We Study Billionaires - The Investor’s Podcast Network - TIP423: Real Estate Update w/ Ian Formigle

Starting point is 00:00:00 You're listening to TIP. On today's show, we have our favorite expert on commercial real estate, Mr. Ian Formigli. Ian is the chief investment officer at Crowdstreet. In this episode, we discuss how the commercial real estate market has performed since we last spoke in mid-2020, what the main drivers were, how labor and supply shortages have affected the market, the rise of niche asset classes, an update on the mass exodus from places like California, the top performing markets of the last year. and so much more. Ian always comes prepared with the most incredible data and insights. So without further ado,

Starting point is 00:00:36 please enjoy this discussion with Ian Formigli. 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. Welcome to The Investors podcast. I'm your host, Trey Lockerbie, and like I said at the top, I'm here with Mr. Ian for meagli. Ian, welcome back to the show. Trey, thanks for having me back. It's always a pleasure to come in and talk to you. Well, last time you were on the show was around August of 2021, and the market was doing some

Starting point is 00:01:18 interesting things. It was starting to bounce back a little bit, multifamily especially, but the commercial offices were lagging a little bit. But something interesting happened in the back half. What happened with commercial property sales and the rest of the market? How did it perform? Yeah, so in the second half of that year, it was just tremendous growth and resurgence in the market.

Starting point is 00:01:36 I mean, when we were speaking, we were seeing, you know, when we spoke last time, you know, in 2021, we were starting to see some movement and it was improvement in the market. It just hadn't really started to accelerate as much as we had previously maybe thought, but it more than made it up for it in the second half of the year. And so when we ended 2021, it was just a historic year for the market across, you know, multiple measures, you know, from starters on a volume side. We ended the year with $809 billion roughly of total transaction volume. and that's according to Real Capital Analytics, the group that I had mentioned during our last

Starting point is 00:02:09 conversation. That was an 88% increase year over year from 2020 volume. So just a huge comeback year for the commercial real estate industry. So when we break out that volume and look into it, you would see that multifamily, as we probably all get, was the dominant sector. That was accounting for about 42% of all deal activity, which translates to about $335 billion. That was also a record. So from there, the other asset class that we've all done.

Starting point is 00:02:35 all been speaking about, and it was no surprise, was industrial. That had the next most transaction volume. That showed up about 21% of total deal volume, about 166 billion. Also a record. So just a huge year for those two asset classes. All the other sectors pretty much then chopped up the remaining $308 billion of total deal volume. And it was interesting to see, you know, hotels bounce back. They had $44 billion of total transaction volume. So not huge, but, you know, coming off of 2020, where they essentially did nothing. It was tremendous to see that asset class start to partake again. And then Office even actually bounced back, had $139 billion of total transaction volume

Starting point is 00:03:13 there as well. And from a returns perspective, 2021 was just equally astounding. You know, we track Green Street's commercial property price index, for example. That's the CPPPI. And prices increased 24% in 2021 with significant price appreciation basically spread across most real estate asset classes. The highest appreciation that we saw last year was in self-storage at 66% and followed by industrial at 41%. So just from a pricing perspective, just huge momentum in the market last year. And then in terms of locations, Dallas-Fort Worth Metro was the number

Starting point is 00:03:52 one market for transaction activity. It was followed by Atlanta and then Los Angeles, Phoenix, and Houston to round out the top five. And most of the top five markets were anchored in apartment sales, except Los Angeles, which was interesting, where we saw industrial sales actually beat apartment sales. And not too surprising, you know, the LA market is a tremendous industrial market. It's actually our number one industrial market in 2022s, which I think we'll talk about a little bit further in the show. But so, so trade, just an overall, a phenomenal year for the commercial real estate market, you know, especially for those multifamily and industrial asset classes. Now, what were some of the drivers behind such a strong performance in the back

Starting point is 00:04:34 half of the year, especially? Yeah, interesting. I think at a high level, you probably sum it up as saying just pent up demand from both buyers and tenants. You know, on the transaction side, you know, I think there was this bit of a perfect storm, you know, coming into 2021 that translated into these rocketing pricing that we saw. You know, we begin with, think about all the macro drivers that were in play last year. You know, first, we saw this tremendous surge of investment. activity across all forms of capital, particularly institutional sources of capital that were back in the markets and they were fully engaged. You know, it felt a bit at times last year as if the institutional capital side of the equation was attempting to kind of make up for a lost time in 2020

Starting point is 00:05:15 when they were more on the sidelines and not as active. And so what we saw was capital flows absolutely driving pricing and rocketing prices upwards in 2021. The next thing that you saw was we had supply chain issues that we know about. And those were preventing, you know, some new stock from being delivered to some markets quickly enough, while at the same time driving its own cost of creating that stock higher. For those of us in the industry, we know that the buyers of existing real estate, they factor replacement cost into their analysis when bidding. In essence, when you buy a property, you want to buy it at what you think is a discount to what it costs to build it today. So, but when you're in an environment,

Starting point is 00:05:58 where replacement costs jump 12% or more in a year, well, that creates more room to increase your bid, because you know that your discount to replacement cost is also increasing at the same time. So I think the third thing that we saw was that market participants were beginning to realize in 2021 that we were beginning to enter an inflationary environment, which we are now talking about in 2022. And in times of inflation, you, you want to hold hard assets. So I think this was just kind of like what you would say is like more fuel on the fire. And I think the final thing was, you know, we were experiencing rapid GDP growth in 2021, right?

Starting point is 00:06:39 We saw that end the year at about 5.6%. I think that's according to a lot of banks, including Goldman Sachs. So I think, Trey, in essence, you rolled it all up. We had a bunch of macroeconomic factors. We had market driven, you know, capital force factors at play. And those were all combining to drive demand for commercial real estate. So just a lot of demand there. Yeah, perfect storm, so to speak.

Starting point is 00:07:03 I mean, especially when you add in the fact that a lot of retail, if that's the right word, had amazing credit scores. They were able to pay off their debt by staying at home, not traveling, less spending, a lot more savings. That was entering the market as well just about the time where it was harder and harder to create new inventory. I want to go stick on that point about supply chain. There's been a lot of discussion about labor shortages and supply chain constraints

Starting point is 00:07:27 and almost every aspect of the economy. How has it affected the commercial real estate investing space? Yeah, I think from a real estate investing perspective, there's a few things that we've been watching as it pertains to labor shortages and supply chain constraints. A few things come to mind, I think, on the risk management side, as well as one other thing that comes to mind in terms of new investment opportunity. So I'll explain what I mean on both fronts. From a risk mitigation standpoint, I think the first thing that stands out to me when

Starting point is 00:07:56 reviewing deal flow is understanding how labor shortages may affect project timelines on new development. For any new development deal that we look at, you know, we have to consider that delays and timing they're costly. So one item that we tend to hone down on when reviewing a ground-up deal is assessing the probability that the developer can deliver the project on time. And one key ingredient for doing so is having confidence in the general contractor. So that means that we have to evaluate things such is the tenure of that relationship between the developer and the contractor. We have to ask questions such as like, how many projects has this team delivered together? How many of those have been in this location? What's this track record in general of the general contractor for delivering on time?

