We Study Billionaires - The Investor’s Podcast Network - TIP283: Commercial Real Estate Trends w/ Ian Formigle from Crowdstreet (Business Podcast)

Starting point is 00:00:00 You're listening to TIP. On today's show, we bring back our former guest and expert in real estate, Mr. Ian Formigli. Ian has two decades of experience in real estate private equity, startups, capital formation, and equity options trading. On today's show, Ian talks about trends in commercial real estate, 18-hour cities, the impact of baby boomers retiring, and many more interesting topics. So without further delay, here's our conversation with Ian Formigli from Crowdstreet. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Hey everyone, welcome to today's show.

Starting point is 00:00:56 My name is Preston Pishon. As always, I'm accompanied by my co-host, Stig Broterson. And today we have a fan favorite with us, and that is Mr. Ian Formigli, Chief Investment Officer from Crowd Street. Ian, welcome back to the show. Now, Preston and Stake, always a pleasure to sit down with you guys and talk real estate. I'm looking forward to today's conversation. You're definitely always more than welcome. Now, let me kick this into you off by asking, how are things going over there at Crowd Street?

Starting point is 00:01:23 I heard you guys hit a billion dollars investments recently. That is incredible. We did. We were excited. We did reach a major milestone recently in that we've seen $1 billion now invested cumulatively over the cycle of our platform. You know, that dates back to April of 2014. And, you know, I think the next thing that's really also exciting about that is that while we've now seen one billion dollars invested over the last five and a half years, we expect to see actually one billion dollars or more

Starting point is 00:01:52 invested in 2020 alone. So I think it's just a great point for the industry to say that it's come a long way and it's finally reaching the mainstream. One billion dollars in 2020 alone. Yeah, that's pretty exciting. We're definitely looking forward to an exciting 2020. Fantastic. So on today's show, we were talking about trends in commercial real estate in 2020 and beyond for that matter. And we will take a closer look at changes in demographics, inequality, cities in the next decade, and just much more.

Starting point is 00:02:25 And based on the trends that we're going to discuss, we'll also come up with different investment thesis in the second part of the show. So let's jump to it. Demographics are ever changing. And one example is that the average life's perspective. are increasing, and so is the average age of insistent living resident. Another example is that millennials want walking distance to dining, shopping, entertainment, and jobs, and knowing that, and even deeper into the changing demographics, how can I, as

Starting point is 00:02:55 investor, use that knowledge to my advantage? Yeah. So, Stig, I think what's really interesting about that question is that it boils down to the basic of supply and demand in commercial real estate. So the things that you mentioned, like the average age of an assisted living resident or millennials that want walkability where they live, those are examples of demand drivers in commercial real estate, and there's tons of them. So I think to begin, it would be worthwhile for us just to take a step back and let's think through supply and demand in commercial real estate. And then how, if we analyze those in conjunction

Starting point is 00:03:34 with trends, investors can profit from them. So first, let's consider supply. When you look at commercial real estate across markets, you can ascertain things like the current stock of it, its composition across various asset classes, and its age. In addition, when you take that information and you look at things like vacancy rates, you can determine whether or not the market is currently oversupplied or undersupplied in a given asset class. So by understanding supply, it's helpful because it gives us great context when you analyze demand. So now let's jump into the demand side of the equation. And a great place to start, as you mentioned, is demographics. Demographics are critical when sizing up demand because it's one of the few things that we can always

Starting point is 00:04:26 predict, right? In a world of uncertainty, we always know roughly the relative age of our population at every given point in time, and we know how many people will fall into each age demographic as the years ensue. So that's a really important part when it comes to analyzing commercial real estate demand. So from there, the next layer of demand is to then consider whether or not the current supply of real estate in a location will continue to adequately. serve its population in the future. If it looks like it won't, then we begin to think through how future demand may create the need for new and different types of commercial real estate in that location. So it's at this point that you can begin to visualize how an individual

