StreetBeats : Expert Insights

2021 Investment Opportunities with Malcolm Davies | StreetBeats Ep. 66

Ian and Malcolm discuss the uptick in TSA traffic, the allure of the mountain region of America, and investment opportunities in 2021.

by Cyrus Maunakea
October 20, 2020 ·
Ian Formigle, Chief Investment Officer
CrowdStreet

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 Forbes.com.

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.

00:00:03    Welcome back to StreetBeats. This is our weekly segment where we're gonna talk about real estate capital markets, what's happening at the macroeconomic level, and how we see that playing out in the commercial real estate landscape. So, with me as always, for this weekly segment is Malcolm Davies, principle and managing director at George Smith Partners. Malcolm, welcome back for today's segment.  

00:00:24    Thanks for having me back.  

00:00:25    It's always a pleasure, Malcolm. So we're, you know, I haven't seen you, it's been two weeks since I've seen you, so I wanna up, uh, so let's dig right into it. Uh, you know, I, I hear you've been on the road a little bit lately. You're doing deals and business. What's going on? Yeah,  

00:00:38    Well look, I, I think myself, much like everybody else, because, um, I've probably traveled every week over the last three weeks, and apparently everyone else who's thinking about it is starting to do that for business purposes. It's the only way I can explain this, but TSA traffic counts finally had a million travelers. Uh, I think it was either yesterday or the day before, but most importantly, seven of the last 11 days, we were over 900,000 through the checkpoints. Um, that only happened once from September, I mean, excuse me, from 11 days ago to March 17th. So that, that demand can only come from one, one, um, one place in my opinion. And that's the business traveler. And so we're starting to see that starting to crank. We're still, you know, 40% of what we were normally, but I think we've all gotta watch that because to me that's the confidence level that is about someone saying, look, we've got to get back out there and see our clients and do business.  

00:01:33    We are, we need to be face-to-face. So that's good for, you know, that's good for our hotel clients, right? It's good for office owners being able to get people out and, and traveling. Uh, and frankly, it's good for the, obviously the United States economy, for the airline industry, obviously, particularly. So those are great things that we're seeing and, um, I'm just participating in that. I just, I had to make the decision that it's too difficult to not see the deals and see my clients, particularly being a capital advisor who is putting all the structure together upfront, really have to know what we're talking  

00:02:05    About. Yeah, yeah. No, uh, I, I I, I was just looking at the same exact data. I mean, the million plus, uh, on October 18th, you know, throughput really stood out. It's the first time, again, first data that that's happened since the pandemic. To your point, we've now seen this spike through, you know, punched through the 40%, you know, relative to same weekday last year. So, you know, this, this is the, this is the first spike we've seen cuz we saw those numbers just kind of hanging in the low to mid 30% range. Uh, so I, I agree there's really only one explanation and is that we're starting to see some more, you know, business oriented travel around the United States. Um, what I'm hopeful to see is that, you know, we're now, it'll be, let, let's look at that s t r data in the weeks to come.  

00:02:47    Mm-hmm. <affirmative>. Yeah, that's what's gonna have to, I mean, cause reminder for everyone out there that the s str r data is lagging. It's showing us what throughput data at TSA is up to the day, right? We're, we're looking at yesterday. S t r data is showing us, you know, the week of October, you know, two weeks ago. So it's like the fifth to the 10th or something like that right now. And so, you know, if what we're seeing right now is sustainable and it is business oriented, we're probably gonna see that start to show up in a little bit of an uptick in the s t r data in the next one to two weeks. So, for example, this last week's data, which again is trailing, is still showing this kind of flat, you know, week over week about 48% occupied about, you know, $99 of a D R and about 48 bucks of RevPAR. That's essentially kind of where it has been for the last month or so. It's just been kind of just trending flat. Um, so I'm,  

00:03:40    I would take that as a positive though, because that should go down at this time of year 10, so,  

00:03:45    Agreed.  

00:03:46    We'll see, I don't know.  

00:03:48    Yeah, so I, no, totally agreed. So I, I think, but you know, maybe what we're gonna see here is we could maybe see, you know, rep par pun punch back up above 50 bucks, see occupancies, get back up into the fifties here, you know, um, and, and then we'll, we'll also, when we look at that S C R data, we can also look at which segments, you know, are performing well. So, you know, the, the business traveler is gonna be a little bit more in kind of the mid-range segment, I think, you know, some of the limited service and some of the mid-range, right? And this is gonna be the, not obviously the, not travel to destinations. Leisure destinations. So if all of a sudden we see cities spike a little bit, there's a little bit of snippet in that right now, because some of the markets that are doing well right now are like Southern California, you know, they're, they're not, they, you know, as a reminder this summer it was all kind of the getting out of the city, getting out into the wilderness or to the beach kind of stuff. Um, we're seeing that revert and we're starting to see it come back to the cities. So, you know, Malcolm, I think what you're talking about here is the beginning of the next wave of, you know, increased business travel.  
00:04:48    Yeah. We hope. We hope so. And I, I think it's, uh, it's hopefully coming.  