Starting point is 00:08:40 And where does the contractor rank within the construction industry and how often has it lost its subs to other projects? And that's really the part about the labor shortages, right? Because one thing that you learned by participating in a number of development deals is that sub, contractors are, you kind of would say they're like hired guns, right? They come in, they're there to conduct, you know, a piece of a project, get it done. And sometimes those subcontractors are willing to bail on one project for a higher paying project down the street. And but what's really important to note is they're only willing to do that to the lower tier contractors because they also don't want to burn bridges, right? They have to go on and get their next job. So when labor is tight,

Starting point is 00:09:21 as it is right now, you really want to focus in on that labor side of the equation and say, and work with those general contractors that are going to command the respect of the subs. And by doing so, you're going to have greater confidence in their ability to deliver projects on time. So I'd say next, aside from construction issues, another risk mitigation concern that stands out to us is, I'd say it's in the hospitality industry. You know, we've seen enough BLS data to know that the hospitality industry is bouncing back, and they are rehiring. But a lot of that workforce that they lost during the pandemic, some of it is low.

Starting point is 00:09:55 lower wage and they're struggling to bring some of that back. So when we consider risk when a value in a hotel deal, we are then going to delve into the question of who is the hotel operator and what is their staffing plan? We need to understand if they have adequate staff in place to execute the business plan. Because to kind of break it down, you can't rent a room if you don't have adequate staff to clean it. So these are things that really do affect a property when you're dealing with like a day-to-day type of occupancy. And finally, I'd say that in the industry, there is an indirect risk in retail shopping centers associated with labor shortages.

Starting point is 00:10:31 And so, you know, in this scenario, while your tenants are the retailers, they're paying you fixed rent on long-term leases, you know, many of your tenants in a shopping center, particularly, I'd say restaurants, well, they rely on lower wage workers to conduct their business. And as we've all read about in places like the Wall Street Journal and so forth, we've heard about these stories where staffing these types of positions has been really challenging since the beginning of the pandemic. So if your shopping center has a number of restaurants in it, and some of those restaurants are now closed for part of the week because they're short-staffed,

Starting point is 00:11:04 well, as a landlord, you have to wonder if those tenants are either going to fail, they're going to either not renew their leases, or they're going to come back to you and ask for renovations. So again, this is an indirect risk, but it's a very real one for the retail industry. And that means that you have to understand the viability of your tenants in a retail shopping center and their ability to staff when evaluating one of these types of deals. So with that downside kind of risk mitigation, you know, said, it's also important to note that supply chain constraints, I should say, does and is creating a new opportunity that is cropping up around the country that's designed to specifically address those constraints. And that is what we call industrial service

Starting point is 00:11:48 facilities. I'm a big fan of this strategy, so I do want to talk about this in our conversation, but there's going to be a point in time where I think it's going to be a better point for us to do it. So I'll pause there while we move on to the next question. Awesome. Well, as I was kind of mentioning earlier about offices slow to return, can you give us any more clarity about what the future of office work looks like? What are you seeing in the data? Yeah, you know, Trey, office has been a fascinating market. And it's, to me, it is probably the most interesting market right now because it is in a major state of transition. So there's a lot to unpack here. So I'll jump into a few of it and try to be as brief as possible. So for starters, early 22,

Starting point is 00:12:28 there is definitely more clarity today, I think relative to a year ago in sense of what the future of office is going to look like. It's coming and it's starting to look more and more like a hybrid model. It's gaining traction and we're starting to see it discussed more and more. And I would say that within the overall sphere of office, you probably do have to carve out some of the other types of work that really do need a physical setting, such as life sciences companies. But one thing I think, for example, Tray, is, you know, last time we talked, we discussed Gallup data that had forecasted what the breakout of the in-office, hybrid office and fully remote workers was going to look like. And I think the update to that is that it's starting to look a little bit more like 37% empty

Starting point is 00:13:13 desks, as we would say kind of the dust is starting to settle a little bit on the space. And so I think the thing that is really beginning to sink in for a lot of knowledge workers around the country is how much time they get back by working remotely. And this is probably one of the reasons why I think that hybrid work is definitely going to be a sustainable trend, at least for, you know, call it this decade. And so just think about like just commuting time and what that does. So, right, U.S. census data we can look at currently estimates that the average commute time is just over 27 minutes. Then you factor in things like getting ready for work and transition back

Starting point is 00:13:47 and forth to work and getting to your desk and actually being productive. Okay, so now we're up to one to two hours per day solidly. It's kind of like thrown out, just getting back and forth. So over the course of the year, that's six to nine weeks, right? That's a lot of time for people that are busy. So you've got to ask yourself, how many people are going to be willing to just give back six to nine weeks of this newfound time just because the pandemic is over. And I think the answer is nobody is really willing to give all of it back. I think a number of people are willing to give some of it back. But the willingness to give it back is going to be really, I think, contingent upon the experience of what they go into the office and what they see when they get

Starting point is 00:14:30 there. And so, you know, and when we look at the market today, I think the kicker here is in the jobs posting data. So according to a recent report, published by Green Street, you can now see that roughly one out of six job postings on LinkedIn are remote. And that was compared to one out of 67 in March of 2020. So a pretty big difference. And then furthermore, there's another website called Ladders, and they're tracking that roughly 20% of high-paying jobs are now remote. So I think the bottom line is, is if the jobs are now being advertisers remote, I think they're going to get staffed remotely, and I think we're going to have a lot more remote workers in, you know, in the years ahead. So I think what that does

Starting point is 00:15:12 is that increasingly makes us kind of bullish on infusing the hybrid office model into our office investment thesis. And it's an important to note that, you know, a growing hybrid office model, it doesn't necessarily mean doom or gloom for the sector. It just means that it's changing. And I'd say that we view office right now as being in this important state of transition that will tend to reshape, I think, the industry over the coming years, but it's just a really fascinating time to see, like, how that transition is taking place. I think an important thing also to point here to, Trey, is that, as we know, office utilization rates vary depending upon location. I think that is also an important part of the equation as to what office looks like

Starting point is 00:15:56 in 24 to 25 as things start to stabilize. So to me, what that suggests is that certain markets, the more highly utilized ones, they're going to start to feel more similar to. to 2019 in the future, while other markets continue to feel a little bit more like 2021. So there's a group called Castle Systems. They track a lot of data in terms of the office space. And what we're seeing is the three markets that are really standing out in terms of utilization, those are Texas markets. Those are Austin, Dallas, and Houston. And they're amongst the top in the nation. And those look right now relatively in the low to mid-40 percent range for utilization. And what I mean by utilization is what percentage of people are coming into an office today relative to who

Starting point is 00:16:41 walked into that office in 2019. Now, if you back up a step and you say, what does it look like across the top 10 metros? That office utilization rate drops to 31%. And then from there, if you look at some of the coastal markets, you know, we've talked about New York and San Francisco in the past. Those are, I think, still kind of down in the 20s. So I think this discrepancy is a part of what makes me more bullish on the Sunbelt office locations as we hit the middle of this decade. Adding on top of this is that there's definitely companies that will revert to roughly five days per week in the office when things return to normal. For example, we look at law firms. While the average office utilization rate across the country, as I mentioned, those top 10 metro is

Starting point is 00:17:20 about 31%. Well, when you look at law firms, now you're at 52%. So I think there are some of these type service type industries, professional service use industries that I think are going to have a higher rate of utilization. So that's something that we also bake into kind of our equation when we think about office in the in the future. And I think the final thing to think about when it comes to the future of office is blending co-working into it. You know, the shifts the office market is experiencing right now, they are very well suited to co-working. When you go to a hybrid model, you are giving up on the idea of dedicated desks for employees, and you're thinking about this percentage of your workforce

Starting point is 00:17:59 that is going to filter in and out of the office on a weekly basis. And the days, they're going to overlap some. There's going to be some unique workers on some days and other days, but you're now starting to run your office more and more like a hotel. And what that really means is that that type of demand, it's really well suited for co-working. And the beauty is that if the co-working, model is embraced by these companies, well, think of the benefits that they get because they no

Starting point is 00:18:26 longer have to manage an office in the way they used to in the past. And managing an office today, it's challenging because you just don't know what to expect. You can get away with that completely by going to the co-working model. So ultimately, what I believe the future office looks like is it looks more like a multifamily property than it does today. There's this thing, sometimes I refer to it as what I call the tenant improvement industrial complex. And what that really means is you have these companies that would come in in the years past, and they would want this customized office space, and you have a landlord that would spend 70 to 100 plus dollars per foot building it out for them.

