Ian Formigle (03:43):
Right now, how we look at the market is, unless you have a highly occupied property with a strong rent roll with long lease terms that are in place, and in industry parlance, we refer to that whole roll up as weighted average lease term, it’s really difficult to obtain reliable price discovery right now on an office deal. You just don’t know what it’s really worth because we’ve got to get to the backside of the pandemic more to understand who’s really going to an office, at what rates, and which tenants are staying, and which ones are going to go? So I think until we get more of that market clarity, we’re going to see diminished office transactions.

Ian Formigle (04:18):
Now, industrial, in contrast, that market is as strong and certain as office is weak right now. But the difference there is that pricing for industrial deals has really spiked in 2021. So now, I think what we’re seeing is we’ve got certain buyers that are just moving to the sidelines, they can really just no longer make those deals pencil. And then at the same time, the market’s so strong that we see sellers as not really highly motivated to transact, more or less, they’re putting a deal out there, throwing it up at a new high premium pricing and saying, “Come and get it. If you pay my price, I’ll sell it. And if not, I’m pretty happy to continue to own and operate it because the fundamentals are really strong.”

Ian Formigle (04:58):
So I think when you combine that together, that dynamic, it’s just really slowing down deal velocity in the industrial side. When we look across other asset classes, retail is off right now about 7% year over year. I do think that that transaction volume picks up once we get to the later part of the year. Now, let’s talk about some of the bright sides of transaction volume because it’s not all down. So for example, we’re seeing a strong year-over-year increase in apartment volume transactions, roughly $63 billion through May, and that’s up 24% relative to the first five months of 2020.

Ian Formigle (05:30):
And also, what’s of note and not really on a dollar basis, but I think just the fact that it’s actually starting to happen again is hotels. The gross numbers are small, we’re talking about a billion dollars of transactions so far in 2021, but that’s up 72% year over year. So we are actually starting to see some hotels trade. I’m bullish on this space as we come out of the pandemic. We’re seeing massive amounts of increases in getting out there and going places, and you’re seeing TSA throughputs spike dramatically. We’re almost back to some 2019 levels of travel already. So I think you’re going to see hotel transactions really start to pick up later this year as that market really gets going.

Ian Formigle (06:09):
When we take it back to the big picture, and I think an interesting data point, which is just showing up in May, is that May as a month, relative to 2020, was up 73% year over year. Now, it’s fair to say, May 2020 was pretty abysmal from a transaction volume standpoint, that was essentially the depths of the pandemic. But it’s also fair to argue that January and February of 2020 were really pre-pandemic, so I think that’s also skewing some of that flat data that we see year over year. So I think when you roll it all up, I’m still bullish that 2021 volume looks, as a chunk, larger than 2020 volume, but probably more perhaps 15 to 20% greater when it’s all said and done relative to the 40% or greater number that CBRE had projected.

Trey Lockerbie (06:54):
So just quickly touching on those really high growth rates you just mentioned. So when you talk about like a 70% increase in the hotel market, you mentioned we’re almost back to 2019 travel levels. Is that what you’re seeing on the transaction basis for hotels we’re almost getting back to 2019 levels on transactions?

Ian Formigle (07:16):
No. Transactions are still down precipitously relative to pre-pandemic. I draw that data point out to suggest that I think that if we’re actually seeing mobility return, this is a key theme, I think we’ll probably talk a little about later, I’m optimistic that you’re actually going to see some real pickup in transaction volume in hotels. The other key thing to also understand in the commercial real estate industry is that so much of transaction volume is really dependent upon debt financing. Most deals are leveraged with commercial real estate debt. If lenders aren’t lending, deals aren’t happening, just bottom line.

Ian Formigle (07:48):
Just in the last few months, you are seeing those lenders actually step into the market, quote deals and transact. So we’re shaking off a lot of rust right now in the hotel industry. We’re also starting to see operations return. And now, you can literally now leverage a deal in 2021 because there are people staying at it, still not to the level that it was in 2019. The optimism there is that the rebound and the recovery in the market is actually happening a lot faster than groups like Smith Travel Research had previously forecast. So I think that it’s still small, a billion dollars is really nothing in the grand scheme of things in terms of total commercial real estate markets.

Ian Formigle (08:26):
It’s just that essentially nothing happened in ’20. Now we’re seeing some deals start to happen. I think you could see like 10, 15X growth and actually start to see some real transactions happening. Probably by ’22, it’s going to start to look like 2019 levels of transaction volume.

Trey Lockerbie (08:41):
Got it. And one thing that was super interesting to me was around the massive migration. So for example, I live in California and I was just astounded to see such a massive migration move to, for instance, Boise, Idaho. And that led to a 20% increase in home asset appreciation there. Are there any particular industries that are migrating to Boise or attracting people to the city other than just maybe a more economical base for real estate?

Ian Formigle (09:12):
So, to get into that one, I would say first, Boise has been a fascinating case study during the pandemic. We were bullish on Boise coming into 2020. From our perspective, I would say that I wasn’t necessarily astounded by what occurred, but I would say that it was an abnormally large spike in population outflow from California into Boise in a matter of months. And so to me, it’s a really interesting case study in how a growing metro can accelerate its transformation when a catalyst event, and in this case being a pandemic, accelerates regional migration. So to answer your question, Trey, as far as, are there pockets or is there a specific story of growth there? If you look at a variety of company growth indexing websites, they tend to show that the growth in Boise has been diversified, which I think is good news for the metro.

