17 February 2022

On today’s show, Trey Lockerbie invites back our favorite expert on commercial real estate, the CIO at Crowdstreet, Mr. Ian Formigle.

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  • How the commercial real estate market has performed since we last spoke in mid-2021.
  • What were the main drivers? 
  • How labor and supply shortages have affected the market.
  • The impact of inflation.
  • The rise of niche asset classes.
  • An update on the mass exoduses from places like California.
  • The top-performing markets of the last year.
  • And much much more!


Disclaimer: The transcript that follows has been generated using artificial intelligence. We strive to be as accurate as possible, but minor errors and slightly off timestamps may be present due to platform differences.

Trey Lockerbie (00:00:03):
On today’s show, we have our favorite expert on commercial real estate, Mr. Ian Formigle. 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-2021, 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, please enjoy this discussion with Ian Formigle.

Intro (00:00:42):
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.

Trey Lockerbie (00:00:53):
Welcome to The Investor’s Podcast. I’m your host, Trey Lockerbie. And like I said, at the top, I’m here with Mr. Ian Formigle. Ian, welcome back to the show.

Ian Formigle (00:01:10):
Trey. Thanks for having me back. It’s always a pleasure to come in and talk to you.

Trey Lockerbie (00:01:14):
Well, last time you were on the show, it was around August of 2021, and the market was doing some 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?

Ian Formigle (00:01:31):
Yeah, so in the second half of that year, it was just tremendous growth and resurgence in the market. When we spoke last time in 2021 we were starting to see some movement and it was an improvement in the market. It just hadn’t really started to accelerate as much as we had previously may be 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 multiple measures from starters on a volume side. We ended the year with an $809 billion roughly total transaction volume. And that’s according to real capital analytics. The group that I had mentioned during our last conversation. That was an 88% increase year over year from 2020 volume.

Ian Formigle (00:02:15):
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 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. That’s $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 hotels bounce back. They had $44 billion of total transaction volume. So not huge, but coming off of 2020 where they essentially did nothing, it was tremendous to see that asset class start to partake again.

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Ian Formigle (00:03:08):
And then the office even actually bounced back, had $139 billion of total transaction volume there as well. And from a returns perspective, 2021 was just equally astounding. We track Green Street’s commercial property price index, for example, that’s the CPPI, 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%.

Ian Formigle (00:03:44):
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 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. The LA market is a tremendous industrial market. It’s actually our number one industrial market in 2022 which I think we’ll talk about a little bit further in the show. So Trey, just an overall phenomenal year for the commercial real estate market especially for those multifamily and industrial asset classes.

Trey Lockerbie (00:04:30):
Now, what were some of the drivers behind such a strong performance in the back half of the year, especially?

Ian Formigle (00:04:36):
Yeah. Interesting. I think at a high level, you probably sum it up as saying just pent up demand and from both buyers and tenants. On the transaction side, I think there was this bit of a perfect storm coming into 2021 that translated into this rocketing pricing that we saw. We begin with think about all the macro drivers that were in play last year. 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 were fully engaged. It felt a bit at times last year as if the institutional capital side of the equation was attempting to kind of makeup for lost time in 2020 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.

Ian Formigle (00:05:27):
The next thing that you saw was we had supply chain issues that we know about, and those were preventing some new stock from being delivered to submarkets quickly enough. And 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, factor replacement costs 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.

Ian Formigle (00:05:57):
But when you’re in an environment 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.

Ian Formigle (00:06:26):
And in times of inflation, you want to hold hard assets. So I think this was what you would say is more fuel on the fire. And I think the final thing was we were experiencing rapid GDP growth in 2021. 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 roll it all up, we had a bunch of macroeconomic factors. We had market-driven capital force factors at play. And those were all combined to drive demand for commercial real estate. So just a lot of demand there.

Trey Lockerbie (00:07:01):
Yeah. The perfect storm, so to speak, 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 when it was harder and harder to create new inventory. I want to go stick to that point about the supply chain. There’s been a lot of discussion about labor shortages and supply chain constraints in almost every aspect of the economy. How has it affected the commercial real estate investing space?

Ian Formigle (00:07:34):
Yeah, I think from a real estate investing perspective, there are 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 opportunities. 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 reviewing deal flow is understanding how labor shortages may affect project timelines on new development. For any new development deal that we look at, we have to consider that delays in 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.

