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You're listening to Teip on today's show, we bring back a guest by popular demand, Mr. Ian for meagerly. Ian has over 24 years of experience in real estate, private equity startups and options trading. As the CEO at Crowd Street, Ian has over 400 offerings, with over 13 billion in commercial real estate. On the episode, we talk to Ian about the structural and infrastructure impacts for all types of real estate the covid is having and what to expect moving forward.


So without further delay, here's our interview with Ian for Meagerly.


You are listening to the Investor's podcast. When we study the financial markets and read the books that influenced self-made billionaires the most, we keep you informed and prepared for the unexpected.


Welcome to the show, I'm your host, brought us in, and as always, I'm accompanied by my co-host, Preston Peche. Today, we have one of our most popular guests with us, and that is Ian Famiglietti, chief investment officer at Cross Street, and he's with us for the fifth time. Thank you for joining us here today on the Masters podcast. Stig and Preston, it's a pleasure to be back on the show today, and I must say the environment's a little bit different than the last time that we spoke.


But cycles are cycles and so eager to talk about what's changing right now. You're definitely right and things are very, very different. I guess that's a sentence that we tend to see a lot more these days. We talked about how one of the strength of having commercial real estate in your portfolio is how uncorrelated is to other assets and external shocks to the market in general. And I think that we used the example that it was more important with stores that open next door than whether we would see an escalation in the trade war with China, for instance.


So let's kick this interview off with this question. How has commercial real estate performed so far in 2020, given everything that has happened? Steeg, you're absolutely correct that we've previously talked about the importance of microeconomic drivers on commercial real estate values. I think what's interesting right now is that we are currently experiencing how a pandemic affects commercial real estate value. And the performance of the overall commercial real estate market in 20 20 has really varied substantially by asset class.


And the performance of each asset class has strongly correlated to the effects of the pandemic so far. However, regardless of the pandemic, the underlying common denominator here is demand, both current and perceived future demand. This concept goes back to some of our first conversations on commercial real estate in that the ultimate driver of value in real estate is demand relative to its supply. You just can't get around that. And right now the pandemic is exposing this concept. Yet once again, I'll walk through major asset classes fairly quickly in the order of of what I call worst to first.


So to kick it off, the most affected asset class so far in the pandemic is hospitality. We've seen a precipitous drop in occupancy rates across the country. They hit as low as twenty two percent nationwide in early April. And that pushed this asset class into a rapid state of distress all over the country after hospitality. Retail is next up. The worst hit segments here are malls, followed by any type of retail that is experiential in nature, particularly those with a heavy food and beverage component.


However, now kind of moving into the middle of retail, there are certain types of it that are faring relatively well right now. So, for example, if you own a power center anchored by Home Depot or Wal-Mart, your shopping center is actually doing pretty well. And then you've got grocery anchored centers. We've seen per square foot sale numbers for grocery stores instantly double. And to me, that demonstrates that this type of retail is still important to our daily lives.


So after retail office is really next up, it's probably going to see some distress in certain locations, particularly in downtown locations of major metros. But overall, I think it's really still too early to tell a lot about what offices is going to do. And the results may end up being spotty. There just haven't been that many trades yet. But one indicator that you can look to is the publicly traded retail and office rates are down a fair amount right now.


So that at least tells you what the public market is thinking about this space right now. Overall, I think we'll know a lot more about the office market by the end of the year. So now moving on to more promising asset classes, multifamily is hanging in there surprisingly well right now. The National Multifamily Housing Council reports apartment collection data nationwide every month. And for the month of June, year over year, collections were practically unchanged relative to twenty nineteen.


So on the transaction side, we've seen small price discounts this year for deals that have traded since March. I'd say anywhere from two to eight percent lower than where we'd see that property trade pre covid. I think the big question right now looming out there for multifamily is what happens as the additional six hundred dollars per week of unemployment benefits burns off with, as of today, no new stimulus package in place. And for example, in June, the Aspen Institute published a study conducted by the covid-19 Eviction Defense Project, and it estimated that roughly one in five tenants in the United States is at risk of eviction by the end of September, absent another major stimulus.


And so because of this possible disruption we might see later this year, we've been focusing on the higher quality properties that are less exposed to high unemployment rates. Such as these are more of the properties that are more populated by people working at home, high class B and class properties. So essentially, if we can find a great multifamily property today in a great market, that would have been bid up last year, yet we can get it at a discount this year.


We're pretty interested in that deal. And also we're pursuing ground up multifamily deals and strong markets, thinking that if a deal delivers in late twenty, twenty one or twenty two, we're now past most of the distress associated directly with the pandemic. And we will now have a property that will be the nicest and newest on the block with little new supply behind it for about a year. And then finally moving on, there are certain asset types that are as strong as ever and their pricing reflects it.