Ian Formigle (10:01):
When we think about, so what are those industries? Well, they look like tech and tech services. Remember, we have the headquarters of Micron Technology based in Boise, so that’s an anchor for that city. It looks like education and learning, financial services, healthcare, construction, government, even real estate. So, Trey, I think what’s interesting is that when you point to this massive spike in real estate prices, I think what we saw in Boise last year, to me, one of these key considerations here is that it is a still relatively small metro. It’s got a population of about 750,000 that ranks it 78th in the United States in terms of population.

Ian Formigle (10:40):
So a 20% spike in real estate pricing in Boise isn’t necessarily a surprise to me because in essence, when a bunch of Californians decides to move to Boise, the amount of wealth they can bring and the amount of price talents they bring into a smaller market could quickly translate into those major housing spikes that we saw. Now, what will remain to be seen is, does that momentum carry forward or do we start to see that taper off a bit? And also, as we discussed in my previous appearance on this podcast, I think one of the super interesting stories in the United States is potentially here in Boise, that I think emerges over the course of the next decade.

Ian Formigle (11:16):
And that’s, as it moves closer towards being an industrial market, I think a super interesting story that is going to emerge for Boise over the course of the next decade is that, as it moves closer to becoming an institutional market, that’s going to change a lot of things for the city. Right now, Boise is growing, you’re seeing this influx of California migration. I think that this presents it with an opportunity to establish some of its key drivers of growth and differentiate itself. So with an existing tech presence and an influx of those Californians, I think it’s possible to see Boise gain some real momentum in tech over the next five years and look like a mini Silicon Valley, so to speak.

Ian Formigle (11:56):
I think this is a story that you’re going to see pop up in a number of cities around the country as we redistribute the population, but I think Boise is one of the beneficiaries.

Trey Lockerbie (12:05):
Similar to what we’ve seen in Austin, for example, people migrating away from Silicon Valley, San Francisco. San Francisco rents dropped 20% in 2020, which to be honest, seemed overdue in some ways, it was just so astronomical. But I’m curious, anecdotally speaking, I get this sense that a large majority of the market is still very bearish on San Francisco, but what is the data actually telling us today?

Ian Formigle (12:31):
Yeah. So there is some interesting data in San Francisco that I think tells us almost like a tale of two markets right now. To your point, San Francisco being one of the banner headline cities along with New York in terms of being the epicenter of the negative effects of the pandemic. And so the two markets I think really, to focus on here, are the multi-family market, which I think is what you were just referencing a minute ago, and then the office market. Those are the two key markets that we saw as having the most headline risks. And so when we look at current data, what it’s telling us essentially is that the multifamily market is bouncing back in 2021 while the office market is still really struggling.

Ian Formigle (13:10):
And my personal guess here is that I think that anecdotal bad vibe out there that’s overhanging San Francisco probably still has a lot to do with the office market because there’s really green shoots in the multifamily side that are starting to look okay. So so let’s get into those and talk about both sides of the market. When we think about the multi-family market, CoStar has great data in terms of tracking month-over-month vacancy rates and rent growth rates. And so what we see right now is still a market that is definitely off the bottom, but it’s at the basis of, I would say an early stage of the recovery.

Ian Formigle (13:44):
Total vacancy rate in San Francisco multifamily right now looks like about 8.4%, and it still is as high as 13% or so for the four to five-star properties. Now, neither one of those numbers are good at a national level. For example, based on those metrics alone, Green Street ranks essentially the top 50 markets that it tracks, and San Francisco is coming in right now at 50th out of 50 markets that it actively tracks, so it’s not in a today good state. But what is interesting is to see how we’ve seen substantial gains in that market year to date. Vacancy was really almost as high as 12% market-wide last year and as high as 20% for those four to five-star properties.

Ian Formigle (14:28):
And that was as recently as the summer of 2020. So if you think about how far we’ve come in less than a year, well, I think we’re back to some pretty decent absorption. We can also dig in a little bit further and we can look at the asking rents because I think this tells an interesting story too of where the market has come from and where it’s back to. So when we look at San Francisco, we know it’s a really expensive rental market. Rents topped out at about $4.10 per square foot across all property types in 2019, so very expensive market. Then rents fell market-wide about 15% to around $3.50 by mid-2020.

Ian Formigle (15:07):
And as you pointed out a minute ago, Trey, if you’re at the high end of that market, you actually saw a deeper drop, that 20 plus percent drop. But what’s interesting is that we are now today back market-wide to about $3.90 per square foot as of July. And at the current rate of recovery, in a sense, it’s fair to say that we might actually see rents fully recover in San Francisco by sometime in 2022. So on the apartment side, at least, it’s pretty clear that San Francisco is a recovery market and its future looks okay. If we want to go back to Green Street for a minute and look at some of the forward-looking data that they track, then there is a metric that they use, which is called MRevPAF, which stands for market revenue per available foot.

Ian Formigle (15:52):
What it really means is that it takes its rent growth outlook, and it multiplies it by the assumed occupancy rates in the market to get a blended perspective on total income growth. And on this metric, San Francisco currently ranks number 14 out of its top 50 markets. So despite the fact that it’s at the bottom of the Green Street ratings today, its outlook on the San Francisco going forward market, at least in apartments, is actually pretty good. Now, let’s turn to the office market because this data unfortunately is markedly different, let’s just say. The last 12 months have been absolutely brutal for the San Francisco office market. It’s really hard to characterize it any other way.

Ian Formigle (16:32):
If we go back to CoStar, according to CoStar, net absorption in the office market is down about 7.3 million square feet, rents are down about 7.4% year over year. That’s actually coming off of further declines in that previous period. And over the last year, they were declining at the fastest rate in the nation. Vacancy today is technically sitting at 13.5%, which isn’t necessarily horrible on a national level, but it doesn’t really tell you the whole story. And it’s also important to note that that vacancy level was sitting around 6% entering 2020, so it’s still markedly down on just absolute vacancy.