Starting point is 00:19:02 Five years later, you kind of tear it out and start all over again because the next company wants something different. And the way the market was working was it was conducive to catering to the needs of the new tenant and solving to their demands. I think that has to go away in the future. Because the way that demand is looking now and how it's fluid and it's also, And also it wants lower duration in terms of commitment. You have to then start thinking about building out an office, like I said, more like a

Starting point is 00:19:30 multifamily property. It's going to look like how it's going to look. We're going to repaint it. We're going to carpet it. We're going to make sure that the lobbies look great. But the space is kind of the space, you know, now for years. And it's kind of a take it or leave it. But again, kind of diving back into that thesis around co-working is that that kind of build

Starting point is 00:19:48 out also works for co-working because it's going to take different types of spaces, it's going to create, you know, multi-use possibilities within one floor or two floors of a building. So I think it's just in the future, we're going to see more and more co-working start to show up in more buildings while maybe some of the bigger, you know, traditional spaces are upstairs. The smaller tenants are gravitating, I think, more and more co-working. It's just kind of how we see it. You know, one topic that we've discussed a lot on the show, as of ladies, you can imagine, is inflation. We just recently had a print over 7%. And I'm really curious. to know how you think commercial real estate will fare as we maybe see more inflationary pressure

Starting point is 00:20:26 in 2022 and beyond, mainly because, you know, cap rates are relatively low and asset prices have been relatively high. So when those cap rates are low, the real returns are low. That might widen. So I'm just kind of curious. At the same time, as you mentioned, real estate is a hard asset. So there's a lot of appeal to move into it. So how does that kind of all balance out in your mind? Trade's probably like the question of early 22, right? When we saw that 7% year of year spike in CPI come out, I think it took everybody back a little bit. I think we kind of knew it was coming, but it was still a little bit of a shock to see it. So, you know, look, this question has definitely been on the minds of a lot of our investors on the marketplace. You know, as we see these kind of

Starting point is 00:21:07 unprecedented, you know, levels of inflation post-pendemic, you know, started to really pop up. You know, both our research and experience suggests that, you know, owning hard-out. assets, you know, during inflationary periods is usually a good strategy. Commercial real estate's a good hedge. And commercial real estate is also the largest category of hard assets. So, you know, I'm going to dive in. Let's add a little bit of context to that. I think what's interesting to note is that last year, we saw Green Street produce a report that sought to analyze this very same question. And what stood out to me was the data that it presented showed that if you looked at the period of the last real inflationary period for us, right, was in the 1970s and 80s. And if we look at how

Starting point is 00:21:45 commercial real estate performed during that period. And it's been tracked through, you can track it through private real estate through the NACRIF index, and you can track it through public reits, through the NAY-Rite index. What you will see over that 1970s to 1980s period is that real estate beat the annualized S&P returns by 9% on average. And what that did is it translated into a 5% annualized real return on investments. So, and as a reminder, real return is what we get, you know, after we take taxes and inflation into perspective. So 5% during that high inflationary period was pretty solid. But on the other hand, the S&P, the long-term treasuries, corporate bonds, right? Those returns were all net real negative during that decade of inflation. So this historic performance of REITs and the

Starting point is 00:22:34 NACREF index, I think it gives us some solace and even maybe some confidence that investing in commercial real estate is actually as good of a hedge as we oftentimes think it to be during periods of inflation. And so from there, I think it really is then worthwhile to kind of break that down when we think about asset class, because not all commercial estate is kind of equal when it comes to hedging against inflation. And so what I mean by that is, is that if we think about the most inflation resilient and dynamic asset class, what you're doing is you're taking the analysis of the duration of the lease. The shorter the lease term, the more resilient, the longer the lease term, the less resilient. So what would be the number one most resilient asset class? Well, hotels. They

Starting point is 00:23:20 get marked to market daily. They can rapidly adjust in times of inflation and kind of garner what you can get at every period of month as as inflation ensues. On the opposite side of the spectrum, well, the most, I'd say inflation, like non-resilient asset class, it would be something like a 30-year net, triple net lease on a Starbucks or a Walgreens, right? That leaves. lease has been signed up years ago, the lease bumps are all baked in. If it was signed up a couple years ago, that lease term, well, it was assuming a low inflationary environment for like the next 30 years. So you'd probably want to avoid that type of asset. Now you've got everything in between. So, you know, what looks closer to hospitality? Well, multifamily apartments, right? Because we've got

Starting point is 00:24:08 one-year lease terms. They're constantly coming up on renewals month by month throughout the year. So you can, again, you can mark to market to keep pace with inflation and grow rents. We saw that in 2021, right? Massive rent growth in multifamily, up double digits nationwide while we saw some markets as high as 25 to 30%. From there, you're going to get into what probably something that looks like, multi-tenant office. Those are three to five-year terms.

Starting point is 00:24:33 So you're going to have probably, what, 15, 20 percent of your building turning at any given time. It's not as, you know, resilient as something like multifamily or hospitality, but it's also not the end of the world. Industrial is going to be a little bit longer. We're going to see five to seven, 10-year lease terms in industrial. So I'd say that in an inflationary environment, industrial is going to do fines, always doing fines, doing great right now, but you probably want to look at what's your weighted average lease term. So, you know, I think that's kind of a good way to look at it in terms of, you know, asset class by asset class. I think the final one is retail.

Starting point is 00:25:04 Retail is going to also have a little bit longer terms, five to ten years. Sometimes those lease bumps in retail, they can go out four or five years. before they bump up. So again, when we think about inflationary environments, we're probably going to look at a retail deal and dive into that rent roll and say, who's rolling? How does it look? When do the rent bumps occur? But overall, it's commercial real estate as we've seen, and we feel confident. It's a good hedge against inflation. 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. In every

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Starting point is 00:29:19 sign up for your $1 per month trial today at Shopify.com slash WSB. Go to Shopify.com slash WSB. That's Shopify.com slash WSB. All right, back to the show. I'm just curious about this, but you mentioned the multifamily boom, and I'm seeing that in your data. I have this question around the chicken or the egg, right? Because obviously, our investors looking at multifamily as an opportunity to go in and take on, you know, this new ownership of the building, which then allows them to essentially raise the rent prices or gives them an opportunity to do so.

Starting point is 00:29:56 Are they seeing a increase in wage inflation in the area, meaning they're studying the demographics around that certain location? and they're saying, hey, people can afford higher rents, there's the opportunity. Or is that the chicken or the egg? Which comes first? Well, okay, so, yeah, the answer is I think it all blends together, but it does start, it probably starts a little bit more with the rent growth because, you know, when you're going and buy a multifamily property, you're looking at the demographics in place, you're looking at what the asset is doing, how it's performing, and also when markets really run,

Starting point is 00:30:27 you're going to look at, and we literally will do this in a deal that we look at today if it's an existing asset. What was the rent achieved on a unit type today and six months ago? And if that unit type just rented for just called $100 more per month today than it did six months ago, then what we have confidence in is not necessarily that it's going to rent for $200 more tomorrow, but that the six month ago lease really is $100 behind the market because you have proof points positive in your deal today of what is achievable on a unit by unit basis. So What you do then is that, you know, to your trade, to your point on when you think about wage growth, now you're taking a deal, you have a confidence in what you can charge today.

