Office of the CIO

Flash Call with CrowdStreet Advisors' Chief Investment Officer

Insights from CrowdStreet Advisors' Chief Investment Officer on the state of the market and what that may mean for investors
by CrowdStreet Advisors
September 01, 2023 · 0 min read

Gain insights that may help you refine your CRE Investment strategies in a replay of our June Flash Call. Join CrowdStreet Advisors' CIO, Ian Formigle, and his team as they review their Mid-Year 2023 Commercial Real Estate Outlook & Opportunities report.

Thank you. Yeah,
hi and welcome to the Crowd Street,
June 2023 flash call.
My name is Ryan Strub. I'm the senior
managing director on the Crowd Street Investments
Team. I wanna thank you for joining us here
today. Very excited to be joined
by three members of Crowds Street Advisors
Office of the Chief Investment Officer.
We're gonna be giving you a presentation today
giving you update on the market based
on what we're seeing through our research and our conversations
with industry professionals. We are
going to keep this conversation market driven.
We're not going to be diving into specific deals,
uh individual deals on the crowd street marketplace,
but rather the market as a whole, which is
a good segue
into some disclaimers that we want to get out of the way before
we start the presentation.
Crowd Street Inc offers investment
opportunities and financial services on
its platform. The Crowd Street marketplace broker
dealer services are provided through
crowds, street capital advisory services
through crowds street advisors. This
presentation is brought to you by crowds street advisors.
It should not be construed as an investment recommendation
or advice nor a solicitation
to offer to buy investment
securities. This is an informational presentation
and we want to share uh what we've seen
in the marketplace over the first half of the year
as we enter Q 3 2023.
So with that, I want to take you to our agenda.
We're gonna be giving you a brief state of the market.
This is gonna be from our chief investment officer.
Um Again, sharing his insights into
what he's seeing through his research and through
communications that we've had with industry professionals.
We're also gonna be giving you an outlook
into five main asset types that you'll
see on the Crowd Street marketplace, hospitality,
industrial, multifamily office,
and retail. Most importantly, we'll be sharing
the opportunities that we see within
each of these asset types.
We're gonna be giving you some closing remarks
and also open it up for questions at
the end of the presentation. Please use
the chat function to ask any questions that you
do have. We will interject the presentation
if we have a question that is relevant to a topic
that we're talking about. Otherwise, we'll save
those questions to the end.
So with that, I want to introduce the speakers today,
we are going to have Ian
Fly, our chief Investment Officer with Crowds Street Advisors,
Anna Marie Allander Lieb, our investments
director, someone who I have the pleasure of working
closely with on a day to day basis along
with our investment analyst.
Not many people read as much research on the
commercial real estate industry as Omna. So very excited
to have her join as well.
And with that, we're gonna be passing it to Ian.
Fly to give a state of the market Ian
to thanks
Ryan and thanks everyone for joining us for
the June installment of our flash
call series.
Uh We're gonna kick things off with just
a, an overview of everything that we're
seeing at a, at a macro level in the
market. And then from there, we're gonna dive
into that asset class by asset class
as you know, on a basis in terms of what we're
seeing out there and really point
in more to the outlook.
So from the top level, I think the
first thing that we want to discuss is we frame
where the overall market sits today
is just to kick things off with transaction
volume. Um because, you know, as
we see it, there's really four fundamental
factors right now that are driving the market.
And when we look at those, we would say that those
are one expensive debt,
two tightening lending standards.
We're gonna talk about that more in a minute.
Three, you know what that's then in inducing
is downward pressure on pricing. We'll go over
that. Um And then four also
re reasonably, you know, solid
underlying fundamentals. And so
when you put all those together, what, what
that really means is that transaction
volume is down, it, it's hard to get
deals done. It's hard to get debt.
Uh There is a big ask spread between
what sellers in some instances are willing
to accept versus what buyers are willing to pay.
That has to do with those underlying, you know, reasonably
intact fundamentals. If you have a deal that
doesn't have to sell, uh you're not inclined
to sell in the current market. So really
when you put that all together, we're, we're seeing that
translate into lower transaction volume.
So at a top level, that's 56%
you know, down year over year in,
in Q one of 2023.
And then if you accelerate and you actually look into the month
of May,
you're seeing total volume now down 70%
year over year. Uh and this is a phenomenon
that we expect to continue throughout most
of the remainder of the year. You know, at this
point, I think there's a lot of the market
is sitting around and we would say kind of like waiting
with bated breath. Um There was a recent
statistic, I think that was interesting where
when you're talking to, you know, groups out there
like Walker and dunlop and so forth, they're
seeing that while not a lot is coming
to market right now, there's a lot of
uh broker opinion of value activity going
on out there. So, in essence, there's a lot of
groups that are potentially looking to transact.
Um but they're also trying to think
about, when would that, you know, more
optimal window of opportunity start
to open? Um in essence,
right now, they're basically, the market is looking
at the current environment saying, hey, if you don't have to sell,
you're probably not a seller right now. Uh
And so for, so what that market really then
translates to is, you know, potential opportunities
on the buy side to the extent that things
do have to trade. Um So we kick
things off with transaction volume, you
know, and for so from here, we're gonna
then move into what that means from a pricing
perspective. And for that, I'm gonna turn
it over to Omna.
Thank you Ian and hello everyone.
My name is,
excuse me, my name is Amna
and I'm an analyst in the office of the CIO
I'll start off by talking about prices
So what you can see on the screen is
Green Street's commercial property price
index or the CPP I index.
And this index essentially captures prices
at which cr A transactions are being negotiated
and contracted at a particular time.
And Green Street updates this data monthly
according to their latest CPP I index.
Cr A prices are down by about 15%
from their peak pricing as of June
2023 data
and that peak was in March of 2022.
And if you remember that was around the same time
that the fed had started raising interest rates
and that immediately impacted
transaction volume. And of course,
because commercial real estate relies heavily
on debt for deals to transact this
higher cost to borrow debt also
started affecting deal pricing as buyers
stepped to the sidelines
in that first half of 2022
prices had first started falling almost
as steeply as they had climbed up in 2020
But that speed of descent slowed down
around October of last year
in 2023 we've only seen
about 2.4% price decline
year to date.
But the industrial sector is one of the sectors
that actually experienced a price increase this
year by about 6% year to date.
And that's also according to green street data,
but industrial couldn't pull the overall
CPP I average up because office
actually pulled it down declining about
12% this year.
And then multifamily retail
and hospitality prices showed little
to no movement this year.
So that's gonna be all for pricing.
We'll have more for you on asset classes later.
But now I'm gonna pass this back to Ian, who's
gonna talk to us about market fundamentals.
All right, thanks.
So I think when we look at market fundamentals,
I mean, really what we're discussing what
we've discussed in, you know, on multiple
flash calls, we've talked about this in,
you know, memo at the beginning of the year even last
year was that if you from
a top line level, the market continues
on its path to what we call normalization.
