StreetBeats : Expert Insights

Pinterest Opts Out for $90 Million with Malcolm Davies | StreetBeats Ep. 57

CrowdStreet's Ian Formigle is joined by Malcolm Davies to discuss what's happening this week in the capital markets.

by Shawna Wright-Smith
September 08, 2020 ·

CrowdStreet’s Ian Formigle is joined by Malcolm Davies, Principal and Managing Director at George Smith Partners to discuss what’s happening with ground-up development projects, why Pinterest paid $90MM to get out of a lease, and the recent jobs report.

Ian Formigle, Chief Investment Officer

Ian is a real estate professional and serial entrepreneur with 24+ years of experience in real estate private equity, startups, and equity and options trading. At CrowdStreet, Ian serves as the key decision-maker for all investments on its Marketplace, totaling over 400 offerings and some $13.7 billion of commercial real estate. Ian is the author of “The Comprehensive Guide to Commercial Real Estate Investing” and he is a contributing author at

Prior to joining CrowdStreet, Ian was VP of Business Development for ScanlanKemperBard Companies, where he managed the firm’s alternative investment platform and served as a senior acquisitions officer on a team that acquired some $500 million of commercial real estate assets during his tenure. Previously, Ian co-founded and served as CEO of Clarus Property Ventures, a regional real estate private equity firm that focused on multifamily acquisitions. Ian began his career as an equity options market maker and member of the Pacific Exchange. Ian holds a BA in Economics and a BA in Political Science from the University of California at Berkeley and has held numerous securities licenses including Series 7 and 63.

Malcolm Davies, Founder & Sr. Managing Partner, Way Capital
Way Capital

Malcolm has over 25 years of experience as an award-winning capital advisor and developer, having advised and been involved with over $15B worth of total capitalizations, both in the equity and debt markets. Davies has utilized his expertise to lead developers and investors to structure and capitalize billions of dollars-worth of commercial real estate ventures. He has extensive experience in structuring transactions across the capital stack, including non-recourse senior and stretch-senior debt, mezzanine and preferred equity financings, and Co-GP and LP equity financing solutions for development, value add and stabilized projects.

Malcolm has vast experience in structuring various scenarios within the capital stack including non-recourse senior debt, mezzanine debt, and preferred & JV equity financings in the construction, value add, and permanent finance marketplace. Malcolm’s expertise as a developer has been instrumental in advising his clients through his real-world experiences in various stages of the real estate cycle, including the Great Recession.

00:00:04    Hi everyone. I'm Ian Formigle, Chief Investment Officer here at CrowdStreet. Welcome back to StreetBeats for Tuesday, September 8th. This is the weekly segment where we're gonna talk through what's going on out there in terms of debt markets, us, c r e, capital markets and trends across the country. And with me as always, is Malcolm Davies, principal and managing director at George Smith Partners. So Malcolm, welcome back. Hope you had a great holiday weekend and are, uh, gearing up for hopefully a little busier fall.  

00:00:37    Yeah, thanks for having me in. It's definitely, we always anticipate that this is the turn where it starts to get very busy. So we'll see how this year turns out.  

00:00:44    Very interesting to see what happens because as you know, this is the week where you get that dump of deals hitting the market. Your inbox is filled up with emails blast from Colliers and e still and the like, just bringing you all that Q4 deal flow. Um, really interesting to see what happens, this, this Q4 in a, in a different type of world. Um, but let's get right into, you know, kind of looking at the last week or so. I mean, despite the fact that we just had a, we just came up the holiday weekend. There were some stuff that was going on out there. Um, so, you know, what are some of the things that you're, that you're looking at that you're starting to think about for this week?  

00:01:21    I mean, look, I mean, one thing that we obviously recognize, we've talked about this in the past, but look, we had the highest ever TSA traffic counts over the holiday weekend. Almost a million passengers tra uh, went through tsa. That was expected. That's great to see though. Cause in April we were at, you know, a hundred thousand. I think, um, you know, going back to the financial world, look, CM BS spreads are going down, which means we are anticipating hopefully less risk, I guess. Um, aaas are down to 93, which is pretty much pre covid levels. Um, B minuses are not quite there yet, so they're pricing a little bit of risk. Um, as we've talked about, I think a little bit earlier, occupancy, um, from sst r we, we are certain toy, a little bit of cresting and coming back down because I think, you know, the leisure travel is going to be kind of dissipating as we go into the fall without the business traveler maybe making up for it as they usually do.  

