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Episode #13: Interview with Ian Formigle, Chief Investment Officer at CrowdStreet

Ian Formigle, the Chief Investment Officer at CrowdStreet one of the largest real estate crowdfunding investment platforms. Ian is a serial entrepreneur with deep experience in real estate private equity, startups, and equity and options trading. At CrowdStreet, Ian serves as the key decision-maker for all investments on its Marketplace, totaling over 450 offerings and over $14 billion of commercial real estate. Ian is the author of “The Comprehensive Guide to Commercial Real Estate Investing" and he is a contributing author for Forbes.

In this episode, Millionacres Editor, Deidre Woollard, interviews  Ian Formigle, Chief Investment Officer at CrowdStreet. They discuss real estate sectors and the outlook for commercial real estate investing. 

Transcript

Ian Formigle: I think one data point that helps put this into perspective is there's a study produced by both Prologis, CB Richard Ellis talks about how that every time we produce one billion dollars of additional online sales. We nee roughly 1.2 million square feet of industrial and logistics real estate to service that demand. That you pivot it back to that increase in sales and say, "Well, look, if we increased sales by 100 billion, if we were in equilibrium going into the pandemic will now were 120 million square feet short of industrial real estate supply." That's led us to being bullish on ground-up industrial in a lot of the key major growth markets, a lot of the key secondary markets, Atlanta Dallas, so forth. We did one in Indianapolis recently, we've done one at Atlanta this year. Generally speaking, when we think about the Edge of the Metro is that's where we're going to be looking to do the larger industrial deals. [MUSIC] Those are your 750,000-square-foot, give or take. Really, high 36 foot clear height, large truck court, larger distribution centers, you get back. If you get a little closer into the Metro, that's when we see those things go down below 300,000 square feet. They look, well, a little bit more, we call last mile distribution. Those are the types of deals that were overall looking for.

Deidre Woollard: You're listening to the Millionacres Podcast. Our mission at Millionacres is to educate and empower investors to make great decisions and achieve real estate investing success. We provide regular content and perspective for everyone from those just starting out to season pros with decades of experience. At Millionacres we work everyday to help demystify real estate investing and build real wealth. [MUSIC] Hello, I'm Deidre Woollard an editor at Millionacres. Thank you so much for tuning into the Millionacres Podcast. Today, we're going to talk about real estate sectors and the outlook for commercial real estate investing. Today's guest is Ian Formigle, the Chief Investment Officer at CrowdStreet, one of the largest real estate crowdfunding investment platforms. Ian is a serial entrepreneur with deep experience in real estate, private equity, startups and equity and options trading. At CrowdStreet, Ian serves as key decision-maker for all investments in its marketplace, totaling over 450 offerings and over $14 billion of commercial real estate. Ian is the author of The Comprehensive Guide to Commercial Real Estate Investing, and he is a contributing author for Forbes. Welcome, Ian.

Ian Formigle: Thanks, Deidre. It's a pleasure to be on the podcast today.

Deidre Woollard: Ian, I'm really excited to chat with you today. I've heard you speak before on commercial real estate investing and I know you have decades of experience. How did that prepare you for the disruption of 2020?

Ian Formigle: Deidre, that's an interesting question because you could argue in some ways that there's nothing that could have prepared you for what happened in 2020. Given that I feel like we're in a once in a multi-lifetime occurrence. But what I would say was that if we go back to March 11th, the date that the CDC label COVID-19, a global pandemic it was quickly thereafter, within the next few days that we came to the realization that the commercial real estate cycle leading up to that point had just ended, that we were entering the beginning of a downturn. We didn't know what that would look like, how deep it would go or how long it would last. But we knew we were going into a downturn. I think then reflecting upon previous cycle experience, you knew that downturns lead to troughs. Troughs lead to bottoms and lead to the emerging of a new cycle and growth ahead. It just mandated that we quickly get very prescriptive about what we're going to do. We had to stress our entire portfolio. We had to quickly assess what opportunities out there no longer made any sense. When we jettison those from our pipeline, we had to identify what handful of opportunities would continue to make sense. Possibly even thrive in the market that was coming and pounce on those, and then continue to learn and adapt as quickly as possible. I think it was looking or taking lessons learned from the last cycle, the GFC, I operated through that cycle and thinking about what happened, how it happened, and what it would take to get to the other side of that. I think one key thing stands out is that underwriting during that period really did amount to steering into the abyss. Looking at assets on an absolute price per pound basis, price per square foot basis, it's that what we would actually say. Making some fundamental beliefs that if the market would someday return to normalcy and if the asset that we're looking at today would look very attractive, if the market would one day return to normal and that deal made sense. That was how you started to look at deals through the early to middle part of the pandemic. I do think that having some background and living through the GFC and experiencing what happened during that cycle really did help us navigate 2020.