00:04:52    Yep. So with that, let's, so let's talk a little bit about U L I, I mean, you and I are, are both participants in that. Uh, I'm actually gonna attend my product council meeting starting later today and trending into tomorrow. Mm-hmm. <affirmative>. Uh, and I really, I do wanna take a couple minutes to talk about the emerging trends in real estate, because that was a, you know, that's probably one of my favorite times of the year when that report drops, you know, this is the forward looking, you know, survey of all the participants out there in the commercial real estate industry. Uh, so tell me, talk to me a little bit about some of the stuff that you, you know, I know you talked about this last week Yeah. With Marie. So, you know, kinda now that we're getting through the, the conference meetings and now into the product council meetings and stuff, you know, what were some of your thoughts?  

00:05:34    Yeah, I mean, look, I'm on, I'm, you know, on the bronze flight for urban development mixed use council, and it's been, uh, the, uh, it's just been one of my favorite things to do in the industry. Always most creative and thoughtful, um, things that I learned, uh, frankly, it's emerging trends, like you said, I can't wait. We talked to this mountain region <laugh>, okay, that is the least populated region in the United States from a time zone perspective. So I think we're gonna talk about that our council is on Thursday, um, and how urban development will be, um, you know, thought through, and we're doing a lot right now in Salt Lake City, obviously in Denver. Um, we've talked a little bit about Boise. Um, but it's not just those areas, right? You know what I mean? It's, we're talking about, you know, the Bozeman's of the world, you know, Missoula's, uh, in Reno.  

00:06:19    I mean, it's, you're seeing stuff that's coming to you and you're just like, wow, would we have thought of this location to do a, a project? But then you start to see the demand and the demand is re incredible. I mean, you start looking at vacancy rates in the mountain region are less than anything anywhere else in the country. And so that demand seems to be there. Um, you know, you wonder, it's the most beautiful part of the country. You wonder over trends over the next 5, 10, 15, 20 years if we're not gonna see a lot larger of our population in the United States be in frankly the nicest part of the country.  

00:06:51    Totally agree. I mean, we've been starting to feel this, this trend, a little bit of movement. I mean, obviously the market that has been kind of obvious as the emerging mountain, you know, market that's gonna come is, is Boise. Yep. It was no shocker to see that market jump substantially in this year's rankings. Um, you know, but to, to your point, the, the market that really stood out to me recently is something that we are now paying attention to, we're gonna pay more attention to going forward is Bozeman. We, we had a, there's a multi-family development deal that approached us, and so we're researching that right now. And so we had an opportunity to catch up with a group that we've worked with in the past that's based in Missoula, multi-family developer, you know, specializing in, in the mountain region. And so that conversation a few weeks ago just really opened my eyes to what's going on there.  

00:07:43    And, you know, previously I would say that we always understood Bozeman to be a special market. It has the, you know, it's got a university, it's got an airport, you know, it has an attractive, you know, lifestyle and people tend to want to be there. But man, the, the work from anywhere phenomenon, just pouring it on. And I think that the data point that's also kind of struck me a little bit was that I think I, I previously understood that there was some tech workers in Bozeman. I didn't really quite get that there's eight to 10,000 of them and that there's more coming. And so just, it, it was kind of abundantly clear that, hey, we gotta pay attention to this market. All you need is a little bit more connectivity to a couple of these markets and then watch 'em pop. And to your point, they have space and, and they, and, and now if we could have some flexibility in where we work, then why wouldn't you wanna work in somewhere as beautiful as Montana or potentially Idaho? I mean, again, another data point out there, Idaho being the largest recipient of in migration since the beginning of the pandemic on a percentage of population basis, right? So not absolute numbers, but you know, where the momentum is going. Uh, so I mean, we're totally bullish on, on Boise. I'm trying to find a deal there to be Totally, yeah. They're, they're tough to find.  