Ian Formigle (00:08:18):
And one key ingredient in doing so is having confidence in the general contractor. So that means that we have to evaluate things such as the tenure of that relationship between the developer and the contractor. We have to ask questions such as how many projects have this team delivered together? How many of those have been in this location? What’s this track-like record in general of the general contractor for delivering on time? 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 because one thing that you learn by participating in a number of development deals is that subcontractors are, you kind of would say they’re like hired guns. They come in, they’re there to conduct a piece of a project, get it done.

Ian Formigle (00:09:03):
And sometimes those subcontractors are willing to bail on one project for a higher paying project down the street. 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. They have to go on and get their next job. So when labor is tight, as it is right now, you really want to focus on that labor side of the equation 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. 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 lower or wage and they’re struggling to bring some of that back.

Ian Formigle (00:09:57):
So when we consider risk when evaluating 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 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 a day-to-day type of occupancy.

Ian Formigle (00:10:24):
And finally, I’d say that in the industry, there is an indirect risk in retail shopping centers associated with labor shortages. And so in this scenario while your tenants are the retailers, they’re paying you fixed rent on long-term leases, many of your tenants in a shopping center, particularly I’d say restaurants, well, they rely on lower-wage workers to conduct their business.

Ian Formigle (00:10:46):
And as we’ve all read about in places like the wall street journal and so forth, we’ve heard about these stories were staffing, these types of positions have 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, 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 rent abatements.

Ian Formigle (00:11:14):
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.

Ian Formigle (00:11:29):
So with that downside kind of risk mitigation said, it’s also important to note that supply chain constraints I should say does 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 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.

Trey Lockerbie (00:12:00):
Awesome. Well, as I was kind of mentioning earlier about offices being 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?

Ian Formigle (00:12:10):
Yeah. Trey, office has been a fascinating market and 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 them and try to be as brief as possible. So for starters, early ’22, there is definitely more clarity today, I think, relative to a year ago, in sense of what the future of the 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.

Ian Formigle (00:12:55):
But one thing I think, for example, Trey is last time we talked, we discussed Gallup data that head 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 desks, as we would say 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 calling it this decade. And so just think about just commuting time and what that does.

Ian Formigle (00:13:38):
So US census data we can look at current estimates that the average commute time is just over 27 minutes. Then you factor in things like getting ready for work and transitioning back 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 that’s thrown out getting back and forth. So over the course of the year, that’s six to nine weeks. That’s a lot of time for people that are busy. So you 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’s 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 there.

Ian Formigle (00:14:31):
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 advertised as remote, I think they’re going to get staffed remotely. And I think we’re going to have a lot more remote workers in the years ahead. So I think what that does is increasing makes us kind of bullish on infusing the hybrid office model into our office investment thesis.

Ian Formigle (00:15:20):
And it’s important to note that a growing hybrid office model, 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. It will tend to reshape I think the industry over the coming years, but I think it’s a really fascinating time to see how that transition’s taking place. I think an important thing also to point out here too, 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 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 2019 in the future.

Ian Formigle (00:16:09):
And 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% range for utilization. And what I mean by utilization is what percentage of people are coming into an office today relative to who 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 coast markets, we’ve talked about New York and San Francisco in the past, those are I think still down in the 20s.

Ian Formigle (00:16:58):
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 are 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 countries, as I mentioned those top 10 metros about 31%. Well, when you look at law firms, now you’re at 52%. So I think there are some of these 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 kind of our equation when we think about office in the future. And I think the final thing to think about when it comes to the future of the office is blending coworking into it.

Ian Formigle (00:17:44):
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 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 in 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 coworking. And the beauty is is that if the coworking model is embraced by these companies, well, think of the benefits that they get because they no longer have to manage an office in the way they used to in the past, and managing an office today is challenging because you just don’t know what to expect.

Ian Formigle (00:18:34):
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 multi-family 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. Five years later, you tear it out and start all over again because the next company wants something different. And the way the market was working as it was conducive to catering to the needs of the new tenant and solving their demands.

Ian Formigle (00:19:15):
I think that has to go away in the future because of the way that demand is looking now and how it’s fluid, and it’s 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 multi-family 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, and we’re going to make sure that the lobbies look great, but the space is kind of the space now for years, and it’s kind of a take it or leave it.