For example, in a world where most of our consumption is now being delivered, we're seeing Shallow Bay, last mile industrial properties.


See record demand. We are a little bit concerned with large class aid distribution centers that are near major ports, given the downtick in international trade. But generally speaking, industrial is doing great and its outlook is strong. And as a final note, there are some additional niche asset classes that are also doing really well right now, such as needs based medical office data centers and manufactured housing. So I think that kind of sums up what we're seeing out there per asset class.


So even when we look at the recent rent collection numbers, in contrast to the unemployment numbers, they haven't been too bad to date, but depending on whether a lot of the government programs that are providing assistance, that could potentially change. And there's people that are saying that this is the calm before the storm. So without asking you whether we're in a U or V shape recovery, what is your broad outlook for the rest of 20, 20? President, I'll definitely say I'm not a macroeconomist, so just a real estate person out there in the market trying to figure it out.


But I will say that from a macroeconomic perspective, you know, personally, I'm somewhat concerned about the rest of 20, 20, but really the next 12 to 18 months. And to your point, I think we are in a recession and a recession has to run its course and markets have to clear. And once we get to the backside of that, we can see growth in this case. I do believe that the pandemic has already inflicted enough lasting damage, that I think there's more downside ahead before we can see the emergence of a meaningful recovery.


And as a lot of intelligent people out there point out, the consumer is 70 percent of our economy. So I also have a thesis that until we see a vaccine or a therapeutic treatment in place for covid-19, we may end up stuck in what The Economist refers to as the 90 percent economy.


Now, from a real estate investment perspective, this outlook has translated into us asking the same question repeatedly, which is how will this deal make it to twenty two? I think this market is looking at a trough within the next year or so. So we're hyper focused on making sure existing portfolio assets and new assets that we bring to our marketplace are equipped to navigate choppy waters before entering the growth phase of this cycle, which, as I mentioned, I do think will occur by twenty twenty two.


Remember that in real estate we're investing for multiple years. It's not just having the right idea, but really building a business plan around that idea that will ensure you have enough runway to realize your vision. Overall, I think real estate will present some amazing investment opportunities over the course of the next year, but you have to be well buttressed in the short term in order to realize outsized profits in the mid-term. So, Ian, you have this great resource on Krosby is called Street Beats, and you do weekly updates on commercial real estate and we will, of course, make sure to link to that in the show notes.


But what I've noticed going through these videos is that you're talking a lot about metrics that you are paying close attention to. Examples would be consumer confidence, job reports, spring collection that just mentioned before. That's just to name a few.


So for someone like me who is not an experienced commercial real estate investor like you, how do I process all of that information out there when evaluating the current situation and the recovery? The debt markets are really critical to the function of the commercial real estate market, because unless you're a major institutional investor without a loan on a property, you just can't buy it. So that means we tend to see a high correlation between how many lenders are in the market making loans and how many deals are actually transacting.


And transaction levels are critical to market visibility as we rely upon those most recent trades to tell us what's happening to valuations right now. To give a stock market analogy, I mean, imagine a stock market where 80 percent of the volume just disappeared overnight. It'd be pretty difficult to have any conviction and where values are heading. And so in May, that's what it was like in the commercial real estate market. And so that's why we're just out there trying to gather up as much data as we can and synthesize it in hopes of making better informed decisions.


So to answer your question, for investors who want to process that information, I'd say pay attention to the trends. For example, one statistic I cite in my video series each week is the ending occupancy data for hotels provided by staff. And this is the nation's leading hotel research group. From the beginning of April until the end of June. In this hotel market, for example, we saw 12 weeks of successive increases in national hotel occupancy from a low of twenty two percent, as I mentioned a few minutes ago, back up to roughly forty six percent today.


So that kind of a balance over a three month period tells me that the hotel industry is now in the early phase of a protracted recovery. However, a forty six percent weekly occupancy rate is still really low. So from a historical perspective, it also tells me that the market is still weak and that any new hotel investments we contemplate must be capitalized with a large amount of operating reserves to help see it through to twenty two, as I mentioned a few minutes ago as well.


And that's the point where we expect there to be better demand for hotels. So just like any market, we're using data in the commercial real estate market to try to help us make better investment decisions as we navigate the pandemic.


So I know you've been through quite a few boom and bust cycles through the years. Just kind of curious whether you've made any changes to your own portfolio here in twenty twenty or made any drastic updates to the way that you look at the markets. So for my existing portfolio, it is largely comprised of illiquid investments, so for some of my existing investments, they're doing somewhere between OK and well. So I probably just waiting until the other side of this cycle and seeing where we can go from here.


