Single Family and BTR Real Estate on the Rise | StreetBeats Ep. 99

- Welcome everybody to this week's edition of StreetBeats. I'm Anna-Marie Allander Lieb and I'm joined today by Zack Streit, SVP at George Smith Partners. Zack, welcome back!

- Hey Anna-Marie, how are you?

- Doing well, doing well. I'm excited. Seems like things are getting back to normal. I'm in the office today and there are other people here with me which is exciting to see.

- Yeah.

- Also our investments team has our kind of first trip planned for next week hitting up Salt Lake City to hit the road and see some deals. So, it feels good to be getting back out there.

- That's pretty good. Where I'm traveling tomorrow and then next week and then a vacation and then traveling again to NMHC in two or three weeks from now. And so it feels good again. I actually stood in line for the first time at the coffee shop in our office building. So yeah, starting to feel like old times.

- Definitely, definitely. And again, going back to the number we've been tracking kind of throughout the pandemic year here. TSA numbers so Sunday we hit 90 % of 2019 levels. So we're at about 1.9 million, through puts, and for the week we average 70 %. And I think last time we spoke we're at about 60 %. So people, people are getting back out there, things are trending in the right direction. And kind of with that, you know, if you look at hospitality, as we know, April was a huge month for occupancy recovery, ADR still lagging a bit behind. I think ADR currently is projected to kind of get back to those 2019 levels by 2015. And that's really, what's kind of holding back that rev per recovery that is expected to get back to pre-pandemic levels by '23, '24. I think the one kind of outsider from that is kind of the luxury sector, which we've seen ADR come back quicker and I think that kind of is reflected also in those sales we talked about last time that we got together. In the Four Sessions, in the Orlando and as well as the Healdsburg Hotel. You know, trading at 1 million and 2 million, the key and it kind of a 4.7 cap rate on the Orlando deal. So definitely seems like the evaluations there

- A hundred percent there, I'm curious with the Memorial day travel looks like this year but my guess is it could even exceed 2019 because of the revenge travel phenomenon. And that should do well for both luxury hotels and kind of like destination, you know all up and down the spectrum.

- For sure.

- So, It's interesting, and I don't know my little counter prediction is, I actually think that business travel and conference travel comes back sooner than expected. I don't think it's 24. I'm going to go out there on a limb and say that it will look very similar to what it looked like pre COVID by the end of 22. So it still gives about a year and a half to get back. But like my gosh, within the last two weeks of us speaking. I think I got four or five invitations to major in person conferences.

- Yeah.

- I see ICC happening in December and NMAC is happening at the beginning of June, Alice is happening, ULI is happening, lodging conferences is happening. That's five major conferences and Hunter Hotel happened and they were expecting 600 people and they had 1200 people. So I know that most of these places are capping. What NMAC said 2500 no more but I don't know if that accounts for the people that just come anyways and don't pay and kind of how that reflects historically but I'm going to go out on a limb and say in 2022 you're going to see a lot of business travel return, both you know, kind of group travel, conference travel and even just like individual sales guys, like, like us just hitting the road and getting back out again. So I don't know, we'll see, I might get skewered on this in a year but I'm going to go out on a limb.

- Yeah, no, I, I agree with you. I think it's coming back. I think people are looking for that kind of one-on-one interaction and especially, you know, when you see other people are getting out on the road, you know, you're gonna want to take part in that and, not miss out.

- We're about to close a CMBS loan on a hotel. We've got full investment committee approval on it, It appraised it should close later this week, it'll end up with an interest rate in the call it 3.6, 3.7%. It's 10 year interest only. It's non-recourse, it's relatively low leverage, It's around a 50 LTV scenario. That's just the beginning, you know, watch for it to come back. And, you know, I wonder CMBS has gotten a lot of bad press but there are guys that need leverage and they need non-recourse and it's probably the only place you can go to find it. And it will become more plentiful I believe as the recovery takes root and as more of the deals get done. We're closing a hotel bridge deal in two weeks that we're going to get 70% loan and cost debt, south of a 6% coupon at five and three quarters all in that we've been working on for a while and that's being closed you know, with an LP equity partner, we help bring into the deal also. So there's, def that's a reset basis which we're seeing interest from both the debt and the equity markets for that. We're taking out another big bridge deal next week. And we're close to signing up, you know, to bridge deals right now to take out kind of construction financing in all three scenarios. On all we're aggressively levered. So it'll be interesting to see how last dollar loan to cost and pricing shakes out, but it seems like there's a ton of interest from the debt markets in the space and the way there hasn't been and you know, heck, doing all this after Memorial day might even be better. We'll see.

- There we go. No, that's great to hear. You know, I think the other topic that we again touched on last week which we're still following is, construction costs in lumber pricing, throughout I think is we're seeing it affect deals. You know, I know for CrowdStreet we've been looking at three deals that have now gone on hold is

- Yeah

- kind of figuring out what to do. You know, one's probably put off until end of next year or end of this year, early next year. And some others are again are kind of figuring out the lumber pricing. And one interesting thing that we've seen too, is we've had a couple of sponsors that have come in with development deals who are actually potentially foregoing pursuing a GMP contract, is they're seeing kind of GCs. They feel are putting in too much cushion to account for kind of the costs that we're seeing happening. And instead are trying to get deals that are fully bid out before proceeding to kind of mitigate that pricing. And I know when we were talking, about this Zack earlier you were kind of pointing out, you know it'll be interesting to see how lenders take this on, you know, generally they're going to want that GMP in place or looked for full bonding.