Ian Formigle (00:19:43):
But again, diving back into that thesis around coworking is that that kind of build-out also works for coworking because it’s going to take types of spaces, it’s going to create 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, traditional spaces are up upstairs. The smaller tenants are gravitating I think more and more co-working, it’s just how we see it.

Trey Lockerbie (00:20:12):
One topic that we’ve discussed a lot on the show, as of late as 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 in 2022 and beyond mainly because cap rates are relatively low and asset prices have been relatively high. So when those cap rates are low, the real returns are low, which 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 appeals to move into it. So how does that kind of all balance out in your mind?

Ian Formigle (00:20:47):
Trade’s probably the question of early ’22. When we saw that 7% a year of year spike in CPI come out I think it took everybody back a little bit. I think we knew it was coming, but it was still a little bit of a shock to see it. So, look, this question has definitely been on the minds of a lot of our investors in the marketplace. As we see these kinds of unprecedented levels of inflation post-pandemic start to really pop up, both our research and experience suggest that owning hard assets during inflationary periods is usually a good strategy. The commercial real estate’s a good hedge and commercial real estate is also the largest category of hard assets. So, dive in, let add a little bit of context to that.

Ian Formigle (00:21:28):
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 last real inflationary period for us was in the 1970s and 80s. And if we look at how commercial real estate performed during that period, and you can track it through private real estate through the NCREIF index, and you can track it through public REITs through the NAREIT index, what you will see over the 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. And as a reminder, the real return is what we get after we take taxes and inflation into perspective.

Ian Formigle (00:22:17):
So 5% during that high inflationary period was pretty solid. But on the other hand, the S&P, the long-term treasuries corporate bonds, those returns were all net real negative during that decade of inflation. So this historic performance of REITs and the NCREIF 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.

Ian Formigle (00:22:46):
And so from there, I think it really is then worthwhile to kind of break that down when we think about the asset class, because not all commercial real estate is 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, well, 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.

Ian Formigle (00:23:16):
So what would be the number one most resilient asset class? Well, hotels. They get a mark to market daily. They can rapidly adjust in times of inflation and garner what you can get at every period of the month as inflation ensues. On the opposite side of the spectrum, well, the most, I’d say, inflation non-resilient asset class would be something like a 30-year triple-net lease on a Starbucks or a Walgreens. That lease has been signed up years ago. The lease bumps are all baked in. If it was signed up a couple of years ago, that lease term, well, it was assuming a low inflationary environment for the next 30 years. So you’d probably want to avoid that type of asset. Now you’ve got everything in between. So, what looks closer to hospitality well, multifamily apartments.

Ian Formigle (00:24:07):
Because we’ve got one-year lease terms. They’re constantly coming up on renewals month by month throughout the year. So again, you can mark to market to keep pace with inflation and grow rents. We saw that in 2021. Massive rent growth in multifamily, up to double digits nationwide, while we saw some markets as high as 25 to 30%. From there, you’re going to get into probably something that looks like a multi-tenant office. Those are three to five-year terms. So you’re going to have probably what, 15, 20% of your year building turning at any given time. It’s not as 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 when in an inflationary environment, industrial’s going to do fine.

Ian Formigle (00:24:52):
It’s always doing fine, it’s doing great right now, but you probably want to look at what’s your weighted average lease term. So, I think that’s a good way to look at it in terms of asset class by asset class. I think the final one is retail. Retail’s going to also have a little bit longer-term terms, 5 to 10 years. Sometimes those lease bumps in retail 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, commercial real estate as we’ve seen is… And we feel confident it’s a good hedge against inflation.

Trey Lockerbie (00:25:28):
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 because obviously are investors looking at multifamily as an opportunity to go in and take on this new ownership of the building, which then allows them to essentially raise the rent prices or gives them an opportunity to do so? Are they seeing an 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 or which comes first?

Ian Formigle (00:26:00):
Well, okay. So yeah, the answer is I think it all blends together, but it probably starts a little bit more with the rent growth because when you’re going and buy a multi-family 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. And we literally will do this in a deal that we look at today if it’s an existing asset. What were the rent achieved on a unit type today and six months ago? And if that unit type just rented for, just call it a hundred dollars more per month today than it did six months ago than 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 a hundred dollars behind the market because you have proof points positive in your deal today of what is achievable on a unit by unit basis.

