StreetBeats : Expert Insights

Thoughts on a K-Shaped Recovery with Malcolm Davies | StreetBeats Ep. 60

Ian Formigle is joined by Malcolm Davies to discuss the a K-shaped recovery and converting hotel assets for other uses.

by Shawna Wright-Smith
September 23, 2020 ·

CrowdStreet’s Ian Formigle is joined by Malcolm Davies, Principal and Managing Director at George Smith Partners to discuss what a lack of a stimulus package means, a K-shaped recovery, and converting hotel assets for other uses.

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.

00:00:05    Hi everyone, this is Ian Formigle, Chief Investment Officer here at CrowdStreet. Welcome back to StreetBeats for September 22nd. In this weekly segment, we cover capital markets, what's going on in greater macro trends across the United States, and how that may be playing out in the commercial real estate industry. For this week, we segment, we are back with Malcolm Davies, as always, principal and managing director at George Smith Partners. Uh, Malcolm, it's good to see you again.  

00:00:31    Thanks for having me again.  

00:00:33    We are gonna get right into it, Malcolm, cuz we had a lot of stuff going on in the last couple weeks, and I think the one thing that we should just say is that, you know, I, I think you and I concur that we just wanna say that, you know, the, the death of Ruth Bader Ginsburg just, it's just, it's sad and it's a loss for our country. And so I think we just Lieb it at that. But it's, I think our thoughts are with everyone right now on that front.  

00:00:55    Yeah, I mean, listen, I mean, she reached across the aisle all the time. I mean, she was, uh, you know, best friends with Antonin Scalia and, you know, a very opposite perspective of political leanings and so I think the country could be great and getting along better on the future. Ho and she was a, a bastion for that. So yeah. Uh, we will definitely miss her.  

00:01:13    So yeah, sad day on that front. Um, but more on an economic front in other news, you know, what were you seeing out there last week that, that stood out to you? Look,  

00:01:23    <laugh>, I, I could talk about the micro because the micro, the dead markets and the likes seem to be running a bit, I mean, know as efficient as they can for multi-family, industrial, a little bit office, and then they taper off as we can imagine into retail and, and hotels. But for this week, I wanna talk about the macro because God, we got a lot <laugh>, um, you know, lack of stimulus. You and I have talked about this for months. We have said that we need to have one more last stimulus before, uh, we get to the end of hopefully the covid, you know, the pandemic, uh, coming to an end, hopefully with a, with a vaccine or, or some type of a solution. Um, that hasn't happened and I don't think it's gonna happen before the election. So what's gonna happen from the ec economics perspective is something that everybody in commercial real estate is paying attention to.  

00:02:08    Look, there's an overdrive in politics right now. We're coming up on an election, this is gonna be a hotly heated con election for, you know, I don't need to obviously speak about that, that's obvious. But look, we, we are seeing Brookfield is laying off on the retail side, 20% of its workforce, uh, airline layoffs without stimulus about government action on, on October 1st, we're gonna see a massive round of layoffs. So, and I did see, um, chair, the Fed chairman Powell speak about commercial real estate. We still have not seen support for industries in commercial real estate like we've seen in the past for things like the car industry. And so what I'm hopeful for, for all of my quote unquote hotel clients, um, to see a little bit of stimulus in that regard. Um, you know, but I, I mean, look, there's other things. I mean, I got a stat for you sublease space in LA there's up 42%.  

00:03:00    Wow. Right. You know, the reality is national versus regional unemployment. We talked about this earlier. You know, the high, the places where the highest unemployment are, the places where we have, you know, a significant amount of our, uh, of our population, California, Illinois, New Jersey, New York, Pennsylvania and Massachusetts, all are hovering in a, in a 12, 13% range unemployment. It's the other states that seem to be in a better spot from an unemployment perspective, which, you know, is a tale of two worlds. I think, you know, obviously a lot of service sector jobs in that. So, um, not great. I'll tell ya. Not great Ian.  