Deidre Woollard: Interesting. Well, I had a chance to read CrowdStreet's investment thesis. That's one of the reasons that we've all wanted to do this episode on sector-specific investing, because I think this year more than ever, the sectors in real estate have varied so dramatically. Before we get started and talking about the specific sectors, do you have any advice on how investors should be thinking about investing in different sectors in general?

Ian Formigle: Yeah. Deidre, that's a great question right now, because you're correct in that we are seeing unprecedented levels of asset pricing dispersion across the various asset classes, so there's really no one way to look at a market right now. There's no one way necessarily even to look at an asset class right now, for a couple of them, there are vast similarities. But it really is going to vary market-by-market and asset-by-asset right now. I think maybe the recommendation is to start with really assessing what's happening there. One thing that I think that has benefited us so far in terms of a perspective, is that commercial real estate experts typically want to start getting into a lot of nuts-and-bolts, the metrics of a deal really quickly. But in times like these, taking one step back and taking a little bit of a 30,000-foot approach and really boiling down an investment opportunity to the basics of what are we talking about here? If this asset is going to perform what are the basic fundamental assumptions that we have to buy into? Is it that people are ultimately going to return to this office to work one day because they're not in at right now? Is it that people like to live in this property today and they want to live in it more going forward and they're going to be willing to pay more rent going forward? Is it people are going to return here to shop one day rate? I think, starting at those just basic fundamental questions will help an investor, I think, begin to get a sense of where they want to look to invest, because it's really powerful to understand that once you start getting into a lot of the assumptions of a property underwriting and what we call an asset pro forma, they all tie to those basic things. Are people going to travel again? Well, we think yes. But when? How will they travel? Where will they travel and what would that look like? Just thinking about those things if that holistic macro-level really help guide your own investment thesis as you start to choose individual investments.

Deidre Woollard: Well, you just mentioned travels. You've perfectly set me up for the next question which is about hotels and hospitality. I mean, it's been the roughest year for hotels. We look at revenue per room is still not bouncing back. I mean, we've seen some, what I would call road trip travel, but overall, flights are way down. We've seen cities like Las Vegas get really hard hit. What are you thinking about hotel and hospitality and are you seeing any hope there?

Ian Formigle: Well, I'd say the good news is we do see some hope down the road. But to your point, Deidre, we did see a historically unprecedented level of distress come to this asset class. For example, when, when we talk about that revenue per room, what we call RevPAR in the industry, that essentially means you take the occupancy rate of the hotel, you multiply that by the average daily rates and that's going to get you the RevPAR number. That number dropped across the whole country, across the industry, 80 percent from March to April. That's just never happened before. It's never happened in any of our lifetimes, has never happened in the history of hotels in the United States as far as we know. I think that just puts it into context that we are in a ounce in a multi-lifetime type of event. What was hopeful to see was that from that period of April to September, in April, it was as bleak as you could possibly get. Certain hotels were down to like five percent occupancy. They are essentially just absolutely empty. But from April to September, you did see the steady eight percent week-over-week climb and inoccupancies and RevPARs. We got to retrace about 30 percent of that drop. We're now back to about 50 percent drop on a year-over-year basis. What's the least a little bit hopeful now is when we got to the September period, we did see a flattening off of that recovery largely due to the fact that we burned off the summer season. People weren't driving for vacation destinations anymore, school or online school was starting again, and so you saw that tail off. Now, just in the last couple of weeks, one thing that we look at is the data provided predominantly by STR, that's a national leading provider of hotel industry research. That data is always going to be a couple of weeks trailing. But TSA throughputs are up to the day. Just this last week, we saw TSA throughputs spike again, exceed over a million passengers for a single day since the pandemic began, and saw that percentage, which had basically gotten up into the low 30 percent of the same weekday last year, now, penetrate 40 percent. It's just stepped up. Now, the question is, why did it step up, and why now in late October? Why did that just step up? What we're wondering right now is did we just see the first semblance of the beginning of a return of business travel. That number now needs to start showing up. If it is true, we should start seeing that in terms of hotel occupancies in the next few weeks. But that's what we're looking at right now. That's how we look at the hotel space going forward. Overall, when we look at next year, while STR for example, they do project a 30 percent increase in 21 RevPAR. The beginning of the recovery of the hotel sector is on the way and it should gain some momentum next year. Overall, we're looking at a full recovery of the sector, essentially, returning back to or exceeding 2019 numbers by 24. Really, what that translates to for us today is anytime we're looking at a hotel, it is acknowledging that it is in a state of distress and will remain so going forward. Looking for capital coming into that project to ensure that it is going to see its way through to 2022 in a rough operating period between now and then. That if we can get that deal to 22 and the pricing that we can get on the asset today is justifiable to the point it's compelling enough to the point where we'd love to buy that today at this price, whatever that price is, knowing that we think we can restore its value by 24, well, that's how I think you make money in the sector. When we look back to the previous cycle, we also know that once we did get to 2012, hotels were the first sector to recover. That's because rents are marked to market every day, so it's going to be the asset class that leads its way into the downturn. It's also going to be the asset class that can lead its way out of the downturn. Net-net, I think that there's brighter days ahead for hotel, we just have some tough sledding ahead of us to get there.

