TIP423: Real Estate Update w/ Ian Formigle

Episode Summary

Executive Summary: Ian Formigli argues that commercial real estate had a historic rebound in 2021, led by multifamily and industrial, and believes inflation, remote work, and migration are reshaping opportunity. He favors ground-up development and select niche plays like life sciences, industrial service facilities, and cannabis, while also seeing renewed value in hospitality and retail despite ongoing transition in office.

Main Topics: 2021 Commercial Real Estate Rebound (Priority: 5/5): The market saw a dramatic recovery in transaction volume, prices, and sector performance after 2020, with multifamily and industrial dominating activity and appreciation. Macro Drivers: Liquidity, Supply Constraints, and Inflation (Priority: 5/5): Pent-up capital demand, supply chain disruptions, rising replacement costs, and inflation expectations all pushed CRE pricing higher and supported hard assets. Office Transition and Hybrid Work (Priority: 5/5): Office is moving toward a hybrid model with lower utilization, more remote job postings, and stronger demand in Sunbelt markets and coworking formats. Inflation Hedges and Asset-Class Differences (Priority: 4/5): Formigli explains that CRE generally hedges inflation, but shorter lease durations and faster mark-to-market cycles make hotels and multifamily more resilient than long-term net lease assets. Niche Asset Classes and Emerging Opportunities (Priority: 5/5): Life sciences, industrial service facilities, and cannabis real estate are highlighted as attractive niches with structural demand and potential cap-rate compression. Multifamily, Industrial, Hospitality, and Retail Outlook (Priority: 4/5): He remains constructive on these core sectors, emphasizing development, value-add renovation, recovery in travel, and hidden value in retail due to distorted perceptions. Migration, Sunbelt Growth, and California Outflows (Priority: 4/5): Population and job migration away from coastal metros continues, benefiting secondary and Sunbelt markets while urban cores gradually recover.

Key Arguments: 2021 was a historic comeback year for commercial real estate, with transaction volume and price appreciation surging across most sectors. Pent-up demand from both capital providers and tenants, combined with rising replacement costs and inflation expectations, fueled aggressive bidding. Supply chain and labor shortages increase development risk, especially for construction timelines, hotel staffing, and retail tenant viability. Office is not dead; it is transitioning toward hybrid work, lower square-foot demand, coworking integration, and different utilization by market and industry. Commercial real estate is a strong inflation hedge, but the best performers are those with shorter lease durations or frequent rent resets. Life sciences are supported by demographics, scientific investment, and clustering around research talent and top universities. Industrial service facilities solve supply-chain bottlenecks and can generate attractive yields, making them a favored short-term niche. Cannabis real estate is still controversial but may re-rate materially as financing and mainstream acceptance increase. Multifamily and industrial remain attractive despite low cap rates because development spreads still provide room for profit. Retail is more resilient than headlines suggest because omnichannel retail blurs the line between e-commerce and brick-and-mortar and leaves room for cap-rate compression. Migration away from California and major coastal metros persists, but intra-metro urban recovery is starting in some markets.