But I would say that the number one biggest change that I have discretion over in my portfolio is that I have increased my cash position relative to twenty nineteen. And that's because real estate does move in multi-year cycles. So now that we are entering a down cycle, I'm looking forward to the opportunity to potentially invest in distressed assets over the course of the next year or so with hopes to realize profits on those investments within a three to five year holding period.


I'm still probably 20 plus years away from my retirement, maybe more. And so that means that I'm comfortable taking additional risk and prioritizing total return over cash flow. But that's just my situation. The investing environment over the next 12 to 18 months, I think should provide opportunities to invest opportunistically. And to the extent they appear, I do plan to invest in a handful of them. It's a very interesting response, and I also think it tells people something about the adventures of being such a liquid type of investment, you sort of like got yourself against your own biases here on this show where we talk a lot about stock investing.


We just know that from our listeners, there are a lot of them have been selling out. When they were I was at the very bottom because he just looked so brutal. It just looked like it was just never going to stop. So I really like your take on that. So for the next question, I just want to preface that we're recording here the 22nd of July and you'll be listening to this eighth of August. And right now there are some talks about new fiscal stimulus.


We don't know exactly how it's going to pan out, but what we can say so far is that fiscal stimulus have been supporting the market very strongly for many types of real estate investments. So which type of fiscal stimulus do you look for in the time to come and why?


So far through the pandemic, we have seen sponsors of crowds street portfolio assets, I'd say really benefit from three types of fiscal stimulus. Two of them have been direct and one of them have been indirect. And so far, you're totally correct that fiscal stimulus has been a huge beneficiary to commercial real estate assets all over the country. So to dig into that, the first form of direct support that we've seen occur already have been economic injury, disaster loans.


Those are the idle loans they're made from the SBA. The maximum loan size of this program is two million. They have a three point seventy five percent interest rate for companies and they amortize over 30 years.


You also get one year of deferral and interest payments, and that's huge right now. So we have seen hotels in our portfolio receive these loans up to the maximum amount.


The second form of direct support has been funds received from the Paycheck Protection Program, the PPP that we've all talked and heard a lot about. From what we saw, hotels and senior housing facilities were the two largest recipients of this form of support. And these are loans provided a critical lifeline for some of these properties. They were used to retain property level employees during the first three months of the pandemic. So based on that, we expect them to be substantially or fully forgiven in the months ahead.


The third form has been an indirect form of support, as we talked about a minute ago. That's coming from that six hundred dollars per week of additional unemployment benefits. We believe this form of stimulus has been propping up multifamily collections at the lower end of the spectrum in the industry. We refer to these as lower class B or Class C properties. And Class C properties tend to be more highly occupied by lower earning service oriented workers. And as we all know, this is the type of employment that's been hardest hit during the pandemic.


So to answer your question on looking ahead, I see two primary types of fiscal stimulus as having the largest impact. The first and to your point, assuming this happens before August 7th, would be a second fiscal stimulus that would extend these outsized unemployment benefits and perhaps a second pay check directly to individuals. And that's going to benefit almost all forms of commercial real estate. But as I mentioned, I think most notably the Class B and C multifamily stands to benefit the most.


Personally, I'm concerned for a potential huge drop off in multifamily collections for these types of properties. If we don't see that second package passed in Congress over the next couple of weeks. And second, I think that we finally start to see the effects of the six hundred billion dollar main street lending program later this year. Remember that the Fed announced this program in April, but we're just now starting to see it actually hit the street. So while it's been slow to come out and I do think it will ultimately start making a difference later in twenty twenty.


So I'm a little bit optimistic there.


And I would say that overall, there's no doubt that three trillion dollars of stimulus has gone a long way to bridge our economy. But I definitely think we're going to need more stimulus to see it through. And without that second package, I do fear for what Q4 might look like. So I think we're all crossing our fingers that it's going to get done.


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So Ian, do to covid-19 those who have been able to work from home, they've done so even after a four year opening. Some will continue to work from home and others might only go back to the office a few days a week. Has this changed the office space investment thesis for commercial real estate investors? I think it's changed some things in some ways, some may be short term and some may be long term and overall, when I think about office right now, I do find it fascinating to study because the pandemic is affecting our lives so much every day right now when it comes to the office space as we all continue to work from our homes.


And so we're thinking about it every day. Yet at the same time, we really don't know what it's going to look like two years from now.


There's so many thoughts and ideas out there as to that future state of office. A lot of them tend to conflict with each other, yet most of them make sense. So that tells me that we really have a long way to go to gain some clarity on what the future of office is really going to look like. Regarding my own office thesis, I actually published an article on Forbes earlier this year and it was called Three Predictions for the Post Pandemic Office.


And in that article, I highlighted changes that I already see coming to the sector, as well as changes that I expect to see in the years ahead. And it all boils down to essentially kind of a mixed bag of fact on net demand. The first thing and we're already seeing this and we're a living example that my company is doing this as well, is that we're retooling spaces across the country right now with significantly more allotted space per employee to me spaces the new amenity.