Deidre Woollard: I would agree with that, and you gave people two really great resources right there, one of which is str.com, which is you can see week by week how hotels are performing and also the TSA has been providing those numbers since the coronavirus started. It's a really good way to be able to see what's happening and both of those are publicly available. I think that really leads us well to the next segment which is a similar retail. Now, retail went through a tough time, but I've seen in the last few months, rent collection rates have been ticking back up. Obviously, I think everyone's holding their breath for the holiday season. We already know that Black Friday is going to look a bit different. Macy's just announced that Santa is not going to be live in the Herald Square store. I mean, it's going to be a different holiday season, but are you starting to feel a little more optimistic about retail?

Ian Formigle: Deidre, so I think the answer is overall, yes, but with a number of caveats, I think, to this answer. Because retail, I think, is somewhat unique amongst all the asset classes in that, I think that this is one of the asset classes that a segment of the sector we'll see long-term damage, potentially, unrecoverable damage. But I think other parts of the sector are going to actually bounce back and maybe be stronger than they were before. Because overall, what I would say is I think I see consolidation coming to the space. I think, we're definitely in an environment where we've said, "Look, we probably seen retail peak somewhere around 2014." Retail still going to be, and as a specifically brick-and-mortar retailers, still going to be an important part of our future going forward. It's going to get increasingly, I think, intertwined with e-commerce sales. You're going to see more locations start to have this hybrid approach of saying, "We're going to sell products at a location, but we're also going to accept returns from our website at this location," that's a part of that. I think the journey of where retail resettles back into post pandemic, it was going there leading up into the pandemic. One of the ways I think about this is to think about the locations of centers within markets and submarkets. What I think right now is that if you have the strongest asset in the submarket, you're the best location, you're the premier center. I think those are going to bounce back and they're going to do well in the next cycle. However, if you are the third best located center in the market or submarket, your asset may be ultimately being redeveloped into housing or storage or perhaps some other use. I do think that there's going to be this bifurcation of the retail market. I think the best assets and the best locations do well. You probably see net-net, you're going to see some square footage removed from the markets, and that's probably where retail finds its footing as we exit the pandemic. When we think about things like that, the asset class, or I should say, the subset of this asset class that I think makes the most sense, are going to be grocery anchored centers. If you find that center, it's on a good corner, has high traffic count outside it, it has a good strong anchor and it has good ingress and egress, that center is going to do okay, it's going to do fine in '22 and it can thrive in '23 and '24. Again, centers that are strong, are going to have the ability to backfill any vacancies that may occur right now because every center is going to have some tenants blowout. I think it's already happening. It's going to continue to happen. But coming out of the pandemic and back into the growth phase of the next cycle, it's like those assets are going to have the ability to absorb tenants that want to come out of other locations. They might have been in the second best location in the last cycle. Now, they have the opportunity to jump into the best location. So you're going to watch those rebound lease backup and do well. Again, it leaves those that next outer ring, the marginal weaker centers left to wonder what they're going to do going forward. They're going to do things like, perhaps, gain tenancy, but it's not going to be credit tenancy. That's going to lead to an increase in cap rates on those types of centers. We've seen that happen in many cycles before, when an asset deteriorates in quality and it has to find its way with a lower category of tenants, what that happens to pricing. I think that's going to happen in this space. That makes us bullish on some parts of retail and very bearish on others. I think that's just part of where we sit as we come out of the pandemic.

Deidre Woollard: I think that makes a lot of sense. One other things that we're keeping an eye on too is, like you mentioned, those Class B and C malls. Some of them aren't going to make it. They might end up being Amazon fulfillment centers or storage, or warehouse or anything. I've seen a couple of instances already of malls, basically, being returned to the lenders already. So we may see more of that going forward.