Ian Formigle (00:26:50):
So what you do then is that Trey to your point on when you think about wage growth, now you’re making a deal, you have confidence in what you can charge today, you can get more confidence by doing some additional analysis and saying, hey, look, if I improve units and I make them as nice as a property down the block that just is renting another unit next door to me for $200 more than me, can I get that rent if I make my unit look nice answered? If you can get to that analysis, maybe yes. But then from there, you 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, my five-mile radius, what are the incomes in this, in this location?

Ian Formigle (00:27:34):
And as we know paying rent, tracks relatively to a percentage of what you earn. You can’t spend all your money on rent. You can only spend up to a certain part and it’s going to range… So when we think about affordability, affordability is 25% of your income. Yes. Affordable. 30% possibly. Yes. When you get into urban metros, you get into 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 in this location of the country, on average, what are people spending to live? 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 look at their own monthly budget.

Ian Formigle (00:28:21):
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 that same percentage of your income. So wage growth is what gives you confidence 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 the goalposts are moving on what people can afford.

Trey Lockerbie (00:29:05):
All right. I love it. 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?

Ian Formigle (00:29:17):
Yeah, so these niche asset classes have been something that we’ve been paying attention to in our marketplace for years. We’ve been hugely into them. They actually have been outperforming on the marketplace, so 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. Life sciences is a sector that we continue just to see tremendous growth. And we’re huge fans of it at Crowdstreet. Absolutely. And Trey, I’d say that what got us excited about life sciences, when we were really digging in and getting behind 2019, we were really studying this space. I’d say it’s early heading into the pandemic was when we got really excited about the space, just coincidentally, and it was the demographics and what was occurring in the space that really stood out.

Ian Formigle (00:30:09):
So just to just dive into that part about what’s widely known that we all get is that we have an aging population. So, oh what, over the next decade, the 65 and older population will increase by more than 30%. Now add onto that the fact that the 65 and older population on average spends three times the amount of money on healthcare 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 those baby boomers, they’re wanting 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 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.

Ian Formigle (00:31:07):
That’s a 93% increase over the previous record that we saw in 2018. So again, VCs and private equity, follow the demographics. And the demographics are saying, spend money on figuring out how to help this agent cohort live happier, healthier, longer lives. So that money is now propelling the life sciences sector, along this exponential trajectory path. And then I think the anecdotal kicker here for us as 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 efforts on treatments. So the speed at which vaccines were rolled out, 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 doubling down.

Ian Formigle (00:32:06):
So now to the question when we think about, okay, so where do we like for this niche asset class? Well, one relatively unique aspect of life science tenants is that they tend to cluster around specific areas. So we see opportunities near the bustling, urban environments, especially, I’d say in areas where you’ve got top 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. It’s the number one 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 are record rising rents and there’s some development.

Ian Formigle (00:33:02):
So there’s some opportunity, I think, to participate in the space. And it’s that super-low vacancy is that gives us confidence in going into new builds. And I think the final thing here, which just is a feel-good part of it is that it’s a type of real estate that benefits humanity. We love the idea of being able to go into a deal, fund the construction of a space that will attract life sciences companies that are then going to go on and do research that might one day create real cures and treatments. So, 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.

Ian Formigle (00:33:39):
So from there, number two, industrial storage facilities. I think just as an overall 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 what are they? Well, these are basically yards. They’re storage yards. You can imagine an infill property located in a Metro. It may be 2 to 10 acres in size. You’re going to throw down some gravel, fence it in, you might possibly erect a simple storage structure on it, but not even necessary. It’s really parking for stuff. Then you take that and you lease it on terms that can range from 3 to 10 years to companies that are going to store trailers, vehicles, containers on it, essentially groups and companies that are looking to solve their supply chain problems. What I love about this strategy is that you can rent them, which is really just land to companies with good credit and which equates to about an 8 to 10% yield on cost.

