be adding 4 or $5,000 a house and that's, you know, that's a pretty thin margin business. And I was talking to him and he's just like, well, you know, I bought my dirt cheap enough and I bought my lumber earlier. So like, I'm okay. I don't know exactly what I'd do if I were going through it now, but you know, if I just believed in the future, I'd probably just continue and sort of take my lumps because this is my business, but you're right. Like this is a hard call for developers right now. in terms of what to do, because you know, margins are thin, land's expensive, you know, and you haven't seen a commensurate like gigantic jump in rents that could offset a lot of this. So, you know, it's a question of, you know, well what am I working for? You know, if all my profit margin gets eaten. So I think that's a really live and really great point. And we should monitor and definitely revisit on in coming weeks.

- Definitely. I agree on, yeah I mean, we did a couple of deals this summer that, you know, again, are figuring out whether they're gonna do a capital call to meet this increase, or some of them are able to work with the lenders to kind of increase financing on that end at this point. To kinda cover those increasing costs. And, you know, hopefully, you know, the rent growth will help offset that. Which also good news on that front we saw in March that median asking rents rose 1.1% on the top of the markets.

- Yeah.

- and this is right the first month that we've seen this pace of growth since last summer. So good to see that that's happening. And even in some of those really hard hit markets, like San Francisco, where rents fell by double digits last year. You know, we saw a growth of 3.4% of March. So yeah.

- Big deal. It means we've hit a bottom and we're coming off of it probably still a long way to go. And some of the downtown urban areas that have kind of been hit really hard, but at least we know that they're starting to come out of it.

- Yeah, that was good to see. And then something we will also continue to watch but

- Yeah.

- Well Zack, I appreciate the time.

- All right, good stuff. Likewise.

- To everybody out there, we'll see you again in two weeks.

- Thanks for tuning in.