TIP337: How to Identify Value in Commercial Real Estate w/ Ian Formigle

Episode Summary

Executive Summary: Ian Famigli argues that COVID created extreme dispersion in commercial real estate, with winners like industrial and manufactured housing and losers like retail and hospitality. He expects easy-money policy and inflation to lift hard-asset prices, while behavioral shifts in remote work and e-commerce will reshape office and industrial demand. He remains bullish on secondary and mountain markets and sees selective opportunities in beaten-down assets.

Main Topics: 2020 Commercial Real Estate Performance (Priority: 5/5): Ian breaks down 2020 returns by asset class and shows how the pandemic produced unprecedented dispersion across sectors and locations, especially when leverage is considered. Money Printing, Inflation, and Asset Prices (Priority: 5/5): He argues that massive liquidity injections and low rates are supportive of commercial real estate values, especially as rents rise and cap rates stay compressed. Behavioral Shifts: Office and Industrial (Priority: 5/5): COVID accelerated hybrid work and e-commerce adoption; Ian believes office demand will be reshaped but not destroyed, while industrial demand remains structurally strong. Secondary-Market Thesis and Population Migration (Priority: 5/5): He says pandemic-era migration toward Sun Belt and mountain markets strengthened CrowdStreet’s conviction in 18-hour-city investing and secondary markets. 2021 Market Rankings and Best Cities (Priority: 4/5): Ian shares CrowdStreet’s top 5 consolidated markets for 2021 and compares them with Green Street’s rankings, highlighting Raleigh-Durham, Austin, Phoenix, Salt Lake City, and Dallas. Asset-Class Calls: Hotels, Senior Housing, Retail, Self-Storage (Priority: 4/5): He revisits what was 'not a buy' pre-COVID, what is attractive now, and how consolidation and repurposing may create opportunities in retail and self-storage. How Private Real Estate Deals Make Money (Priority: 4/5): Ian explains multifamily cash flows through operating distributions, refinancings/return of capital, and sale proceeds, illustrating how private CRE returns are built.

Key Arguments: Commercial real estate in 2020 was defined by unprecedented price dispersion: sector, geography, and leverage dramatically changed outcomes. Industrial and manufactured housing were the strongest sectors in 2020, while retail and hospitality were hit hardest; leverage amplified both gains and losses. Massive 2020 monetary stimulus and low-rate policy likely create upward pressure on CRE prices by boosting rents and compressing cap rates. Fiscal stimulus helped stabilize apartments and distressed sectors by supporting rent collections and operator cash flow. Office demand will change, but hybrid work does not necessarily imply a proportional reduction in total space needs because hoteling, distancing, and redesign raise square footage requirements. E-commerce adoption is likely permanent and implies significant incremental demand for industrial real estate, with the U.S. still underbuilt. COVID accelerated migration away from large coastal markets and toward Sun Belt and mountain secondary markets, reinforcing the 18-hour-city thesis. Many downside markets like New York and San Francisco are partially priced in, but recovery should occur faster once stabilization is visible. Upside secondary markets such as Boise may take longer to reprice because institutional capital has not fully arrived yet. Hotels remain high-risk but potentially highly attractive when bought at deep discounts because the sector suffered a uniform and historic shock and should recover as travel normalizes. Senior housing remains challenged near term due to prior oversupply, but demographic tailwinds make it a future buy. Retail will likely consolidate around best-located, grocery-anchored centers, while weaker assets may be repurposed into self-storage, last-mile distribution, or multifamily.

