Impacts of Inflation Rate on CRE with Zach Streit | StreetBeats Ep. 101

 

In this episode of StreetBeats, CrowdStreet’s Anna-Marie and Zach Streit, SVP of George Smith Partners, talk about the impact of inflation rates on the real estate markets, home prices, and the broader economy. They’ll also dive into recent TSA numbers and signs that the capital markets are really starting to bounce back. 

Anna-Marie Allander Lieb, Director of Investments
CrowdStreet

Anna-Marie Allander Lieb is our Director of Investments, sitting on CrowdStreet's Investment Committee while also managing the team responsible for identifying and reviewing potential offerings for the Marketplace. Prior to joining CrowdStreet, Anna-Marie worked for the Tax Credit Investment Group at PNC where she specialized in underwriting innovative tax credit equity and debt financing solutions for Historic Tax Credit, and Low-Income Housing Tax Credit investments. Anna-Marie started her real estate career in Boston where she was a member of the CBRE New England Capital Markets Team. Anna-Marie holds a B.Sc. in Economics with a concentration in Real Estate from the Wharton School of Business.

Zach Streit, Senior Vice President
George Smith Partners

Zachary D. Streit has arranged and closed in excess of $1 billion and has underwritten in excess of $6 billion of debt and equity financings for a broad array of real estate transactions. He has significant experience arranging and closing construction loans, CMBS loans and private/hard money loans across all commercial property types. Zachary’s clients recognize him for his relentless focus on execution and responsiveness.

Zachary is an active member of real estate industry groups and related charities and has a number of professional designations. Affiliations include: Urban Land Institute (ULI), International Council of Shopping Centers (ICSC), National Association of Industrial and Office Parks (NAIOP), Jewish Federation Real Estate and Construction Group (REC), AIPAC Los Angeles Real Estate Group and Jewish National Fund’s (JNF) Commercial Real Estate Division. Zachary is a Member of The State Bar of California and is also a licensed real estate broker in the State of California.

Zachary has 12 years of real estate experience, including 5 years of experience as a principal lender. Prior professional positions include: Managing Director of Originations for Anchor Loans LP; Vice President of Originations at Colony American Finance, a Colony Capital subsidiary; Founder and President of Streit Lending; and Investment Associate, Aviva Investors’ Global Real Estate Multi-Manager Group.

Zachary has a Master of Science in Real Estate Finance from New York University, a Juris Doctorate from the Benjamin N. Cardozo School of Law and a Bachelor of the Arts, Summa Cum Laude, in Political Science from Yeshiva University. Zachary remains involved with his alumni associations.

- Welcome this week's edition of CrowdStreet StreetBeats Capital Markets. I'm Anna-Marie Lieb, Director of Investments here at CrowdStreet. And I'm joined by Zach Streit VP at George Smith Partners. Zach, I think, you know, the story continues here this week as we meet up again with inflation. It's continuing to go up. I know everybody's saying it's transitory, and related to the COVID pandemic, but what are your thoughts there? You think this is, you know, something we need to be, keep an eye out for? Or do you think it's going to start pulling back?

- My thoughts there is I have to embarrass you first and say congratulations on the promotion and the title change.

- Oh, thank you!

- I was going to do this, there was no way you were getting out of it. So congratulations, I saw that on LinkedIn and super excited for you guys and as you continue to grow, CS is really lucky to have you. So I think that's really great.

- Thank you Zach.

- That's my first thought on inflation. My second thought on inflation is that it's our first in-person staff meeting and I'm wearing a tie because we've had, you know, 40 folks in one room together and our office is now open. So I think, I think, you know, I, we're elated about that. It feels so good to be back and to be together. It's like, so much energy that's been missing for so long. So I think that's wonderful. So that's a brief aside.

- Yeah.

- Inflation is a really interesting one. I think inflation, you know, personal consumption expenditures, which is the Fed's preferred inflation gauge came in and almost, I don't know, one and a half to two X. Their target came in, you know, around between three four, and three nine, depending on what you're looking at. And the Fed's inflation target is two and everybody's thought, hey, inflation is going to mean higher interest rate in tapering, much, much sooner.

- [Anna] Yup

- And that you're, you know, 3% interest rates were even step three from agency and mid threes on CMBS is going to be gone and that's going to be 5 and 6%, and we all going to have a problem. And actually, ten-year T dropped. It's now at one and a half percent latest agency pricing I saw. I think you're getting down as low as like two and three quarters, you know, at tier four 55% LTV stuff on multi and no, we're, we're hearing about CMBS going at 3% on rates. So truly, truly amazing rates and transitory. The Fed seems to think that this is based on, you know, depressed year over year stats because in May and April, sorry, in April, May, and June of last year, things were pretty bad as we all know. And so, you know, they think that mostly this is slack in the system, if you will, but it's going to wear out. That should give investors a lot of confidence. And it is definitely bolstering the flow of capital into the capital markets. And we don't want to talk about some of the deals that we are closing or have closed. You know, you'll see incredible rates that are, you know, 3%, 4%, 5%, sometimes a little higher than that, but on a higher stuff, there was no bid at all. So, so far I would say that these inflation concerns they're out there. The yield curve is steeper, rate caps are more expensive, but it is not stopping the flow of capital and it is not inhibiting deal flow, you know, nearly I think the way some, you know, sort of, you know, more, I don't know circumspect outlooks thought it might.

- Definitely. Yeah, no, it's definitely something we'll, we'll keep an eye out on. And then maybe do you want to talk through some of those closed deals you mentioned there? I know you guys are

- Yeah.

