TIP368: The Best Opportunities in CRE w/ Ian Formigle

Episode Summary

Executive Summary: Ian Formigli of CrowdStreet argued that commercial real estate has moved from pandemic shock into a growth cycle, though office remains impaired and hotel recovery is just starting. He highlighted migration into secondary markets, the uneven recovery across asset classes, demographic tailwinds from aging boomers, and the need to underwrite climate risk and building quality more carefully.

Main Topics: Commercial real estate recovery after COVID (Priority: 5/5): Formigli reviewed transaction volumes across asset classes and argued that CRE is recovering, but not as quickly as many expected early in 2021. Industrial is constrained by pricing, office remains clouded by uncertainty, while apartments and hotels are showing renewed strength. Office market uncertainty versus industrial strength (Priority: 5/5): He contrasted office's weak price discovery and lingering vacancy concerns with industrial's strong fundamentals, noting that industrial deal flow is slowing mainly because pricing has risen too far for some buyers and sellers are not motivated to transact. Migration and growth in secondary markets (Priority: 5/5): The discussion focused on population and capital flows from expensive coastal metros into places like Boise, Austin, Salt Lake City, Phoenix, Raleigh-Durham, Charlotte, and Florida markets, which are benefiting from affordability and job growth. San Francisco as a tale of two markets (Priority: 5/5): Formigli separated San Francisco's multifamily recovery from its still-weak office sector, arguing apartments are rebounding while office faces high availability, tech tenant uncertainty, and structural obsolescence in older buildings. Remote and hybrid work normalization (Priority: 4/5): He described remote work as settling into a more flexible hybrid model rather than a full return to office, with employers and employees still negotiating the balance and the Delta variant adding uncertainty. Silver tsunami and real estate opportunities (Priority: 5/5): He said senior housing remains challenged by oversupply, low occupancy, and aging-in-place technology, while the more compelling plays are in life sciences real estate and medical office buildings that serve the aging population's healthcare demand. Climate risk and deferred maintenance (Priority: 4/5): Formigli said climate change must be incorporated into underwriting, but emphasized that older buildings also pose risks from deferred capital spending, using the Champlain Towers collapse as a warning for investors to favor newer, better-maintained assets.

Key Arguments: Commercial real estate in 2021 is not uniformly recovering; it is diverging by asset class, with apartments and hospitality improving while office remains structurally challenged. Transaction volume was only roughly flat year over year through May 2021, implying the market was recovering more slowly than early forecasts had predicted. Office deals are hard to price because post-pandemic occupancy, tenant demand, and lease behavior remain unclear, limiting transaction activity. Industrial transaction volume is down not because fundamentals are weak, but because pricing has become so aggressive that buyers cannot make deals pencil and sellers do not need to sell. Migration from California and other expensive metros is strengthening smaller and secondary cities, where incoming wealth and remote work flexibility can quickly lift prices and demand. San Francisco multifamily is recovering faster than its office market; the negative sentiment toward the city is driven more by office weakness than by housing. Hybrid work appears durable, but Formigli expects a gradual drift toward more office attendance than the initial post-pandemic consensus suggested. Senior housing is not the best immediate play on aging demographics because of oversupply, lower move-in ages, and technology that allows seniors to age in place longer. Life sciences and medical office better capture demographic demand because they serve the growing 65+ population through healthcare and medical services, not just housing. Climate risk should be treated as standard underwriting, but older properties may be even more vulnerable due to deferred maintenance and costly retrofits.