Ian Formigle: Yeah. We've definitely seen that and we will see more of it going forward. I think to your point, when you're looking at those types of scenarios, if you buy them, you're buying them at what you perceive as land value. Because that's essentially what you're buying. You're buying a short-term, whatever residual step of revenue that you ultimately think goes away so that you can repurpose that location into a higher and better use in the future.

Deidre Woollard: Exactly. So the next sector to talk about is medical. Medical is really complicated this year, I think, because one of the things we've seen in investing in REITs which is, obviously, different than what [inaudible 00:19:30] does. But you have some of the REITs that have senior housing and medical office and things like that. Obviously, senior housing has been a sector that has taken a lot of hits, partly because of what's been happening with COVID-19. But one thing to like about medical offices is those long-term leases. We've seen a lot of interest this year in life sciences. What are you looking at in terms of investing in healthcare real estate right now?

Ian Formigle: Deidre, I'd say overall that we like healthcare real estate. It obviously depends on where it's located and who the tenants are. During the pandemic, we were very focused on needs-based healthcare real estate. So for example, we did have a portfolio on our marketplace earlier this year. It was a multi-location, so about 10 locations around the DFW Metro. It was all renal care. As anybody who has intimate knowledge of this to know that dialysis goes on no matter what's happening. A pandemic or not, you need to go in for dialysis if that's the care you're seeking. I think that case study applies to the types of uses of medical real estate that we were seeking to do during the pandemic. Essentially, the types of uses that you are going to continue to see. Occupancies remain viable, no matter what. Coming out of the pandemic, we broaden the scope of what we like in medical office. We're looking, for example, at a medical office still right now, just in the greater Washington DC metro area. When we think about medical office, we think about things like transportation. Where does it say, doesn't have the ability to get to it via public transportation that helps. Obviously, parking ratios are really important, and who your tenants are. To your point, you'd rather weighed average lease term of those tenants, is really important when we're thinking about the uses of it. Also, I think there was a bit of a theme that we embarked upon earlier in the phase of the commercial real estate cycle last time on the marketplace that we will look to do again in terms of the proximate to the major medical centers, either hospital or district. We even had a deal on our marketplace earlier this year that was keying off of a redevelopment within a major medical district in Miami. Basically, the medical district in Miami. So those are the types of opportunities that we like going forward. We like the ones that are situated in medical districts, have strong tenant rent rolls, have waited lease term. The cap rates set a little bit above other asset classes like multi-family. They're in line overall with office cap rates, but yet, I think the durability of the tenant base is obviously, I think stronger today than your average office offers. We have an aging population where demographics are trending in that direction. So overall, I think the medical office space sits in a pretty good position vis-a-vis other asset classes. So we look to bring opportunities to our marketplace where they make sense.

Deidre Woollard: Yeah. I think you made a really good point there about the aging of America. That's definitely one of the trends that is going to continue to impact that sector because, obviously, people tend to use more medical services as they age. So we are going to see more need for that, especially, those things that are consistent like dialysis. Let's pivot again and talk about the sector that I think everyone has been talking about this year, which is industrial real estate. I mean, e-commerce has been, obviously, in a hyper speed. It's like we can't build enough warehouses at this point. So it was the fastest growing sector in 2019. I'm assuming it will be the fastest growing sector in 2020. But I noticed in your investment thesis, you actually had some reasons for caution and I thought that was really interesting. So I was wondering if you could go into that?