Starting point is 00:05:16 commercial real estate asset may or may not be aligned with future demand. And we know you want to be aligned with future demand, since any time demand exceeds supply, regardless of the market, prices tend to increase. And I would say that the trickiest part of a supply demand analysis is to contemplate how demand across our different age demographics will evolve over time. We definitely know that just because one age group likes something today does not mean that the next generation will like it as well when they reach that same age. And I would say that if anything, we tend to have confidence in knowing that the tastes and the interests of that next generation will probably look somewhat different from the current

Starting point is 00:06:06 age demographic. So this translates into everything from knowing how people live to where they live. If you layer in that level of thought and analysis and apply it to the current and proposed future supply of real estate in a location, you're now setting yourself up to make better and form investment decisions. And so I think that's just a really powerful way to start thinking about supply and demand. So, Ian, it's interesting that you say that. So let's talk more about the demand side. Not only are a ton of baby boomers retiring, but they own a substantial portion of the wealth. Recently, I read a stat that 70% of the wealth in the U.S. is owned by citizens

Starting point is 00:06:43 that are 50 years and older. So knowing that, what opportunities does that give us as an investor? Yeah, I definitely agree right off the bat that baby boomers as a generation are driving uses in commercial real estate at every step in the way. And I think they're going to continue to use that wealth to drive numerous changes in commercial real estate over the coming years. I think there's two trends that are in play here that are intriguing. So the first one, for example, is that we.

Starting point is 00:07:13 are seeing, definitely gaining momentum that I believe that baby boomers will help drive in a term that was recently coined by the Urban Lands Institute called HIPsterbia. Hipsurbia essentially refers to up-and-coming live-workplay suburbs that are near our urban centers. Current examples of Hipsurbia-type locations around the United States include Tempe, Arizona, Santa Clara, California, and Evanston, Illinois. So think about a vibrant inner suburb near a major population that is developing a greater sense of place. And the reason I think baby boomers will drive the further emergence of more hipsterbian locations

Starting point is 00:08:01 around the U.S. is to consider that when they sell their large homes that are now becoming mostly empty, where will they go? we already know that urbanization has brought transit and great food and entertainment to our city centers. These are the kind of amenities that are attractive to baby boomers, but are they really going to want to live in our urban centers as they downsize? Maybe some, but I think for the most part, not so much, mainly because I think the pace of the urban core is probably too fast. However, if you can deliver 80 plus percent of the urban live workplay experience, yet do it in a more relaxed suburban setting, now that is something that I think baby boomers are going to buy into and they have the wealth to afford it. So take an inner suburban location that will increasingly attract wealthy baby boomers and then also consider that these same locations have on average better, better,

Starting point is 00:09:05 public school systems, that's going to make them attractive to millennials as well who are now starting to form families. So combine that, and I think you have a powerful trend to watch over the coming decade, so we're definitely watching the inner, vibrant suburb of major cities. The second baby boomer-driven trend that I think is interesting is the growing demand that we are seeing for life sciences real estate. As baby boomers age, they will demand, they will demand new and better medical solutions to maintain their quality of life. And they possess the wealth to compel markets to produce those solutions. Right? If you think about it, consider that the average baby boomer is now in their 60s. Well, what's going to happen when they're in their 70s?

Starting point is 00:09:51 Yet they want the same quality of life they had in their 60s. It's at this stage in life, right, that we all know that time is more valuable than money. And so I see the baby boomer generation using that wealth to drive huge advances in life sciences because those companies are going to scramble to meet that demand. So let's take this trend and let's pivot it to real estate. If we look across the major life sciences markets in the United States, those include Boston, the Bay Area, San Diego, and Raleigh Durham. We see tight vacancies and rising rents. And I expect that trend to continue over the next decade. For example, we partner with a Boston-based company whose core business plan is to acquire office space and convert it to lab space.