Starting point is 00:31:12 You can get more confidence by doing some additional analysis and saying, hey, look, if I improve units and I make them nice, I make them as nice as a property down the block that just is renting another unit next door to me for, you know, $200 more than me. Can I get that rent? If I make my unit look nice, the answer, if you can get to that analysis, maybe yes. But then from there, you've got to get to that demographics. Now we're going to get into that level of the wage growth. Because what you can know today is, hey, within my one mile radius, my three mile radius,

Starting point is 00:31:41 my five mile radius, what are the incomes in this location? And as we know, like paying rent is, it tracks relatively to a percentage of what you earn, right? You can't spend all your money on rent. You can only spend up to a certain part. And it's, you know, it's going to range. You know, so when we think about affordability, you know, affordability is 25% of your income, yes, affordable, 30%, possibly. Yes, when you get into urban metros, you get into

Starting point is 00:32:06 the biggest markets like New York and San Francisco, you see that go up to above 40%. You always have to put it into the context of kind of like what in this location of the country, on average, what are people spending to live? Then, now you can start pivoting to wage growth. So if we see in times like today, when we're seeing wage growth occur, well, if you know these people in this location are making more money tomorrow than they are today, they're going to kind of look at it. at their own monthly budget. I mean, yes, everybody wants to have more discretionary income for fun stuff, but if the rents are going up and you want to live in a nice place, then you're willing to pay, you know, that same percentage of your income. So wage growth is what gives you confidence

Starting point is 00:32:44 in the continuation of some of the rent trends that we're seeing. Now, look, in 2021, we saw the pent-up demand leading to outsized rent growth, absolutely. In 22, we're seeing it moderate, But it's still, I think, above long-term trends. I think we'd say we roughly think it's 5% at a national level. It'll taper down to 2% to 3% as the decade ensues. But it's that wage growth that gives you some confidence that we can continue to see some run because basically like, right, again, the goalposts are moving on what people can afford. All right, I love it.

Starting point is 00:33:17 Talk to us about this idea about the rising appeal of niche asset classes. Describe what a niche asset class is and what are the best opportunities that you're seeing in the space? Yeah, so these kind of niche asset classes has been something that we've been paying attention to on our marketplace for years. We've been hugely into them. They actually have been outperformers on the marketplace. So they kind of actually do they do perform while they're interesting. And so I think right now, I'd say there's like three types of deals that we really particularly like. So I'm just happy to jump into them. So first, life sciences. You know, life sciences is a sector that we continue just to see tremendous growth in. We're huge fans of it at Crowd Street. Absolutely. And Trey, I'd say that what got us excited about life sciences when we were really digging in and getting behind, you know, 2019, we were really studying the space.

Starting point is 00:34:09 I'd say it's, you know, kind of early, you know, heading into the pandemic was when we got really excited about the space, just kind of coincidentally. And it was the demographics and what was occurring in the space that really stood out. So just to just dive into that part about, right, what's widely known that we all get is that we have an aging population. So over the next decade, the 65 and older population will increase by more than 30%. Now add on to that the fact that the 65 and older population, on average, spends three times the amount of money on health care as younger cohorts. So then we take that and we add on top of that the fact that we have this trend in data that's proving out that baby boomers, they're wanting

Starting point is 00:34:51 to live healthier, more active, and longer lives. They're demanding more solutions. to help them do that. So in essence, we have this major demographic movement that's underway, and it needs R&D real estate to support it. So now, now we, when we look back at 2020 and say, oh, well, we saw $70 billion of private and public capital poured into life science-related companies in the United States, that's not a surprise. That's a 93% increase over the previous record that we saw in 2018. So again, VCs and private equity, they follow the demographics. And the demographics are saying, spend money on figuring out how to help this aging cohort live happier, healthier, longer lives. So that money is now propelling life sciences sector along

Starting point is 00:35:38 this exponential trajectory path. And then I think the anecdotal kicker here for us was we saw what happened during the pandemic to say, hey, when you dump a bunch of money into MRNA, you can get COVID-19 vaccines faster than we ever thought possible before. So I think we have this added spotlight to what's possible when you focus money and in efforts on treatments. So the speed at which vaccines were rolled out, right, it's just a testament, I think, to the success that's possible in this field. And investors, real estate investors and private equity investors, VC investors, they're all taking note and they're all kind of doubling down. So now to the question, right, when we think about, okay, so where do we like, where do we like

Starting point is 00:36:21 for this niche asset class? Well, one relatively unique aspect of life science tennis, is that they tend to cluster around specific areas. So we see opportunities near bustling urban environments, especially I'd say in areas where you've got type talent, you've got a lot of intellectual capital amassed, and you've got a presence of top research universities. So what does that look like around the country? Well, number one, Boston Metro, right?

Starting point is 00:36:46 It's the number one kind of like, I think, intellectual capital of the world when it comes to life sciences. From there, you're going to see San Francisco, Raleigh Durham is an emerging, I think, cluster that's really interesting as well as New York. Another interesting point here is that when you've got a market where supply is very limited, vacancies are extremely tight, and there's a record rising rents, and there's some development. So there's some opportunity, I think, to participate in the space.

Starting point is 00:37:16 And it's that super low vacancy is what gives us confidence in going into new builds. And, you know, I think the final thing here, which just is kind of like a feel-good part of it, is that, you know, it's a type of real estate that benefits humanity, right? We love the idea of being able to go into a deal, fund, you know, the construction of a space that will attract life sciences companies that are then going to go on and do research that, you know, might one day create like real cures and treatments. So, you know, I think overall you can definitely expect us to continue to lean into life sciences. We're going to be doing this stuff probably for years. So from there, Number two, industrial storage facilities. I think just as an overall, like today opportunity, this is probably my favorite niche. And what you're seeing in the industrial services facilities, and really just to start off with it, like, what are they? Well, these are basically yards. They're storage yards.

Starting point is 00:38:08 You can imagine like an infill property location in a metro. It may be two to ten acres in size. You're going to throw down some gravel, fence it in. you might possibly erect like a simple storage structure on it, but not even necessarily. It's really parking for stuff. Then you take that and you lease it on terms that can range from three to ten years to companies that are going to like store trailers, vehicles, containers on it, essentially groups and companies that are looking to solve their supply chain problems.

Starting point is 00:38:41 What I love about this strategy is that you can rent them, which is really just land to companies with good credit and what equates to about an 8 to 10% yield on cost. And to me, that's a short-term phenomenon that's essentially too much yield. I think that compresses over time. So I kind of think this is like a get-it-wellat-last type of deal. And so we're going to pretty much, we're looking all over for them. We're doing them wherever, wherever possible. The trick is assembling them because, you know, it's harder, it's hard to find them because they are, they tend to be infill. People and companies want them to be located proximate to where they're to deploy their goods and services. So I think, but if you can find them, there's demand for them

Starting point is 00:39:22 and we're going to continue to do them for as long as that opportunity lasts. And I think the other, the third thing that we are really leaning into as a niche is cannabis facilities. You know, and I totally understand to acknowledge that this sector is still somewhat controversial, but facts are facts. This is a type of real estate that is becoming more and more mainstream across the country as states continue to legalize the recreational use of cannabis products. And so to give you an example of a type of opportunity within space that I think is really representative of what we see is the opportunity going forward is, you know, you can take, we're about to participate in a cannabis industrial facility that's located in the inland empire of California.