Ian Formigle (00:34:42):
And to me, that’s a short-term phenomenon that’s essentially too much yield. I think that compresses over time. So I think this is like a get it while at lasts type of deal. And so pretty much we’re looking all over for them. We’re doing them wherever possible. The trick is assembling them because it’s hard to find them because they tend to be infill. People and companies want them to be located proximate to where they’re going to deploy their goods and services. But if you can find them, there’s demand for them and we’re going to continue to do them for as long as that opportunity lasts. And I think the third thing that we are really leaning into as a niche is cannabis facilities. And I totally understand to acknowledge that this sector is still somewhat controversial, but facts are facts.

Ian Formigle (00:35:28):
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 as the opportunity going forward is we’re about to participate in a cannabis industrial facility that’s located in the inland empire of California. So in this case, the property is a hundred percent leased. It’s leased to two tenants, both of whom have very solid financials and you have a weighted average lease term of over eight years. And we’re buying that property at what’s a going-in cap rate. So NOI is divided by the purchase price of the property of 8%. And if we were to going to swap out those tenants with just conventional industrial tenants, that could be literally right down the street, if you swap those tenants in, that deal now trades at a 3% cap rate.

Ian Formigle (00:36:25):
So I totally get that cannabis is still an emerging industry, but to me, a 500 basis point 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.

Ian Formigle (00:37:02):
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, present what I would say, again, a land grab opportunity. 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 all of those on the marketplace right now.

Trey Lockerbie (00:37:34):
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?

Ian Formigle (00:37:51):
Yeah, well, multifamily is ubiquitous. It’s now I’d say the most widely understood and invested in the asset class. So it’s here to stay. And it’s totally true that pricing’s really popped up on these in the last couple of years, and now we have record low cap rates. But overall, I would say that we still like the multifamily and industrial sectors. I definitely feel that there are ways to continue to profit from them in ’22 and beyond, but they are certainly not on sale. And they would fall into the bucket, I think though right now of kind 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.

Ian Formigle (00:38:35):
These two sectors are a little bit different than you did in years past. And so I guess what I mean by that is for multifamily, 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 the massive appreciation for this asset class. For the most part that rent growth has actually outpaced increased construction costs, even though they were up 12% last year. So whenever we evaluate a ground-up multifamily project, we ultimately drive the analysis to the unlevered yield on the cost we believe the asset can stabilize at by year three. That’s once it’s built and leased up.

Ian Formigle (00:39:25):
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 points spread between what we would stabilize at and then compressing down to what we would sell it at. So if we were stabilizing at 6%, as we talk about, we would want to see that asset trade at a four and a half cap at the exit. Well, the good news is, 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.

Ian Formigle (00:40:14):
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. And it’s totally fair to say that we do expect cap rates to moderate and increase to some degree over the next three years, but not dramatically. 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.

Ian Formigle (00:40:53):
The other thing that’s also worth noting in multifamily that I think is now popped back up and returned as a strategy and is a strategy that we saw taper in 2018 and 2019 is value-added acquisitions. So the business model for a value-added acquisition is pretty straightforward. You buy a property, you think that it’s well located. It’s got what we would 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.

Ian Formigle (00:41:24):
Back in 2015 and 2016, we really liked this strategy. We were leaning into it in a lot of places, I’d say Atlanta and Dallas Fort Worth are really good examples of that. One way that we evaluated them was very specific to look at the return on the cost of an investment into a unit renovation and what that would translate to in additional rep. 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 roughly $165 per month increase in rent, and in 2015 and 2016, absolutely that type of investment yielding that additional rent was achievable.

Ian Formigle (00:42:10):
Then what we saw was that later in the cycle, that return on cost tended to taper. It was tapering down to the low teens. And by the time it hit the low teens, I think bloom was off the rose a little bit so to speak when it comes to doing we really like this strategy? We were then 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, 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 fast rents have just spiked in a lot of markets.

Ian Formigle (00:42:49):
And now you have some of these assets that are just left behind, but they could catch up if they were renovated. And we definitely do expect rent growth to moderate over the next few years, which again, to us it suggest that it’s possible that the value adds play that has kind of come back to the market, it might be gone by ’25 or ’26, but we like it for today and we’re definitely leaning into it. And when we think about the vintage of an asset class that really suits this 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-quality construction, it now has higher ceiling Heights than the stuff that was built in the 70s and 80s.