Starting point is 00:10:41 When it does acquire the space and converts it to lab, it sees strong demand for that newly created lab space, whereas the previous regular office space sat vacant. So I think this is just a really interesting trend that we continue to see a lot of underlying fundamental demand for. And I would say that the final thing that I like about life science real estate is that it is relatively more predictable than other forms of real estate because it generally needs to be proximate to major research universities. So this means that by watching where the largest grants are placed and where the most cutting edge research is conducted, you can be reasonably confident that those are also the same locations where life science, real estate demand will continue to grow. So to me, this is a major

Starting point is 00:11:30 trend, but it's something that we're keenly attuned to. Very interesting, Ian. So let's jump back and talk about millennials again. And the reason why I wanted to shift gears here is that I'm really trying to wrap my head around the impact on student loan debt. Because as many as 61% of millennials are delaying buying a home primarily because of student loan debt, And you might be thinking, why is that important? And as I'm trying to wrap my head around it, I'm thinking that it sounds like a huge red flag to me because it distorts the entire ecosystem in housing. Because it's not just a question of millennials entering the market, but it's also the

Starting point is 00:12:12 current owners of those homes who might want to cash out. Everything else equal just sounds to me like they would experience a lower demand when they exit. So how should investors think about this trend? Yeah, this is an interesting conversation. It's something that we talk a lot about in forums like the Urban Land Institute. And so I do think that when you have an environment where construction costs have been outpacing wage growth, as they have been doing for the last five years, affordability of ownership of real estate is going to eventually become a major issue. And when you layer onto that, the burden of student debt that is a national problem, I I would say that absent a correction in the housing market, I think that from here, if you look forward, you can probably expect home ownership rates to decline over the coming years. Now, we did see an uptick in ownership rates from 63.7% in 2016 to 64.8% in 2018.

Starting point is 00:13:14 But I think that uptick was largely driven by the drop in interest rates. And so now going forward with rates low, I think that we're going to probably continue to see that trend decline a little bit. So overall, I think there's really two trends to consider here as it pertains to this phenomenon. The first, I think, is the question of what becomes of our outer suburbs. As I already discussed, I like the future of our inner walkable suburbs, right, especially the ones that are going to embody the vision of hipsterbia, great communities, great core, you know, amenity-filled locations. However, I'm concerned about what becomes. of these outer suburbs.

Starting point is 00:13:54 These are the ones that, as you mentioned, when the baby boomers leave, I don't think they're necessarily going to be backfilled by millennials as they're either too far out or they have failed to create that sense of place. So I think this is a trend to watch and so I'm a little concerned about what becomes of those outer suburbs. The second trend, thinking a little bit more optimistically now,

Starting point is 00:14:18 is the advent of low-density multifamily housing. What we are seeing right now is we're seeing multi-family housing developers respond to both the baby boomer and millennial populations demand for a new type of housing that is actually going to be located in this type of inner suburb hipsterbia. And what they're doing is by planning multifamily housing developments that look more similar to either like a townhome or a mini single-family. home development, but yet also have the amenities that can match the best traditional multifamily projects, and then you locate those in the inner suburbs. This is a trend we're seeing right now,

Starting point is 00:15:05 and we're seeing a lot of demand for it. And if you think about what people are seeking right now in a living situation, this type of property makes sense. For starters, a lot of millennials and baby boomers have pets, and it's easier to house a pet when you have a porch and a small backyard space rather than a balcony and an interior corridor that leads to an elevator. Now, specific to millennials, developing this kind of product in an inner suburb gets you access to those better schools that we talked about, which, as we've discussed, is really becoming an increasing concern to this demographic as they're now becoming young families. Specific to baby boomers, I think, is the attractiveness of the reduced footprints these type of projects offer relative to the house

Starting point is 00:15:52 they just sold. They have the ease of care, yet they also have the abundance of amenities and are in a good location within that inner suburb. It's what I would say is as close to a lock and leave situation while still having the feel of your own home. And both of those demographics prefer to have their own roof over their head rather than a floor above them where they can hear the footsteps of their neighbors above. This concept also offers much better natural light. And when you live in places like the northwest that I live in, natural light is an important consideration. So overall, we are seeing this kind of demand and this kind of deal flow now start to show up in metros like Phoenix and Dallas. And we expect it to continue to see it spread.

Starting point is 00:16:42 across more cities around the country as this concept takes root. The economics of it definitely look good so far. One aspect that I like about this business model is that the project will deliver over multiple phases, which means that they are faster and easier to stabilize than a large traditional multifamily project. So consider that you can develop and lease 20 units at a time as they come online, rather than having to start with a single vacant 300 unit building and go from zero to 300 filled units over the course of that next year, hopefully. So overall, we're bullish on this trend,

Starting point is 00:17:24 and we look to bring this type of deal to our marketplace. Let's take a quick break and hear from today's sponsors. All right, I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, Every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its 18th year, bringing together activists, technologists, journalists, investors, and builders from all over the world, many of them operating on the front lines of history.