00:02:12    Um, construction starts, we're starting to pay attention to that. We've noticed that they've come down a bit over the last few months. And so, you know, what does that mean ultimately, you know, what I think that means is that a lot of projects aren't necessarily penciling. Right. Um, you know, except for multi-family, you know, so a lot of people are underwriting, you know, the, the metrics and making and looking at it and saying, well, that's not what I underwrote this deal to look like. Um, but I think ultimately you look, we're hopeful about a couple things. I was talking to you earlier about this. We saw an announcement about logistics of how they will actually send out the actual vaccines, uh, and how complicated it is, uh, from a logistics perspective. So I was thinking, wow, that's great to see an article about logistics. Not that is coming, you know?  

00:02:55    Right. Yeah, no, there's, there's a lot there. There's a lot to unpack in the, in that, in the flurry of, uh, of data points you throughout. But, um, couple of 'em. One, uh, very interesting to know what construction starts. Uh, I'd say we are seeing similar aspects of what's going on. I think that actually partially ties into some of our thesis around ground up development right now because we're expecting it to slow down, uh, probably even perhaps precipitously in q4. Q1. And so we looked at it from the perspective of, hey, look, if there is a deal which is predominantly, you know, multi-family in nature, that we can have conviction in terms of when it does deliver late 21, early 22, and knowing that we think, and we still believe that there will be a slowdown in what would be the higher up part of the funnel in terms of the development perspective.  

00:03:44    You know, essentially meaning that if you can deliver something in early 22, you have a 12 month or so kind of window of, you know, clearness clarity to get your building in out delivered, stabilized before you see supply start to ramp up again. Um, and maybe even see some benefits of some pricing. You know, cuz again, I think that's one thing we talked about a minute ago is that if, if we do see this slow down in construction, well we know that, you know, construction costs, the, the demand for that is somewhat elastic. So if it slows down, we're gonna see, uh, pricing come down a little bit, which is gonna help, you know, those last deals get through and get built at reasonably, you know, attractive prices relative to what they were thinking, you know, a year ago. Um, so, you know, interesting stuff out there on the construction front.  

00:04:28    And I look, I think one thing that's always about construction is thinking about when you deliver and then having your capital stack believe and what it's gonna be like for you. Yeah. You know, when you deliver. And so, you know, we are talking to all of our clients about timing and a like, and I've always told them, look, we gotta pay attention to, this is a very interesting year from we got a big election. Uh, we have, you know, not knowing where we're gonna be with, with Covid and how we'll we'll have some solutions. I mean, it feels positive in a lot of places, but look, if you're gonna develop a property, it generally takes you two years to finish it. That's it from the moment you break ground. Right. But you imagine you have to plan for that. And so, you know, we've even thought at looking at, you know, even hotels for example, when is the right time for hotel?  

00:05:14    You know, if you deliver, if you started in Q1 or Q2 in a hotel, you deliver it in q1, Q2 of 23. We'll stabilize in q1, Q2 of 24. And every, like, even the most conservative outlook is saying 24 is a year will be 19. So, you know, you can look at those numbers and say, well, when do you do it? The hard part about, and our job really, particularly in construction and and prognosticating where we're going in the future, is to be able to convince the capital stack, you know, of that. That's where we earn our keep so to speak. Um, I, I anticipate the next nine to 12 months are gonna be a lot of that as it relates to construction. Um, thinking about where we're going, not exactly where we're, and  

00:05:55    As we talked about a few minutes ago too off camera was, you know, that if I'm thinking office I I, I'm probably thinking more long term mm-hmm. <affirmative> and I don't wanna be in those markets that we think are, you know, kind where, to your point where the puck is going in terms of okay, could I believe in office in Durham? Yes, I can Nashville, oh yeah. Three or four years. Sure it's got short-term supply, there's no doubt, but those are the metros that are going in the right direction that you think are going to become the long-term beneficiary of some of the disruption that's occurring in other markets. You know, and this is a good segue, Malcolm, cause I want to talk about what Anna-Marie and Zack touched on last week in terms of, I still think there's some interesting stuff that's gotta filter through the major markets. The one data point that was fascinating was the 89 and a half million termination fee that Pinterest paid to Alexandria to get out of a lease. Right? Think about that. Paying 90 million to not lease office space in Soma right next to Caltrain station. I mean, when you guys saw that news, what were you thinking?  