You know, in essence, after we saw this period,
pandemic driven, you know, anomalous
you know, spiking rent growth,
you know, driving massive household
creation coming out of the depths of the pandemic
to then now settling back down. It's
been a roller coaster ride. There's no doubt for
the last, you know, couple of years. Um
But at this point, everything that we're
seeing so far this year and everything that
we continue to see on a go forward basis
and groups like co-star project is
that things are going back to long term trends.
You know, I mean, you have to set aside office as
a sector, it's going through its own cyclical
bear market. But if you remove office
from the equation, what you start to see
is rent growth that looks
like long term trends 2 to 3%
and kind of like the expectation of that going
forward occupancies that are ranging
from low nineties to mid to high nineties
depending upon the asset class. So
in essence, kind of getting back toward towards normalization.
And as I talked about a minute ago, really what that means
is that. So from from the street level,
you know, most asset classes and particularly
if you look at industrial and even in still
in multifamily,
there's, there's still people who want to show up, they
want to lease real estate, they want to occupy
it, they wanna use it and you know,
and what really from the stress that
we're seeing continues to be really induced
from the capital market's perspective, right?
Debt being exceedingly expensive and
difficult to obtain, you know, creating
those big ass spreads that we talk about. So,
you know, so again, looking forward,
what we would say is that, you know, we, we
continue to see more or less the same
kind of like moderate rates of rent
growth, everything that we
like, we bake into the deals
on a day to day aspect and kind of when we put together,
you know, and assemble business plans and what we see is feasible.
It all takes this into consideration.
Um But this is really what we see. And I think
one thing also to call out here is
that, you know, on the retail sector, you're gonna
see that that the costar data is showing
a, you know, a relatively flat
to like negative, you know, marginal rent
growth in the outline
Um Sorry, I think, I think, I think we just
had a technical hiccup in my, in my studio.
So anyways, but what I wanna call out here is that for
retail uh malls are included
in costar's data. So to the extent you're actually
seeing kind of that zero rent growth in that chart
in 2024 2025.
It's kind of pulled down by malls, you
know, at Crowd Street, we're really more focused
on strip and grocery anchored
centers. And what we're seeing in within those
subsets of the asset class is a continued
kind of 3% rent growth occupancies
remaining steady.
Uh So for now, I think that's gonna wrap up
for market fundamentals. So let's move
on and talk about lending standards and what
we're seeing from that aspect. And for that, I'm gonna
pass it over to Anna Marie.
Thanks. I um
so the chart you see here is
the senior loan officer opinion
survey um on bank
lending practices and it shows
kind of the net percentage of banks tightening
lending standards for commercial real estate. So essentially,
it's the number of banks tightening standards,
less those that are using standards.
Um And what you'll notice is that through 2021
if you look at that kind of period of time down there, we
were really in a period of easing lending
standards, um which is notable
with the standards ranging between negative 10%
to negative 20% in Q 4 21
and that really coincided with a record
setting quarter in terms of transaction volume,
where we saw 350 billion um
worth of deals getting done.
Now, you contrast this to, to where we find ourselves
today and lending standards have tightened
significantly um with that net
percentage ranging now between 65
to 74% depending on asset class
as of April 23.
Um And as Ian noted previously, you know,
along with that, we've seen that dramatic decrease
in transaction volume, which came in at about
75 billion um in Q 1 23.
Um also notable from the April survey
that came along with, with this info.
Um was that the most frequently reported
change in terms of CRE lending standards
by banks um was wider
spreads on loan rates over
the bank's cost to fund as
well as lower loan to value ratio. So
this really means we're seeing a decrease
in proceeds and more expensive
cost to, to get those proceeds for
um commercial real estate um
Um The survey also noted that banks
are expecting lending standards to continue
to tighten throughout 2023.
Um So really what this means is that
we're going to see an increased stress on borrowers
um as we already have seen um
here in the last past couple of quarters
and we expect kind of debt funds
and other opportunistic lenders to kind of step
in and fill some of those gaps in terms of proceeds
on deals and getting deals done. But again, the cost
of financing is going up and that's making
it more difficult to, to get deals done.
Um So with that, I'll, I'll pass it back to you, Ian to, to talk
about inflation.
Thanks Mary, you know, and one of the things just to call
out in terms of those lending standards that we're seeing
is that obviously in the wake of,
you know, the the mini banking crisis that we had earlier
this year in the way in the form of SBB
and First Republic is that, you know, banks
are looking to maintain liquidity.
Um That's
sorry about that. We're having some technical difficulties
on audio. We should be back with you here shortly
uh with Ian
talking about inflation.
All right, sorry for that pause while,
while we have the technical difficulties, but it sounds like
we're back on track.
Uh So really what I want to call it is in terms of
those, those lending standards that this is,
you know, for, for the short term,
you know, leading through the rest of the year, we
continue to foresee that the ability to
get debt will be difficult. Um
It has interesting counter effects, right?
I mean, it's gonna slow transaction volume down.
Um But on the flip side, it's going to place
a higher level of scrutiny on deal flow. And
really what we're seeing is that it's raising the bar,
so to speak, for all deals, so deals,
you know, the the lower half kind of the 50 percentile
and below type deals that might have gotten done
in the past, they don't get done now. Um And
so I think that creates some interesting opportunities
um down the road that we'll talk about, you know, in
a few more minutes, but let's talk about inflation
for a minute because as we all know,
in the inflation has been the story of,
you know, the greater macro market for the last
year and a half. It's what's driving
the commercial real estate market on a monthly
In essence, everybody the entire market
is watching and waiting, hoping
that we might be reaching peak rates wondering
when the first downtick in interest rates
will come. Um And as I talk about,
we're gonna talk at the end of the, the presentation
about a memo that I'm getting ready to publish later
this week. Um But what we discuss
in this is that, you know, in our opinion,
in terms of getting some greater demand behind
the market and what we see kind of coming out of the
trough is going to be probably
some, you know, there'll be a lot of factors that play into this.
But I think interest rates is gonna be one
in essence, we think that the first time
that we see, you know, that 1st 25 basis
point reduction kind of might wave like
an all clear signal. And we expect at that
point, the potential for more capital
to start coming into the market, driving
prices maybe then translating
into the first bit of cap rate compression
after we've seen some cap rate expansion.
So here, what we want to call out is that, you know, from,
you know, the good news from our perspective
is, you know, inflation is roughly half
of what it was just eight months ago,
it's continuing to go down, you know, on
a month, over month basis, we saw that 4%
CP I print last month. And
what I wanna call out here that I think is interesting.
And again, what I touch upon on my memo is
that for the first time since we've
been raising interest rates and got into the high inflation
environment, we have now flipped
and what we have flipped is the fed
funds rate at 5 to 5 and a quarter percent
is now greater than CP
I at 4%. And that's significant
for the I think for the following reason is that if
we go back to that economic concept
that Paul Volcker employed in the early 19
eighties, it was, if you want
to get inflation under control, you
must raise the fed funds rate
to above the inflation rate.
And if you do that will change
consumer behavior, it will, it will
induce savings, it will curb
spending and it will in essence, make
the cost of capital expensive enough
that you'll then see disinflation.
And, and the numbers we saw in the early eighties, right in 1980
you know, we saw inflation hit 14%.