Ian Formigle: Yeah, sure. Well, to begin, I totally concur. Overall, we're bullish on industrial. We look at it from the perspective that it came into 2020, in a relative state of equilibrium, demand had been strong, absorption had been occurring, yet we'd also seen some supply. Supply had been roughly, also depends on market, but roughly speaking, supply was falling in line with demand, and it was keeping cap rates low, but it wasn't in excess demand. It looked in roughly equilibrium. Then the pandemic hits. Then to your point, now we see e-commerce sales spike almost to roughly 20 percent of all retail sales and it depends on which website, in which way you get your information. But net-net, well, we saw roughly $100 billion of increase in online sales in 2020. I think, one data point that helps put this into perspective is there is a study produced by both ProLogis and CB Richard Ellis talks about how every time we produce $1 billion of additional online sales, we need roughly 1.2 million square feet of industrial and logistics real estate to service that demand. So they pivot it back to that increase in sales and say, if we increased sales about 100 billion, if we were in equilibrium going into the pandemic, well, now, we're a 120 million square feet short of industrial real estate supply. So that's led us to being bullish on ground-up industrial in a lot of the key major growth markets, a lot of the key secondary markets; Atlanta, Dallas, so forth. We did went in Indianapolis recently, we've done one in Atlanta this year. So generally speaking, when we think about the edge of the metros, that's where we're going to be looking to do the larger industrial deals. Those are your 750,000 square foot, give or take, really high, 36 foot clear height, large truck court, larger distribution centers. If you get a little closer into the metro, that's when we see those things go down below 300,000 square feet. They look a little bit more what we call last mile distribution. So those are the types of deals that we're overall looking for. Now, to answer your part of the question about the pause in terms of what we saw in terms of some trepidation around major ports, is that during the pandemic we saw international trade drop. There's some political, there's also economic ramifications there. Really what we're looking at is the logistics real estates, a lot of the major distribution centers that are located in proximity to our largest ports. So port of Los Angeles being a good example, then Inland Empire being the industrial market that serves that, for example. For part of this year, we're watching vacancies in demand for large industrial space in the Inland Empire. That's a market that's banned. It's blue-chip market for industrials so it's been priced to near perfection. You had to just pause in wonder a little bit to say if we're bringing fewer cargo container cranes off of those ships right now, we're bringing fewer cargo boxes off of those ships. We're seeing a little less outflow from those ports into filling up the industrial warehouses out in the Inland Empire. Are we seeing a short-term lack of demand that could lead to a little bit of distress in that sector? I think as we get to 21 R, we've already started to see trade pickup. Provided that we continue to see those trends, I think that we get less concerned about that phenomenon. But it also means that we're going to pay closer attention to those major markets. While generally speaking, we're more bullish on the industrial real estate that surrounds the secondary markets because those are the ones that are actually serving those metros. Those metros growing in population should provide the underlying fundamental demand for the real estate there. [MUSIC]

Deidre Woollard: That's really smart. Yeah. I think the secondary markets are definitely a place that all of us are looking for next year. So let's use this time to take a quick break. We hope you're enjoying this and every episode of The Millionacres Podcast. If you have a [inaudible 00:28:20] , we'd love to hear from you. Please visit millionacrepodcasts.fool.com and tell us what you think of the podcasts so far, what kind of content and guests you'd like to hear, and what else we can do to help you grow smarter, happier and richer, through real estate. We are here with Ian Formigley, Chief Investment Officer at CrowdStreet. We're discussing sector specific commercial real estate investing. We've talked a bit about this year. Ian, I want to bring you into the future a little bit. I know so much about 2021 depends on vaccines and treatment protocols for COVID-19. But let's talk about some of the trends we could see. How optimistic are you feeling right now?

Ian Formigle: I'd say, I am moderately optimistic heading into 2021. I probably become fairly bullish about Q3 and Q4 of next year. Then from there I think we're onto the next part of the cycle, and I think we're back into a growth phase.

Deidre Woollard: So do you see that as a growth phase, it's going to pick up slowly or do you feel like that's going to be a dramatic uptake?

Ian Formigle: I'd say, it's starting a little bit slow. Again, if think about 2021, by the time that we hit the end of '21, I think there's some strong momentum. I think everything that we're seeing in terms of the fiscal stimulus, that's going to start playing out as we start to have an economy that can function more normally, people back out doing what they like to do. We're not inhibited anymore in terms of mobility. I think that's where you start to see some real fuel behind the growth phase of the next cycle. We do have people that are projecting 3 plus percent GDP growth next year. If that starts to materialize, call it by the early to middle part of next year leading into 2022, that's where you can probably see things really start to move; asset pricing really start to take off, demand really start to come to a lot of forms of real estate. I see it gaining momentum over the year. So I see some acceleration starting midyear, and then heading into that year, and then full steam ahead by '22.

Deidre Woollard: So you mentioned mobility and one of the things that's been happening this year, certainly on the residential real estate side, is this whole urban exodus thing. We talked a little bit before about secondary markets. Secondary markets are booming. We've seen people leaving New York and San Francisco. The rents in those cities are dropping. In terms of the housing, and specifically, multi-family, do you feel like this is a short-term trend? Do you feel like multi-family may be falling out of favor a little bit? We've seen some activity on the build-to-rent single-family market. What are you thinking about that?