And I think that companies are going to use increased space to recruit employees as we roll out of the pandemic. And this is going to take precedent over these formerly important social amenities, such as a free food and Ping-Pong tables and things like that. I think they're going to fade in the background for a while while space is going to be the new thing. And increased space as a trend is important because it's reversing a nearly 20 year trend that we saw take place since the beginning of the century.


And we saw office space drop from roughly two hundred and fifty square feet per employee all the way down to just over one hundred square feet per employee in those most densely clustered open office settings. And that one hundred to one hundred and twenty five square foot per employee office. Well, that's gone for right now. And we honestly don't know when or even if it's going to return. When we look at office space, I think it's interesting to see how Cushman and Wakefield has already created a prototype for the Post covid office in its Amsterdam location, and they're calling it the Six Feet Office.


One item of note that I found particularly interesting when I was studying that six feet office is that in one part of the office in an area that previously had twenty eight desks, it now has sixteen. And so that translates into a forty three percent reduction in density. Now, I don't think that means we're going to necessarily see a forty three percent increase in office space demand nationwide. But I think it's fair to say that our new distance office environments are going to create demand for more space per employee for the foreseeable future.


The second thing that I see is that while we will see office space is spread out, we will also see reductions in office space demand in two forms, the first of which is that office tenants are simply not looking to expand right now, since they aren't even fully utilizing their current space is everyone's at home and we're going to see office demand also just lag relative year over year because we're in a recession and we're not hiring like we used to.


So I think this is going to continue to be a drag on demand if unemployment remains high and we have a protracted recession. And as you noted, president, there's little doubt that we're going to see a greater percentage of our workforce remain working remotely after we exit the pandemic with companies like Twitter announcing that all employees are free to remain working remotely, indefinitely. And you have Morgan Stanley CEO James Gorman going on record to say that his company could definitely operate with much less real estate.


It's clear to me that we are at the beginning of a trend that we'll see more people working remotely, indefinitely, and this is going to have a drag on demand for office space. The third trend that I see emerging is shifts in the location of office demand. For example, if you're a company offices and a high priced tower and a central business district, and now you need to roughly double the allotment of space per employee, even with that offset of some remote workers, your existing space no longer pencils.


So as companies grapple with office occupancy cost, particularly in our highest price markets, I see two things happening. The first thing I see happening is that office tenants will relocate a portion of. Their employees from higher cost to lower cost Metro's so, for example, if a company was thinking of opening a second office in Austin rather than growing its HQ in San Francisco, well, I think the pandemic may have just pushed that decision past the tipping point, considering that Austin office rents are less than half of those in San Francisco.


The other thing that I see occurring is a resurgence in demand for suburban office space. And this is actually already started to occur so far in twenty twenty and we can even trace it back to twenty nineteen. So for example, in twenty nineteen, sixty nine percent of class, a net absorption occurred in the suburbs and that was up substantially over its 10 year average of 60 percent. And when you think about it, suburban office offers a lot of things right now that are compelling to workers who are uncomfortable entering an office right now, such as its plentiful nationwide vacancies, about two percent higher than downtown locations.


It has free parking. It's usually a low rise, which lets you use the stairs rather than crowd into elevators. They're typically closer to employees homes. So that offers an easier commute. But most importantly, it's a lot cheaper. Thirty eight percent cheaper nationwide at the class level. So moving forward, I think we see large companies with a downtown HQ at a suburban satellite office. And as I mentioned just a second ago, this is a trend that we are already seeing, seeing some major users in the largest metros reach out to brokers and start to look for fifty to one hundred thousand square feet of suburban office when they occupy roughly a million square feet in the city core.


So to sum it all up, I know there's a lot to unpack there, but there's definitely changes coming to our office environment over the next year or so.


And I think some of those changes are going to continue to play out throughout this cycle. Ian, on the show we previously talked about retail and retail has been struggling for quite some time going into the pandemic. Now looking at the pandemic today, it has hurt most businesses, but brick and mortar retail businesses have been in a world of pain. You mentioned malls before as an example. Now, as a value investor, I just can't help but think that this might also be an opportunity.


But is there an opportunity in retail right now because it is so much unloved? I do think there's some opportunity out there for retail, but to begin, it's definitely fair to say and as we mentioned about a minute ago, retail has taken the second largest hit so far during the pandemic. And it's also fair to characterize the space overall as having a relatively tough road ahead of it. And I even had a value oriented thesis around retail coming into twenty twenty.


But certain aspects of it I don't think are valid anymore.