Ian Formigle (17:09):
And what that vacancy rate doesn’t even account for is this massive spike in sublease availabilities as lots of tech companies are now realizing they don’t need as much space in San Francisco as they used to, and they’re putting that space on the market via sublease. So when you take sublease vacancy, combine it with traditional vacancy, true vacant office space, that total availability rate is now about 19% and that is bad at the national level. And so really, I think when you put it together, there’s, unfortunately, a bit of a perfect storm right now that’s still hitting the San Francisco office market.

Ian Formigle (17:43):
You’ve got a market that, one, heavily leans on tech tenants. Most of those workers are still at home. Two, SF tech companies continue to sort out their hybrid office policies, and these are the types of companies that are more likely to rely on remote workers when things settle down in the months and years ahead. Third, think about this, this was a market that was probably one of the epicenters of worker sensitivity to safety during the pandemic. Today, there’s still a ton of class B office buildings in San Francisco that are not really equipped for a post-COVID world.

Ian Formigle (18:18):
So I think there’s unfortunately just a lot of unleasable space in this market until either buildings are upgraded or tenant expectations change. And I think neither of those things happen immediately, you hope they happen in the next year or two. So I think when you put it all together, I think this adds up to suggest that there’s more pain ahead in the office market, and current expectations even going forward right now are for more negative rent growth all the way up until 2023, vacancy is expected to increase in the year ahead, topping out at 17%. So that probably puts the total availability rate solidly into the low to mid-20s.

Ian Formigle (18:55):
But after we get to ’23, ’24, they do think that vacancy trends down to about 12 to 13% by 2025. But it is fair to say that as far as market outlooks go across any asset class, this is about as bleak as it gets in the United States. The one thing I do think it’s fair to say is before we go and just proclaim the end of the San Francisco office, I do think that there’s recency bias here that’s at play and it is leading us to partially disregard why San Francisco became one of the most expensive and most well-occupied markets in the United States in the first place.

Ian Formigle (19:30):
When we come to looking at markets at the beginning of any year at CrowdStreet, we think about a number of attributes that make a market attractive and what we think spurs growth. And if you just step back, pull name off and just look at a market, San Francisco still to me possesses most of those attributes. There’s a number of things going for it. For example, you have major research universities, Stanford, UC Berkeley, UCSF, and you need a good market. It pumps out a lot of intellectual capital every year, and companies, they want to be near that intellectual capital captured as it’s coming out of school, hopefully, incented to stick around.

Ian Formigle (20:08):
Also, think about the fact that after Boston, San Francisco has the second-largest life sciences cluster in the United States, so major growth market with a lot of runway ahead of it. It still ranks number one in the United States for attracting VC capital. It’s already attracted over $25 billion this year, according to a recent San Jose Business Journal article. When we think about also the quality of life measurements, it’s got a temperate climate. It’s hard to argue that the weather isn’t pretty bad. It’s pretty good, good weather in San Francisco, and generally the Bay Area.

Ian Formigle (20:38):
It is a highly land-constrained market, I think that’s important to note too. When we think about the area, the city is about 47 square miles. You’ve got water on three sides of it, just to provide some context in terms of how small that is for a major city. Oklahoma City is over 600 square miles, so we’re talking less than 10% of the size of Oklahoma City. And then finally, think about this, it has a major airport and it is the gateway to Asia. So I could go on on some things that are great about San Francisco. I’m a former resident of the city, so I’m probably pretty biased.

Ian Formigle (21:11):
And there’s no doubt that the market still has a lot of sorting out to do in its office sector, but it’s still an amazing city. I think most things in San Francisco look a lot better by 2024. And while I’m not obviously bullish on office right now, I think if the right opportunistic deal showed up, we’d probably take a look at it and we would definitely start looking at some multifamily deals coming up in the months, for sure.

Trey Lockerbie (21:35):
Yeah. And just to add to that, with San Francisco, you’re just an hour or two away from things like Napa wine country, Big Sur, Yosemite, so you’ve got all these attractions. Probably ties into that as well.

Ian Formigle (21:47):
Yeah. Central Coast is pretty beautiful. Last time I checked, Pebble Beach is pretty awesome.

Trey Lockerbie (21:51):
Well, I’m glad you touched on that hybrid working model because last time you were on the show, you mentioned a “new normal” of sorts with 10% of employees working remotely, 30% hybrid, so say three days a week in the office. Are you seeing that model sustained through the rest of this year? Is it getting more remote, less remote? I know it depends on the market, but just generally speaking, what are you seeing there as far as occupancy?

Ian Formigle (22:18):
Let’s unpack that a bit. Well, I mentioned it’s fair to say that the data is a bit murky and it’s not fully consistent. There are a number of data points out there that discuss how workers are finding their way back to their office throughout the summer, and probably expected to do more so after Labor Day. For example, there’s a Gallup poll out there that shows that how remote or hybrid work had trended down from a high of about 70% in April of 2020 down into the mid-50% range as of Q1, 2021. And if we extrapolate that a little bit, I’d probably say that that would peg remote or hybrid work at roughly 50% right now.

Ian Formigle (22:53):
With more companies looking to get workers back into the office later this year, it’s certainly possible that the overall percentage could continue to trend down towards that 60% full-time, 30% hybrid, 10% remote worker breakout that we had discussed on the last episode. However, as I mentioned, every time we turn around, I think we hear about another major company updating its office working policy, and it tends to continue to go into the direction of greater flexibility for hybrid work, particularly for the tech companies. We’ve got Uber that recently expanded its work remote policy, it went from 40 to 50%. And it’s even granting workers greater flexibility on how they want to choose that 50% of out-of-office time.