Ian Formigle: Yeah. So the way we look at multi-family right now, I'd say is roughly as follows. First, there's no doubt that we're seeing distressed come to the largest city. So to your point that New York and San Francisco are leading the way down right now in terms of what multi-family can look like on the downside. Concurrently, we're seeing 4 percent rent growth in Nashville. So part of what I see is first, do the city's centers bounce back? Yes, I do think they do bounce back. I think that a lot of the current uninterest in living in the core, as we can imagine, is tied to the fact that there's not a lot of vibrance in our city cores right now. Leases are a one-year type of commitment, typically speaking. So if you think about the next year to say, "Look, for a lot of part of the next year, this is not going to be that exciting to live here." Yes. I don't live in a city core, but I live near a city center. It would be tough to live in the city center right now. If I'm living in the city right now, in the center of it, I'm probably looking to move just outside of it for a period of time. I'll probably take a wait-and-see approach. But if the lifestyle return that I found attractive, it's at that point that I'm going to go back. So I think when you equate that to time, probably look for urban multi-family to start to recover and bounce back by 2022. In the near-term, I think you're seeing an excess movement towards the suburban real estate right now, just for the obvious reasons. I think that momentum is a blend. Some of it may seem a little bit of a petering-out a little bit in terms of when things do get back to normal and city centers start to look a lot more attractive. But however, I do think there are underlying demographic drivers that will continue to stay in place. You mentioned the build to rent strategy. I think that's almost our number one housing strategy right now. We love that. We've put it on our marketplace earlier this year. We just took a deal down on our marketplace. Just today, for example, just filled up a deal in that sector. We love that space. I love it because it is playing into that demographic trend. Millennials; they're now 30-plus age older on average. Now, typically speaking, they have partners. They have pets. They would like to have space for their pets in a backyard versus a balcony. The idea of having your own door you can come in and go from rather than an accord leading to an elevator. These are all things that are desirable. Having your own walls, having your own roof rather than somebody above you. As the millennial demographic ages into their thirties more and more, which is going to happen this cycle, that change in lifestyle of what the build to rent property offers, it's attractive. It's an apartment style amenitized project. It's going to have all the types of bells and whistles that you want. It has the pool, the clubhouse, it's going to have the dog park. It's going to have the things that you would want. It's going to be professionally maintained and it's going to give you a bit of a single-family lifestyle and it's going to give it to you at an affordable price. It's at a rent that's commensurate with what a two bedroom apartment was going for closer into the city, but yet now you have more space. I think those things are all going to resonate, I'm seeing anecdotal evidence all around me that suggests that that will be the case. I think that's why that space has a lot of tailwinds behind it going forward. I think the kicker on this is that in cycles past when we saw people age into this age demographic, this is the time when they start thinking about buying homes. There are people that are buying homes across the country. One thing I think the pandemic has done which has benefited a lot of 30-somethings out there is that they are saving at a rate that they weren't accustomed to you and that's helping them save some down payments on homes. Partially, why we're seeing single-family residential so strong out there right now. But for a lot of other millennial, they're also still have high levels of student debt. That's what's different about this population and this demographic than was in prior cycles. So from that standpoint, I think you're going to see a little bit of stickiness to the rent model. It's affordable, it delivers a single-family housing type of lifestyle, but it also does it with, like I said, nice amenities around you that are attractive. I think from that standpoint, we just think that business plan makes an abundant amount of sense, we'll continue to do that going forward. Then as well, I think we would see and we do seek suburban-located multi-family properties on the higher class B towards class A, end of the spectrum. Those are the ones that are holding up really well in terms of of month-over-month occupancies and rental payments. I think they've also got some tailwinds ahead of them as this re-settling into the, what I would also say is the inner suburb. I think the outer suburbs, I think there are still a little bit of a question mark. But we also did see that a lot of inner suburbs, were becoming more and more desirable. ULI coined a phrase last year called the hipsturbia, essentially saying that, "Hey, what do you really like about being in an urban environment? Well, you want to go to a cool restaurant, you maybe want to go to a craft brewery. You want to have a walking environment with a lot of vibrancy around you and great common areas." Those types of things have been showing up in our inner suburbs now this last cycle. A decade ago or more, you really did have to go into the city centers to get that vibrancy. We're now creating that on a slightly smaller scale and a lot of next-ring-out locations. So I think when you think about from a multi-family perspective, if you can take that multi-family property, put it in a location that's near one of those next outer locations, but it can give you enough of a feel of the urban vibrancy that you desired and were seeking out years ago. But now maybe the schools are better, maybe now the lifestyle is just little bit easier, I think that makes a lot of sense. So I think that's one of the reasons why we're bullish about multi-family and those types of locations.

Deidre Woollard: I think that's really interesting, especially because the millennials obviously are a huge influential group. You also have on the other end, you have the baby boomers who are aging and that's a huge influential group. Those two groups, the ways that they act in the next few years, it really going to impact real estate in just about every single sector. As we wrap up here, one sector we haven't talked about, we've talked about it a little bit, but not really, but it it connects to housing, which is offices. Are you feeling optimistic that offices come back in 2022? Or are you feeling like that's more or like maybe at 2023 or even further proposition?