Data Points: Total commercial real estate transaction volume in 2021: $809 billion - Overall U.S. CRE deal activity per Real Capital Analytics, cited as a historic rebound year. Year-over-year transaction volume growth: 88% - 2021 transaction volume versus 2020. Multifamily share of deal activity: 42% - Dominant sector in 2021 transaction volume. Multifamily transaction volume: $335 billion - Record level for apartment deals in 2021. Industrial share of deal activity: 21% - Second-largest sector by transaction volume. Industrial transaction volume: $166 billion - Record industrial deal volume in 2021. Hotel transaction volume: $44 billion - Hotels rebounded from near-zero 2020 activity. Office transaction volume: $139 billion - Office also recovered in 2021 despite structural concerns. Green Street CPPPI price increase: 24% - Commercial property prices rose in 2021 across many asset classes. Self-storage price appreciation: 66% - Highest asset-class appreciation mentioned for 2021. Industrial price appreciation: 41% - Second-highest appreciation cited for 2021. Top transaction market: Dallas-Fort Worth - Ranked number one for transaction activity in 2021. Office utilization in top Texas markets: low to mid-40% range - Austin, Dallas, and Houston cited as leading office utilization markets. Office utilization across top 10 metros: 31% - Average office utilization relative to 2019 levels. Office utilization in coastal markets: in the 20s% - New York and San Francisco remained substantially below pre-pandemic office attendance. Remote job postings on LinkedIn: 1 in 6 - Compared with pre-pandemic levels as cited from Green Street. Remote job postings in March 2020: 1 in 67 - Baseline comparison for remote hiring. High-paying jobs that are remote: 20% - Figure from Ladders cited in discussion of persistent remote work. Average U.S. commute time: just over 27 minutes - Used to illustrate time reclaimed by remote/hybrid work. Inflation print mentioned: over 7% - Year-over-year CPI discussed as a concern in early 2022. GDP growth in 2021: 5.6% - Macro backdrop supporting CRE demand. 65+ population growth over next decade: more than 30% - Demographic support for life sciences demand. Private and public capital into life sciences in 2020: $70 billion - Investment supporting the life sciences ecosystem. Increase over previous record in life sciences capital: 93% - 2020 compared with the prior record in 2018. Industrial service facility yield on cost: 8% to 10% - Attractive yield on infill yard/land lease strategy. Cannabis industrial going-in cap rate: 8% - Example deal in the Inland Empire of California. Equivalent conventional industrial cap rate: 3% - Same building/location but with conventional industrial tenants. Multifamily national rent growth in 2021: double digits - Used to justify strong development and value-add economics. National multifamily rent growth in 2022 estimate: about 5% - Expected to moderate from 2021 peaks. Longer-term multifamily rent growth estimate: 2% to 3% - Projected trend later in the decade. Stabilized yield on cost for ground-up multifamily: 6% - Target yield on cost for development underwriting. Typical exit cap for ground-up multifamily historically: 4.5% - Illustrates development spread assumptions. Current implied exit cap for multifamily development: 3.5% - Shows compressed cap rates in 2022. Value-add unit renovation return on cost: 20% - Historical target in 2015-2016 for apartment renovations. Rent uplift per $10,000 renovation: about $165/month - Value-add apartment economics example. Industrial development spread historically: 125 to 150 bps - Older cycle spread between development basis and exit cap. Industrial development spread currently: about 200 bps - Current spread supporting new industrial development. Pre-pandemic hotel RevPAR high: $99.48 - July 2019 benchmark before the pandemic. Hotel RevPAR trough: $15.61 - April 2020 pandemic low. Hotel RevPAR record in July 2021: $99.95 - Unexpected recovery milestone for hospitality. Retail availability rate: 5.9% - Q3 2021 retail availability, a 10-year low. Retail availability prior quarter: 6.2% - Q2 2021 comparison. Retail collections at pandemic depth: 67% nationwide - Illustrates stress on shopping centers during 2020. Retail debt coverage ratio before pandemic: 2.4x - Well-leased shopping centers entering COVID with strong coverage. Retail debt coverage ratio after collections hit: 1.5x - Still sufficient to pay mortgage in the example. California population trend: First decline in 2020 - California Policy Lab data cited on outmigration. Bay Area inbound migration change: 45% fewer moved in from out of state - Compared with pre-pandemic levels.

Pivotal Quotes: "I think it was just a perfect storm coming into 2021 that translated into these rocketing pricing that we saw." — Ian Formigli: Explaining the drivers of the commercial real estate rebound. "The future office looks like it looks more like a multifamily property than it does today." — Ian Formigli: Describing how office design and leasing models will evolve under hybrid work. "Commercial real estate is a good hedge. And commercial real estate is also the largest category of hard assets." — Ian Formigli: Answering the question of how CRE performs in inflationary environments.

Implications: CRE remains attractive, but winners will be those aligned with structural shifts: hybrid work, inflation resilience, Sunbelt migration, and niche sectors with real demand. Core sectors still offer opportunity, especially via development and repositioning.