Ian Formigle (23:34):
Apple, we heard that they were planning to go into the office three days a week officially after Labor Day, they have moved that back. They’re citing that with a Delta variant uptick in cases, they’re going to punt on that decision. So I think just a lot of hybrid flexibility in the future for Apple and a TBD basis. Google had been trending really more towards that model. Now, they’re announcing a plan to let up to 20% of its workforce remain remote indefinitely. So I think there’s some flex there. And even on the financial sector, we had been seeing companies like Goldman Sachs and B of A and Morgan Stanley call for its employees to return to the office by September.

Ian Formigle (24:12):
We also know there’s some pushback going on there. And I think that you were starting to see some of those companies rethink how rigid they want to be and their office policies. And I think some of that, I think, remains to be seen, but I won’t be surprised in October if we start to see some changes coming there too. I think overall, when I tend to synthesize everything I’m reading out there, I’d probably adjust that 60% full-time, 30% hybrid, 10% remote model to probably something more like 50% full-time, 38% hybrid, and 12% remote. But that’s just my guess.

Ian Formigle (24:45):
And I do think that the Delta variant is the wild card here that could change these trends later this year.

Trey Lockerbie (24:50):
Yeah. It makes sense. Actually, if you think about it, going back to that Boise example with the 20% growth in home prices, I’m sure there are burgeoning industries there, especially the tech movement you mentioned, but there’s also that flexibility you mentioned, where people can now say, “Well, why pay for a three-bedroom in San Francisco when I can still work at Apple and live in Boise?” Are you expecting to see almost like a flattening of sorts, just because if that flexibility trend continues to stay strong moving forward, do you think that that just almost creates a leveling across the major metropolitan areas with more rural markets at all?

Ian Formigle (25:25):
Yeah, a really interesting question. I think now we’re going to go into behavioral economics and say, we know that workers right now, they like their flexibility, they like the ability to work at home as much as they want, and they’re arguing with their employers to make sure that they can continue to do that going forward. And because we’re still in the pandemic experiment, so to speak, and we know that you have companies that it’s a sensitive time, and so I think you’re seeing these companies listen to the employees. We also know that it’s hard to attract talent right now, so it’s an employees’ market.

Ian Formigle (25:59):
So I think that as a company, you’ve got to listen to your people and you’re going to bow to their whims a little bit right now. As we get a couple of years down the road, what we don’t know enough right now is that if we have prolonged periods of remote work, does this really change the collaborative effect? Do we start to see a little bit of stunting of the growth of the younger employees? There’s a lot of stuff that’s been talked about out there that suggests that being in an office has a lot of benefit to it. And I think that we probably have to experience this a little bit more and get a little bit further down the road, because now if we start to see the stunting of growth of the younger employees, obviously the younger employees are going to want to get back into the office. They’re going to be leaning in. Right now, they’re kind of leaning out.

Ian Formigle (26:38):
So we’re only three or four innings into this story, there’s a lot more to come. It would be pretty fascinating to see what happens later this decade. There’s no doubt to me that a higher percentage of the hybrid workforce, like that’s a thing, but I also think that there’s a little bit of a pendulum that swung and it might swing back a little bit to the middle over the course of the next year maybe two years, I guess it remains to be seen how that looks.

Trey Lockerbie (27:00):
Well, we avoided this catastrophe in commercial real estate with this unprecedented amount of government intervention that obviously helped prop up the market. I was actually amazed to read in your report that rent collections never dropped below 93% in 2020. Where do we see rent collections today?

Ian Formigle (27:21):
Trey, this year, when we look at rent collections at the national level and the National Multifamily Housing Council is the best source of this data, you’re going to see that collections are pretty flat to almost slightly down for 2021 relative to 2020. And I think that’s less to argue that collections are weak this year, but rather really how strong collections remained throughout the pandemic. According to that NMHC data, which is really the best monthly data collection source on national rents, we saw the year start off weaker than 2020 with collections just over 93% for January and February, and that was about 200 basis points lower year over year.

Ian Formigle (28:00):
So it started off a little bit weaker. However, since then, you’ve seen collections spike up. Now they average about 95.4% from March to June. And that’s relative to 95.6% for the same period last year. So now I say that we’re in the flat zone relative to last year and those collection numbers are relatively strong. And then looking ahead is where actually I think the story gets a little bit better for 2021. I think that you’re going to see collections remain above 94% for the balance of the year. And I think that stays above 94%, even with the burn-off of the moratorium on evictions that will happen later this year. Now, if we go back to last year, we did see that rent collections did trend down as the pandemic got deeper and deeper in, and we saw them go down to that 93% number that you mentioned a minute ago.

Ian Formigle (28:48):
And one thing I would say is that I think if we say, why aren’t collections stronger this year? It’s a great market, we’re back to growth, GDP growth is happening, should just be all up into the right? Probably the reason that they aren’t stronger so far this year relative to last year is that we’ve seen a massive amount of rent growth in 2021, 6.2% year over year, according to Green Street and hitting double digits, solidly double digits in some of the fastest-growing markets around the country like Vegas and Jacksonville, and Phoenix, Irvine, California, and Aurora, Colorado and the Denver Metro.

Ian Formigle (29:20):
So with rents rising fast across the nation, it can become more difficult to pay your rent or pay it on time. So I think there’s a little bit of that phenomenon in the data, but overall, I think with rents going up, not keeping C-levels on the rise, fundamentals of the multi-family sector look really strong going forward.