But it's definitely not all doom and gloom out there in retail. And I do think that there is opportunity. The area that I see the most opportunity right now is in that grocery anchored shopping center. And as I mentioned a few minutes ago, it's worth mentioning it again in that we have seen store sales roughly double at grocery store Anker's during the pandemic and the rate at which they doubled. It's just mind boggling. We just haven't seen that kind of activity in retail before.


So tells you that the space isn't dead. And what that translates to is that we now have the percentage of our food consumption that we currently purchase at grocery stores is back up to the mid 60 percent range. And that's a level that we haven't seen since the mid nineteen nineties.


So knowing that we're probably going to see some regression towards the mean as we exit the pandemic, I do expect grocery store sales to remain strong for a number of years.


So really what that translates to right now is that whenever we see a grocery anchored center at a compelling price with a set of in-line tenants that we think can mostly survive, we're interested because the price on that center is getting very low. And an example of this is that we did just have our first post covid grocery anchored shopping center in our marketplace recently.


It was located in Salt Lake City. It's anchored by Luckie, which for this center that means it's Albertsons credit. It was priced at ninety three dollars a square foot. It's really far below replacement cost.


It's even below other western US trades that we saw for Luckie anchored shopping centers in recent years, which had traded probably closer to more like two hundred dollars per square foot over that time period.


So in an environment where you know that nobody is going to build a competing shopping center, they just really aren't building retail any more across the country. And yet you still have strong car traffic in front of you. In this example, it was sixty six thousand cars per day, which is good for a grocery anchored shopping center. If you can buy that for under one hundred dollars per square foot. That's pretty compelling in my opinion. So we would look for more opportunities similar to that moving forward.


Another thing that I wanted to follow up on is our conversation about finding value in the mega trend with the rising popularity of our cities, which impact do you expect covid-19 to help in this trend and do see mispricing in the market that just haven't been captured yet? I think anyone who's listened to one of our previous conversations knows that I am a huge fan of the 18 hour city trend around the country and as we study it in twenty twenty, I think the main effect that we're seeing so far during the pandemic is just simply an acceleration of it.


So it's been fascinating. Right now you're seeing a spike in population migration out of the some of the largest metros and it's going to those secondary 18 hour markets. It's also going to tertiary markets as well. And it's doing so because you have with this pandemic hitting some of the largest cities the hardest and with some of the employers in those metros now offering workers the flexibility to work remotely on an indefinite basis, you're definitely seeing people take advantage of that situation and relocate to cheaper metros that still offer a good quality of life.


For example, Marcus and Millichap recently published a migration trends study on this topic a little over a month ago. And we're studying that. And we're even seeing also regional effects of this trend. For example, I think we're seeing some East Coast behavior in West Coast behavior on the East Coast. People are leaving New York City right now. I do think that's a short term trend. I do think that 9/11 and the Great Recession proved that New York is a resilient market.


So it will be amazingly popular again. But for today, people are leaving and they're leaving for places such as Florida, other places like Charlotte. So a lot of markets in Florida, as well as like Charlotte and Nashville. Now, over on the West Coast, you're seeing population migration flow out of California, particularly concentrated in the Bay Area and L.A. Again, those are the workers that are able to start to have flexibility in where they work. And those people are continuing to relocate to Texas.


This is a trend that's been going on for multiple years, particularly Austin. And as well, we're seeing them leave to smaller metros such as Boise and Salt Lake City. Green Street Advisors also recently published a report on this trend, and it discussed the cities that it sees as best positioned to thrive post pandemic, its top five cities where Raleigh, Durham, Denver, Charlotte, Austin and Phoenix. When we think about mispricing in this market, we're definitely taking advantage of the current market opportunities to invest in deals to either acquire assets or develop assets in locations we like the most.


Those include Austin, Charlotte and Nashville as an addition to the pretty much most of the other cities that are listed in these studies from Green Street and Marcus and Millichap. And we're seeing discounts relative to those prices. I'd say the total swing right now is about 10 percent. So we would see a roughly five percent downtick in pricing this year over what would have likely been probably a five percent uptick in twenty 20 with no pandemic. So it's not a major shift, but it's giving us access to get into great assets and great locations at a discount in price.


So any time we can see that kind of opportunity, we're definitely interested. And the last thing that it's worth pointing out is that in twenty 20 in a recessionary environment, a way to get a good deal in commercial real estate prices one way. But the other way is the structure of the deal. We are now in a market where equity is harder to obtain relative to what it was a year ago. And that means that investors can receive more advantageous splits on profits as well as preferred returns in private equity deals.


Online capital, which is our segment, it's fluid and dynamic, and we're seeing developers and operators come in motivated to incent investors with attractive terms in order to raise the capital that they need. And so overall, I'm definitely excited to see that crowd. St. Secondary market thesis is gaining more momentum in twenty twenty because we've spent the last six years positioning ourselves to obtain the best deal flow in these markets. So right now it feels pretty good to be in that position.