Starting point is 00:40:02 So in this case, the property is 100% leased. It's leased to two tenants, both of whom have like very solid financials. And you have a weighted average lease term of over eight years. So, and we're buying that property at what's a going in cap rate, right? So NOI divided by the purchase price of the property of 8%. And when we, and if we were going to swap out those tenants with just conventional industrial tenants that could be like literally right down the street, if you swap those tenants in, that deal now trades at a 3% cap rate. So I totally get that cannabis is still an emerging industry, but to me, a 500 basis point

Starting point is 00:40:41 spread in the same type of building, in the same location, just simply because of who that tenant is right now, it's too much. I think that spread compresses in the future. And to me, what we're starting to get evidence of that is three years ago, four years ago, couldn't really get a bank loan on cannabis industrial facilities. You can today. So as the cannabis sector gains more and more acceptance over the next five years call it, I think that you will definitely see those spreads taper dramatically, probably.

Starting point is 00:41:11 probably, and it's totally possible that we could go a decade down the road, and you could see cannabis industrial real estate in a given location traded the exact same cap rate as any other use. And so to me, this really means that, again, cannabis properties, they present what I would say, again, kind of a land grab opportunity, right? Get them where you can, watch that cap rate compression occur over time, and then one day they will look and feel and trade just like any other form of real estate. So those are the three, I think, niches that really stand out to us, and we're pursuing

Starting point is 00:41:41 all of those on the marketplace right now. Now, on the other end of the spectrum from niche is are things like multifamily and industrial real estate. Is multifamily just so popular because it's easy to understand? My second question is, can you even profit still on these sectors or are they just simply overbought? Yeah, well, multifamily is ubiquitous. It's now, I'd say, kind of like the most widely understood and invested in asset class.

Starting point is 00:42:08 So it's here to stay. And it's totally true that, you know, prices. things really popped up on these in the last couple years. And now we have record low cap rates. But overall, I would say that we still like multifamily and industrial sectors. I definitely feel that there's ways to continue to profit from them in 22 and beyond. But they are certainly not on sale. And they would kind of fall into the bucket, I think, though, right now of kind of like you get what you pay for. So with that said, there's no doubt that they are substantially more expensive. They are. And I do think that it is wise to think about your approach to each sector,

Starting point is 00:42:45 you know, these two sectors a little bit differently than you did in years past. And so I guess what I mean by that is when for multi-family, I think right now we see two strategies as most viable right now. First, for anyone who follows our marketplace, you will see that we tend to favor ground-up multifamily developments. And that strategy definitely carries into 2022. We've seen tremendous rent growth in the space. What that tremendous rent growth has translated into is massive appreciation for this asset class. For the most part, that rent growth has actually outpaced increased construction costs, even though that they were up 12% last year. So whenever we evaluate a ground-up multifamily project, we ultimately drive the analysis to the unlevered

Starting point is 00:43:29 yield on cost. We believe the asset can stabilize at by year three. That's once it's built and leased up. So again, unlevered yield on cost, take the net operating income of the property, you divide that by the cost of the project to build it. That is your unlevered, stabilized yield on cost. So what we are seeing right now is even in today's environment, we think we can stabilize with reasonably trended rents, a project around a 6% stabilized yield on cost. And historically, what we've sought for these types of ground-up multifamily properties is about 150 basis point spread between what we would stabilize at and then compressing down to

Starting point is 00:44:09 what we would sell it at. So if we were stabilizing it at 6%, as we talk about, we would want to see that asset trade at a four and a half cap at exit. Well, the good news is that today, if you're building it, it's not a four and a half cap. It's actually a three and a half cap. So really what that means is that spread between the yield on cost and the exit cap is now not 150 basis points, but it can be 250 basis points depending upon the deal and the location and so forth. So it's, and it's totally fair to say that we do expect cap rates to moderate and

Starting point is 00:44:43 increase to some degree over the next three years, but not dramatically. So I think that while there's, and there's still some supply on the horizon, yes, multifamily is being built around the country. We're seeing it in cranes wherever we go. But overall, we like ground up multifamily development because of this excess spread, and we're pursuing projects right now in many growth markets. The other thing, it's also worth noting in multifamily that I think has now popped back up and returned as a strategy. And is a little bit different, like, as a strategy that we saw kind of taper in 2018 and 2019,

Starting point is 00:45:15 is value-added acquisitions. So the business model for a value-added acquisition, it's pretty straightforward. You buy a property. You think that it's well-located. It's got, what we'd say, good bones. But it's getting tired. And therefore, it's unable to achieve the rents that it otherwise could if it were renovated. Back in 2015 and 2016, we really liked the strategy.

Starting point is 00:45:37 We were leaning into it in a lot of places. I'd say Atlanta and Dallas, Fort Worth, is a really good example of that in one way that we evaluated them was very specific to looking at the return on cost of an investment into a unit renovation and what that would translate to in additional rent. and the metric that we used to see as possible was a 20% return on cost. So to quantify that, really what that means is, for every $10,000 that you would invest into improving the unit, you wanted to see about a roughly $165 per month increase in rent. And in 2015 and 2016, absolutely that type of investment yielding that additional rent was achievable. Then what we saw was that later in the cycle, that return on cost tended to tapers. tapering down to the low teens.

Starting point is 00:46:28 And by the time it hit the low teens, we were, I think we were kind of a little bit, not, you know, bloom was off the rose a little bit, kind of, so to speak, when it come to like, do we really like this strategy? We were then more pivoting a little bit more towards development at that time. But now, fast forward to today, 2022. Again, with that massive rent growth that we just saw in all these markets,

Starting point is 00:46:46 you can once again now take a $10,000 investment into a unit upgrade, and you can actually yield more than $165 per monthly rent, because of how much, how fast rents have just spiked in a lot of markets. And now you have some of these assets that are just kind of left behind, but they could catch up if they were renovated. You know, and it's, we definitely do expect rent growth to moderate over the next few years, which again, to us to suggest that it's possible that the value add play that has kind of come back to the market, it might be gone by 25 or 26.

Starting point is 00:47:19 But we like it for today and we're definitely leaning into it. And when we think about vintage of asset class that really, suits his strategy. In 2022, it's an early 2000 vintage property that is really well suited for it. Because if you think about an apartment complex that was built in 2005, it's still got good bones. It's got high-grade, high-quality construction. It now has higher ceiling heights than the stuff that was built in the 70s and 80s. So you can take that property. And if you renovate it, it can actually live very, very close to being to new. And we've actually seen that in multiple markets, renovated 2005 vintage property with a really sharp interior renovation that's going

Starting point is 00:48:00 to give you a new kitchen, new bathrooms, new flooring, and fixtures and the like, and you can get very, very close to new Class A rents. You do still need to trade at a discount, but that discount's actually lower than what you would otherwise think. So that's kind of how we view the multifamily sector today. Now, on industrial, I'd say it has similarities to the multifamily story, right? We have the same rapid asset appreciation that we've seen, the same compressing cap rates. We are now solidly into like mid three caps. As I mentioned, if it's in the inland empire of California, it's a three cap absolutely deal. So it for us, what that means is it's hard to find existing assets that make a lot of sense to us. It's possible, but they're rare. But similar to multifamily,

Starting point is 00:48:43 because of that massive rent growth that is at the same time, you know, with decreasing cap rates, we're seeing this outsized spread come in development. So similarly, I'd say when we think about industrial development last cycle, you know, we were looking at spreads of 125 to maybe 150 basis points, and that made sense to do an industrial development. We've seen that bump out now to about 200 basis points. So in general, I'd say that makes us favor ground up industrial projects, particularly as we see them lease up fast in multiple markets.