Ian Formigle (00:43:34):
So you can take that property and if you renovate it, it can actually live very, very close to being too new. And we’ve actually seen that in multiple markets. Renovated 2005 vintage property with a really sharp interior renovation that’s going to give you a new kitchen, new bathrooms, new flooring, 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. We have the same rapid asset appreciation that we’ve seen, the same compressing cap rates we are now solidly into mid-three cap apps. As I mentioned, if it’s in the inland empire of California, it’s a three-cap absolutely deal.

Ian Formigle (00:44:21):
So 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 because of that massive rent growth, that is at the same time with decreasing cap rates, we’re seeing this outsized spread come into development. So similarly, I’d say when we think about industrial development the last cycle, we were looking at spreads of 125 to maybe 150 by 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. In essence, you put up the walls, as soon as the walls are up, the tenants start to show up.

Ian Formigle (00:45:09):
And by the time the projects are done, you might have it fully leased. You probably have it at least half least. The rate of absorption has 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. So again, there’s this high-speed 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 those stabilized prices that we’re seeing, even though the buildings are maybe still on lease-up. And the final thing about industrial is we know the US 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 we like in the short to midterm, then that’s something that we definitely lean into on the marketplace.

Trey Lockerbie (00:46:00):
Now, earlier, you mentioned that hospitality was starting to bounce back. What markets do you think will bounce back the fastest, assuming that we’ll finally be able to move past COVID over the next, say two years?

Ian Formigle (00:46:13):
The hospitality industry’s been fascinating to watch since the pandemic. As we know, it was brutally hit. It did bounce back pretty strongly in ’21. And for ’22, we definitely see continued recovery for the sector, but with the acknowledgment of there’s a possibility of some bumps along the way. And when I talk about 2021, 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, if I rewind to last year, 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.

Ian Formigle (00:47:01):
What was surprising was we had a 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. So STR is the nation’s leading data source for the hotel industry. So when you look at the STR RevPAR reports, now RevPAR, which literally stands for, its revenue per available room. That’s the product of the average daily rate in occupancy. You’d find that the hospitality sector, hit its high, pre-pandemic high back in July of 2019. It was just under a hundred dollars at $99.48 cents. It then got completely wiped out during the pandemic. It bottomed on April 20 at this brutal number of $15.61 cents. 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 cents.

Ian Formigle (00:47:59):
And that was double 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 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 reasonably bullish on the hospitality sector in ’22. But it’s also fair to say that look, it should expect some volatility remains in the sector until we really get post-pandemic. So now, if you are able to take a deal and bake some level of uncertainty into it for this year and you know with some things like excess operating reserves, I think you have a pretty good deal.

Ian Formigle (00:48:40):
And those are the kind of deals that we 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 is called workcations.

Ian Formigle (00:49:00):
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 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 and how we like them in our 2022 best places to invest report, which is available on the Crowdstreet marketplace.

Ian Formigle (00:49:39):
So I think to sum it up, Trey, the fuel that drove this first phase of the recovery in the hospitality sector in 2021 was I think stronger than expected. That was obviously largely thanks in part to the summertime surge and travel. To me, this puts some wins in the sale of the hospitality sector, expectations of continued recovery. And I personally think that by the time we hit the end of ’23 into ’24, that’s now a new record-breaking year for the market. So as long as we can find deals that are well thought out in terms of navigating some of the remaining uncertainty, then I think you’ve got a great story for great returns in the years ahead.

Trey Lockerbie (00:50:27):
So I’m an entrepreneur and I 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, hmm, what could I do with that? What could that be? 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 almost left for dead. Is it dead or are there opportunities flying under the radar here?

Ian Formigle (00:50:55):
This is an 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, that negative press that’s out there. And I think what’s been happening in retail can be summed up during an interview. I like to watch the Walker Webcast, I’m a fan of Willie Walker. Recently, he had a guest by the name of Frank Cespedes. What Frank points out is during the interview, he points to some department of commerce data. And what he also mentions is how there is this liberal methodology that’s applied when quantifying online sales.

Ian Formigle (00:51:47):
And so the story that 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 and you went to that shopping center. 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 a reason behind that, because while brick and mortar, it’s not a great emerging story. It’s a been there story. And online is the emerging story. So we even want the story to go in the direction, 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.

Ian Formigle (00:52:35):
And so what part of made me 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, we saw occupancy levels in our retail portfolio that were 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, 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 could pay your mortgage, you can always see yourself through to the other side of a bad add time in a cycle and eek 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.