And we're seeing some great deal flow as a result.


Let's talk about the resurgence of the commercial mortgage backed securities market. The underlying loans are securitized loans for properties to success, apartment buildings and complexes, factories, Telx office buildings and many of the other types of commercial real estate. And they also diversified the amounts and terms to. Could you please talk to an audience about why the commercial mortgage backed securities market is so important for us as investors to understand and whether you see any bad debt hytten. CMBS plays an important role in the debt issuance and commercial real estate, it's relatively important also for all asset classes other than multifamily.


When you back out multifamily in the reason that you would back out multifamily is that agency debt, namely Fannie Mae and Freddie Mac. Well, they really dominate that space. So in CMBS does lend in the multifamily space, but it's an outlier source of capital. But it's important for all the other asset classes and it really accounts for about twenty three percent of all commercial real estate debt absent multifamily that was issued last year. So it doesn't make up the lion's share, but it's meaningful.


And I'd say that the reason that I pay attention to the CMBS markets is because for me, they can serve as what I would refer to as a canary in the coal mine for the greater commercial real estate market. And they do so for a few reasons. The first reason that I think so is that they are typically placed on riskier assets. This is a type of debt that you can have a property with some vacancy or some transition that needs to occur.


And CMBS execution is something that you can get. And so what that tells me is it is oftentimes the first type of debt to show signs of weakness when the market turns and we're actually seeing this right now. So, for example, CMBS delinquency rates are skyrocketing today on hospitality and retail loans for June. Delinquencies are now up to about twenty five percent and 20 percent, respectively, when both of those asset classes had sub five percent delinquency rates as recently as March.


Since other forms of debt, as I talked about the agency and also bank debt, they haven't really shown a real spike in delinquency rates yet. So to me, that really exemplifies how CMBS can be a leading indicator for future distress and a commercial real estate market.


Now, when we think about bad hidden debt that's out there, I do think it's reasonable to estimate that we will see some of that emerge in the hotel and retail sectors later this year. And it's also important to note that even within CMBS industrial office and multifamily delinquencies, while they're still sub five percent as of June.


So it's also highlighting that we have a disparity going on right now in terms of performance across the different asset classes, as we discussed earlier in the conversation. And I think that this disparity also highlights a key difference between our current recession and the 2008 recession and that this recession so far has really been about how this pandemic crisis affects real estate. Specifically in 2008 was really all about how a financial crisis affects real estate.


Now, we may still see a bit of a financial crisis ensue before this current recession is over, but I do think that our current recession will continue to play out differently than the last one. So I think it's definitely wise for investors to look at it from this is not 2008. This is 20, 20, and to pay attention to those differences. Another thing that I do when I look to when it comes to CMBS is when it dries up quickly, as it did in March, you know, that transaction volume is going to drop and then that means that a market is going to cease to function normally.


So on top of that, when we have these markets that stop ceasing functioning normally and you have CMBS issuance rates had dropped precipitously, is they basically just went to zero in March and April. That activity in the CMBS market, it definitely acts as a general. What I would say is a psychological indicator out there. And what that means is that all market participants start to get skittish about everything. So it's an important bellwether just to pay attention to him in terms of what's going on out there.


But then what's interesting is that when it's sidelined, but then it starts to come back as it's starting to come back right now. Now it becomes a leading indicator for a potential return to a better functioning market. This doesn't necessarily mean that prices are going to immediately rise. But what it tells me is that when a market starts to function more normally, you have better opportunity for markets to clear. And this, again, will create a bit of a psychological indicator out there.


And it starts to get all participants in that market a little more comfortable about resuming doing deals. So there's a lot to look at when we think about the CMBS market, but it's certainly worth paying attention to. And that's why industry professionals do so every day.


So I'm pretty sure everybody has some form of availability bias, focusing too much on recent information and have a hard time zooming out, looking at investments from a helicopter perspective as we're sitting here in the middle of covid-19. Is there any part of commercial real estate that has fundamentally changed or will this be business as usual in a few years? To begin with, President, I completely agree that as a society, we tend to overemphasize the effects of short term trends.


I mean, personally, I'm always skeptical of any argument that uses the short term trend extrapolation approach. To me, that's a methodology for making massive miscalculations a few years out. So I'd say that despite some of the temptation to get caught up in these emotional swings, I try to always take a step back. And I look at situations like our current one in two ways. First, I identify short term trends that look like simple knee jerk reactions, and then I like to play them counter cyclically when given the opportunity.


But then second, I also seek to identify short term trends, but those that play into strong underlying demographics.


And when you see that, well, then those are the ones to run with. So let's give some examples of that and we can begin with the knee jerk reaction. So, for example, there's a lot of people out there that are calling for an absolute end to the downtown central business district office with a focal point of this thesis centered on Manhattan. And I can certainly agree that there's short term pain coming to the Manhattan office space.