Trey Lockerbie (29:40):
Last time you were on the show we talked a little bit about the real estate market cycle and given that interest rates, and its assumption, but are likely to stay low for a long time. And that means that creative destruction seems to be at bay for the foreseeable future. How do you see the cycle handing out from here if our government continues to reflate this bubble if you will?

Ian Formigle (30:04):
I think to begin with this question, you start with where we are now relative to where we were at the beginning of the year. So I’ve given this adage of like, I think the way to say it is not necessarily what a difference a day makes, but what a difference 180 days make. And what I really mean by that is that just rewind to January 1st and think about that environment that we lived in relative to the one that we live in today. Right at the beginning of the year, we were approaching 250,000 new cases of COVID daily, and pretty much none of us were vaccinated.

Ian Formigle (30:37):
I think there was this concept of hope that we were surging into 2021 with, and that was on the horizon. But for the most part, we were all forced to cling to that sense of hope because none of the actual relief that we were looking for had yet to arrive. We weren’t getting out of our houses yet, things weren’t opening yet, life did not feel normal by any means, and it was actually, things were about to get worse before they got better. So now we fast forward to the end of June, now, we’re in July. We’re seeing that daily cases have dropped into a low of 30,000 as of July 4th. You got over 60% of all eligible Americans are at least partially vaccinated.

Ian Formigle (31:13):
So the landscape has changed. And there’s this one data point, I think it’s actually pretty awesome, I had a chance to experience it in person when I was in Salt Lake. And if you want to see, look at one example of just demonstrates how far we’ve come this year, you look at NBA arenas, I’m a fan of Dr. Peter Lindemann, a great real estate economist. And he’s consistently stated throughout the pandemic that if you want to know when the US economy is back and when we are getting past the pandemic, look to when our arenas are full.

Ian Formigle (31:41):
Well, anyone who’s watched the NBA playoffs knows that the arenas are full of people again. And just the idea that 20,000 people feel comfortable coming together indoors, that was almost inconceivable at the start of the year. So just a huge difference in how we’re thinking and acting. And it’s definitely fair to say, “Look, this pandemic is not over globally, it’s still brutal when we get outside the US borders.” But it does appear that the US is on the backside of it. Like I said, there’s a little bit of a wild card out there in the Delta variant, but by and large, we have a shift in how we’re doing and what we can do.

Ian Formigle (32:15):
And to me, what that means is that we’ve restored our mobility. To me, that is a super operative term because mobility is what is critical to a commercial real estate market. If you think about it, we have to get out, we have to visit real estate, we’ve got to touch it, we have to experience it. Whether we’re going to a hotel or we’re going to go to brunch, we’re going to finally get back to going to the gym. We all have to go out and navigate our built environment. And we can do that today. We couldn’t do that literally as recently as four or five months ago.

Ian Formigle (32:44):
So it’s with this restoration of mobility, you pair that with good macro news, such as GDP growth, estimates that are like 7% coined to the IMF. And really what that now translates to in a commercial real estate market is solely back to the growth cycle. I’d say with an asterisk on you got a COVID overhang for office, but otherwise, across all other asset classes, it is a new market and that market is growing. And so otherwise, we’re seeing huge spikes in demand for all these asset classes, industrial is white-hot, multi-families surging again. We’re seeing strong NOI growth. We talked about how we’ve got strong occupancy and rent growth in a lot of markets.

Ian Formigle (33:22):
And as we discussed a few minutes ago, we’re seeing this massive resurgence in the hospitality sector, which is really amazing if you think about it, given just how devastated that space was months ago. I think when you add it all up, again, we’re back to a solid multi-year outlook in the commercial real estate market. I think it only gets derailed by an exogenous shock. So if we do fall back into a pandemic-like environment, we’ve sheltering in place, I think all bets are off for a period of months, but otherwise, you are back to a growth market for 2021. And you’ve probably got a solid five-year runway, at least if not more.

Trey Lockerbie (33:58):
You mentioned apartments doing incredibly well, and that seems obvious to me to some degree because it seems like that’s the easiest thing to underwrite. I think that banks are most comfortable with things like apartment complexes, multi-families. So which cities in your opinion, would you be focusing on if your strategy was built around multi-family or apartments? Maybe they’ve benefited from that migration we talked about earlier, but I’m curious, what’s driving the cities that you’re most focused on?

Ian Formigle (34:25):
I’d probably say that at CrowdStreet, we believe that the metros that continue to benefit from immigration and have a strong outlook of growth in this cycle are largely are mostly the same ones that we saw gaining momentum before the pandemic. These are predominantly growing secondary markets, some tertiary markets. And so right now, I’d say that some of our favorite multi-family markets, well, they include places like Raleigh, Durham, Austin, Texas, Charlotte, Salt Lake City. We spent some time in that market recently. I was blown away by what’s going on in Salt Lake, Phoenix, strong year-over-year rent growth, again, major inflow migration from California.

Ian Formigle (35:03):
We’re fans of Southern Florida, particularly like Fort Lauderdale and West Palm Beach and other Texas markets like Dallas as well. And then say, “Well, what’s the common thread here?” These are all markets with stronger than average job growth, which is back to job growth in 2021, in 2020, it was a lack of job destruction. And they offer on average, better affordability than the average market around the country. I think the exception in that list is Austin because it’s becoming pretty expensive. I do think that you see smaller markets continue to benefit from the increased remote working capabilities that we talked about a few minutes ago.

Ian Formigle (35:38):
So of course, I think a market like Boise continues to do well, but overall, I think that there’s a tremendous runway of growth that’s still ahead of it for these secondary markets. And for us, I think they just continue to outperform over the course of the cycle.