Starting point is 00:49:15 I mean, in essence, you put up the walls, As soon as the walls are up, the tenants start to show up. And by the time the project's done, you might have it fully leased. You probably have it at least half-leased. I mean, the rate of absorption is still been pretty astounding. And also, I think because of that speed, in years past, we would normally underwrite these projects to sell within three years. But in actuality, they're selling in two years or less.

Starting point is 00:49:39 So there's just, again, there's just like high-speed kind of velocity that's in the space that I think speaks to some opportunity that's there. And there's just so much purchasing demand in the market for these. And that's what's driving that kind of those stabilized prices that we're seeing, even though that the buildings are maybe still in lease up. And the final thing about industrial is we know the U.S. continues to need a lot more of it than it currently has. And so to the extent that we can reliably deliver industrial real estate to the markets that

Starting point is 00:50:04 we like in the short to midterm, then that's something that we definitely lean into on the marketplace. 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 VANTA is a game changer. VANTA automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform. So whether you're prepping for a SOC 2 or running an enterprise GRC program, VANTA keeps you secure and keeps your deals moving.

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Starting point is 00:54:02 bumps along the way. And, you know, when I talk about 2021, right, we do what is now known is that we marked the beginning of the recovery for the sector. And that's important for the sector going forward because you do need a base to build off of. And also what was interesting even in 2021 was, if I rewind to last year, you know, we were moderately bullish on some resurgence in the space. Assets were trading at lower levels than they were relative to 2019 pricing, but we were optimistic that things were going to start to look a little bit better for the space. What was surprising was we had performance in July of 2021 that set a new record. So to quantify that, So, for example, we track occupancy and daily rate numbers that are provided by STR.

Starting point is 00:54:46 So, STR being the nation's leading data source for the hotel industry. So when you look at the STR RevPAR reports, now RevPAR, which really stands for, you know, it's revenue per available room. That's the product of average daily rate and occupancy. You'd find that the hospitality sector, right, it hit, it hit its high, pre-pandemic high back in July of 2019. It was just under $100 at $99.48. cents. It then got completely wiped out during the pandemic. It bottomed in April 20 at this brutal number

Starting point is 00:55:17 of $15.61 and then it started to perk up a little bit. And then back in July of 2021, which was a surprise to, I think, everybody, was that it set a new monthly all-time high of $99.95. That was, and that was double of what it was a year before. So I think we were all expecting some recovery in 2021. I don't think any of us were really expecting to see record revpar, you know, on a monthly basis hit that year. I think a lot of us were thinking it was going to be 23 and some people even thought 24. So it's important to note that the market did start to bounce back. So I think that's what makes us like reasonably bullish on the hospitality sector in 22. But it's also fair to that to say that, look, it will, it should expect some volatility remain in the sector until we really get post-pendemic. So now if you are able to

Starting point is 00:56:04 kind of take a deal and bake some level of uncertainty into it for this year and, you know, But just sit with some things like excess operating reserves, I think you have a pretty good deal, and those are the kind of deals that we kind of look for in the marketplace. So we like it first and foremost in Charleston. We're most bullish on that marketplace. We see a lot of momentum coming to it. We already saw it last year and continuing this year. And we're also leaning into this growing trend of what are called workations.

Starting point is 00:56:33 So you work for a period of time, you recreate for a period of time. And I think that's something that's in an increasingly remote work environment. I think that's something that actually has momentum this year. So for that reason, we ranked the Colorado Mountain Region as our number seven market for 22. I do think that mountain towns are great places to kind of blend this work and recreating. So I think you're going to see some continued demand for those types of spaces. And overall, you can see all the rankings on which markets we like and where we like them

Starting point is 00:57:06 and how we like them in our 2022 best places to invest report, which is available on the Crowd Street Marketplace. So I think to sum it up, Trey, like the fuel that drove this first phase of the recovery in the hospitality sector in 2021 was, I think, stronger than expected. I mean, that was obviously largely thanks and, you know, part to the summertime surge in travel. To me, this puts some wins in the sale of the hospitality sector, expectations of, you know, continued recovery. And I personally think that by the time we hit 20, end of towards end of 23 into 24,

Starting point is 00:57:42 that's, that's now new record-breaking year for the market. So as long as we can find deals that are, you know, kind of well thought out in terms of navigating some of the remaining uncertainty, then I think you've got, you know, you've got a great story for, you know, great returns in the years ahead. So I'm an entrepreneur and I have a have this thing where every time I drive down a street and I see a four-lease sign on a building, my mind instantly goes, what could I do with that? What could that be? Right. And as I've been driving around, this is totally anecdotal, but as I've been driving around my neighborhood, I'm seeing more and more just for-lease signs on almost every street. It feels like retail has been

Starting point is 00:58:22 almost left for dead. Is it dead or are there opportunities, you know, flying under the radar here? This is the interesting one because I feel like retail has just been overly beaten up in the press. Headlines drive perspective. And I think in this case, that perspective is somewhat disjointed with reality. I like the retail sector in 2022. I think it's been overlooked since the beginning of the pandemic because of all that negative press that's out there. And I think what's been happening in retail can be. summed up during an interview, there was a, I like to watch the Walker webcast. I'm a fan of

Starting point is 00:59:03 Willie Walker. Recently, he had a guest on by the name, make of Frank Sopetas. What Frank points out is he, during the interview, he points to some Department of Commerce data. And what he also mentions is that how there is this liberal methodology that's applied when quantifying online sales. And so the story that he pointed out was, for example, if you buy something online and you pick it up in a store. It counts as an online sale. But you went to that store, right? And you went to that shopping center.

Starting point is 00:59:33 So what that tells me is that fundamentally, online sales in this nation will tend to be overstated relative to reality, while brick and mortar sales will tend to be understated. And there's actually probably reason behind that because, well, brick and mortar, it's not a great emerging story. It's a been their story. and online is the emerging story. So we even want the story to kind of go in the direction, right?

Starting point is 00:59:58 The narrative wants to overstate the online story. Not to say that online's not growing because it is, but I think there's definitely a little bit of nuance here that's worth delving into. And so what part of maybe moderately bullish on retail right now, it even traces back to what we saw within our portfolio during the depths of the pandemic. And so what I mean by that is when we headed into the pandemic,

Starting point is 01:00:20 we saw occupancy levels in our retail portfolio. high. The weighted average lease terms were in excess of five years. And what that translated to was that the assets in the portfolio had really robust debt coverage ratios. And as you know, like one of the things that if there's one way to lose money in real estate, it's not being able to pay your mortgage. If you can pay your mortgage, you can kind of always see yourself through to the other side of a bad time in a cycle and eke out either a good, okay, some sort of return. It's when you can't pay your mortgage is when you might have to give the keys back at the bottom. So pandemic hits. We saw, you know, we heard that news out there. Collection ratios dropped to

Starting point is 01:00:59 roughly 67% nationwide. But what we saw was that good assets. So when we looked into our portfolio, if you had a well-leased property, your debt coverage ratio going into the pandemic for a lot of these shopping centers was about 2.4x, right? 2.4 times the debt coverage ratio that you needed in net operating income. Then you take this hit on 33% of your collections. Well, what you're left with is a debt coverage ratio that's about 1.5. That's enough to pay your mortgage. You have funds to conduct tenant improvements, and you even have some reserve cash flow.