But if we were to see prices dropped precipitously there, I become a buyer. As I mentioned before, I think New York has repeatedly demonstrated resilience over the long run. I think it will do it again. And if we saw a massive drop in in New York office prices, then I want to opportunistically buy.


Now, also, remember, there's a really another important reason why sometimes we can see this knee jerk reaction translate into future opportunity. And so for real estate, lower asset values create the ability for new buyers to come in and purchase those properties and then profitably operate them at lower rents. Sometimes there's just nothing better than a basis reset to reinvigorate a market. So any time we can look at a scenario and say we like that market long term, we like the opportunity to go in and buy it low basis and essentially outcompete all the higher basis competition, it's a good way to make money over three or four years.


Now let's talk about a short term trend that plays in to a underlying demographic movement. And an example of this movement I see happening is towards a form of residential housing called build to rent. Now, these are essentially purpose built, small, single family communities, but they have the amenities of a multifamily complex. So maybe imagine small bungalows all clustered in a single community, but they have a clubhouse, they have a pool, they have a fitness center, and they are one hundred percent for rent.


In this case, I see the pandemic as a driver of a short term trend towards this type of housing, because right now people are opting out of downtown living in order to feel safe. It just makes sense, however, when we look at the demographics of the millennial generation who are now on average about 30 years old, and they're a cohort that is looked to to absorb this type of housing. Also, keep in mind that many of them now are in relationships and some of them have dogs and almost all of them are saddled with student debt.


Now, we have a short term trend, but one that is driving a shift in behavior in the direction of strong underlying demographic fundamentals.


So in this case, I see this trend as potentially sticking due to the fact that I think this will play a greater and greater into the ongoing demographic shift of the millennial generation who will increasingly see this form of housing as an alternative to mid rise and high rise downtown multifamily.


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ICOM spelled Belin KNST Blankest Dotcom's billion billionaires to get twenty five percent of a premium membership and a seven day free trial. Blankest dotcom sless billion billionaires. All right, back to the show. So let's talk about timing the market, and I do apologize, you know, I can't help myself whenever I talk about selling the market because every time we talk about it, we talk about our crystal balls and how they're always been broken and time the market is definitely hard.


Having said that, there's also a difference between the volatile stock market and then something like commercial real estate that you also mentioned earlier.


Like, the cycles are just different and there's a different volatility there. And so going back in history, what we've seen in previous crises, again, not to make too many comparisons, but what we're seeing is that for single family homes in previous crises, many of the best deals have come after, say, a 12 months or later, like because people typically do everything they can to keep the homes. And even if they try selling, they have a precrisis reservation price, which just takes time to come down.


And even if it's in foreclosure. So that's a lengthy process, too. But that's something that might be a bit more familiar for the audience because they do see the for sale sign whenever they're driving around, but transitioning into commercial real estate and keep that in mind. What we've seen historically, would it be better to wait with your cash on the sideline before you invest in commercial real estate? Right now. When we think about the commercial real estate market, just like any market, I think it's impossible to time it right now.


All we know is that the previous cycle just ended. We're going into a down part of the cycle. We know that a trough is out there at some point and then we know recovery at some point after that. But to think that I can figure out when that's going to occur and try to load up at the bottom, then I probably say that for me that's a fool's errand. So rather, what I'm going to do is I'm going to just simply look to layer into opportunities that look attractive relative to the previous peak.


At the time when I had that opportunity. Also, keep in mind that commercial real estate is a really inefficient market in that not all assets are going to trade all the time. So you may have a one and only opportunity to invest in a specific asset during this part of the cycle. The next time it trades may be five or six years from now in an entirely different part of the cycle. So it's interesting that you mention the single family residential market because the commercial real estate market can really behave differently than the single family market for a number of reasons.


The first reason that I see as a difference is debt maturity. So one of our first conversations on this show, we discussed how perhaps one of the worst positions to find yourself in is with a real estate investment asset that is at the point of debt maturity during the trough of a market. Now, remember, in the single family market, we all have these 30 year amortizing loans and people are going to make decisions to either buy or sell and or continue to pay based upon their own ability to pay or if they move or so forth in commercial real estate is different.


Right. We have these shorter term loans that mature. And if you mature during the trough, well, then that's when you're most exposed. So this means that some of the best deals will be timed actually to their debt maturities as they occur over the next year or two, rather than a particular point in time where an owner throws in the towel. So I think debt maturity is just something really important to look at and that's going to create certain types of opportunities.