Ian Formigle (00:53:20):
So pandemic hits, we heard that news out there, collection ratios dropped to 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. 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. And that was in April of 2020, the worst time in our memories of what would be like to own a retail property. So now fast forward today. That stress has burned off.

Ian Formigle (00:54:12):
In addition, you absolutely have a scenario where the pandemic served as a bit of a forcing function. Some of 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 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 the center going ahead. So then you take that environment and layer it onto 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 in 2017. And that’s not surprising to me because today in 2022, we see more and more retailers intertwine their online business with their brick and mortar business.

Ian Formigle (00:55:05):
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 fascinating to think about is just the optics. So from a cap rate perspective, the retail 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, while that’s a 3.5% cap rate deal, if it’s stabilized, an equivalently good retail center in the same location is going to be valued around a 6% cap rate.

Ian Formigle (00:56:01):
And that’s a big spread. That’s 250 basis points of spread. And if retail continues to grow it’s a percentage of sales that are driven by eCommerce, but in a brick and mortar intertwined kind of hybrid environment, and if retail continues to grow its percentages of sales in brick and mortar locations that are driven by its eCommerce 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 the last half-mile distribution. And if we begin to realize that this retail outlet is just this differentiated form of delivering goods to a location, will it really continue to trade at a 250 or maybe 300 basis point discount to industrial? I don’t think so. And that’s why I think that there’s hidden value in retail right now.

Trey Lockerbie (00:56:56):
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?

Ian Formigle (00:57:11):
Yeah. Look, my overall perspective on inflation is that I think it does abate over the next few years. I think it’s got a period of time, and again, provided that interest rates move up and lockstep, I don’t see it as something posing a major threat to it. If it gets out of control and the wheels fall off, that’s where there’s some risk. So, roughly speaking, look, we all think there are three to four rate bumps coming in the next year, 25 basis points each. If the tenure 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, to be totally honest, probably the risk that I see is as kind of the outlier that could come back as is political risk, to be totally honest.

Ian Formigle (00:57:57):
I think our economy’s strong, what we look at it, we’re looking at roughly 4% GDP growth this year. We continue to be the market where the world wants to invest in. So I think from a macroeconomic perspective, trending down to microeconomics and market-rate driven perspective, I think there’s a really good runway here. I think that we’re a little bit disconnected from the strength of our economy and 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 is a perspective is hopefully it doesn’t play into diminishing markets, but it’s probably the one thing that might set us back a bit.

Trey Lockerbie (00:58:51):
Now, are you referring to the recent FLMC meeting, for example, where they’re 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?

Ian Formigle (00:59:03):
Yeah. My perspective on those types of things is, again, that will show up in moderation. And the other thing that I think in terms of look if you want to run three or four years down the road, with the amount of liquidity that we’ve injected into the economy, I do feel that we are relatively speaking in the zero lower bound type of environment. Interest rates can’t go up too high. Nothing can get too out of bounds too fast, because 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 the restraint that will always be brought and there will be moderation. Where I see the more risk is just in the way differing municipalities approach different decisions.

Ian Formigle (00:59:47):
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. It’s the disagreement leading to potentially bad policy decisions, one way 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 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 estate industry.

Trey Lockerbie (01:00:37):
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. The last time you were on the show, we were talking about this mass exodus in places, especially San Francisco. Has that bottomed in your opinion, or is that still on trend?

Ian Formigle (01:00:59):
Trey, I think from our vantage point, we’re still seeing that those kinds of trends and the migration in the United States are still in place. And it’s still occurring of a net drag on places like California. In addition, say New York and LA, 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 when you ball it up, people are still out there rethinking where they want to live. And there is this, given that there is some continued momentum around remote work, as we’ve discussed with this more flexibility to do so, that’s factoring into some of the migratory patterns. And I feel 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.

Ian Formigle (01:01:49):
And 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 the state. The numbers show that compared to pre-pandemic levels, about 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 the U-Haul phenomenon you discussed.

Ian Formigle (01:02:40):
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, 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, it has been Austin, Texas. There was a website, it’s called moveBuddha, and they track some of this data and they noted that. Again, just pulling it back a little bit. It just what goes back to the bigger picture of the reshuffling of the US urban geography since the pandemic. This is going to continue on for years. I think absolutely.