Trey Lockerbie (35:53):
All right. And it’s great that hospitality is coming back obviously, but now you have things like Airbnb, which at a $90 billion market cap is now bigger than Marriott, Hilton, and IHG combined. So knowing that they will continue to be a force to reckon with, should an investor interested in hospitality focus on cities with increased regulations such as San Francisco, New York, Orlando, and Miami?

Ian Formigle (36:20):
I think the answer to this question is those are great markets, I don’t necessarily know that the regulation of Airbnb is the driver. So I guess I’ll get into that a little bit. But for starters, there’s no doubt that increased regulation in some of those major markets, it has served to level the playing field in the hospitality sector for Airbnb relative to the Hiltons and Hyatts of the industry. I mainly see it as a good thing. I think that this makes the cohabitation of Airbnb in a major market with those other traditional hospitality providers as sustainable. And so ultimately, it’s a good thing in the long run.

Ian Formigle (36:55):
Now, also what I would say is that Miami, DC, New York, Orlando, and San Francisco, those are some of our favorite hospitality markets right now, but our outlook is not really as much driven by the regulation of Airbnb within those markets, but I think really more so because we see those as markets that are faster than average to recover in 2021, is we’re seeing this resurgence in occupancy and average daily rates. Miami right now it’s currently one of the strongest markets in the country. We’re really bullish on the Miami hospitality market.

Ian Formigle (37:27):
Everywhere you look, hotels are outperforming where they thought they would at this point so far in the recovery. In a market where today in 2021, if you’re thinking about new hotel acquisitions, discounts to 2019 pricing are still possible, although they’re dwindling in number and also percentage discount, it’s the rapid recovery that’s going to really translate, I think into profits the cycle three or four years down the road. This is to me, this is a rebound story. And you want to harness that by, like going where the people go. Now, let’s get into that for a minute.

Ian Formigle (37:59):
When we think about which markets that we like to invest in terms of hotels, we do think about those macro drivers. I think Orlando provides an interesting case study in this. So Orlando is a market that in 2019 had 76 million visitors, number one in the country by a mile, number two is New York at 55 million. So like Orlando just gets tons of people coming to it. So as we now start to get out and we start to navigate the country, we’re going to quickly, and you’re seeing this show up in the data, Orlando is now seeing a massive inflow of people, they’re streaming back into the Disney parks now that Disney is open.

Ian Formigle (38:36):
I’m completely confident that we’re going to see total visitors to Orlando spike beyond its previous high in the next couple of years. Who knows exactly when, but I’m definitely bullish on more than 76 million people visiting Orlando in a year during the cycle. So if you bring it back to Airbnb, sure, it can take a bite out of a market, particularly the smaller ones, and I think to your point, the less regulated ones. But I think if you just step back, you focus on the macro drivers, key in on those markets that are going to benefit the most as the world returns to normal, that’s how I think you earn returns in the hotel sector in the coming cycle.

Trey Lockerbie (39:15):
Shifting gears a little bit, I want to talk about the “silver tsunami.” This is, of course, the wave of baby boomers who are reaching retirement age this decade. They even started around 2011, they started hitting 65 up until 2029. And this is anticipated to translate into all kinds of greater demand for goods and services targeted at the elderly demographic. Where do you see the silver tsunami creating the best opportunities in commercial real estate?

Ian Formigle (39:45):
Trey, to answer this question, I’m going to start by just turning it around and then directly answering it. So I’m going to begin by talking about where I don’t necessarily see the obvious opportunity to cash in on the silver tsunami right now. And that is today in the senior housing sector. From my vantage point, I think senior housing still has a couple of headwinds attached to it that I don’t necessarily see burning off until we get further into the baby boomer demographic boom that’s going to happen kind of what, like mid-25, 26, 27. And so I would say I’m a little bit trepidatious on the space today for the next few years.

Ian Formigle (40:21):
And so there’s two key reasons. The first is oversupply in the sector still today. If we go back to the last cycle, there was a lot of optimism over the growth of the seniors housing sector, and that did translate into some heavy supply coming into the market. I think you saw supply peak at around 7% of existing stock in 2019. So when the pandemic hit, the sector was exposed, you started to see vacancies tick up. And then once the pandemic hit, new movements just froze, and it became this source of COVID headline risks.

Ian Formigle (40:53):
I think we all remember reading some of these horrible stories about mass infections early in the pandemic. And I think from that point forward, if you didn’t have to put your parent into a senior housing facility in 2020, you were prolonging in that decision at all costs. And so what that translated into is that at the national level, occupancy sunk to 78.8% in Q1 of this year. That’s according to the National Investment Center for Senior Housing and Care. It’s NIC, It’s the go-to source for data in the space. And that’s 78.8%, I think it’s like an eight-year load. It’s a poor occupancy number.

Ian Formigle (41:26):
Moving on, talking about the second factor. And this one’s a little bit more interesting, I think we’ve come to this by learning more about the space, and talking to people in the space, and actually talking about things that are disrupting the space. And a couple of things here. One is that you have seen the average age of a new moving of a senior housing resident that has increased from 82 to 84 over the last like five years to six years. Over the same period, the average us life expectancy has remained flat. It’s almost like down like a fraction of a year.

Ian Formigle (41:56):
So to me on average, what that means is that we are seeing a decrease in the length of stay. And I don’t know necessarily think that was fully baked into the models of the people creating the supplies. And so again, that’s a further contributor to this excess supply relative to demand right now. And the other factor that is playing into the demand side of the equation is, consider the technology. Becoming a new resident in an assisted-living project, it’s very much a needs-based decision. It’s not really a “want to”, it’s like “we must.”