Another thing I think to look at is that during periods of distress, institutional owners can become fatigued or that they they can also determine that an asset is simply no longer a core part of their business strategy. If this occurs, they tend to shed that asset and they get aggressive on price in order to liquidate it quickly. This was actually the case for a distressed hotel acquisition that we participated in earlier this year that's located in the Baltimore Inner Harbor. I think the third thing to look at is that the nature of this downturn has, as we've talked about before, vastly different effects so far on these different asset classes.


So I think this is going to translate to the, quote unquote, best deals for some of the asset classes, such as hospitality and retail, to emerge earlier, while other sectors such as office, they may take more time to materialize. So I think from that perspective, you want to pay attention to when the opportunities present themselves. And again, I fall back on the if the deal looks compelling today relative to what it looked like yesterday, that's when you don't want to take a hard look at it, knowing that this may be the one and only time to look at that type of opportunity before it changes and goes away.


So I think when you put that all together, I think this means that as buyers, we tend to be rewarded if we pay constant attention and acknowledge that there's no one magic moment during the downturn to load up on all your investments, but instead continue to pay attention and then jump on compelling opportunities as they arise. I think if we do that, we're setting ourselves up to profit in the growth part of this next cycle. I think that's a great Segway into the last question here, because with everything we've talked about in this episode, Ian, what are the main key takeaways for the listener whenever they consider if they should be jumping into the commercial real estate market for the first time or perhaps adding to a position that they already built?


There are so many takeaways from today, but I think I'll leave you with four and hit the highlights of this. So number one, our last cycle just ended in February as we study multiple real estate cycles. Those data suggest that the next 12 to 18 months should bring us some of the best opportunities that we've seen to invest in commercial real estate since the last recession. So I think opportunities coming, but we have to layer into it. We have to be a little patient, however.


Number two, I'd say is that this recession is already demonstrating strong signs that it's going to be different than the last recession. Some types of assets and deals, they're going to become more distressed and discounted than even in two thousand nine. Hotel is a good example of that right now. But others such as industrial, well, they probably don't become distressed at all. They just continue to appreciate. So if you wait to see distress in the best performing asset classes in this downturn, then I think you missed this altogether.


I just don't think you can have it all and you're going to have to pick your spots. Third, when you do look at distressed deals, really look at the discount to replacement cost, distressed assets can be nearly impossible to reliably forecast. It's just so hard when you're looking at a vacant hotel right now and asking, well, when does it get back to its normal occupancy level?


So back in my private equity real estate days, when we invested in 2009 and 2010, we kind of had a methodology where we would just stare into the abyss and make a gut call that if the world returned to a normal state one day and if we bought this asset at a current price that was offered to us, if that would be compelling in a normal world, then we would make that call and then we would pair it with a strategy of looking at good assets in good locations.


We'd make assumptions, but we would know that those assumptions were almost assuredly going to be wrong. And then we took risk. And when we did it during two thousand, nine and 10, we were rewarded with double the triple our equity within a few years. And fourth, and finally, I think the most frustrating thing in a time like right now is to have the right idea, but the wrong execution. So when we invest passively, my recommendation is to pay attention to the strength of the sponsorship and make sure that the deal that you're investigating has enough runway to get to the other side of the pandemic.


As I mentioned, right now, when we look at opportunities today in the marketplace, we're looking at the beginning of opportunity around twenty, twenty two. But if we're only going to get the opportunity to purchase it either today or later this year or early next year, then we just simply need to have enough money in the deal to get us there. Remember that we're trying to earn profits in twenty, twenty three to twenty, twenty five and just simply not get washed out before twenty, twenty two.


So I think in essence if you do those four things you're ahead of the game.


Ian, thank you so much for this outstanding discussion today. I thoroughly enjoyed it. I know every time you come on the show, I just learned so much. So if the audience wants to learn more about you, where should they check you out?


Steg and Presson, as I always point out and in each of our interviews, I'm very easy to find on LinkedIn as I'm the only information on that platform. People can feel free to connect with me there. As you can tell, I always love to talk about real estate, and I'm always happy to engage in conversations that help investors make better real estate investment decisions. And for those who want to study real estate investing in more depth, you can also find I've got a book on Amazon.


You can find it there. Some people read it and said it's helpful. It's a relatively quick read. I think finally is that there's always a ton of great content on the Crowd Street website. So that's w w w Cloudstreet Dotcom. Feel free to log in there. Lots of great information that our team puts out on a almost a daily basis. So it's a great resource for anybody who wants to learn more.


All right, Ian, thanks again for making time and coming on the show. And so with that, that's all we had for everybody today. We look forward to seeing everybody again next week. Everyone have a safe and healthy week ahead. Thank you for listening to IP to access our show notes, courses or forums, go to the Investors podcast Dotcom. This show is for entertainment purposes only before making any decisions, consult a professional. The show is copyrighted by the Investors Podcast Network written permission must be granted before syndication or before casting.