Ian Formigle (01:03:21):
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 U-Haul story that you referenced a minute ago that I look at every year, I love to read the United Van Lines study. Comes out at the beginning of the year. So they just published the 2021 report. And it tracks you. I think it’s great to look at when you want to talk about net migratory trends, van lines, moving companies, they’re a great data set. So 2021 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, so who were the net beneficiaries? They were Vermont, Florida, the Carolinas, Tennessee, and Idaho, a bunch of other states too. But those are some of the ones that stood out.

Ian Formigle (01:04:16):
And Trey, I think just to finish this thought, there’s definitely continued migration out of major metros right now. Fewer people are going into some of these dense areas. It’s starting to change though. We are starting to see some urban renaissance. We are actually bullish on multifamily, for example, located more towards the urban core. I think we saw there’s a little bit of the tide went out, tides I think is starting to come back in. That’s more of an intra-metro migration trend.

Ian Formigle (01:04:42):
So, 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. They’re still a great city. They got a ton of intellectual capital. And so I do see better days ahead for it and other markets that are like it, but it’s going to take a little bit more, I think towards the middle of the decade for that to feel normal again.

Trey Lockerbie (01:05:17):
All right. I have one last question for you. And it’s about Crowdstreet specifically. When I was on the platform looking around, I noticed something and I was just going to get your thoughts on it. Crowdstreet is a marketplace, but you also are an advisor. So I was kind of curious to know how you distinguish the difference depending on the listing that you’re offering?

Ian Formigle (01:05:36):
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 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 canvas it against our own discretionary sources of capital, it’s from our funds and our privately managed accounts.

Ian Formigle (01:06:27):
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. 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. 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, from an asset class standpoint, from a sponsorship standpoint? We are fiduciaries at the fund level, so we’re going to make that decision. If there are five of the same type of deal that is 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.

Ian Formigle (01:07:26):
But the point is, is 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 a hundred deals per year, repeatedly, that it dawned on us that 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 a hundred deals, trending to 150 deals probably or more this year. And then that would give us the opportunity to 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.

Ian Formigle (01:08:12):
And so that’s the strength of the advisory side of the business. And I think one last point really illustrates us well, is that when we look at a single deal… Commercial real estate, private equities, as we talk about a lot, it’s finite. It’s not like a stock. You can’t just go keep buying it. 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 on their projects. 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.

Ian Formigle (01:08:53):
And at the end of the day, the marketplace is a best efforts marketplace. It’s a place where it can go. Those individual investors will go into that project, but there’s no absolute sense of certainties 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 one-off basis. And it’s that capital that helps us win the deal.

Ian Formigle (01:09:20):
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 eight, now $10 million maybe could be known sources of capital that are discretionary 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. So what we talk about with fund investors and marketplace investors is that your partners in helping us achieve the best possible deal flow for the marketplace, but it always circles and runs through the marketplace. As I said, it begins and ends as a marketplace.

Trey Lockerbie (01:09:56):
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 to hand people off to Crowdstreet, to you personally, to any other resources you want to share.

Ian Formigle (01:10:09):
Oh yeah. Trey, as we always talk about, the easiest way to learn more about us, what we’re doing, and deal flow is to go to the Crowdstreet website, so www.crowdstreet.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’s doing 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 nomenclatures, 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.

Ian Formigle (01:10:44):
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 Formigle on that platform, so pretty easy to find. I love talking deals. You know me. I can talk deals for the rest of the day and am happy to chat online. So those are great ways to find and learn more about us for anyone who’s interested.

Trey Lockerbie (01:11:12):
Well, Ian, it’s always a pleasure. I look forward to doing this again, getting an update from you later this year. It’d be interesting.

Ian Formigle (01:11:17):
Yeah. Likewise, Trey, looking forward to the next conversation.

Trey Lockerbie (01:11:20):
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 @TreyLockerbie and don’t forget to check out all the resources we have for you theinvestorspodcast.com. And with that, we’ll see you again. Next time.

Outro (01:11:34):
Thank you for listening to TIP. Make sure to subscribe to millennial investing by The Investor’s 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 by The Investor’s Podcast Network, written permission must be granted before syndication or rebroadcasting.


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