Starting point is 01:01:34 And that was in April of 2020, like the worst time in our memories of what it would be like to own a retail property. So now, fast forward today, that stress has burned off. you know, in addition, it's also, you absolutely have a scenario where the pandemic served as a bit of a forcing function. Some of those, you know, those weaker retailers, they did exit some of the centers around the United States. So overall, really what that means is now the tenants that are in place, they just came through like one of the worst retail periods in our history. So they're strong, they're relatively strong. And they're probably likely to stick around in a center going ahead.

Starting point is 01:02:10 So then you take that environment and I layer on to it, look at some data. that was recently published by the IHL. That discusses how national retailers expect to open more stores in 2022 for the first time since then they will close since 2017. And that's not surprising to me because today in 2022, we see more and more retailers intertwined their online business with their brick and mortar business. And then second, according to CBRE, we can look back at Q3 of 2021. and we saw that all retail asset classes experienced positive absorption, and that reduced the overall retail availability to a 10-year low of 5.9% in Q3 from the previous 6.2% in Q2. So really the point there is that the fundamentals are coming back. And the final point about retail here, which I think is

Starting point is 01:03:04 fascinating to think about, is just the optics. So from a cap rate perspective, the retailist sector is valued on a cap rate basis, kind of like a dinosaur industry with little hope of growth. And what I mean by that is that, while a good multifamily property or a good industrial property, as we've talked about just a minute ago,

Starting point is 01:03:24 while that's a 3.5% cap rate deal, if it's stabilized, an equivalently good retail center in a same location is going to be valued around a 6% cap rate. And that's a big spread, right? That's 250 basis points of spread. And if retail continues to grow,

Starting point is 01:03:40 grow its percentage of sales that are driven by e-commerce, but in a brick-and-mortar intertwined hybrid environment. And if retail continues to grow its percentages of sales in brick-and-mortar locations that are driven by its e-commerce platforms, isn't it possible in the years ahead that we begin to view retail more in the perspective of something that feels a bit like last-mile distribution? Maybe it's last half-mile distribution, right? And if we begin to realize that this retail outlet is just this kind of differentiated form of delivering goods to a location, will it really continue to trade at a 250 or maybe 300 basis

Starting point is 01:04:22 point discount to industrial? I don't think so. And that's why I think that there's hidden value in retail right now. So if you're generally bullish on the commercial real estate sector going forward, what risks do you see in the market? if it's not things like inflation, for example, or otherwise, that could pose a threat to the growth of the industry over the next few years. Yeah, I mean, look, my overall perspective on inflation is that I think it does abate over the

Starting point is 01:04:50 next few years. I think it's got a period of time. And again, provided that interest rates kind of move up and lockstep, I don't see it as, you know, as something posing a major threat to it. If it gets out of control, that's in the wheels fall off. That's where there's some risk. So, you know, roughly speaking, look, we all kind of think there's three to four, you know, rate bumps coming in the next year, 25 basis points each.

Starting point is 01:05:13 You know, if the 10-year treasury is sitting at two and a half percent this time next year, that's probably overall a good thing for the industry. Rates have been probably too low for too long. If we think about risks, I mean, to be totally honest, probably the risk that I see is kind of the outlier that could come back is political risk, to be totally honest. Like, I think our economy is strong. What we look at, we're looking at roughly 4% GDP growth this year. year, we continue to be the market where the world wants to invest in. So I think from a macroeconomic

Starting point is 01:05:42 perspective, trending down to microeconomics and market rate-driven perspective, I think there's a really good runway here. I think we're a little bit disconnected from the strength of our economy and, you know, in our political system. It's not great right now. It's too polarized. It doesn't work together to get stuff done. And so I think that would be the thing that could derail us. And so that's probably the one thing. It's something that is completely outside of our control. So for the most part, but that's what I would say as a perspective is, you know, hopefully it doesn't, it doesn't play into, you know, diminishing markets, but it's probably the one thing that might kind of set us back a bit. Now, are you referring to the recent FMC meeting, for example, where they're

Starting point is 01:06:28 talking about tapering liquidity and raising interest rates. And do you have any opinion on how that's going to affect the market over the next, say, 12 months? Yeah. I mean, my perspective on those types of things is, again, I think that will show up in moderation. The other thing that I think in terms of, look, if you want to run three or four years down the road, I mean, we are with the amount of liquidity that we've injected into the

Starting point is 01:06:51 economy, I do feel that we are relatively speaking in the zero lower bound type of environment, right? Interest rates can't go up too high. Nothing can get too out of bounds too fast because, you know, at the end of the day, we wouldn't be able to afford to service our own national debt. So I think that there's restraint that will always be brought and there will be moderation. You know, where I see the more risk is just kind of in the way differing, you know, differing municipalities approach different decisions.

Starting point is 01:07:20 We've got a lot of tough decisions to make around the country in terms of how to invest in infrastructure, how to deal with budget deficits and so forth, right? it's the disagreement leading to potentially bad policy decisions one way or the other, whatever it is. That's the part where I think that if it's not well-coordinated, there can be some risk. We've seen some examples around the country when minds are not on the same page. I think everybody just loses. So to me, that's the part when we look around the country, I'd say that it does start

Starting point is 01:07:52 to factor into the equation a little bit for markets, that we want to see municipalities that do seem to get a sense of how to get stuff done and how to come together and reach consensus to make decisions. Absent consensus, nothing gets done. And when nothing gets done, markets suffer. And that's particularly true in the commercial real estate industry. Oh, you're talking about California. No, I'm kidding. I live in California. And I have just been amazed to see some headlines saying things like, U-Haul is sold out of trucks leaving California. Last time you were on the show, we were talking about this mass exodus in places, especially like San Francisco. Has that bottomed, in your opinion, or is that still on trend?

Starting point is 01:08:32 Trey, I think from our vantage point, we're still seeing that those kinds of trend and the migration of the United States is still in place. And it's still occurring, you know, from a net drag on places like California. In addition, you know, say New York and L.A., still some net negative migration. And it's generally speaking going to some secondary markets and other smaller cities around the United States. I think we, you bowl it up, people are still out there rethinking where they want to live. And there's, there is this, you know, given that we, there is some continued momentum around remote work, as we've discussed, with this more flexibility to do so, like that, that's factoring into some

Starting point is 01:09:12 the migratory patterns. And I feel like that we need to remind ourselves that these migratory patterns, they were in place before COVID. It's just that they were accelerated through the pandemic. And, you know, within, within places like California, They are more prominent in the Bay Area. So let's unpack that a little bit more. We looked at a report that was produced by the California Policy Lab that showed that in 2020, that was the first time that population actually declined in California. And you did see the Bay Area seeing the biggest drop, and that was due to consistent negative net migration in state.

Starting point is 01:09:52 The numbers show that compared to pre-pendemic levels, you know, roughly about 45% fewer people moved into the Bay Area from out of state. And there has been this consistent trend for the last two decades of fewer people moving into California. I do remember we've discussed previously and we did talk about that whole, you know, the U-Haul phenomenon you discussed. I remember at one point during the pandemic, it was eight times more expensive to rent a U-Haul from San Francisco to Phoenix than the reverse trip.

Starting point is 01:10:22 Same trip, reverse direction. So you did know, and you saw that people were, moving out of California and they were going to places like Phoenix, they were going to Texas, and they were going to Idaho and the like. But the number one destination for people leaving San Francisco has actually been, it has been Austin, Texas. There is a website that's called Move Buddha, and they track some of this data, and they noted that. You know, again, just pulling it back a little bit, it just goes back to the bigger picture of the reshuffling of the U.S. urban geography, you know, since the pandemic. This is going to continue on for years, I think absolutely.