We saw Volcker raise the fed funds rate
all the way to 19%. And
then we saw inflation come down pretty significantly
thereafter in that period. So
this is an interesting inflection point because
we were just sitting here in October or September
last year talking about how when
inflation was still eight plus percent
fed funds rate was sub 4%.
It was the same economists that were actually pointing
to this phenomenon. And calling out caution
saying we're not doing enough right now
to get inflation under control because
inflation is more than double the
fed funds rate. Now we've flipped. So
in my opinion, I think this is starts to create
more disinflation
in, you know, in the months ahead, gives
us kind of more, you know, confidence
that we are really on this downward trend.
And as we can see in the chart, like we're dis inflating
at a pretty, pretty good clip. And so I think
there's, you know, there's real optimism out there
to say that might continue in the months ahead.
Yes. Now that we're 4% it might
slow down a bit, but it still feels like we're
tracking lower.
And the other thing I want now I want to talk about
is where, you know, a, a key component
of both CP I and core CP
I, because one thing that like
when we're seeing inflation coming down and we're seeing
these CP I prints lower. If
you're also seeing some other economists
point out be like, yes, but core CP
I is a bit stickier and
it's been true, it's coming down, it hasn't
come down at the rate of CP I. But
what's interesting in our opinion is that when we
look at housing, right. This is the industry that we live
in every day. So housing costs and
shelter. Well, it's about one third
of CP I, it's about 40%
of core CP I.
And we also know that there's a lag
between the time that we're actually seeing
rental growth growth rates on the street.
And when those rental growth rates translate
into CP I data. And so,
you know, there's different debating theories out there
in terms of what that lag time is.
And Jay Parsons who is an economist
at real page is one, I think he's a brilliant
mind. I think he's great for the industry. And he points
out that his opinion is it's about
12 months.
And in a recent post he made on linkedin,
he actually quantified and show this in this following
graph. He's saying, hey, look, look how
in March of 2022
we hit peak rental rate
growth in the market,
but then we didn't see rental rate growth
in CP I until March of 2023.
And now this is, you know, may data
now in may data on the street, you're all
the way back down to 2.3%
growth right on
the street. So now the logical
conclusion is going forward, we
would expect to see this data continuing
to flow into CP I and core CP I
creating more disinflation in the months
ahead. So when you roll it all up. And what is the key
takeaway? I think the key takeaway here is
watch, inflation continue to taper down
throughout the remainder of the year. I think where
we sit right now is very interesting. I do
think that where, where we watched this pause
from the fed this last month is interesting
because in my opinion, if they're pausing,
it is a wait and see. Yes.
The rhetoric is saying, look two more,
you know, in incremental increases.
But at the same time, if we continue to see,
actually CP I continue to drop,
then I think there's incentive for their,
for them to continue to hold. And
so therefore, it's a little bit more in my personal opinion
that I would say watch for rates
to hold, not necessarily rise
and not necessarily go down quickly,
but more or less. We might be at peak rates
right now and we then might see
the logical conclusion being that, that first
interest rate reduction maybe early
2024. And that would then give us
a little bit more tailwind behind the market
on a go forward basis.
Um So from here, we are going
to move on
and we are now, I think
from this point, we're gonna get into asset
class by asset class if I if I'm not mistaken.


hello again, everyone. Thank you, Ian.
So let's talk about hospitality
first, I'll give you a brief overview
on the outlook. Then I'll jump into the opportunity
section before I pass it back to Ian for industrial
So to track hospitality performance,
we look at revenue per available room
or rev par.
So two years before the pandemic rev
for hotels across the US was in the 67
to $99 range.
But we all know how the sector was obliterated
during the pandemic due to COVID-19 restrictions
during that time, revenue tanked
to its lowest ever numbers down to about
$17 per room which you can see
that dip on the chart on the screen,
this of course affected transaction activity
as investors shied away from the sector because
it was at a standstill.
The good news today is that the market is showing
signs of entering its next phase of
revenue recovered fully in 2022
and has now surpassed pre pandemic levels.
But the caveat there is that uh the recovery
is on a nominal basis which means
that the sector has recovered if you do not account
for inflation.
So when can we expect to recover on a real
On the right hand side of the screen, I've pasted
what's called the 2019 real rev par
A leading hospitality data source called
STR tracks this metric. And
what this is showing you is that when you compare
to 2019 levels of rev par real
recovery and revenue will be achieved sometime
in 2025.
Now I'm gonna move on to the opportunity
OK. For opportunities,
um prices seem to be stuck at pre
pandemic levels after falling
during the pandemic. Hotel prices
have creeped back up to exactly where they were
before the pandemic according to green street


So from our perspective, there are opportunities
to buy or recapitalize hotels
today at 2020 prices and
many of these properties would have likely appreciated
if the pandemic hadn't massively
disrupted its um its trend line.
So our strategy is leaning into
opportunities where these price disparities
continue to exist
also where such deals exist.
One strategy that we think is viable is
to lean into core plus deals
as opposed to um overthinking
the risk profile, especially
if it's possible to invest in a property
that's already cash flowing where
you can reasonably believe in its growth over
the holding period.
And this can be a viable strategy right now for
hospitality, especially because
right now it's one of the assets that's
um has the potential to offer what's called
positive leverage.
Um And briefly, what that means is that the
high cost of debt is not diluting
analyzed investor returns in a way
that um it would in in
in in the case of negative leverage.
So now when we think of opportunities by the
type of hospitality property data
from CBRES Hotel state of the Union
report shows that resort style
or leisure hotels are outperforming
in their recovery as compared to urban
And part of the reason may be that leisure
travel has recovered more than business
travel so far. So there are currently
more opportunities to tap into
leisure hotels, especially extended
stay hotels in drivable destinations
or vacation markets with a high travel demand.
Lastly, let me touch on a few things we're monitoring
for this sector.
So the consumer savings rate has decreased
quite significantly from its pandemic
high of 33%
down to now about 4%.
So, and that's actually below its
average trend line.
Um We're gonna be monitoring this as this
could put a wrench in travel recovery
and we're also monitoring urban recovery.
It's important to understand that CRE works
in an ecosystem. So markets
where offices are struggling or business
travel is lagging that can impact
hotel occupancy as well.
An example of this showed up a few days ago
when it was announced that the investment company
park hotels and resorts defaulted
on a loan on two of its hotels in
San Francisco because of struggles
in the market's urban core.
And the company's CEO is planning to give
up these properties and he blamed
um in, in a news report that insider released,
uh they quote that he blamed remote
work and street conditions as the main culprit.
So we're definitely gonna be monitoring conditions
in the urban sector and in the next few
months that that's gonna matter.
Now I'm gonna pass this back to Ian who's gonna
talk to us about the industrial industrial
sector. Thank you.
Great, thanks.
All right, when we turn to the industrial sector, we
see a market that continues to, to
still continue to operate with very sound fundamentals
in our opinion. Um As you can see,
you know, occupancies remain high.
Uh The expectation is for rent growth
to continue to kind of average in the,
you know, mid single digit range over
the next few years. You know, we're definitely
seeing rent growth come down off
the peak. Um But at the same
time, we, you know, this is, this is what this
is fully expected in our terms. And because
we were like simply unable to continue
in our minds to con to continue to grow
rents at double digits uh indefinitely.
