TIP221: Commercial Real Estate Investing w/ Ian Formigle (Business Podcast)

Episode Summary

Executive Summary: The episode examines commercial real estate as an investable asset class, explaining its historical consolidation, return potential, leverage effects, and role in portfolio diversification. Ian Formigal argues CRE can provide attractive risk-adjusted returns, low correlation to equities, and access to yield, but success depends on understanding local markets, debt maturity, liquidity constraints, and risk tier. He also shares lessons from a bad deal and a highly successful Seattle investment, then discusses how CrowdStreet helps democratize access to CRE.

Main Topics: Commercial real estate history and democratization (Priority: 5/5): Ian explains how the 1933 Securities Act restricted access to private securities, leading to consolidation of CRE ownership among institutions, and how the 2012 JOBS Act began reopening access to individual investors through platforms like CrowdStreet. Historical returns and leverage (Priority: 5/5): He compares unlevered and levered CRE returns, noting that leverage can roughly double returns while materially increasing risk, and emphasizes using unlevered data for apples-to-apples benchmarking. CRE as a portfolio diversifier (Priority: 5/5): Ian argues CRE offers low or zero correlation to equities and can improve portfolio Sharpe ratio, making it attractive for investors seeking diversification and yield in a low-rate environment. Risk, liquidity, and debt maturity (Priority: 5/5): The discussion stresses that CRE is illiquid private capital, so investors must be compensated via a liquidity premium and manage refinancing risk by matching debt terms to the business plan and cycle. Market cycles, crises, and locality (Priority: 4/5): Ian explains that CRE is highly local: macro shocks matter in systemic crises, but normal performance is driven far more by neighborhood, submarket, tenant demand, and property-specific execution than by broad market headlines. Risk spectrum and asset selection (Priority: 4/5): He outlines core, core plus, value-add, and opportunistic strategies, linking each to typical leverage, hold period, and target return ranges, and highlights current opportunity in secondary markets. Entrepreneurship and CrowdStreet's mission (Priority: 4/5): Ian describes CrowdStreet’s founding goal of making CRE markets more accessible, transparent, and efficient, and explains the company’s disciplined resource allocation and product expansion strategy.

Key Arguments: Commercial real estate became concentrated in institutional hands due to securities law constraints, leaving individual investors underexposed to a major asset class. Historical CRE returns should be evaluated on an unlevered basis first; leverage can materially enhance returns but also magnifies losses. CRE offers meaningful diversification because its long-run correlation to public equities is low to near zero in many indices. Private CRE requires compensation for illiquidity; investors should expect roughly 5-7 years of lock-up on average and plan liquidity elsewhere. Debt maturity is central to risk management: whether an investor survives a downturn often depends on refinancing ability when debt comes due. The biggest driver of CRE performance is local market dynamics and property-level execution, not broad macro trends alone. Secondary markets are increasingly attractive because they combine improving livability, lower costs, and growing job creation, supporting long-term property demand. Commercial real estate is inefficient relative to public equities, which creates opportunity for skilled buyers who can identify mispricing and transact with certainty. Investors should match the CRE strategy to the risk profile: core assets for stability, value-add/opportunistic for higher returns and shorter, execution-driven hold periods. CrowdStreet was built to broaden access to CRE investments and education, helping individuals evaluate deals at their own pace rather than chase the first available opportunity.

Data Points: Commercial real estate market size: $15 trillion - Ian describes the size of the U.S. commercial real estate market and how ownership is concentrated among a few large players. CrowdStreet offerings completed: Nearly 300 offerings - Mentioned in the intro as part of CrowdStreet’s marketplace history. CrowdStreet offering volume: Over $10 billion - Total commercial real estate volume completed on CrowdStreet’s platform. Average unlevered CRE returns (1986-2016): About 7.9% - National Multifamily Housing Council data cited for major CRE asset classes. Multifamily unlevered returns (1986-2016): About 9% - Multifamily outperformed other major property types on an unlevered basis. Office/industrial/retail/hospitality unlevered returns: Low to mid-8% range - Historical unlevered returns for other major CRE sectors. Typical leverage ratio: About 65% - Presented as a common median leverage level for commercial real estate in the U.S. Illustrative levered returns: About 16% average; multifamily about 18% - Ian estimates levered returns could roughly double the unlevered historical figures over a typical hold period. Typical hold period: 5 to 7 years - Common holding period used for CRE deals and return estimates. Average holding period on CrowdStreet marketplace: 5.3 years - Actual average holding period across offerings on CrowdStreet’s platform. Potential holding period range: 2 to 10 years - Realized hold periods can vary widely depending on the deal and market cycle. Pensions’ CRE allocation: 6% to 13% - Typical portfolio allocation range for pension investors. Endowments’ CRE allocation: 10% to 20% - Typical portfolio allocation range for endowments. Super high-net-worth / family office CRE allocation: 20% to over 50% - Illustrates how sophisticated investors often allocate much more to direct CRE. Net worth threshold for super high-net-worth investors: In excess of $30 million - Used to define the investor group discussed in allocation examples. Core leveraged returns: 8% to 10% - Target annualized returns for stabilized, trophy-quality assets. Core unlevered returns: 5% to 7% - Target annualized returns before leverage for core assets. Core holding period: 8 to 15 years - Typical long-term hold horizon for core strategies. Core plus leveraged returns: 11% to 14% - Target returns for slightly riskier, less prime assets. Core plus holding period: 5 to 10 years - Typical hold range for core plus assets. Value-add leveraged returns: 15% to 20% - Target returns for assets requiring operational or capital improvements. Value-add holding period: 3 to 6 years - Typical hold range tied to executing the business plan. Opportunistic leveraged returns: Greater than 20% - Target return for distressed or highly transitional deals. Opportunistic holding period: 2 to 4 years - Typical shorter hold period for high-risk turnaround deals. Target inception yields: 4% to 6% - Typical yield range investors might seek at the beginning of a CRE investment. Levered yield example: Above 10% annually - Illustrated by combining a 7% cap rate with 4.5% debt cost. Cap rate example: 7% - Used as an unlevered yield proxy on a commercial property. Debt cost example: 4.5% - Example multifamily borrowing rate in 2017-2018. Seattle business park acquisition basis: $10 million / about $100 per square foot - Example of a successful South Seattle investment. Seattle exit value: $17.5 million - The property sold above original business plan expectations. Seattle planned exit value: $15.9 million - Original projected sale value after five years. Seattle return multiple: 2.3x - Reported investor multiple from the South Seattle deal. Seattle annualized return: About 46% - Annualized performance from the South Seattle example. Oklahoma City supply increase: 40% in six months - A bad investment example where expansion in the FAA student-housing market overwhelmed demand. Occupancy deterioration in Oklahoma City: From 100% to 60% occupied - Describes the negative impact of rapid supply growth on the syndication deal. Live deals on CrowdStreet: 20 to 40 live at any given time - Current marketplace inventory described by Ian at the end of the interview.

Pivotal Quotes: "markets are stronger when they're accessible, they're transparent, and they're efficient" — Ian Formigal: Explaining the founding philosophy behind CrowdStreet. "real estate is local" — Ian Formigal: A central thesis used throughout the discussion to explain why property-level and submarket factors dominate CRE performance. "you make money on the buy, you realize it at the exit" — Ian Formigal: His summary of how inefficiency and entry price determine eventual CRE outcomes.

Implications: CRE can enhance diversification and yield, but only for investors who can tolerate illiquidity, understand leverage, and evaluate local fundamentals. Platforms like CrowdStreet may broaden access, yet disciplined underwriting remains essential.