Ian Formigle: For office, I think that next year is the year, so call it mid-'21 to early '22 is when we're going to start to understand a lot about what the future of office is going to look like. Right now we have office properties that are still collecting rent almost at the rate that they've always been collecting rent. I think really what that tells you is, you've got tenants on those properties that are still viable. You've also got a complete acknowledgment on both sides of the equation that nobody knows exactly what anybody wants. Right now, renewals look like six months renewals. To me, that's just a kick-the-can, we need to get post-pandemic to begin to see what's really going to happen to office. We've all got our thesis about what's going to happen to office but I think rubber meets the road, so to speak, sometime probably around summer of next year. In the short-term I think there's no doubt that in the city centers there is a level of reset that's coming. There's some varied level of distress that comes to be asset. It will be very case-by-case specific because as you can imagine, some properties in the urban core, they are full of strong tenants on long-term leases. If their weighted average lease term is five-years, then by the time that their property has a material role in its tenant base, we're going to be so far into the next cycle that a lot of this will be an ancient history. It's properties right now that we're in then, they were a little bit weaker in the core, they had some vacancy, they had shorter-term tenants in place and they have more exposure. That's where I think that you're going to see the distress. I think those are the ones that you're going to see some price resets. There is no doubt that New York and San Francisco, like we're seeing in the multi-family sector, are going to need to probably experience some reset in their office sectors because asset pricing was just so high. Essentially, what we say is priced to perfection in the last cycle, that they are the ones that are most vulnerable. Meanwhile, locations, like I'll use Nashville for example, I think they're going to do fine. They were surging in demand but the demand was an underlying draw of people and jobs into that location. That doesn't change because of COVID, if anything, it accelerates because of COVID. People are now deciding that it's time to get on with the next phase of their life. We're seeing this migration patterns start to occur. If anything, some of the markets that we saw accelerating in terms of demand, well now they just saw their next kick up in terms of that level of acceleration. So essentially, the same markets we like before, we like better now in a way. Coming out of '21, if we say that that part of the office is got to go through some level of true price discovery in some disruption in '21, probably settling down in '22, probably suggest that buying opportunities are going to show up next year. Like I said, I think it will be a case-by-case. It will be depending upon location. You can't say that all markets are going to be distressed. I do think that office will come back. To answer the question, does office go away or we are going to stay in our Zoom environments? Definitely, I don't think the answer to that question is yes. I think it's no. I think you probably see some acceleration in terms of office occupancies and people wanting to figure out the new build and what that looks like. Probably around the time that we haven't the majority of office workers back in the office. For example, during 2020, It's been fair to say that a lot of us out there, I fit into this bucket, we've been able to do our work about as well as at home as we did in the office. But I think the reason for that is because everybody else's out of the office too. The Zoom environment is great when everybody else is on Zoom. Now, go to an environment where the majority of the people are back in the office. I've called in and participated in Zoom. I've been on the road enough during the previous years to understand that's a poor experience. You miss out on so much. Somebody says something, you don't know what somebody said, somebody turned to another person, just made a comment. There have been literally meetings. Again, I am in national for example, and my exact meeting is back at home in Portland. I probably don't even I should just not even be here because it's just frustrating to not really understand what's going on in that meeting. I probably should just get the notes afterwards and just do a debrief for somebody who attended. I think once we get to that point, that's when you see where those people want to get back into the office. Now will everybody come back? No. I think 20 percent of people or thereabouts will remain remote indefinitely. We're going to see office root change in terms of how it looks and feels. It's going to have to adapt to the next model. The 100-125 square feet per employee model has probably gone for the near-term. It's gone indefinitely. I don't know when it comes back. I don't know if it comes back. But we're going to probably figure out how we're going to make offices vibrant again and attractive to those workers. That's probably going to lead to more space obviously. So net-net, that to me tells me that there is demand there for office. Just going to take some time to figure it out. That's how we look at office, so and how we will look at it going forward. We have to be cautious about it in the short-term. But if we can see pricing that looks really compelling then we're buyers there, and we see that as opportunity in the mid-term.

Deidre Woollard: Interesting, you used the phrase priced to perfection a couple of times. I was wondering if you could just explain for people a little bit of what that means to you.