- Yeah. So this is an interesting one. I've wondered a lot about this is, you know, could you lock in the GMP but maybe you don't have lumber bought out and it sort of floats and then there's a spring obligation for more equity. If the tray doesn't go your way, you know, are there other creative solutions? Certainly there are opportunities for maze debt and preferred equity to come in here and fill a gap. You know, that, that could be fine from the senior lender standpoint. The question is, does that work for the sponsor and for the equity partner, because that's obviously adding more leverage, adding more cost to deals and does it work,

- Right

- But it's a crazy thing on how this is impacting the market. Existing home sales fell, housing starts plunged in occasional or went up.

- Yeah So you can see what happens when costs hurt and you know there's just less supply on the market. It happens quickly. I, very interesting to see what requirements will be out there. If you don't go with the GMP on lumber and, you know, do lenders start allowing like cost plus, but you know if costs rise between now and then who plugs the hole maybe if you've got a good relationship with your bank they'll come up with you. But we haven't seen that we generally seen that lenders tend to always want to GMP. They tend to always want it to be almost completely bought out. And, and, if for portions that aren't you know, it often, you know, they're going to look at it and say like, well, we're maxing out on our dollars. So is there really additional room? And this is where it's extremely important to choose the right lender to make sure you have a great relationship with them. And to make sure that, you know if you need them to work with you they're going to be there to do that and to figure out like what are the avenues of what is possible? Because the last thing you want is to be in this scenario where you have a two to $3 million bus and kind of nobody wants to pony up that extra capital but to your point, we're seeing it and we're feeling it in almost all construction deals also.

- Definitely it's, definitely a big topic. And then I thought also China to pivot here a bit Zack, you're before we jumped on also talking about kind of the amount of capital that is flowing into the single family and BTR space. Quiet some amazing statistics there.

- Can I try and share my screen and see if this works,

- Yeah, try it.

- Share my screen. If I can find it here it is. Let's see if this works first time doing it. So IMN put out this slide and it doesn't have a date on it, but at least when they wrote about it, they implied that it was this year. And if you total up the deal details and the right most column, which I didn't you get to about $15 billion that's been allocated I think in just almost six months or almost five months of the year today. And maybe it's a little bit of the fourth quarter of last year in here, but it doesn't really matter. I mean, this sort of proves the thesis of, you know, the multifamily market is what like 50% institutional but single family is only 2%. And this is that additional runway. Clearly not all this money is actually been deployed into assets. A lot of it's money that's earmarked for growth either divide existing rental portfolios or for more build to rent. But like, this is a crazy amount of capital to be deployed in such a short period of time. And this is equity capital. That's getting deployed, like, you know, really into I don't even think it's a niche asset class anymore, just into a sort of, you know, variant of multi-family. It's an incredible thing to see. So, you know, look for I think more appreciation in that space, more compression in that space and frankly, more interest in it. And maybe you begin to start seeing interest in less obvious markets and less obvious locations. I've heard of luxury strategies that, you know, folks instead of, you know, trying to build houses that are 200 or $250,000, you know, per unit and you're now building up four and $500,000 per unit, because you think that in some markets you can sell for 700,000 maybe different locations, you know, maybe this non equity will allow for locations where land has been historically a little bit more expensive but I don't know, folks are willing to pay for it. And, you know, maybe upward pressure on rents justifies it. So this is definitely something to watch.

- Yeah, definitely. No, it's been, been great to see. And I think really it's just showing how, this asset class is getting institutionalized and you can see the capital flowing to it. So definitely one to watch going forward

- In a big way. But I think the last thing we talked about is his jobs. It's very difficult for to get Ubers right now. It's difficult for the restaurant and hotel owners to hire people. The, I think was it federal subsidy towards unemployment is supposed to burn off, I think in September and some states are trying to move for it to end earlier than that. And I think I saw a research paper that said that like one in seven unemployed at least would turn down a job because of the enhanced unemployment. Sure feels like it's higher from what people are saying but it could be that, you know as these subsidies end that employment begins to come back and some of the tougher to higher areas, get folks in.

- Definitely. I think that and then also I think another factor too, is just school's reopening. I mean, just the childcare issue too, on top of that right. Factor that, that plays into it.

- I think LA unified announced that they're opening in September. So that's been a major victory because that's been a a very, very difficult issue down here in Southern California to get everybody comfortable. But it just, it just feels like more and more we're emerging, you know, from the from the COVID pandemic, which is great.

- Yeah, definitely. And yeah. And to your point, I mean I think that's also potentially holding back hospitality. Some of it we've, I've read about hotel owners and operators who, you know, again, to your point can't get workers in the door to, you know turn rooms and manage the hotel. So they're leaving some rooms offline even though they could get them booked up but they just don't have the band power capacity to, you know, manage the rooms and turn them over thereafter. So, well, Zack appreciate the time today.

- Likewise, Anna Marie, good stuff. And then soon we'll do one of these in person.

- Yes, yes. Looking forward to it.