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Starting point is 00:21:50 And I know this question could be interpreted as a political question, but I'm simply looking at it from a numbers and projection or a trend standpoint. How do you see this progressing from an investing point of view? Yeah, so Preston, the lack of affordable housing, is it's an unfortunate trend in the U.S. It is a reality that we have to deal with today. And I think it is one that will intensify at least over the next five years. As I mentioned on a previous podcast,

Starting point is 00:22:20 according to Harvard's Joint Center for Housing Studies, roughly one million new households per year are projected to be formed through 2035. However, at the same time, three out of four new jobs in the U.S. are relatively low paying. So I think that combine these two trends, and you can understand why we are producing more renters than homeowners right now in the U.S., and those renters need affordable housing to make ends meet.

Starting point is 00:22:49 This market reality leads us to continue to see opportunity in refreshing aging 1970s and 1980s vintage multifamily housing. Properties of this vintage, if they have been untouched, are really nearing the end of their useful life. However, if they're repositioned with things like new roofs, heating and cooling systems, improved common areas, and refurbished unit interiors, they get a new lease on life, and they provide tenants with vastly improved living conditions over their previous state. What's also important is that they can be offered to tenants even refurbished at prices they can afford. So they're getting a much better quality of life, and yet at the same time, this is still enabling investors to earn a profit.

Starting point is 00:23:37 So I think this is somewhat of a win-win situation. And finally, given their vintage, they often sit in good locations around the United States that have filled in around them over the last few decades. So they can provide immediate access to jobs and retail corridors. And I would say that overall, in some respects, many private operators of real estate around the country, are solving a portion of our country's affordable housing crisis, one property at a time. That's an interesting way of looking at it. Now, I've seen that Crown Street has suggested purchasing multifamily assets and conservatively leveraged the investment with a cheap 10-year fixed rate debt. And this is clearly taken out of context. This is not a wonder formula for

Starting point is 00:24:27 everyone. But I wanted to bring this into the mix because I would like to hear you talk more about the investment thesis behind this and how this relates to the major trends that we just discussed? Of course, this thesis has a lot to do with recent changes in interest rates. We are in an environment right now where interest rates have gone down over the past nine months, yet cap rates, or how real estate is valued, have remained relatively stable. That's important because as the cost of debt goes down, all else equal, net cash flow. goes up. And in a yield-starved world, that's powerful. Multifamily as an asset class benefits from a decrease in interest rates relatively more than other asset classes because historically, it has the tightest

Starting point is 00:25:19 spread between cap rates and the risk-free rate of return, which for our industry really means the 10-year treasury. So to quantify this, over the past few years, multifamily cap rates have averaged around 350 basis points over the 10-year treasury when that same spread for other asset classes, such as hotels, for example, has averaged almost 700 basis points. So that tighter spread is important. And it's important because it means that a decrease in interest rates has a more dramatic effect on the net cash flow of a multifamily asset than it does on something like a hotel asset. So, for example, today, right now, we are seeing 10-year fixed-rate debt from agencies like Fannie Mae or Freddie Mac quoted at rates of 3.5% or even below in some

Starting point is 00:26:21 instances. These same loans were quoted at over 4% a year ago, so that's a big swing. This drop means that many multifamily deals underwrite better today than they did 10 to 12 months ago, so that is something that we're currently looking at in the market. So, Ian, talk to us more about the terms, specifically the duration and the fixed rate. What do you see as the most optimal variables of those two to use? I'd be happy to. To begin, 10 years is an attractive maturity rate right now, I think, because it nearly guarantees that the loan will mature in the next real estate cycle. Or put another way, I have yet to hear an economist right now predict that our current real estate cycle will extend another seven to eight years. And as we know as real estate investors,