00:03:36    Yeah, no, some, you know, there's some definitely some tough news coming out and just stuff across the board. I mean, I think what and what the data that you just pointed out I think really highlights is as we talked about this kind of, you know, this continually emerging K shaped recovery. Yeah. And, and that, cuz you can look at the highlight, you know, the national numbers, right? The national numbers this week say, hey, 860,000 new jobless claims, 12.6 million continuing claims and that, and that number looks relatively good from the peak of 24.9 million, you know, that we saw in May. It does also point out that, you know, remember that we were at 1.7 million on continuing claims this same week in September last year. So a long way to go. But we are seeing this downward trend at the national level. But it's really when you get into the regional story that you see that some regions are really still hurting pretty bad, others are seeming to bounce back. Um, and it really has a lot to do with what those, that populace and that job base looks like in, in that particular location. So, so to the sense, yes, the, the case shape recovery is really starting to unfold. So what your recovery looks like really does matter in terms of where you live and what you do.  

00:04:46    It's so true and it, and that drives also it's a commercial real estate itself. So, you know, we, like I it's tale of different worlds, you know, I think about last week I did a, a big panel on, uh, on conversions of hotel rooms to multi-family and it, we had thousands of people come and attend this thing and people were, you know, talking about it because that makes some sense, right? Hotels may have, well should our having less demand today, whereas we don't have, we have a lack of affordable housing. What's a way to deliver a more affordable housing, smaller units easy, already built well below replacement cost. You know, it just seems like that makes sense. That is growing. That's something that will get done. You know, conversely, uh, you think about a a retail center though, you know, that, that has lots of restaurants and like, you know, that's a deal that's more a stro of a struggle to get done. So it's a table of two different worlds.  

00:05:39    Yeah, no, I mean I I'd say on the retail front that the, you know, the consolidation play is what's gonna come, right? That it's going, it's going to, we are going to see retail bounce back in some form, but there are gonna be centers that just simply don't bounce back at all. And I think then whatever center really kind of got hit, took broadside hit during the pandemic and then has, you know, a relatively weak remaining rent roll, you know, watch those tenants then fully vacate to go into the strongest center in the submarket that now has vacancy. So it's kind of cleaned out, its weakest part of its rent roll kind of ha it will now have, its it be able to pick and choose amongst who, whoever else remains hotel development right now, as you mentioned, that's just something that's kind of interesting to continue to watch because we're starting to see, uh, some of the trends in terms of deals that were in the planning stages are starting to fall out.  

00:06:30    S str r just pointed out in its most recent update that just last week, 33 projects around the country that were in final stages just got shell and they're, they're, they're, they're off, they're, they're moved to the sidelines indefinitely. So, you know, as, so what's happening in hospitality right now is, I think it's kind of typical playbook of when a, when a market becomes seriously distressed, yes there's gonna be a certain segment in the market that's gonna blow out. There's gonna be a certain segment in the market that kind of hangs in there, but then there's gonna be this drop in new supply. So then if you time it right, yes, potentially adding new supply at the right time in the next part of the cycle could be a gold mine. But getting it right's gonna be huge. And so, you know, you see this more than I do, but I think, you know, so I would, I would look at it from the perspective of, you know, when can you get reasonable priced financing because you need that to be, have your project successful. You, you, if you're gonna put a 30% senior on it and have really expensive me up to 65 ltc, that's not gonna get it done. Like you're, you're kind of behind the eight ball before you even, and,  

00:07:33    But you know, so this is like 2011, I remember we were doing deals, uh, multifamily construction financing was very expensive, but there was so much in equity invested Yeah. Pre, uh, G ffc that they felt like even that really expensive debt was worth it because it was able for them to build out and recoup and get their equity back. You know, we'll get there in some places. Cause a lot of this invests been put in. To your point, I think it's interesting in that same market that we're testing the water is to see where construction financing might be on an incredibly well located hotel, great asset, right? In that same market, we are de we are removing keys outta the market today to be converted to studio unit apartments. So like you said, there's definitely that point where new keys might come into the market because frankly, other keys have left the market.  