Data Points: Total CRE transaction volume through May 2021: $170 billion - Real Capital Analytics data cited for the U.S. commercial real estate market Year-over-year CRE transaction growth through May 2021: 1% - Overall market volume was essentially flat versus 2020 Office transaction volume change: -14% YoY - Office deal volume was down because of uncertainty around post-pandemic demand and pricing Industrial transaction volume change: -15% YoY - Industrial volume was down because pricing rose and buyers stepped away Retail transaction volume change: -7% YoY - Retail volume remained below prior-year levels Apartment transaction volume through May 2021: $63 billion, up 24% YoY - Multifamily was one of the strongest CRE sectors Hotel transaction volume through May 2021: About $1 billion, up 72% YoY - Early signs of hotel market reopening and financing returning May 2021 transaction volume growth YoY: 73% - Monthly volume jumped sharply versus May 2020, which was near the pandemic trough Projected full-year 2021 CRE transaction growth: 15% to 20% vs. 2020 - Formigli's view was below CBRE's earlier 40%+ forecast San Francisco multifamily vacancy: 8.4% - CoStar data for the apartment market during the recovery San Francisco Class A / 4-5 star multifamily vacancy: 13% - Higher-end apartment vacancies remained elevated San Francisco multifamily vacancy at 2020 peak: ~12% market-wide and ~20% for 4-5 star properties - Shows how far the apartment market had recovered by mid-2021 San Francisco multifamily asking rent peak in 2019: $4.10 per sq. ft. - Pre-pandemic rent level across property types San Francisco multifamily asking rent mid-2020: $3.50 per sq. ft. - Rent fell about 15% during the pandemic San Francisco multifamily asking rent by July 2021: $3.90 per sq. ft. - Rents had almost fully recovered by the time of the interview San Francisco office net absorption: -7.3 million sq. ft. - CoStar data showing severe office demand decline San Francisco office rent change: -7.4% YoY - Office rents continued to fall San Francisco office vacancy: 13.5% - Traditional vacancy, excluding sublease space San Francisco office total availability including sublease: ~19% - Combining direct vacancy and sublease space Remote or hybrid work share in Q1 2021: Mid-50% range - Gallup poll cited as workers began returning to offices Remote or hybrid work share in April 2020: ~70% - Peak remote/hybrid share early in the pandemic Suggested workforce mix: 50% full-time, 38% hybrid, 12% remote - Formigli's updated estimate for the evolving office model National rent collections Jan-Feb 2021: Just over 93% - NMHC collection data at the start of 2021 National rent collections Mar-Jun 2021: 95.4% average - Collections improved and remained close to 2020 levels Same period 2020 rent collections: 95.6% average - Comparison point for Mar-Jun 2021 Expected rent collections for rest of 2021: Above 94% - Despite eviction moratorium changes, collections were expected to remain strong 2021 rent growth: 6.2% YoY - Green Street data showing broad rent inflation across the U.S. Fastest rent growth markets mentioned: Vegas, Jacksonville, Phoenix, Irvine, Aurora/Denver metro - Examples of markets with double-digit rent increases U.S. vaccination level by July 4, 2021: Over 60% of eligible Americans partially vaccinated - Used to illustrate the improving pandemic backdrop Daily COVID cases in early 2021: Around 250,000 per day - Context for how severe conditions were at the start of the year Daily COVID cases by mid-2021: Low 30,000s - Evidence of the reopening backdrop GDP growth estimate cited: ~7% - IMF forecast supporting a growth-cycle view Boise metro population: About 750,000 - Illustrates why inflows can move prices quickly in a smaller market Boise population rank in the U.S.: 78th - Shows Boise is still a relatively small metro Miami/Orlando/New York/other hospitality markets: Highlighted as strong recovery markets - Used to explain hotel investment focus Orlando visitors in 2019: 76 million - Benchmark for potential post-pandemic travel recovery New York visitors in 2019: 55 million - Comparison to Orlando's scale Senior housing occupancy in Q1 2021: 78.8% - NIC data showing the sector still under pressure Senior housing supply peak: ~7% of existing stock in 2019 - Oversupply helped expose the sector during the pandemic Average age of new senior housing move-in: 82 to 84 - Shows residents are entering later, which may shorten length of stay U.S. population age 65+ today: ~17% - Statista figure cited for the current older population share U.S. population age 65+ by 2030: Over 20% - Expected growth in the aging demographic Single-family housing price growth: 15% YoY - Used to illustrate the wealth shift and possible homeowner monetization decisions Baby boomer retirement rate in 2020: 3.2% - Pew study cited as a spike in retirements Historical baby boomer retirement rate since 2012: ~2% - Average trend before the 2020 spike Date of Champlain Towers collapse: 2021, building built in 1981 - Used as a cautionary example of deferred maintenance and older construction risk Estimated deferred maintenance cost at Champlain Towers: $15 million - 2018 engineering report estimate Deferred maintenance cost per unit: $110,000 per unit - Based on a 136-unit building Value range of affected condo units: $400,000 to $800,000 - Illustrates why special assessments can be difficult to fund

Pivotal Quotes: "What a difference 180 days make." — Ian Formigli: He used this to contrast early-2021 pandemic conditions with the much stronger mid-2021 reopening environment. "Mobility is what is critical to a commercial real estate market." — Ian Formigli: He argued that renewed travel and movement are central to the recovery of hotels and other CRE sectors. "We are placing our bets predominantly in life sciences and medical office real estate." — Ian Formigli: His view on the best way to capture demographic aging exposure rather than focusing on senior housing.

Implications: CRE opportunities are becoming more selective: apartments, hospitality, life sciences, and strong secondary markets look attractive, while office and older assets need caution. Investors should underwrite remote-work, migration, climate, and maintenance risks more explicitly.