Starting point is 00:27:17 one of the greatest risks in owning commercial real estate is having your debt mature during a market downturn. If asset values are impaired at your maturity date, you are either going to have to look at putting more capital behind that deal, or if you don't have the capital, possibly be forced to sell it at a market bottom. So comparatively, short-term interest rates, specifically variable ones, they're really cheap right now. They definitely offer more flexibility, but they do expose you to that possibility of refinancing risk in the event that the downturn that we don't know when it will occur

Starting point is 00:28:00 happens to occur within the next few years. Another thing that I think is good about 10-year fixed rate loans right now is that they provide you with certainty of your debt costs over the next decade. So I think given the previous conversations that we've just had on trends in home ownership, generally speaking, I expect multifamily occupancy rates to remain strong and rents to continue to rise probably at least in line with the rate of inflation over the coming years. So if rents increase and our occupancies are relatively stable, then your yield in a multifamily asset can grow over time when your debt costs are fixed.

Starting point is 00:28:43 So I think in a part of a cycle where we don't know if this cycle will end in one year or five years, this is a type of strategy that allows you to sleep at night. Most Fannie Mae and Freddie Mac loans have this kind of provision in them. And remember that only Freddie Mac and Fannie Mae, this is the only type of commercial real estate they loan on. They don't loan on office and retail and hospitality. They loan on multifamily. So if interest rates are higher five years down the road, which I would say right now, most economists predict that, but most economists also predict that they would be higher today than five years ago.

Starting point is 00:29:26 So we clearly don't have the crystal ball. But what I can say is that locking in a mid 3% interest rate loan right now seems to be relatively attractive. since it is harder to assume other forms of commercial real estate debt and those other types of lenders don't usually allow you to leveraging up a different loan down the road. This is something that's unique to multifamily and I just think that given where interest rates are, where multifamily sits, how we think about homeownership going forward, this is a strategy that can allow you to insulate yourself from the uncertainty over the next few years,

Starting point is 00:30:05 earn a steady return, and then look to exit in the next cycle, potentially through a sale that includes an assumption of that debt that you just locked in today. Interesting. So let me look into my broken crystal ball here. It has always been broken, but if I had to look into my broken crystal ball, one of the trends that you see out there right now, that is the so-called 18-hour cities. and they are on the rise with higher than average urban population growth. And this is with the lower cost of living and doing business.

Starting point is 00:30:40 So perhaps I could ask you to provide examples of 18-hour cities and how investors can benefit from this knowledge, given that we'll continue to see this rise in them. And perhaps both if they live close to these cities and in case that they don't, how can we benefit from knowing this? At Crowdstreet, we are big believers in the prospects of 18-hour cities. As you just mentioned, you have job growth and population growth rates that are outpacing national averages. And we're seeing them attract companies like Amazon and Google. And so as a result, when we look into those

Starting point is 00:31:18 markets, we are seeing surging demand for all types of commercial real estate. The thing I like about 18-hour cities, too, is that if you look over the last 10,000, or 15 years, they've come so far in terms of providing amenities such as great food and entertainment, public transit, and airport connectivity. I think 30 years ago, you used to have to live in or near a 24-hour city to get access to the best of what the U.S. has to offer, but that's rapidly changing, and I think right now it is definitely not the case. And in terms of kind of the top 18-hour cities that we see around the country that are seeing the strongest growth and demand for commercial real estate. I guess if I had to rank the top five, I'd say, number one, Dallas, although you could

Starting point is 00:32:06 probably almost argue this is a primary market now. It doesn't really feel like a secondary market anymore. Two, Austin. Number three, Charlotte. Number four, Nashville. Number five, Seattle. There's a couple other markets in there as well that we're seeing great momentum in like Tampa Bay. I think where I live in Portland, Oregon is seeing a lot of momentum, but those top five kind of seem like they have the most momentum right now. And I think you only have to look examples of this to say when you look at a scenario where multifamily property values are trending down in a place like Manhattan, yet they're setting new highs in Nashville. Something's going on right now. Something in the United States is changing and the markets

Starting point is 00:32:51 are reacting. And the 18-hour city story is, it's a major movement in the United States. It's been underway for over a decade, but I think there's still a long runway ahead of us. So for investors, benefiting from this knowledge really means investing in the locations where you have the strongest long-term conviction in. I think right now, if you were to think about one city in the U.S., that has the best odds to have substantially higher real estate values a decade from now, it's hard to beat Austin. Austin is certainly no secret. Its real estate market is on fire.