Ian Formigle (42:28):
With the advancement of new technologies that are increasingly allowing seniors to age in place, I expect to see more seniors prolong that decision-making process with their children, who are the decision-makers in this process, let’s be real. They’re going to kick that can down the road because they’re able to help their mom age in place a couple more years due to the advent of new technology. And so I think that’s going to just pick up in the next three or four or five years. I think that one thing is that don’t underestimate the power of how technology can change a lot of markets. And I think it is changing senior housing market rates right now.

Ian Formigle (43:04):
And so to me, this is the possibility of seeing the average age of the new entrance into the senior house housing project go from 84 to maybe 85 or 86. And again, we’re not increasing our average life expectancy, so that again could compress the average length of stay. But with that said, there’s no doubt, demographics are demographics and the silver tsunami is going to bring a spike in the 83 to 87-year-old segment that is beginning around 2025, and it’s going to accelerate into ’27. And so as a result, of course, we’re optimists on plays in the space. If we look at them from a senior housing perspective today, I think it’d have to be an opportunistic type of deal.

Ian Formigle (43:43):
But I do think that market looks a lot more normal by ’24, ’25 when more that bulge and the demographics start to show up. So if senior housing in my perspective isn’t necessarily the best way to play it, how do you play it because it’s coming? And to me, that answer is through life sciences real estate and medical office buildings. So when we think about those segments, not only do you capture baby boomers in this type of real estate, you capture the older baby boomers, you capture the younger baby boomers, you’re going to start to capture oldest gen X-ers, essentially like the 65 and upper market, because there’s a big market.

Ian Formigle (44:22):
If we look at other data sources such as Statista, the 65 and your older segment of our country’s population today is hitting about 17%. And that is expected to go to roughly 20%, over 20% actually by 2030. To me, right now I think seniors housing is trying to play a guessing game of where they’re going to live. I think I might be able to accurately forecast to a better degree the increase in demand for their medications and their need for medical attention, particularly the types you can’t conduct by video, such as renal care. Until we see a meaningful change in the underlying fundamentals of the senior housing market, we’re placing our bets predominantly in life sciences and medical office real estate.

Trey Lockerbie (45:04):
From what I’m reading, the average savings rate of people in their mid-60s is only like $160,000. It doesn’t seem like the baby boomers on balance have a lot of retirement money. I’m curious about if there’s going to be a wealth transfer of sorts in real estate given that the boomers own a large majority of the real estate. I’m also curious if you think the fact that our dollar is depreciating, our wage has been fairly stagnant, that might delay the retirement age and push that a little bit further? It’s kind of a two-part question.

Ian Formigle (45:40):
First part of that question, that’s a tough one to call, but what I could see is that to the extent that the aging boomers they own real estate, we’ve had a real estate asset boom, single-family housing, what? Up 15% year over year, the highest it’s ever been. I’m actually seeing, and I’m of an age where my parents are solidly in this demographic, you’re starting to see people of that age, wonder if today or in the near future is the right time to monetize some of those. Because if you’re getting later in life, for example, and you’re sitting on now a tremendous amount more of your total net worth, your remaining wealth to get you through the rest of your life., and that’s now in your house, now, it just tip that equation.

Ian Formigle (46:22):
Do you stay in your house? Do you monetize your house to liquidate that? And does that provide you the additional nest egg that you need to feel comfortable for the remainder of your life? I think some of those questions that are being wondered about right now. I don’t know if there’s really enough data to say we’re seeing the monetization of the baby boomer houses, but I do think that that’s would be something interesting to watch in the coming months or year. But when it comes to the retirement of the baby boomers, I think the answer to your question, Trey, it’s maybe yes, but I don’t know.

Ian Formigle (46:51):
I see some mixed data out there on the causes of the baby boomer retirement or the rate of retirement that make me think that there’s not like a real discernible trend. For example, I guess some of what I mean by that is there’s a Pew Research study last year that noted that we saw this uptick in baby boomers retiring in 2020. According to study, we saw the year of 2020 translated about 3.2% of baby boomers retiring that year. And that was more than 50% higher than the average trend up until that point, dating back to 2012 of about 2%. Now, you could also say like, baby boomers are getting older, so is there some noise in there?

Ian Formigle (47:30):
Very possibly there’s some noise in that data, but we did see a pretty dramatic spike in the percentage of the population that retired. But it’s also fair to say that maybe some of those baby boomers needed to postpone retirement. I think particularly if any of those boomers were employed going into the pandemic and they were one of the people that were laid off during the pandemic, of course, but being unemployed last year, even despite getting some benefits from the government, you saw your nest egg, a chunk of it wiped out potentially, you’re maybe now trying to figure out how to earn a little bit more income before you really hang it up for good.

Ian Formigle (48:03):
So to me, I think that when I go back to the aggregate data, I don’t know if I necessarily see a trend, but I’m not an economist, so what do I really know?

Trey Lockerbie (48:13):
One of my last questions for you is around climate change. Miami, for example, has been experiencing dry day flooding, attributed to sea levels rising. And that’s now gone as far as to cause a large apartment complex to collapse. These appear to be only the beginning signs of climate change that will likely continue to impact some of those major cities near the major coastal cities, I should say. Do you factor that into your perspectives at all if you’re comparing something like a Miami to something more like an Austin?

Ian Formigle (48:47):
To address, I think there’s two interesting parts to this question and there’s somewhat different. So let’s address the first part of your question. So regarding climate change, the answer is yes, we do factor in numerous considerations when it comes to thinking about climate change and to the extent possible sensitizing deals to the risks that are associated with climate change. Climate change isn’t just one thing, it’s everything. We’re seeing more abnormal weather patterns, so to your point, dry flooding in Miami, flooding in New York City, more frequent and powerful tropical storms.