So we saw that huge run into the market.
We saw now we saw rent growth pair back,
we've seen, you know, a cap rate expansion
of call it 80 points or so.
Uh in this year, we've seen cap rates
more or less flatten out uh with rent growth
continuing to increase. And so also
when we look at the a lot of the markets out there,
we're seeing positive absorption. So we see the opportunity
to continue to add supply.
So let's actually talk about, you know, in terms of now this
the opportunities. So again, like I said, we'll continue
to look into, you know, key
primary and secondary markets where we
see positive absorption continuing to occur,
occupancies remaining tight. We think those
markets can uh handle more supply
uh because they're, they're filling it up.
We also are looking around,
you know, when we think about where geographically
we're focused a little bit on the center of the country
right now, from this friend shoring perspective.
Um in essence, you've now seen that
with the wage growth in China over the last decade
or so, wages are now higher in China
on average than they are in Mexico. And so
you combine that wage scenario
with, you know, some geopolitical
tensions at the top line level. And
you know, and now we're seeing a greater propensity
and in like a renewed increasing
interest in bringing manufacturing
back onto our continent, some coming
inside the borders of the US. But then also
we're seeing an increase in manufacturing
occurring in Mexico. We continue
to see that trend continue on throughout
the rest of the decade. So to the extent
that we can see tight markets that are
catering towards goods coming over
the, the southern border. Uh and
then distributing from there, we think those are markets that
we that have good runway in our opinion.
Uh The other thing that we're seeing for the first time in
a year or I'd say probably two years
is the ability even to get into some acquisitions.
Uh you know, coming into last year, cap rates,
you know, at a national level going below 4%
just simply wasn't making sense in our minds
to acquire anything because the spread
between building it and then selling it was
just too great. We said we would just build it.
We couldn't seem, you know, make sense of
acquiring it, operating it. Now
with cap rates expanded, there's, there's
a little bit more of a normal market phenomenon
going on out there. So now we see the ability
to step into some types of acquisitions.
Uh You've seen us do this a little bit, you know, so
far this year in terms of, you know, maybe coming
in to a lease up play
one thing that we want to call out that was I think
notable that just this week is
that Pro Lodges and Blackstone announced
a major deal. Uh This is a, a logistics
portfolio that Blackstone is selling to
Pro Lodges.
It's 14 million square feet.
It comprises 70 properties, it's all
over the country and it's transacting it
at $3.1 billion which is
about $220 per square foot.
One other thing in particular that stood out
to us is the valuation of
that deal in terms of what was the underlying income.
The deal was predicated on an in
place cap rate of about 4%.
So 4% of the yield in terms of
that $3.1 billion. But
on a mark to market basis, it was 5.75%
on a fully adjusted market rent
basis. So when you back into those numbers,
that would suggest that on average, that
portfolio is about 43%
below current market rates.
And so, you know, and and to us,
this is a good indicator, right, Blackstone
being a top tier operator of industrial
in the United States. If their portfolio
is essentially failing, you know, struggling to
catch up to mark to market rents, we
think there's definitely still some upside. We've seen
deal flow come into our pipeline that
has similar characteristics. So there's
some, this is another thing that we're monitoring and to the extent
that we see the opportunity to
acquire properties where there is a good mark
to market play. Some of these situations
stand out. And as we just saw, you know,
that Blackstone prolog
deal, I think is indicative of that. So
from here, let's move on to multifamily
and for that, I'm gonna pass it to Anne Marie.
Thanks Ian.
Um So overall our outlook
for multifamily is that it's a fairly stable
asset class. Um at the end
of the day, you know, demand for multifamily really is
nondiscretionary. Um This asset
class definitely has slowed,
but it's important to remember um
that we're coming from a period in 2021
where we really experience double digit
rent growth as you can see on the chart here. Um
And also that was coupled with exceptionally
high transaction volume.
Um We did see this cool in 2022
and interest rates increased um and
expect this cooling to continue uh with
rent growth hovering in the 1.5 to 3%
range for the next few years. But this
is really just bringing it down in line
with the trends um that we've seen between
2015 and 2019 when rent
growth really averaged about 3%.
Um You'll also notice that vacancy is forecasted
to drop um to a little
below around 2% 92%
per co-star.
Um One main factor for this pullback
can be attributed to new supply that's
incoming um per co star.
We had about 627,000
units start construction in 2022.
Um And this is the highest rate we've seen in
the last 26 years in terms of the
Um However, given the constraints
that we talked about earlier in the debt markets
um and softening conditions,
um overall uh new
construction starts are beginning to pull
back. Um And for 2023 they're forecasted
to end at about 350,000
Um And this is the level below anything we've seen
from data dating back to about 2017
in terms of opportunities. Um We
really are leaning into this higher cap rate environment
that we're finding ourselves in.
Um We're really believe we're coming
into an environment for multifamily where pricing
is gonna start benefiting buyers
um and opportunities may exist to
purchase really well located class a
properties at a discounted price
point to what we've seen previously.
Um If we look into cap rates, we've,
we've seen that they've really been compressing over the last
15 months. Um If you
look at March 2022
per Green Street, at that point in time,
cap rates for the multifamily sector
nationally were averaging about 3.8%
fast forward to today. And you see
that now at about 5.2% nationally.
Um So that's about 100 and 40 basis
point expansion.
Um Again, the last time we saw
multifamily cap rates in this range of
5.2% you'd have to go back all the way
to 2014. So, so we really do
feel like there is value in those
well located debt assets.
Um The other opportunity that, that we
believe exists in is
that of distress deal flow in the multifamily
sector. Again, there was a lot um
of operators and owners who purchased
assets with floating rate debt.
Um And with the increase in interest rates,
um we do believe that they may be
finding it difficult to service those loans
moving forward, which could um
create opportunities for some of those
um opportunistic purchases.
Lastly, um in terms
of development, um our outlook here
is that you really have to be selective.
Um As I mentioned earlier, there has
been a lot of new supply coming online.
Um however, not mark all markets
are created equal. Um So it's really
important to dive into the specific markets
to, to understand what, what the supply
Um you know, searching for those markets
that might have more stringent entitlement
policies um limiting that supply
is gonna be beneficial. Um Further,
I think it's important to, to go into those
deals um with tempered rent growth
and, and cap rate um assumptions
um in their underwriting and make sure that you're partnering
with the right developer um
to really make sure that they're delivering
quality projects in these markets
with, with less um incoming supply
in terms of things we're monitoring. Um Again,
I think the most notable one is that that supply
Um as I've mentioned, overall
fundamentals in multi family are holding
um but there has been some softening in
occupancy within the sector.
Um Again, we believe that this can be
um attributed to that robust construction pipeline
um per coar right now, there are about 1.1
million total units under construction currently.
Um However, it is important to note
that this supply is really concentrated
across 15 markets.
Um So you need to understand
individual markets um when
you're going into to developments or
looking at multifamily in particular, um
An example I'm gonna pull out is Austin
again, per Moody's um it has
quite robust job growth of about
1.7% which should
um attribute to about demand
of an additional 7000 units for the market.
