TIP309: Real Estate & COVID-19 w/ Ian Formigle (Business Podcast)

Episode Summary

Executive Summary: Ian Formigli argues COVID-19 exposed real estate’s core driver—demand versus supply—while sharply separating winners from losers. Hospitality and retail were hit hardest, industrial and niche sectors stayed strong, multifamily held up but faces stimulus risk, and office is likely to see lower density and more suburban demand. He expects the next 12–18 months to create major opportunities, but only for patient investors with strong sponsorship and enough runway.

Main Topics: COVID’s uneven impact across real estate asset classes (Priority: 5/5): Formigli ranks the pandemic’s effects from worst to best: hospitality was crushed first, retail suffered heavily, office remains uncertain, multifamily proved resilient, and industrial plus several niche sectors stayed strong. Multifamily resilience and stimulus dependence (Priority: 5/5): Apartment collections remained surprisingly stable, but lower-tier Class B/C properties may weaken if enhanced unemployment benefits expire without replacement stimulus. Office thesis reset: density, location, and hybrid work (Priority: 5/5): He expects more square footage per employee, reduced demand from remote work, and a shift from expensive CBD offices toward suburban and lower-cost metro space. Retail’s bifurcation and grocery-anchored opportunity (Priority: 4/5): Malls and experiential retail remain distressed, but grocery-anchored centers are benefiting from record sales and can still be attractive at prices well below replacement cost. Capital markets, CMBS, and market signals (Priority: 4/5): He views CMBS delinquency and issuance as a leading indicator for distress and market functioning, especially in hospitality and retail, where delinquencies rose sharply. Investment strategy: patience, cyclicality, and underwriting for 2022+ (Priority: 5/5): Formigli advises layering into opportunities rather than trying to time the bottom, focusing on distressed discounts, sponsor quality, and enough capital to survive until recovery. Population migration and the rise of 18-hour cities (Priority: 4/5): COVID is accelerating migration from large coastal metros to secondary and tertiary markets like Austin, Charlotte, Nashville, Phoenix, Denver, and Raleigh-Durham.

Key Arguments: Commercial real estate value is still driven primarily by demand relative to supply; COVID is simply exposing that principle more clearly. Hospitality suffered the most because occupancy collapsed, while industrial benefited from e-commerce and last-mile distribution demand. Office demand is likely to weaken structurally because companies need more space per employee and many workers will remain remote or hybrid. Suburban office may outperform CBD office because it is cheaper, more accessible, and better suited to post-pandemic workspace needs. Multifamily collections held up through June, but Class B/C assets are vulnerable if stimulus expires and job losses persist. Grocery-anchored retail is one of the few retail categories with durable demand and may offer value because new retail supply is limited. CMBS stress is an early warning signal: rising delinquencies in hospitality and retail suggest more distress ahead, even if bank and agency debt have not cracked yet. The best opportunities in distressed real estate often appear after a basis reset, especially when lower acquisition prices let new owners compete more effectively. Investors should prioritize deals with enough operating runway to make it through the downturn rather than chasing a perfect market-timing entry. The current recession is different from 2008 because it is driven by a pandemic shock to use patterns and demand, not primarily by a financial-system collapse.

Data Points: Hospitality occupancy: 22% nationwide - Low point in early April during the pandemic Hospitality occupancy: 46% nationwide - Recovered level by late June, indicating early-stage recovery but still weak Grocery store sales: roughly doubled - Per-square-foot sales at grocery anchors during the pandemic Apartment collections: practically unchanged vs. 2019 - National Multifamily Housing Council June collection data Multifamily transaction discount: 2% to 8% lower - Price discounts on deals traded since March versus pre-COVID levels Eviction risk: roughly 1 in 5 tenants - Aspen Institute / COVID-19 Eviction Defense Project estimate for end of September absent major stimulus EIDL loan terms: up to $2 million at 3.75% for 30 years with 1 year deferral - SBA-backed direct relief used by hotels in CrowdStreet portfolio assets PPP recipients: hotels and senior housing were the largest recipients - Direct fiscal support helping retain employees during the first three months of the pandemic Additional unemployment benefit: $600 per week - Indirect support propping up lower-tier multifamily collections Main Street lending program: $600 billion - Fed program expected to reach the market later in 2020 Commercial real estate debt share: about 23% - Share of CRE debt issuance last year attributable to CMBS, excluding multifamily CMBS delinquency rates: about 25% hospitality; 20% retail - June delinquency rates, up sharply from sub-5% in March CMBS delinquency baseline: sub-5% - Delinquencies in industrial, office, and multifamily remained below this level in June Office space per employee: about 250 sq. ft. to just over 100 sq. ft. - Long-term density trend that Formigli expects to partially reverse Cushman & Wakefield example: 28 desks reduced to 16 - Amsterdam prototype for a post-COVID six-feet office; 43% density reduction Suburban share of Class A net absorption: 69% in 2019 - Up from a 10-year average of 60%, showing pre-pandemic suburban strength Class A suburban cost advantage: 38% cheaper nationwide - Suburban office compared with downtown office at the Class A level Grocery-anchored shopping center example: $93 per square foot - Salt Lake City deal, far below replacement cost and prior trades near $200 per square foot Grocery-anchored prior trades: about $200 per square foot - Comparable Western U.S. trades in recent years Traffic count example: 66,000 cars per day - Supporting traffic for the grocery-anchored shopping center example Secondary-city migration: about 10% swing in pricing - Roughly 5% pandemic-driven downtick versus expected 5% 2020 uptick without COVID

Pivotal Quotes: "the ultimate driver of value in real estate is demand relative to its supply." — Ian Formigli: Explaining why COVID’s impact varies so much by asset class "Space is the new amenity." — Ian Formigli: His view on how office design and leasing will change post-pandemic "I think we are in a recession, and a recession has to run its course, and markets have to clear." — Ian Formigli: His macro outlook for the next 12 to 18 months

Implications: Investors should expect a bifurcated CRE market: strong industrial and selective multifamily, distressed hospitality/retail, and a reshaped office sector. Best results will come from patient, well-capitalized deals with strong sponsors and realistic hold periods.