Ian Formigle (49:20):
I live out in the West. The West just got rampant wildfires every summer now, not only does that translate to the mash of degradation in air quality, you wonder about your proximity to the forest fires. If you don’t get hit by the fire, you might get hit by the mudslide that comes after the fire. We even now have the heat dome that hit the Pacific Northwest. So the bummer is that you can’t really say now that any region is immune to the effects of climate change, I feel like it’s everywhere. So when we think about real estate in these environments, that continue to just shock us with these unprecedented climate events.

Ian Formigle (49:56):
I think that what this does is it forces you to critically analyze a property’s ability to endure these outlier climate scenarios. So it starts to feel to us just like a standard underwriting practice. This translates into everything from making sure these properties are located outside of flood zones. We have to look at wind ratings, we have to look at modernized heating and cooling systems. It goes on and on. You got to turn over so many rocks to try to feel comfortable that your deal is not susceptible to the next major climate event. What’s interesting is I do want to talk a minute about what you referenced, which I think is the tragedy of the Champlain Towers in the Miami Metro.

Ian Formigle (50:36):
And so while there’s no doubt that Miami there’s a lot of concern in the Miami Metro about rising sea levels and what that’s going to do to the real estate in that Metro, to me, the specific moral of the story of the Champlain Towers was in this case, not as much of one of climate change, but of the hazards of deferring necessary capital expenditures in older buildings. And this is an important thing because I think it’s something that’s what we’re now learning, it’s massively overlooked around the country. So for starters, think about this, Champlain Towers was built in 1981, so that made it 40 years old when it collapsed.

Ian Formigle (51:12):
Now, we’ve all read about that 2018 engineering report. And when you looked at that report, it showed multiple points of strain, including eroded concrete and failed waterproofing at its base. Now, adequate waterproofing, it is critical to maintaining the structural integrity of reinforced concrete, and that’s the type of construction that was used at Champlain Towers. So when we think about deals that are 40 years old, we have to be critical of the current condition of the property. So as the Champlain Towers incident brutally demonstrated, these are critical building systems, and when they’re not properly maintained, they can fail.

Ian Formigle (51:52):
If they fail, the cost can be catastrophic. And if we think about fixing them, well, the cost of properly addressing them, these latent issues in these buildings, well, they can far outweigh what is economically feasible. So another thing was interesting to look at is that when you go back and take a look at that case study of Champlain Towers, that 2018 report, total estimated cost to defer all the different maintenance to cure all the deferred maintenance in that building was $15 million or $110,000 a unit, it was 136-unit building. And these were four condos that were worth somewhere between 400,000 and 800,000, depending on points with one bedroom or two-bedroom at the time of the collapse.

Ian Formigle (52:32):
And $110,000 on roughly a $600,000 unit, that’s a lot of money to expect these owners to fund. So in the case of that tower, unfortunately, they didn’t fund it. And it’s now creating, I think a number of similar lurking scenarios in these older buildings, particularly in coastal markets where air can really degrade the structure over time. So to me, I think it’s fair to say that what happened in Surfside is one of several data points that makes me today, I think somewhat more biased towards newer properties. Now, drawing this back to the whole climate change issue, I think as climates change, now at the same time, getting away from climate, but we are seeing advances in PropTech.

Ian Formigle (53:15):
To me, this creates now, we’re seeing all kinds of new demands being placed on buildings that I think are beginning to expose how a lot of these older buildings are just simply ill-equipped to keep up with this rate of change. And I think to address the change, to address these latent deferred issues in properties, and to catch up on advances in PropTech, it starts to look a lot more like redevelopment than it does refurbishment. And I just don’t think that that phenomenon is adequately priced into markets yet. So for right now, I think that just makes us a little bit more leaning in the direction of newer properties.

Ian Formigle (53:52):
And when we are approached with older properties, we have to dig really deep, we have to really, really analyze and get all over the physical structure because these problems are lurking, they’re out there, and I think they’re going to continue to pop up.

Trey Lockerbie (54:05):
Well, Ian, it is always just such a pleasure to have you on the show. You bring such a wealth of knowledge in this space, especially, and I’ve really enjoyed this. Before I let you go, I want to make sure I give you a handoff to CrowdStreet, and to you and your research and any other resources you want to share with the audience.

Ian Formigle (54:21):
Well, first Trey, I want to say thanks. It’s a pleasure as always to come on the show. I guess this is my favorite show to come on. I love having these conversations and certainly look forward to doing it again. For anyone who wants to just learn more about us, where you can find us, the website is the easiest place, that’s www.crowdstreet.com. And as I always know in the conversations, you can ping me on LinkedIn. I’m the only Ian Formigle, that ends in an E on that platform. So it’s pretty easy to find me. You can hit me up there, I’m always happy to have a conversation, you can tell. I love talking deals, can talk about them all day long.

Trey Lockerbie (54:57):
Ian, always a pleasure.

Ian Formigle (54:59):
Thanks, Trey. I really appreciate it.

Trey Lockerbie (55:01):
All right, everybody, that’s all we have for you today. If you’re loving the show, please don’t forget to follow us on your favorite podcast app. And if you’d be so kind, to leave us a review, we’d really appreciate it. If you want to get in touch, you can always reach me on Twitter @treylockerbie. And if you’re curious about the best opportunities in the equity market, especially, Google TIP Finance, and check out the dream tool we built for you there. And with that, we’ll see you again next time.

Outro (55:23):
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