00:09:01    Uh, it's, it's, um, oh, well, I, I mean the work from anywhere, you know, you see these announcements from tech companies, um, you know, that say, Hey, work from anywhere, work from home, um, is permanent. And that's an amazing thing to say from a company's perspective, because you're starting to see people going, well, if you're gonna say that I'm gonna go move to Crested Butte, Colorado, or I'm gonna move to, you know, Missoula, Montana, um, you know, or like you said, Bozeman, I, we always chuckle cuz here in LA we, we actually have a great board in name for Bozeman. It's called Boze Angeles, uh, because so many people go up to Bozeman, um, as their vacation homes. But you know what, it's just gonna be curious to see how companies then use different satellite regions of the country to reconnect their workforce. If we're gonna see this grow, and I'm not positive, this is a forever everything yet I'm not sold entirely. But what I am sold on is if you can have a great career, a great job, and you can live in places like Boise, Bozeman, salt Lake City. Yeah. You know, these are great places to live. Um, you'll find I think some, some real, real appetite for folks to really spend their careers in these markets because the quality of life is extremely high.  

00:10:14    Um, so, you know, kind of looking forward what, you know, what's what, what are you looking at in the weeks ahead? How's the year shaping up for you?  

00:10:20    Look, I mean, we're probably gonna close more business in Q4 than not quite, but definitely in q1, Q2, and q3, not quite as much as those three quarters, but probably 60% of what we did in q1, q2, and Q3 is closing right now in q4. So what does that mean? It means that all the pent up deal flow that had to sit on the sideline that we were anticipating closing in q2, um, you know, is coming back now to close. Right. Everyone has done that work to figure it out. So in that sense, I'm not really necessarily focused on those deals that are closing here in q4. What I'm focused on right now is 2021. I already, I start focusing on 2021 generally, um, frankly late August and early September. Um, and reality is paying attention to what the trends are going into next year. Um, I, I anticipate next year that we'll start to see a lot of other investment activity that we'll start to think about where we're gonna be in 20 23, 20 24, and 2025. And I think you're gonna see probably a healthy appetite.  

00:11:22    I totally agree. I mean, you look out there, you got C B R E already projecting a 50% increase in total transaction volume. You know, we are, we, we've been down precipitously so, you know, we could definitely see a snap back. Uh, you know, Darren Powderly in his weekly segment just recently talked to Bruce Feld, an attorney in New York mm-hmm. <affirmative> and also seeing, you know, his perspective is yes, get ready for a spike in volume in 2021. I totally concur with Bruce's thoughts in terms of, you know, we had these, uh, major blockages of uncertainty that were keeping everything kind of in the, the status quo. Obviously the election number one clarity in terms of what is, when does post pandemic happen and what does it look like once it starts to occur? The, so we we're already gonna get through the, the first level of uncertainty later this year, then we're gonna come into 2021.  

00:12:08    Yes. We're gonna get clarity at some point on what, you know, post pandemic looks like. We don't exactly know which month now, but it's, but, but 20 one's gonna be the year. As soon as I feel like we see that light at the end of the tunnel, I i I, I totally agree with Darren and Bru in that conversation and say like, watch capital really forcefully come off the sidelines and start placing major bets for the next cycle because we will now be at the beginning of the next cycle. Yeah. And so to your point, we're definitely prepping for, you know, what that looks like in 21 kind of ramping up and getting ready for it because, you know, as you know, Malcolm, this is the time when you really want to be in there swinging. Uh, yeah. Because it's setting you up to, to realize great returns by 25.  

00:12:51    It's unbelievable. I mean, people are gonna be doing business travel, I think people are gonna be traveling. They're gonna come up with the Yolo, you know, you only live once and that's probably gonna go on for five years. You know, cuz someone will say, Hey, I don't know when the next pandemic will come. So this is new and uncharted territories for us as a society and we'll see how it plays out, but highly optimistic.  

00:13:11    So I think that's gonna wrap it up for this week. Thanks for, thanks for joining us and providing the thoughts. Uh, I'll see you again in a, in a couple weeks from now. That'll  

00:13:18    Be an interesting Yeah, I think, I think but if you're not coming, let's, I'm trying to think. We will be doing this and on election day with you and I, woo  

00:13:25    <laugh>. Oh wow. Maybe  

00:13:27    We should do it on the day after, you know,  

00:13:28    I think we're gonna have to, we gotta do it on the day after. We gotta, yeah.  

00:13:31    We, we gotta All Cool. I'll see. I'll see you on the fourth.  

00:13:36    Yes. All right. So everyone out there watch for us to come back on the post election day, uh, version of, of StreetBeats. Next week Anna-Marie will be back with Malcolm to talk about the run up into the election. And until then, everyone out there stay safe.