However, if you, if you dive a little deeper into
Austin, um it's currently expected
that about 31,000 units
um will be delivered in 2023. So that's
gonna leave a shortfall um of
demand for about 24,000 units
of demand. So definitely things for
monitoring in multifamily.
Um With that, I'm gonna pass it to Ian uh to
discuss office,
right? Thanks Anna Marie.
So when we come to the office sector, I mean,
this is obviously the outlier asset class.
Um as I mentioned earlier, it's sitting, you know, deep
in its own kind of secular, you know, bear
and really from our perspective, this is
the year that office is starting
to experience it at the next wave
of price discovery, you know, huge
markdowns in, you know, in kind of
pre pandemic pricing,
you know, a couple of data points on that just to illustrate,
you know, first um Denver
in the Wells Fargo Center there, it's a 53 story
tower, it's 1.2 million square feet, it's
got AC M BS loan on it and that goes through
a valuation process regularly. Um
Trepp just recently reported that
that loan or that I should say that asset
really has been revalued. Um It
was valued at $475
million in 2019. It was just
valued at $287
million it's a 40% decrease
in price uh within the last four
years. So again, you know, and that, that puts
that asset just above valuation
of its loan balance. And so, you know, I think
that right now is very indicative of what's
going on across the country. And a lot of
these key, you know, particularly like downtown
CBD Trophy located assets,
um you know, the markdowns are coming,
the price discovery is coming.
So in essence, I think what that translates
to is that, you know, we're, you know, there may
be some opportunities and we'll talk about this in a second
coming up right now. What this outlet
looks like is in the, in the short term,
you know, decreasing occupancy. You
know, I think the Castle systems just
kind of at least celebrated that at
a nation nationwide level. We just got to
50% utilization on the buildings
that they track. It's great to see that that's an uptick,
but 50% utilization is still far
off of, you know, the 90 plus percent utilization
that we saw, you know, pre pandemic. So
the the office market does have
a tremendous, you know, way to go. Other
deal that stands out is that Clare and Partners
is getting ready to sell 60 Spear Street
in San Francisco. Uh The estimated
valuation of that asset when it comes to market
is roughly $200 per square foot. That
is an asset that last traded in 2014
at $700 per square foot. So again, these
markdowns, they're starting to come, they're starting
to show up. And in our opinion, that's the beginning
of the, of the basis reset that the market really
needs. So let's talk a little bit about
where, what that might translate to in terms of opportunities.
So, from that perspective,
I'll make sure I don't, there we go.
So we're seeing a few things start to pop up
that that are starting to look interesting. The
first is what we're calling this flight to quality.
Uh you know, given that the entire
office sector is on a strong downward trend
in terms of pricing.
Um while that de definitely
affects and is, you know, feeling the
brunt of that in certain assets that are suffering
that, you know, that vacancy, there's other assets
that are currently occupied, well occupied,
in fact, and they might have strong
weighted average lease term five plus years.
Um They might have strong tenants in place, right?
Tenants that are doing very well that are actually utilizing
that office right now. And it more
looks like a pre pandemic scenario for
certain buildings now because
of the market dynamics, those
cap rates on all office have expanded
dramatically. So we're starting to see
some of these deals be presented at cap
rates that are looking like 10% even
And if we can find a scenario where
we have conviction in a tenant in
a tenant base in the location
of an asset, a sponsor. And
now we have the ability to maybe ride through
this next two or three years of what we
think is continued price discovery while
getting into a deal at north of a 10 cap.
That's what we consider flights of quality. That's what
we will consider
from there. It goes into that straight distressed
assets at some point, this
market is gonna go on to on such
a level of sale that there may be
certain opportunities that stand out. Those
might be trait like that might turn into
the the loans. In fact, uh there's
one office owner that we track.
Uh and in his quarterly report, the CEO
quoted, you know, we believe that these opportunities
will be more likely to come in the form
of loan sales and not in foreclosures.
So I think that's a segment that we're tracking,
we're monitoring that possibility as well.
Uh Once we get to a point where we think we've got
very, very compelling basis kind of rock
bottom pricing um that might stand out
to us in terms of distress. Um And
then other, uh you know, and then other than that, it's gonna
be kind of this what we call these creative structures,
these rescue capital scenarios, maybe
you can get in to something that is
in the middle of the stack or even below
like a lower stack, almost even senior position.
That's that loan sale scenario. I think
there's gonna be some interesting things that
will ultimately occur, I think
right now from our perspective is, is just more
of the when. So we're gonna, we're, we're cautious,
we're just watching, we're waiting. Um, but
we're paying attention and when those opportunities
pop up, um, we're gonna, we're gonna evaluate
them and potentially jump on some.
Uh, so with that, uh, I think
we're gonna pass it. So it's gonna, we're gonna go on to retail
to wrap up our asset classes and for that, I'm
gonna pass it back to Anne.
Thanks Ian. Um All right, I'm gonna keep this quick
because I know we are bumping up on time and we
do want to leave some time for questions
from, from everyone who's tuning in.
Um So in terms of retail, I think comparatively
retail actually has been performing quite well.
Um In fact, CBRE reported that in
that was one of retail's best years uh with
strong performance from neighborhood centers,
community and strip centers. Um This
really was in large part due to low availability
um and a very limited development pipeline
with only about a half percent
of total inventory under construction per
Um Looking forward to see that demand may
outstrip supply and is seen on the
graph. Um Occupants see
it's expected to stay elevated at around 95%.
Um However, there may be some
softening in rent growth. Um This
could be a potential result from a slowdown
in consumer spending. Um Again,
we're thinking rent growth may start dipping
below um 3% moving
forward. Um As you can see in the chart as well
in terms of opportunities um that we
are seeing in retail, we believe it's gonna be um
really worthwhile to pay attention to those
grocery anchored stores um and well
located um neighborhood or community centers.
Um Gross re anchored retail again
has been performing well and we expect this
trend to continue really due to its nondiscretionary
um and its ability to provide fairly
stabilized tenancy. Um
We believe in retail due to the potential ability
to enter into a deal with positive leverage
again, like Amna um described
in hospitality um given where cap
rates are, um this,
this really is possible. We're seeing cap rates
currently in the 5 to 7.5 range
um per Green Street.
Um And as an example, um real
estate Lurk that was published yesterday, just um
noted that Stockbridge Capital is
actually marketing a grocery and drugstore
anchored um component of a
San Diego shopping center that is fully
leased going in at a 5.2%
rate. Um And Stockbridge is actually
offering seller financing um of
54 million on this deal um
at an interest only rate of 3.5%
for the sale. So, again, that, that's a great example
of that, that positive leverage there.
Um in terms of what we're monitoring, um
you know, really this comes down to the US consumer
health. Um that really is top of mind,
you know, they are the the drivers behind retail
um and have played a large part in the recent
success of the sector um
due to the strength of consumer spending. Um
recall again that post pandemic,
the consumer savings rate set sat at
about 30%
um but fast forward to today
and that's dropped to 4.1%. So we'll
really be watching consumer spending habits
um to monitor um the slowdown
in spending and it's uh affects some retail.