Ian Formigle: Yeah, sure. When we say priced to perfection in the industry, it is when you look at a portfolio, pro forma, say, it's a number of properties, and you see this whole pro forma. Assume everything goes well, occupancies stay above the market average for the next 5-7 years, rents grow at or above the long-term average steadily for the next seven years. You have expenses that remained low for the next seven years. Like there's all these different levers that you can pull on in a pro forma that will either increase returns or decrease returns. At the end of the day, you're buying a property for a price you have to sell it for a price. You have to operate it in between. You're trying to figure out how much money you can make operating it, and that's a portion of your return. The rest of the return is what we call through the reversion, is essentially selling it for more than what you bought it for. If you have to pay a price for a property that is so high, that the only way for you to really justify selling it for a reasonable profit in the future, is that everything in that property goes better than it's ever gone, and that we reach rental rates that we've never achieved, and we see growth rates that are above the historical norms, and they have to remain that way. Well, if you start adding all those out, do you just have to ask yourself, what's the probability of all of those things occurring? Is it possible? Of course, anything is possible. But is it probable? I would say that history has taught people in the industry cycle-over-cycle to suggest that it doesn't all work perfectly all the time for seven years, just doesn't really ever happen. When we say priced for perfection, we're talking about assets that have reached these levels of pricing, and where that's the type of underwriting that you have to assume in order to hit a desirable rate of return by disposition. It's in those scenarios where we step back and say, "I think the more likely scenario is that something is going to go wrong here, and that there may be a time in the future to buy this asset at a price that looks maybe similar to today or maybe lower than today." But that will get priced in such a way that now we think we have a better probability of achieving that desired rate of return because we don't have to do everything perfectly going forward in order to hit it.

Deidre Woollard: Interesting. The opposite of that would be like priced at reasonable unless there's something like that.

Ian Formigle: Price to large margins of era. Those are the deals that we love. That's a typical distressed underwriting, is assets really beat up. You're getting a very huge discount. You do have to make a bunch of assumptions, but then you price in huge margins of air to be wrong. If you can still make a pretty good rate of return and be hugely wrong in a deal, that's the type of deal that you said. That's the one that I want to go into.

Deidre Woollard: Absolutely. Obviously, I know CrowdStreet looks at probably hundreds of deals every year. I know that you've only put a very small bound of them actually up in your marketplace for people. Given that if you could sum up the investing goals of the platform for the next year in one sentence, what what would that be?

Ian Formigle: The goal for the next year is to return to a reasonable rate of philosophy. It is to seek the best operators and developers around the country and to partner with them on bringing on that we think will emerge as being hugely attractive investment opportunities in '21, as we really get into the next part of the cycle. Remember commercial real estate transactions are down 70 percent year-over-year. We're in a supply constrained transaction environment. Some of those start to turn around. That's where I think you're going to start to see some real interesting opportunities emerge.

Deidre Woollard: Absolutely. Last question I want to ask you is, obviously, you work with a lot of experienced investors, but do you have advice for someone who is just getting started in commercial real estate? Is there something that they should be doing as they start to learn about the space? Is there anything that you wish you had known when you were starting out?

Ian Formigle: I think the number 1 thing that new investors can really spend time on first and foremost, is to really just look at the quality of the operator or the developer. Feel like new investors oftentimes on our marketplace, they quickly gravitate towards the asset, the returns. They will start to look at the deal. I can tell you over a long time of experience and working with the best groups and working with groups in between, is that you cannot overemphasize the amount of importance you should place on the quality and the capabilities of that operator or a developer. A great deal with a mediocre operator will have an okay outcome, could have a bad outcome. An okay or mediocre deal in the hands of the best operator out there, will typically have a good outcome. The market of commercial real estate is so inefficient compared to equity markets. That inefficiency plays into the advantage of the best in class operators. It plays to the disadvantage of the middle players. It plays with the vast disadvantage of the weakest players to the extent that they get exited from the market. Really start with that operator, understand them and what they've done and where they do it, and know that your first and foremost making that decision based upon them. Then you want to understand the deal. Then you want to get confidence that what they're doing is the thing that you want to do with them. If you take that approach, I think you do better on average than you don't.

Deidre Woollard: That's a very good advice. Well, Ian, thank you so much for your time today. Just a reminder to our listeners that you can find the CrowdStreet Investing Thesis at crowdstreet.com. It's a really good fast read. It's a nice overview of all of the different sectors and just a lot of really great thought went into it.

Ian Formigle: Deidre, I just want to say, thank you for having me on the podcast today. It was a pleasure to chat with you.

Deidre Woollard: Thank you for tuning into the Millionacres Podcast. I hope you'd like today show. If you enjoy this episode, please consider subscribing to your favorite podcast provider. If you have any questions, please feel free to drop off the line at help@millionacres.com. Stay well and stay invested. [MUSIC] People on this program may have an interest in the deals, offerings, or services they discussed. A Millionacres or the Motley Fool may have a formal recommendation for or against. Always consults to certify tax professional before acting on tax advice. Do not buy or sell assets based solely on what you hear.

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