00:08:24    And I asked a question to some cl uh, panelists last week on this conversion panel from, you know, hospitality conversions, what you can do with some of your ho ho, you know, hotel assets. It was really fascinating to see that. Is there some, is there a, a belief that maybe the acceleration of covid with multi in hospitality we're converging covid i's accelerating that convergence, right? I I made a joke. It's either, uh, extended stay hotels or short-term, short term multi-family, right? It's, they're the same. So does it make sense to where you take 30% of your keys, convert them to multi-family for defensive mode for the next three or four years to see where the world is going and then keep your hotel running at the lower occupancy levels might be better. So we'll see, you know, how this all plays out, but there might be some stories there.  

00:09:12    Now to the last point, I think you and I have been talking about the build to rent single family space for a while and um, there's been just a tremendous amount of institutional investment in that space and the demand is there. And uh, we think that in the right markets where you could have the availability of a lot of Allander, you know, 12 units of 19 units an acre on average is kind of what we've seen is the ones that are successful. Um, you know, it's difficult in, you know, really, you know, tighter MSAs like Seattle and, and PortAllander and Los Angeles, but you know, out in Vegas or Arizona, Tal, Texas, we've seen growth in that space like no other. Um, so we'll see this is, it's nichey multifamily where we're gonna see some growth. Yeah.  

00:09:53    And on the B T R front, we're still hugely bullish on the space. Uh, it was recently connected to a, a senior person in the industry. We were chatting about this exact topic and he's super bullish on it, sees it as one of the best things he's ever seen in his 20 plus year career. You know, all in commercial real estate. So, you know, we're gonna bring our next B T R deal to the marketplace in the next couple weeks and we're gonna be on the hunt for more, you know, in the months to come because, you know, we're fundamentally believers in that space. If you can put up, you know, a build to rent community, do it well have it properly amenitized deliver rents that are, you know, you know, similar to, you know, class a garden style in that submarket, I think it's gonna lease up.  

00:10:35    I think it's gonna perform well. And so, you know, I think it really, it's a matter of looking for the expertise that is good and understands this emerging space, um, in terms of how to deliver that, that residential experience because it's not single family yet, it's not multi-family, it's somewhere in between. So you, you, you do need to kind of have your finger on the pulse of what this new market's gonna look like. I think the last thing that I'll I'll mention is as we look ahead is that as we, you know, obviously the next month and a half, two months is really just all election cycle stuff. As we move past that, I think that what will play out, and it's I think already really kinda showing the signs of it playing out in certain markets is the fact that what we discussed a minute ago offline, you know, is that we just increased our money supply by 25% over the last few months and, and that you cannot increase money supply to that degree and not have it play out in the markets.  

00:11:24    So I do think that the equity markets are already showing this stock markets back at almost highs bouncing around, but back at highs are, are emblematic of that. And what I think will play out over the next one to three years now is that hard asset values are on the rise. And if you can really only put your place your money in four places, either cash, but now our cash is getting, we have deba going on in the dollar, you could put it in bonds, but that's earn no return and the Fed's telling you it's gonna earn no, it's gonna earn no return for the foreseeable future. You're really only left with two other choices and that's equities and alternatives. And so I think you're gonna see asset appreciation in both of those. Um, so it's not surprised to me that we've already seen the stock market up now. I think the next leg will be as we get to 21 to start to see some of that, um, that monetary policy show up in asset prices. So that's why we're kind of back on the hunt for the stuff that really makes the most sense because we think we've got the beginnings of the next cycle and it's being prompted by, you know, this change in policy.  

00:12:25    No question. No question.  

00:12:27    Great. Well thanks Malcolm. It's pro. Uh, it was a pleasure as always. Uh, thanks everyone for tuning in. Uh, Anna-Marie will be back next week to talk to Malcolm and I will be back the week after that. So in the meantime, everyone, Stacy.