Um We're also going to be paying attention to
new construction starts again, as I mentioned
previously, currently, there, there's really
a limited incoming supply pipeline
in the retail sector. Um but should
that, you know, change and in that pipeline
increase, um you know, it, it may have
an effect on vacancy moving forward.
Um and that window may begin to close
on retail's kind of current upward
run. Um And with that, I'll,
I'll pass it over to Ian for some closing remarks.
All right. Well, thanks Anna Marie and thanks Omna
for insights on on those asset
classes. So, I mean, overall, you
know, we're happy and pleased to get the market
outlook on the street. Uh You
know, hopefully that some of the comments that we gave today
brought some color to it brought some, some of those
aspects to life. Um, you know, this
is in essence how we see the market
right now. And these are the things that we are
looking for and looking for signs
uh in the months ahead. And, you know, I, I do
think, you know, and, and then again, we're gonna touch
upon when, you know, we have a memo coming
out. But, you know, overall the,
the it points to the possibility that
this is an interesting time in the market, you
know, in essence, what we're seeing is that everything,
all the bad news, there's, there's, there's been so
much of it so quickly and it's affected
the market, you know, as we've seen over the last year,
what we're starting to see honestly is kind of the
peter out of the bad news and the beginning
of the prospect and the possibility of
some good news.
Uh And you know, what we've seen from a pricing
perspective is Omna pointed out earlier in the presentation
is that pricing in the main asset classes
of industrial and multifamily, it's been flat
like they're not, prices aren't going down
anymore. Cap rates have more or less flattened
out. So to us, it's just, it's just
an interesting point in time. Could there be
future cap rate expansion? Of course, could
there be, you know, another downward
leg of pricing? Sure, that's always possible.
Um But the longer that we sit
here in this current kind of like sideways trending
market, the more that we start to gain more
conviction that maybe if we're not at
the bottom, we're somewhere near it and
the backside of the trough might actually be
somewhere in the short term in the months ahead.
So these are the signs that we're gonna be looking for.
We know ultimately that when
we know that we're through the trough, well, we'll be three
or four months beyond it. Uh That's how
we're gonna know that we've gotten through it. Uh, so
on a day to day basis, we're just looking for these more,
these day to day signs, our, our assets
continuing to transact relatively in line
or at better prices than, than they did
a month ago is our occupancy
rates holding is rent growth holding as
we have discussed, the more that we see that
the more that we gain confidence that, you know, we're
kind of somewhere near the bottom of this, uh, it's
gonna be difficult to get good deals done because
of the way the capital markets continue to function
and we expect that for months ahead. Um, but
to the extent that we can find good deals, you
know, to the extent that we see we're gonna, we're leaning in
to those deals that, that are well priced,
have the right types of capital associated
with them are constructed. Well, and I think the
key thing in our mind right now is that
deals that stand out to us are ones that
don't require a tremendous amount
of short term, you know,
good news, uh in order to
affect business plans, in essence, if we can get
into deals right now and kind of continue
to kind of slog through the short term
and, and then have greater confidence that there's
maybe some tailwinds in 24
25. Uh but we're priced right,
and we're capitalized right in the short term.
I think that to us is, is what looks like a winning
business plan. Um So with that, I think
uh we're gonna invite Ryan back back in
because we gotta get into Q and A, we got about 12 minutes
or so. Uh So Ryan come
up and join us
before that. Um ok. Yeah, sorry. Uh
So, yeah, so on that. Yeah, so before we
do Q and A I guess I was thinking we were gonna do that at the
end. Uh But let's jump into some of the updates.
I'm just gonna keep this quick. So a quick
update, we recently released our commercial
real estate outlook and opportunities mid-year report,
which you should have received in your email.
It essentially covers what we talked about today,
but in greater detail, you can also
find a niche asset class section
there. We also touch on student housing, self
storage and life sciences.
Also a quick coming soon announcement
that Ian wrote his third memo and we
will be releasing it tomorrow. It's titled
Are We Out of the Woods? Yet, Ian shares
his thoughts on where we are in the current market
cycle when Powell might begin to
lower interest rates and what, where we may
be headed, um, in the next
phase of the cycle.
Um And I hope that's informative for you.
Final note that uh after the Q and
A you'll receive a survey that'll pop pop
up. Uh Please take that to give us your
feedback on these calls and I'm gonna pass
it back to Ryan. Let's jump into Q and A.
All right. Thank you. A great presentation.
This is my favorite part, which is the Q and A
um some interaction here with the uh viewers
of the audience. Um At the end of the day, we want
to provide you information on what you want to hear.
So I do encourage you still use the chat
feature at the bottom of your screen. If you do have a question
um that you want answered, please type that in
and we can get, get to you. I will say again,
this presentation is going to be on the market
as, as a whole. So if you do have a question on
a specific asset or an investment that you see on
the Crowds Street marketplace, go to crowds street
dot com. Sign up. If you don't have an account,
we do have the resources available to answer those.
But this is not the forum for that.
Um In the, I'm looking at the questions
that are coming in here. I do see some themes
um and they do kind of tailor to the presentation
that was just given a lot of questions about
debt. Uh And I'm gonna start Anna Marie
on the multifamily side here
because we do look at a lot of multifamily deals together.
A question that came in from John
here um are loans
more available to multifamily
refinances compared to
multifamily acquisitions.
Um And maybe you can provide some color on the
availability um and
details of uh of multifamily loans.
Um You know, I think instead of thinking
about it probably as refinances versus
acquisitions, I think it kind of more.
So um is looking
at the the kind of status of the asset in terms
of is the asset stabilized. Um
If you have a stabilized asset, it's definitely
gonna be easier to refinance. You know, you have
the agency financing through Fannie Mae
um and in Freddie Mac that um
is available for those. So if you have a stabilized
asset, it's able to, to cover debt service
um typically, right, those would be underwriting
to a 1.25 coverage ratios
is what you'd be looking for. Um debt
is available. Um They granted
again, some of the proceeds may be a bit lower. So
on refinances, it also is gonna,
you're gonna have to consider how much debt is currently
on the property. Are you gonna be able to
cover that with the new proceeds? And if not,
you may have what is known as um
an equity in refinance where
you know, the owners will have to put in equity alongside
the debt um to, to get the,
the original loan that you're trying to refinance
um covered.
Yeah. And you know, the other thing I've seen Anna Marie is
the availability is there a lot of times it comes
down to proceeds and rates,
we are see proceeds coming down, we are
seeing rates and spreads increase.
Um So the financing is there, it's just different
than it was, you know, a year ago.
Um Another question on
um debt as well here. So
uh a lot of noise about
maturities. We, we touched on this a little bit
but we do see a lot of debt maturities coming
up. There was a recent report from Politico
uh that was called CRE debt
maturities, a potential time bomb.
Um What are your thoughts on this narrative?
And, and especially what we're hearing in the news in terms
of debt maturities both for CM BS
um but also for agency. Um
I and maybe you can take a first step at that one and then would
love to hear some other thoughts as well.