Starting point is 00:33:36 But it is for good reason, because consider these things about the city. First, it has a metro population of about $2.2 million. That means it has critical mass, but it still has a lot of room to grow. two, it's a state capital. Number three, it's in a non-income tax state. It's becoming a really important trend in investing. Number four, it's rapidly attracting millennials. Like a lot of the cities that we discussed,

Starting point is 00:34:03 but Austin's at the top of the list. Number five, it has a major and growing tech presence. Number six, it has a major university in the middle of its city. And number seven, it's in a sunbelt location. add those all up, and I think that Austin is almost unfair in how many advantages it has from a real estate perspective. It's rapid rate of growth means that assets can definitely be mispriced in the short term, so isn't necessarily the best place, or I would say it's a place where you want to be

Starting point is 00:34:38 really thoughtful on a short-term investing horizon. But if your investment time horizon is 10 years or more, I almost, Don't see how you can go wrong investing here. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up, and customers now expect proof of security just to do business. That's why Vantza is a game changer.

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Starting point is 00:38:10 All right, back to the show. So, Ian, we talk a lot about stocks on our show. And with stock investing, we often bring up the best sectors for where we're at in the current business cycle. And since we're talking about commercial real estate, I'm curious if you look at market cycles and whether they impact real estate. Yeah, I think there are some ways to think about investing in real estate from a cycle, timing of cycle perspective.

Starting point is 00:38:36 I'll talk about a couple of asset classes as well as a couple of, a couple of of investment strategies that I think perform better in certain parts of a real estate cycle, you know, perhaps maybe where we sit right now. So first, let's discuss asset classes. If you want to invest in an asset class that performs relatively well in a recession, then take a look at manufactured housing and self-storage. Manufactured housing is a very resilient asset class during downturns. All you need to do is just go back and look at the great,

Starting point is 00:39:10 financial crisis period and see how manufactured housing values remain strong in 2009 to 2010, despite overall a crashing real estate market around it everywhere else. And then, you know, for self-storage, the household downsizing that can occur in a recession has countercyclical benefits for this asset class. So think about it. As people downsize during a recession and they're moving, they see their move as temporary, which makes them want to retain their possessions and store them for better days ahead. This can lead to an increase in self-storage occupancy rates.

Starting point is 00:39:49 Again, if you go back and look at the great financial crisis period, you will see that self-storage performed relatively well. So now, that we talked about asset classes, let's talk about strategies. So, for example, if you believe we are near a market top and you want to insulate yourself from a coming recession, I do think there are a couple ways to prepare yourself. Now, first, as we already just discussed, investing in an asset like a good multifamily property, placing 10-year fixed rate debt on it, I think is a good way to weather the storm of a recession and sell in the next expansionary cycle.

Starting point is 00:40:27 Another way to invest is to look at assets like office buildings or retail shopping centers, but what's really important is you want to look for credit tenants on long-term leases. And it's because the certainty of income that these types of leases provide, they will help you operate through a recession, provide enough cash flow to service your debt and possibly earn a yield, and then sell in a future expansionary cycle. The most polarized version of that is if you could find credit tenants occupying 100% of the property for 10 or 15 years, and you know that that credit tenant will, even in the

Starting point is 00:41:11 course of a next recession, continue to be able to service its lease payments, well, then you know that you are now, what I would say, recession agnostic. You're going to get paid and you're really thinking about what is the environment when my lease expiration happens one day in the future. You know, I love the way you think and talk about cash flows. We do the exact same thing on the show when we talk about stocks. You know, that is a really, really good way of looking into the future because you don't have to look too much into the future if that is how you build your portfolio. Now, I've been talking on the show and in my newsletters about how I'm beginning to look more

Starting point is 00:41:51 into real estate. I think that the stock market looks very old-valued. and I would like to diversify away from that, which is also one of the reasons why we have you on the podcast. And, you know, I had this investment thesis that might be because I'm definitely not an expert in commercial real estate, but I have this investment thesis that I wanted to be ready with cash if when the market crashes. And the idea I had was that something as illiquid as commercial real estate, at least in relation to something like stocks, could perhaps be acquired at very attractive prices.