Data Points: S&P 500 performance in 2020: +16.26% - Used as a benchmark for comparing broader market performance during the pandemic year. MSCI US REIT Index performance in 2020: -7.5% - Proxy for public REITs; cited as an unlevered comparison point. Green Street CPPI overall 2020 return: -8.2% - Unlevered private U.S. real estate price index across asset classes. Industrial property price return, 2020: +9.5% - One of the strongest private real estate sectors in 2020. Manufactured housing price return, 2020: +11.5% - Another top-performing asset class during the pandemic. Retail property price return, 2020: -20.7% - Shows severe distress in retail real estate. Hospitality property price return, 2020: -25.1% - Illustrates the worst-hit major property type. Apartment price return, 2020: +3.4% - Blended national apartment performance on an unlevered basis. Leveraged return multiplier assumption: 2.5x - Based on assuming 60% leverage applied to unlevered returns. Industrial leveraged return, 2020: ~24% - Approximate leveraged result using the 60% leverage assumption. Manufactured housing leveraged return, 2020: ~30% - Approximate leveraged result using the 60% leverage assumption. Retail leveraged return, 2020: -51.6% - Approximate leveraged downside under 60% leverage. Hospitality leveraged return, 2020: -61.6% - Approximate leveraged downside under 60% leverage. Pre-COVID remote workers: 6% to 8% - Baseline share of office employees already working remotely before the pandemic. Desired fully remote workers after COVID: 10% to 12% - Estimated share of workers who want to remain remote indefinitely. Hybrid workers share: 28% to 30% - Estimated share wanting hybrid arrangements. Example office space density pre-COVID: 125 sq. ft. per employee - Open office format used as a baseline example. Hybrid office space density estimate: 150 to 175 sq. ft. per employee - Estimated requirement to accommodate hoteling and spacing in a hybrid environment. E-commerce share pre-2020: ~12% - Share of total retail sales coming from e-commerce entering 2020. E-commerce share during 2020: 17% to 18% (up to 20% by some sources) - Pandemic-era spike in online retail penetration. Projected e-commerce share by 2030: ~30% - Long-term expectation for total retail sales via e-commerce. Industrial space undersupply: 100 million to 200 million sq. ft. - Estimated current shortage implied by e-commerce growth. Additional U.S. industrial space needed by 2025: 1 billion sq. ft. - Estimate cited from GLL for future industrial demand. Apartment collections at national level in Q4 2020: >93% - National Multifamily Housing Council data showing strong rent collections despite forecasts of a drop. U.S. population migration example: 8x more expensive - One-way U-Haul rental from San Francisco to Phoenix versus reverse, showing net migration direction. Orlando annual visitors at peak: ~75 million - Used to illustrate hospitality rebound potential; larger than New York's ~50 million cited in the discussion. Hotel occupancy drop by April 2020: 80% - Nationwide occupancy collapse in hospitality during early pandemic. Green Street hospitality recovery forecast: By 2024 - Expected full recovery to 2019 revenue levels. Potential hospitality recovery timing: By 2023 - Ian suggests recovery could happen faster than consensus. Average age of new assisted living resident: 81 to 83 years old - Used to show senior housing demand sensitivity to small demographic shifts. CrowdStreet 2021 top 5 markets: 1 Raleigh-Durham, 2 Austin, 3 Phoenix, 4 Salt Lake City, 5 Dallas - CrowdStreet’s consolidated market ranking for 2021. Green Street top 5 markets mentioned: Raleigh-Durham, Denver, Charlotte, Austin, Phoenix - Benchmark ranking discussed earlier in the interview. CrowdStreet top-20 rank examples: Denver #13, Charlotte #11 - CrowdStreet’s relative ranking versus Green Street. Boise population: ~750,000 - Used to explain why Boise may still be off institutional radar. Average private multifamily hold period: ~5 years - Typical holding period for CrowdStreet multifamily investments. Typical initial annualized distributions: 3% to 5% - Early operating cash-flow distributions to limited partners in a multifamily deal. Potential refinance return of capital: ~50% of original equity within ~3 years - Example of tax-efficient capital recycling in a successful multifamily investment. Illustrative multifamily deal return: Mid-teens annualized IRR - Hypothetical five-year private real estate deal performance.

Pivotal Quotes: "I think the key theme for commercial real estate performance in 2020 was just simply unprecedented price dispersions that was driven by the effects of the pandemic." — Ian Famigli: Explaining why 2020 returns varied so sharply by property type and location. "Over 20% of all dollars now in existence were created in 2020." — Ian Famigli: Making the case that liquidity and easy money will pressure asset prices upward over time. "I see two primary behavioral changes coming out of COVID that I do think have substantial effects on the commercial real estate market. And they're in the office and industrial sectors." — Ian Famigli: Framing the most durable pandemic-driven shifts affecting CRE demand.

Implications: Investors should focus on asset class, leverage, and location rather than broad CRE labels. Winners are likely in industrial and select Sun Belt/secondary markets, while distressed sectors like hotels, retail, and some office assets may offer opportunistic entries if priced for recovery.