Yeah, sure. And we did, we, we put out just a little
brief piece on this uh just this week touching
on that and what we're seeing is.
So first, I think you have to look at where
debt maturity is coming from. Uh multifamily
is about half of all outstanding debt,
roughly four trillion of outstanding
debt. So multifamily being about
two trillion of that and then, and then also
looking at the potential for like so then with that
two of the two trillion of commercial, so by and
large, a lot of the multifamily debt as we just
touched upon as it's coming due.
Uh There isn't like major distress in, in
much of that, there's gonna be pockets of distress.
Um but it's
gonna be limited to, did you buy,
you know, at the, at the, you know, at the peak pricing,
did you, did you over lever that asset?
Um but assets that were acquired, you know, 34
or five years ago, they've seen enough rent growth,
they've seen enough asset appreciation. Um
They've given some of that back this year, but more
or less those, those loans are still relatively
intact. It's really gonna be on the office
side, ok. Look, but there's about 100 and
my recollection about 100 and $30 billion
of maturities of, of office
coming due. And that's over the
next two years and even within the office
sector and what we touch upon in this,
in that brief blog post that we put out is
that, you know, and, and we had this slide,
you know, uh in one of our slides we talked about, you
know, the extend and pretend
and that's a phenomenon when you
have maturities coming due, when you
have a macro driven event that's
happening right now for the office sector,
it's not necessarily to say like the lenders don't
really want the those assets right now. If,
if you have a bad, if you have a, an asset that's
underwater and you believe it's operator driven,
ok? You're gonna take that asset back, you have to
cure that problem. You think that problem is
the current borrower and you're gonna look to
liquidate the asset or you know, potentially
install a new operator when it's macro driven
like it is right now, you, you, you view
that borrower more as kind of a your partner. You're like, hey, we
got to get through this all together. Um That
is going to create scenarios
where the lender wants the borrower to
put in some money, put it, you know, both in the
forms of an equity contribution that Anna just touched
upon put in additional reserves
more or less, help them kick the can and
hope that in the, in two or three years out from
now that they're in a better environment, asset
values have popped up a little bit. Maybe that that asset
is back to being in a better loan to value position.
So we're already seeing that happen. So
our, you know, the way that we summed it up was, do
we, do we think that CRE maturities are
a time bomb? A giant time bomb? No,
I'd say that it's a series of these small
incendiary devices. A couple of them are going
to blow up and then others are going to get diffused through
that, that those workouts in terms
of the extent of pretend. So we'll continue
to monitor that on an ongoing basis, but that's
what we see in the market right now. And I'll just add
there that the uh amount of loans that are
expiring within the next two years. Office
makes up about 20% and multifamily
is actually making up about 30%. And
most of those multifamily loans are not expected
to be distressed. So I think looking at percentage
really matters, like break it down and then
see exactly that it's not that big
time bomb, but that it's a little bit
more nuanced than that.
Yeah, exactly. You know, the underlying information
behind those loans is really important and that
is a good segue. We do have some questions coming
in on the office market as a whole. Um
One question here, concern in the office market
is that it seems like there's a push from
organizations to bring their workers
back into the office. So we all went remote
2020 now you're starting to see a push to bring
workers back into the office. Um
What do we think some clear signs will
be? Um, that we're now kind of at
that inflection point where you start to see
office utilization um
increasing versus, versus decreasing.
Sure, I guess I'll jump in on that one. There's a couple of things
to think about in terms of office utilization.
Uh So as I mentioned earlier, you know, nationwide,
we're about 50% utilization rate right now.
Um we are continuing to see more,
more companies announce, you know, the
return to the hybrid office. And I think
that is the operative term, right? I think that as
we get back to what is the new normal for office?
Uh as you know, it's been anecdotally,
you know, pointed out Friday is dead
as an office day probably forever.
Monday is kind of like up in the
air, do people come in or not? But
growing consensus around that, you know, office
at stabilization will look like,
you know, a lot of people returning to an office
wherever they live and work uh from a Tuesday
to Thursday kind of basis, there are gonna
be some companies that continue to live
in a, you know, in a remote, you know, world.
Um but that, that's gonna be, you know, it's
gonna be anecdotal in the, in the overall picture,
right? I do think that we get back to
better utilization. I think the the
statistic that in my mind sticks out is
making sense is that Doctor Peter Letterman talks
about this kind of like two thirds back.
So when we see daily utilization
get back into the two thirds range. That means
that like it's a 2 to 1 in the office versus
kind of out of the office. And he thinks that
is the point where that's the tipping point
where everyone's gonna look around and say, well, if I'm
not in the office, I'm, I'm actually in the,
in the, in the minority here. I should probably be
in the office if I care about my advancing
my career because those decision makers,
well, they're back in the office now. And
as, and as we've learned, as, you know, as a lot
of data out there suggests, you know, being
in the office, being in front of decision makers is
a good way to advance your career. So I think that
will be an interesting point. Um But
overall, you know, and I think there's one interesting
trade, if we want to talk about more
like the upside and what's the potential
bull case for, why office might look better
in the next few years? Just look at what
happened in New York. Just this week. Sl
Green announced that they sold a 49.9%
stake in their 2 45 Park
Avenue Office Tower to Mari Trusts,
Japanese Group and a gross
asset valuation of $2 billion.
That's $1100 per square foot.
Now, it's fair to point out that that deal
did benefit from fixed rate
debt of 4.2% that's in place
through 2027. So that definitely affected
valuation there. But at the same time,
that's a real trade. That's a big asset.
It is, it is a, it's a fantastic
asset and it's,
you know, in a core location, Park Avenue
is not going anywhere in New York. And
if there's a, a major group that's willing to come
in today with all things known in the market
and post an $1100 per square
foot valuation, it tells you that
that office market is not dead,
that there are groups out there that are fully bullish
on what it might look like in the future.
Yeah, I think it's really interesting. I mean, if you take
a step back and we all went remote, right? We didn't
have a playbook for how to operate in this
environment. And I think we've figured out a lot of things, but
one of the pieces that I think has been very difficult
is that employee growth, especially for
the younger employees, right? Who don't
have the ability to sit in the conference room, like
hear those conversations with the senior leadership
team members. Um I think that's something that
is missing and, you know, we haven't
found a way to cure that in a remote environment,
bringing people back to the office. Definitely,
Ian to your point helps out it's important to be in the room
with the decision makers, you know, hear the conversations
that they're having. And so I think that is going to draw
more people back into the office that
two thirds, one third is an interesting inflection point to
pay attention to as well.
Um Another question here in the office
uh space really quickly and IAN
this kind of got me thinking the the deal that you
had mentioned
where we went from 400 million plus
down to 287 to 40% decrease
in value.
So, you know, when are we going to start to see
the office space shrink, right? Like
the repurposing of some of these buildings,
especially in the major metros, like if
you go from 400 plus million down to
2 87 not only is that, you
know, just kind of not the best use for that building
but also the the tax base, right? That tax
revenue from, from that building to the municipality,
that's a huge issue if you see that across the board.