Starting point is 00:42:26 On the other hand, I was thinking even if I'm right that, say, a $10 million building could be bought at a huge discount because that seller is very motivated. If that happens simultaneously with credit drying up, perhaps my investment thesis really goes out the window if you can't get any financing at a discount. So I guess my question is this, given that a plan to use leverage, and I do have cash in a recession, can the investment then still be financed with that? it would have to be an old-cast deal. You're correct that the price of commercial real estate assets can become very attractive

Starting point is 00:43:02 in a downturn. Some of that is going to be attributable to what happened to that asset during the downturn, perhaps it lost tenants. And some of that drop in values from their peaks can be attributable to the current state of the credit markets. So now kind of thinking through it in a normal recession perspective, you can expect credit markets to slow down and become more conservative, but I would say that in a normal recession environment, they don't usually freeze. So to answer your question, I think you can usually expect to finance a property in a recession. However, I would also expect to receive a lower percentage of the purchase price in debt proceeds, and I would also expect to accept more stringent performance covenants, essentially more rules to obey in

Starting point is 00:43:54 getting that loan. Now, in extreme situations, okay, now potentially all bets are off. For example, going back to the scenario of the global financial crisis, it is fair to say that credit markets froze in 2009. That's part of the reason why we saw total U.S. commercial real estate transaction volume, crater 88 percent, from its 2007 high of 580 billion, down. to 71 billion in 2009. So some of this answer just kind of depends on what type of downturn we're facing. But generally speaking, you will see the opportunity to finance purchase prices, you know, at lower prices, possibly with a little bit lower leverage.

Starting point is 00:44:42 But we always like the opportunity to buy low and sell high in any asset class. And so, you know, when you understand that we are in a downturn, that you really do want to get aggressive, find those assets where the values have become impaired relative to where they were three years ago, look at that location, understand and believe that if that location and that asset can bounce back over the next few years, then you stand to potentially hugely profit from that scenario. To bring it back to that scenario of the great financial crisis, is any time that we looked at a deal where we knew it was in a good location, it might be challenging to buy.

Starting point is 00:45:25 It might be challenging to leverage. But buying it in 2011, come 2015, people were looking at 3x equity multiples all over the place. So, Ian, how is financing different as you move across the country? And is it any different when you go from state to state? I would say in that scenario, it very much is market by market. In a recessionary environment, you can think about it from a primary, secondary, and tertiary market perspective, right? Primary markets being the Bostons and the L.A.s, the San Francisco's and New Yorks of our country, secondary markets, as we discussed, the Charlottes, the Dallases, Seattle,

Starting point is 00:46:06 Portlands, and Denver's. And then tertiary being kind of like once we drop off the top 50 metros, typically speaking, in a downturn, you're going to have to kind of look at what market you're in, you're going to have to look at the velocity of credit that had occurred prior to the downturn, and then understand that in a primary market, lenders are going to be usually most inclined to lend there because that large primary market has greater liquidity. They're going to be more cautious in a secondary market, but if that market has great growth prospects, they're still going to probably lend there, and then they're going to become very cautious when it comes to anything in a tertiary market because they know that is the most ill-liquid market in a downturn.

Starting point is 00:46:56 They also tend to know that that will be the most ill-liquid market, or I should say the last market to really return to liquidity in the next expansionary cycle. But when you think about it from a market perspective, also understand that just because the liquidity is going to be better from primary than trending down to secondary to tertiary, that also means that asset values will drop probably somewhat in line with that perception of liquidity. So if you happen to be the opportunity to be a buyer in that kind of market, now you can build your investment thesis about where you want to be. Do you want to buy something that has dropped a little bit, but know that you're in the prime market that will then quickly