00:06:58    It's wild. I mean, you know, one, I was thinking for the, for the, you know, for the landlord in that situation, it probably wasn't that bad. I mean, at the end of the day, they've got a couple years with that amount. We talked about how much that gross effective lease amount is over the duration of the lease. Yeah. And if they're able to get a new lease in the next year to two years, they're gonna be looking on the upside of that. And conversely, maybe it wasn't a bad deal for Pinterest either because they can get a lower lease, uh, somewhere else as there is more supply on the  

00:07:30    Market. In terms of the market right now, like for me, the, you know, I think the run was over extended. I just, I think we're seeing a correction in the market. So I'm not reading too much into that one way or the other, other than it was probably time for, you know, you can't just keep going up indefinitely when there is still a recession going on. Um, but you know, the last thing I think we didn't really get a chance to talk about was that, you know, we did have a pretty solid jobs report last week. Yeah. 1.4 million jobs. We're now down below 9% unemployment 3.4.  

00:07:59    Yeah. I mean that, that, that's, that stands out in a sense that, I mean, if we rewind all the way back to the beginning of the pandemic, the most bullish kind of v-shaped perspective was calling for sub 10% unemployment as we ended the year. And nobody was believing that was, you know, that was the most bullish scenario. Yeah. The, the kind of the, the u shapes and the, and the swoo shapes. There's like no solidly we're gonna be, you know, hey, we're gonna hit 20 plus percent, it's still gonna be 15% at the end of the year. You know, to me right now this sits at, and, and there's maybe there's a little bit of a noise in the 8.4% because there's some temporary jobs in there, but I think solidly 9% and below is real. So now the question is if we can kind of continue to maintain that essentially that, you know, that rate of job absorption, the, the, at least for the previous perspective and knowing that we still have a long way to climb out of this.  

00:08:51    You know, the v-shaped camp is getting, uh, you know, some points on the board basically for saying that the economy is probably more resilient than we were giving it credit for. Uh, now, now we gotta get on and kind of keep pushing ahead. But it's, it, it, I will say it continues to surprise me. Every time the jobs report comes out, it's better than I, I think it will be, I was maybe getting more pessimistic and I'm, I'm starting to realize that, you know, hey, maybe the economy wants to get back to doing stuff next year. Um, now to your point, we just gotta get onto the logistics of, you know, getting a vaccine, you know, out and then disseminated  

00:09:24    <laugh>. I mean, look, I mean, if you can get your airlines hotels, uh, restaurants, I think we'd pr start probably getting back to a normal unemployment that we had pre covid o um, frankly in, you know, let's be honest there. It's not, it's a struggle. I mean you see a lots of, you know, furloughs and layoffs still contin in, in those industries. So, but if the vaccine's announced and we're talking about logistics Yeah, you're talking about, I mean, I'll give you the last, last point. I saw an announcement that, uh, usher has, has set a July date for like, stuff in Vegas. He's doing a residency. Okay. Yeah. Now, I mean, if you're not sure, fan or not, it doesn't really matter, but they're planning, they think that by July of 2021, that people will be in droves going to Las Vegas. So maybe they're, they got something, they know something we don't know yet. But hopefully,  

00:10:12    There you go. We gotta hope that we can all go to Vegas in July and party with Usher,  

00:10:16    <laugh> tell what Vegas will be going crazy when it gets, when this happens. I can assure you they'll be fine for years. <laugh>.  

00:10:24    All right, well I think we covered a lot for this week, so I think that's, that'll be a wrap for now. Uh, so I'd say everyone stay tuned next week, Anna-Marie's gonna be back to host this segment talking about more stuff as we get into the thick of September. Obviously we've got, you know, multiple really interesting weeks coming up. I feel like every week between now and mid-December is gonna be a rollercoaster ride one way or another. So I'd say stay tuned. Uh, Malcolm, thanks for joining us again for this week as always, and we'll look forward to you coming back and talking next week. I'll be back two weeks from now. And in the meantime, everyone out there stay safe.