So, you know, are we starting to see some
uh office space convert to either multifamily
or other uses or, or where do you kind of see
some of those obsolete buildings moving to
uh moving forward?
Yeah, so there's there's a few things going on there a lot to
unpack, but let's just kind of dive in and talk about it.
So first, um you know, do we think
that there are office buildings out there that can
convert into other uses such as multifamily.
Uh The answer is yes, we actually, we talked about
this, there's an article that we, we put out on it.
Um But, but in the, as,
as a percentage of the overall stock,
it's actually pretty low. Um, New York Times
did a really cool article on this earlier this year
that talked about all the things that you need
in order to convert an office into
multifamily, you need proximity
to windows. Uh My recollection is you
want to be about 18 ft from a window in
a, in a residential building. You know, you've got
deep floor, you know, 19 fifties,
sixties constructed office buildings in places
like New York, that you might be 60 ft from a window.
That means that you have to then punch light walls
down through the middle of these things. That may
be exactly where you put all
the core operating, you know, mechanics of
the building in an office building such as your, your
power, your plumbing, your
elevators and so forth. So long
story short, there's a lot that goes into, can
you convert a building,
some of the older ones, the smaller floor plate
kind of that turn of the century building. And those
also have some of those kind of like interesting characteristics
to them that kind of set up for, you know, potential
office conversions. We've seen some of those
we will, I think we still see some of those going forward,
but that's not a big percentage of the stock. So I think
there's still a lot that sits there. You
know, my personal opinion is that I think when
we think about, you know, going through
this, ok, there's another Cushman and Wakefield
also talked about this kind of stratification
of office. You've got your best office
top 15%. That's the stuff
that's always gonna be fine. It's gonna be well occupied
and it's gonna be well occupied. Going forward. There's
that next kind of 15 to 20%.
And then, you know, and then they go to the next layer and the bottom,
the bottom is this, this what they continued like that,
that bottom third or so is really
the stuff that I think languishes, it's what we
call commoditized. It's older,
it's maybe seventies and eighties vintage. It has
low ceiling heights, there's really nothing
compelling about it and there's no reason
you really want to be in it. It used to be
occupied for the basis of cheap rent.
And there may be some demand for that
on a on a go forward basis. But increasingly
what we're seeing is that return to office
is give me a, a compelling reason to
be in that space and I'll come there. Hence
the 2 45 Park Avenue scenario, that's
a compelling office building to go be
in, go visit it and you'll experience why.
Um So from my perspective, I think
that there could be years where you have this
commoditized class B class
C office space, just sit there and languish
um You, it probably sits there at 50%
occupied. It gets down to a basis
where it's, you could kind of continue
to limp it along. Um Ultimately,
these things get down to, they really
have to get below land value because you, you
have to pay to demolish it
once you hit that, those levels. That's
when you see those buildings start to go away, get
repurposed from a new ground up construction.
Be it a new shopping center, a new multifamily
deal or whatever. Um But that's
a multiyear thing that needs
to kind of unfold. And so which is
why I said in the meantime, I think this is another
1 to 2 years of continual price
I think the stuff that bounces back, that's what
you, you pick up at cheap prices and
you kind of watch the other stuff, language
and you know, sorry uh language and then slowly
and gradually get repurposed as
those assets get down to land value.
Yeah, definitely a plate to quality and it's,
you know, coming from a construction background, I started my
career in commercial construction. It's not
as easy as just repurposing something
that was designed to be an office building into
multifamily or self storage. There's a lot of
work that goes in there. And I, and to your point
too, you really have to get these at a basis
that is so attractive that you're, you
know, below the land value here because you
do have to peel the walls back. And once you
do that, you have no idea what you're gonna find in some
of these projects as well that were built, you know, 30
40 years ago. So those more obsolete
buildings are gonna be the ones that are more expensive
to convert. Um And it really just doesn't
set up well, just based on how the building was constructed
Um I'm gonna do one more question here because I know we're
already a couple of minutes over. Uh, and then we can
wrap up here, but this is an important one especially
that's something that we're seeing in real time.
Um, and it's relating to insurance.
So insurance is one of the most confounding elements
of a multifamily deal. I am hearing
many um, insurance
quotes costs that are doubling or tripling
year over year. Can you provide any
color on where you see the insurance
market heading? Um And when it might
stabilize where we might start to see some
um realistic expectations of where
those costs are gonna be coming in because it has
been difficult over the past couple of months.
Yeah, I guess I'll, I'll start with that, Anne Marie. If you've got
any additional thoughts, feel free to jump in.
But, you know, I think the, the one thing of course, so
to begin with our insurance rates going up.
Yes, they're going up, you know, going up at a, at a national
level. Uh, they're, they're concentrated
in areas, uh, that have, you know, kind
of extreme weather attached to them such as like
Florida. Um, Houston comes to mind.
We've seen, you know, a good spike in insurance
costs there. Uh, you know, I think the one
thing to point out, ok. So other than just
we, we look at it day to day on every
day, every deal, every asset, I think the
one thing to call out here in terms of like
how do you get to, you know, better
visibility on insurance costs. This,
this is a sponsor thing more even
sometimes than it is just a, you know, a market
thing because when, when you look at one
sponsor, for example, has I'll just use a number
a million square foot portfolio, few
different assets, couple locations,
they're gonna go buy another property or build another property,
they're gonna get an insurance quote that is gonna
be reflective of their overall exposure.
One thing that's very common in the commercial industry
we see is that you do,
you basically span you basically cross
collateralized most so to speak, your insurance
ex exposure across the whole portfolio,
the uh the the insurance companies want
that portfolio coverage as well, right? Because that mitigates
that one off, you know, isolated risk
to a particular building.
So if you only have a million square foot portfolio.
You can only aggregate and ex and spread your
insurance costs across a million square feet.
Now, if you have a 10,000,020 million square
foot portfolio, now you're, now you're
getting economies of scale. That's turn,
that turns into tremendous pricing
power and, and gives you the ability
to, to take that, take that
I, that, you know, that Florida risk
and now you're diversifying it across the rest of
the country so that insurance company
isn't necessarily, yes, they're quoting you on the
next building,
but they're quoting you on the next building in Florida
based upon what your overall portfolio
looks like. And when you put one Florida
building into a greater portfolio of assets
spread across the country, well, now you've
spread and diversified that single asset
risk into a broader portfolio. So
to me, the name of the game right now is really look
for those groups who are able to manage
their insurance costs by aggregating
and, and operating larger portfolios.
Thanks, I am.
All right, we are out of time here. I do want
to remind you, we had the commercial real
estate outlook and opportunities. Mid-year
2023 report released on June
Uh And coming soon, we have the memo from
the office of the Cio the third edition.
Are we out of the woods yet that'll be released later
this week? Uh Again, really appreciate
everyone taking the time to jump on listen
to the presentation again. Go to crowds
street dot com. If you do have questions
on the marketplace, we have a lot of resources available
to you there. We also have ac re
education center there that goes from CRE
101 all the way up to more advanced
topics. So definitely a place to check out in
Anna Marie. Ana. Thank you for joining us
again. Appreciate you tuning in. We'll see
you soon.
Thank you. Bye.