Starting point is 00:47:40 rebound? Do you want to be more opportunistic and buy in the secondary market, knowing that it might be a little harder to acquire? But if you're in the right growth of the secondary market, probably it's going to look great three or four years from now, or potentially in a tertiary market, buy at a steep discount, maybe have very little leverage on that asset, not exactly know when you will be able to sell it, but also know that your basis is so compelling that you can be very patient. So leverage and liquidity, it's going to end markets. They're all going to become intertwined when we look at various places around the United States. So when our listeners hear about these various commercial real estate options, multifamily assets like we talked about

Starting point is 00:48:26 before, retail, office buildings, or whatever the example could be, I guess to someone listeners, it might sound like you need a lot of money to enter the market. But how do options change if you have $10,000, $100,000, perhaps even a million dollars you can invest for? Yeah. So, I mean, if you think about it just from an asset by asset perspective, commercial real estate is capital intensive. There's a lot of assets out there, one individual property, $100 million, $75 million. Think about 60 to 70% leverage and the balance being equity, just in a single transaction. So when you think about a capital intensive investment, and then you would think about that from an offline commercial real estate investing perspective,

Starting point is 00:49:15 in any scenario where the investment is pulled together and capitalized by individuals, you can expect minimum investment amounts to be high. I would say that even for syndications that we've seen off of our platform that have been intended for individual investors, you can expect in that private environment, the minimums to average roughly $250,000, even more. So really what I think that the advent of online platforms did, such as CrowdStreep, but there's plenty more, is that we're leveraging technology in two ways to benefit individual investors. So the first is that we're reducing those minimum investment amounts. So today on our platform, the minimum investment amount is $25,000.

Starting point is 00:49:59 that investment amount can either get you access to a single asset deal or it could purchase an interest in a diversified index style fund. The second is that online platforms leverage technology. So now we are assembling large numbers of individual investors into a single deal at levels that have never before been seen. So for example, we've had recent projects on our platform that have had over 400, individual investors in them that have teamed up to contribute over $25 million of equity into a single transaction. So this is a kind of scale that is now giving individual investors

Starting point is 00:50:44 access to a quality of commercial real estate that just wasn't simply available to them before. And that's because $25 million of equity in a single transaction has really historically been the exclusive domain of large institutions. So that's a paradigm that we're breaking down right now. That's kind of what's exciting to be sitting in this industry right now. And we've really seen that happen starting substantially in 2019. And we expect a lot more of it to come over the next few years. And thank you so much for just an awesome interview.

Starting point is 00:51:23 I'll tell you, Crowd Street seems to be firing on all cylinders right now. So if people want to learn more about you, where should they look? What I typically say on each of these interviews is that I'm very easy to find on LinkedIn because I'm the only Ian Formigli. I always invite investors to find me here and begin a conversation. If you ping me, I'm going to hit you back and we're going to talk about deals because I like talking about real estate and I love sharing ideas. And then in general, investors can always learn more about Crowd Street and our marketplace

Starting point is 00:51:55 by visiting us online at www.crowdstreet.com. Fantastic. And as always, we'll definitely make sure to link to that in our show notes. We can only say thank you to Ian for coming here back for the fourth time on The Investors podcast. Thank you, Ian. Preston and Steg, thank you again for having me on. It's always a pleasure and I look forward to the next conversation.

Starting point is 00:52:19 So, guys, before we let you go, please make sure to check out our completely new real estate podcast, too. The name of the show is real estate investing by The Amherstas podcast. And our show host, Robert Leonard, will interview Ian Famigli very soon. The interview will be live March 24. But before then, you can already, today, mid-February, listen to the first four completely free podcast episodes about how to get started in real estate investing. The way to do that is simply to search for The Ammasters Podcast Network, that is

Starting point is 00:52:51 the Amherstor's Podcast Network, on your podcast app, and subscribe to you. to our new real estate investing show. But guys, that was all that Preston I had for you. For this episode of The Investors Podcast, we'll be back next week. Thank you for listening to TIP. To access our show notes, courses or forums, go to the investorspodcast.com. This show is for entertainment purposes only. Before making any decisions, consult a professional. This show is copyrighted by the Investors Podcast Network. Written permissions must be granted before syndication or re-broadcasting. I don't know.

We Study Billionaires - The Investor’s Podcast Network - TIP283: Commercial Real Estate Trends w/ Ian Formigle from Crowdstreet (Business Podcast)

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