Starting point is 01:10:54 we're always on the move. It'll trend down over time, but there's maybe a little bit of bump right now. And so one data source, similar to the UHawis story that you referenced a minute ago that I look at every year, I love to read the United Van Line study. It comes out at the beginning of year. So they just published the 2021 report. And it tracks years, I think it's great to look at when you want to talk about net migratory trends, you know, van lines, moving companies, they're great data set. So 2020 one report by United Van Lines showed that the largest net outflows from state to state were Illinois, New York, Connecticut, and California. And the largest inflows, right? So who were the net beneficiaries? They were Vermont, Florida, the Carolinas, Tennessee, and Idaho. A bunch of other

Starting point is 01:11:47 states, too, but those are some of the ones that stood out. And trade, I think just to finish this thought, there's just definitely continued migration. out of major metros right now. Fewer people are going into some these dense areas. It's starting to change, though. I mean, we are starting to see some urban renaissance. We are actually bullish on multifamily, for example, located more towards the urban core.

Starting point is 01:12:08 I think we saw, you know, there's a little bit of the tide went out. Tides, I think, is starting to come back in. That's more of an intrametro migration trend. So, you know, now we're not really talking about in and out of the state as much as we are kind of talking about in and out of the city. But overall, I do think that things will tend to normalize over the next few years, and I think even normalize to some degree for the Bay Area. And despite the headlines, we've already seen occupancy and rent bounce back in places like San Francisco.

Starting point is 01:12:36 They're still a great city. They got a ton of intellectual capital. And so I do see better a days ahead for it and other markets that are like it. But we're going to have to, you know, it's going to take a little bit more, I think, towards the middle of the decade for that to feel normal again. All right, I have one last question for you, and it's about Crowd Street specifically. When I was on the platform looking around, I noticed something, and I was just going to get your thoughts on it. Crowd Street is a marketplace, but you also are an advisor.

Starting point is 01:13:03 So I was kind of curious to know how you distinguish the difference depending on the listing that you're offering. This is a great question, Trey. And I think the answer to it sheds light on what I think is the core value proposition of our business. CrowdStreet begins and ends with our marketplace. It's the lifeblood of our business. So when we sought to launch the advisory side of our business in 2018, it was always centered

Starting point is 01:13:29 around the idea that it would strengthen our marketplace while offering investors just an alternative path to investing through Crowdstreet. And so to take that from top to bottom, when we evaluate a deal at Crowdstreet, it begins as an evaluation for a marketplace offering. first. It's after we go through that entire process. And if we approve that deal for the marketplace, it's at that point that we canvass it against our own discretionary sources of capital. It's from our funds and our privately managed accounts. And if it looks to be a fit for any of those fund mandates or the mandates within the privately managed account, it then runs through separate processes.

Starting point is 01:14:09 One is an investment committee that I'm a member of. The other is through IWS advisors who Canvas through the privately managed accounts. And then we review it for potential allocation from those sources of capital. And it's through this second lens. Okay, now we're acting as fiduciaries, right? We've already approved the deal for the marketplace. Now we're going to ask questions like, is this a good fit for this fund? Does it provide the diversification that we're looking for from a geographic standpoint,

Starting point is 01:14:39 from an asset class standpoint, from a sponsorship standpoint, right? we have to, we are fiduciaries at the fund level, so we're going to make that decision. If there's five of the same type of deal that are coming through at the same time and the fund is really going to only have the potential to allocate prudently to one or two of those, yeah, then we're going to choose between those one or two of those five deals. But the point is that it's always, it's based on the strength of the marketplace. That's the deal flow. That's why investors actually come to CrowdStreet in the first place. I'm biased, but I think we have the best deal flow in the country. And it was when we realized that we could do over 100 deals per year repeatedly, that it dawned on us that

Starting point is 01:15:15 we have the opportunity to create really interesting investment vehicles that just weren't eligible in other places because we're leveraging 250-plus relationships all over the country to then bring in over 100 deals, trending to 150 deals probably or more this year. And then that would give us the opportunity to then divide that capital and allocate it efficiently over such a robust number of opportunities that it would ultimately translate into an investment vehicle that looked unique and looked compelling. And so that's the strength of the advisory side of the business. And I think one last point really illustrates as well is that when we look at a single deal, commercial real estate private equity, as we talk about a lot, it's finite. It's not like a

Starting point is 01:15:59 stock. You can't just go keep buying it, right? It's in a case of a middle market deal, it's going to come with $20 or $30 million of total potential equity allocation. It's all that deal is going to offer. And what's important is that as we grow and scale our marketplace, the best sponsors out there, they have ample choices on how to capitalize their project, right? So they do want to see an element of certainty of execution in their capital solution. So they come and bring us a deal. It's got that $30 million of allocation, for example.

Starting point is 01:16:26 And they'll look at the end of the day, the marketplace is a best efforts marketplace, right? It's a place where it can go. It'll subscribe. Those individual investors will go into that project. but there is no absolute sense of certainty to it when we begin. It's based on the history and the track record of what we do in a marketplace. But now, on top of that, we can layer on discretionary sources of capital, potentially on a

Starting point is 01:16:49 one-off basis. And it's that capital that helps us win the deal. So if we go to that sponsor with a $30 million allocation, we say, okay, we're going to bring this deal to the marketplace. But on top of that, while we do, the first five or $8, now $10 million maybe could be known sources of capital that's discretionary to Crowdstreet. that's instrumental in winning that deal. That helps us actually bring the remaining $25 million to $20 million of allocation to the marketplace.

Starting point is 01:17:14 So what we talk about with fund investors and marketplace investors is that your partners, your partners in helping us achieve the best possible deal flow for the marketplace, but it always circles and runs through the marketplace. Like I said, it begins and ends as a marketplace. Well, Ian, I always love these conversations. You always bring so much knowledge and I learn a ton. Before I let you go, I want to give you the opportunity. hand people off to Crowd Street, to you personally, to any other resources you want to share.

Starting point is 01:17:43 Oh, yeah, Tras, we always talk about, you know, easiest way to learn more about us, what we're doing and deal flow is to go to the Crowd Street website. So www.w.w.com. Create an account. It's easy. You can start logging in. There's a wealth of information. The team that is behind generating the content on the website, it's done a tremendous job. And there's a lot of education. That's where I say start. Start by educating yourself. There's a lot of nomenclature. There's stuff that we've talked about even in the course of this conversation. But we're happy to help break it down, get investors up the curve. So that's a great place. I have a book that's on Amazon. If anybody wants to check it out, I think it's called the Comprehensive Guide to Commercial Real Estate. So you can go look at that there. Also, individually, if anybody wants to reach out to me on LinkedIn, I'm the only Ian for Migli on that platform. So pretty easy to find. I love talking deals. You know, you know, you know, me. I can talk deals for the rest of the day and happy to chat online. So those are great ways to find and learn more about us for anyone who's interested. Well, Ian, it's always a pleasure. I look forward to doing this again, getting the update from you later this year. It'd be interesting.

Starting point is 01:18:50 Likewise, Trey, looking forward to the next conversation. All right, everybody, that's our show. If you're loving it, please go ahead and follow us on your favorite podcast app. You can also reach out to me on Twitter at Trey Lockerby. And don't forget to check out all the resources we have for you at the investorspodcast.com. And with that, we'll see you again next time. Thank you for listening to TIP. Make sure to subscribe to millennial investing by the Investors Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts, or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision consult a professional. This show is copyrighted

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