- still keeping it action packed and

- We're trying to, we had a good, I would say last few weeks where we closed about $150 million in deals. The biggest one to close was a $45 million loan on a kind of mid construction condo deal in downtown LA. Lot of tough words during COVID. And we were able to get that done. We were able to get the sponsor some more proceeds, get them a lower rate, and we were able to do a deal, you know, in a market and not an asset type that is pretty out of favor and to do it in a way that is very accretive to the project overall. So stoked on that, we've closed a couple of hotel loans, which were stoked on. More important than that, We're working on, the refi of a take out a pretty high leverage construction on a hotel deal and 80% loan to cost construction stack. And, you know, we're getting quotes that are in around 8% to do that today, which is amazing because

- Yeah.

- that's cheaper than what the development construction loan cost, and six months ago there probably isn't a bid on that type of stuff. Or if there is it's 12, 14, 15%. So it may not be every hotel everywhere, but it's certainly some hotels, in some places. we're going to launch a refinance of the Radisson Blu hotel. Probably after July 4th. It's a pretty big loan. It should be in a $140 million range, plus or minus. That is going to be heavily dependent on, you know, folks thought for Disneyland and it's rebound and growth. I've been checking 'cause I've been thinking about taking my two and a half year old there. You can't get a ticket to the main park for a month

- Yeah.

- And it isn't clear, you know, how much they are restricting or aren't restricting. I think they're intentionally being vague, but from the people I talked to that went, they're saying it's pretty full. And it's really interesting that you, you know, can't get that ticket.

- Yeah.

- It's also really interesting that there's 2 million people that have traveled over the last two days. Highest level since pre COVID, you know, based on a 2.3 or $2.4 million level. Sorry, 2.3 or $2.4 million person pre COVID.

- [Anna] Yeah.

- So really beginning to see a bounce back and the capital markets are reflecting that

- [Anna] Yeah.

- I'll stop there, there's more deals that we're closing. There always are, but don't want to hog the time too much.

- Definitely, and no I think, you know, it's, you know, what we were talking about, you know, I think, throughout the past few months was, you know, once we get those vaccination numbers. So that, certain level. I think we predicted kind of this explosion in terms of people getting back out there and kind of taking those trips that, you know, potentially they put on the sideline previously. Now it feels like we're, we're actually kind of living that now again, with those TSA numbers, you know, your anecdote there about, about Disney, you know, being booked out for a month. I think that that's really ringing true. And I think the, you know, kind of going back to what I saw this week, I think ties in a bit to inflation is how foam prices. Again, they just keep climbing. We saw another record in April that was actually a 30 year record. Housing crisis rose 14.6% for the month. You know, again, I think this is due to the low rates that we're seeing out there. And then also there's a continued shortage of homes for sale, really.

- [Zach] Yeah. You know things are getting multiple bids and in going way over asking. And so really across the board affordability is worsening. And I think that's A, probably helping the run-up we've seen kind of in the SFR space and in BTR.

- [Zach] Yeah.

- but also that probably is contributing to it, right. We've got these big institutional players that just keep kind of doubling down on this space and obviously you're competing, right? All the capital is flowing in, I think right?` Just this past week we had KKR, they announced that they're launching an SFR management company, my community homes to purchase and buy SFRs. Blackstone, just wired for around 6 billion. Home partners for America. In June we had Invesco also going in and investing 5 billion to far about 200,000 single family rentals. Just the action in the space it's been incredible to, see.

- [Zach] And those didn't even make this chart.

- [Anna] Yeah, Look at all these are the, the chart there. Walker and Dunlop this week came out with the stat that the SFR market now is valued at 3.4 trillion. Which, you know, if you compare it to, you know, your standard multi-family market, you know, not that far behind now

- [Zach] No.

- [Anna] Given that that is estimated 3.5 trillion, so

- [Zach] Truly, truly incredible, an interesting anecdote from that space and I'll stop sharing this now, was I had breakfast with an equity capital source on Friday and, you know, he said they really want to get into the space, but they're trying to differentiate. So I said, interesting, how are you differentiating? And he said, you know, we're going to not, the Phoenix-es, not the Texas-es, not the Southeast, but like areas in the Midwest, areas in the mountain states. And we're trying to get deals done there. You know, which is kind of interesting because those aren't the core markets. We had a deal cross our desk, you know, let's say also in a major Western market that wasn't a core market for this asset class and then had a little bit of a higher price point associated with it to your earlier point about how expensive homes have gotten. And in some markets, just lack of any new home or, you know, single family for rent supply, it becomes extremely attractive. And we're doing two build to rent deals now with kind of sponsor and repeat equity partner. And the quotes that we're getting are, are pretty fantastic. I mean, you can get, you know, depending on what leverage level you want, I don't know anywhere between call it, you know, 4 and 6% money, you know, 4% money for lower leverage deals in your call it 65% range. Sometimes even south of that and, you know, higher, 5 to 6% money. If you want to go to, you know, I don't know, 70, 75% on your leverage. There's a lot of attention from lenders on the asset class because they realized two things. One, what you just said about this massive influx of institutional capital that are all potential buyers.

- [Anna] Yeah.

- And two, because you can finance it with Fannie and Freddie debt, which a lot of these buyers are doing. So those two twin forces have been, you know, just, giant support for the space.

- Definitely. Well, I think that, wraps it up for this week. Thanks everybody out there for tuning in and next week or in two weeks from now, you'll be joined by Zach and Ryan Stroup my coworker here.

- Poor Ryan

- So look forward to that. Thanks to you so much Zach

- Awesome, thanks Anna-Marie

- And, we'll sew you in a few weeks, Thanks.

- Okay

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