Sep 15, 2022
Ian Formigle Ian is a real estate professional and serial entrepreneur with over 25 years of experience in real estate private equity, equity options trading and start-ups. Ian is Chief Investment Officer at CrowdStreet, overseeing its marketplace, an online commercial real estate investment platform that has completed over 650 offerings totalling over $25 billion of commercial real estate. Prior to joining CrowdStreet, Ian was VP of Business Development for ScanlanKemperBard Companies, where he managed the firm’s alternative investment platform and served as a senior acquisitions officer. Previously, Ian co-founded and served as CEO of Clarus Property Ventures, a regional real estate private equity firm that focused on multifamily acquisitions. Ian began his career as an equity options market maker and member of the Pacific Exchange
In this episode we talked about:
Useful links:
Book - Rey Dalio “Principles: Your Guided Journal (Create Your
Own Principles to Get the Work and Life You Want)”
Podcast - The Prof G Pod with Scott Galloway:
https://podcasts.apple.com/gb/podcast/the-prof-g-pod-with-scott-galloway/id1498802610
Contact Ian: https://www.crowdstreet.com/
https://www.linkedin.com/in/ianformigle/
Transcription:
Jesse (0s): Welcome to the working capital real estate podcast. My name's Jessica galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. Ladies and gentlemen, my name's Jesse Fraga. You're listening to working capital the real estate podcast. My special guest today is returning guest Ian for melee.
Ian is a real estate professional and C entrepreneur with over 25 years of experience in real estate, private equity, startups, and equity and options trading at crowd street in is the chief investment officer leading the office of the CIO division and is responsible for the overall strategy of the firm. Ian serves as a member of the crowd street, executive management team, and is responsible for the final review and approval of all deals that go live on the online marketplace. He's also chairman of the crowd street advisory investment committee, Ian, how you doing?
Ian (1m 3s): Doing pretty good, Jesse. Thanks for having me back on the podcast. It's a pleasure to be
Jesse (1m 6s): Here. Well, it's great to have you again, and we're just joking before the, before the podcast that not much has changed in the last 12 to 18 months. So this will probably just be kind of retread old, old hat.
Ian (1m 16s): Yeah, exactly. Nothing nothing's changed since February of last year.
Jesse (1m 21s): So for those that, that didn't catch the first episode, although it is, I think at this point close to a year, year and a half old, there's a lot of good information there on the company in general and the market and the outlook at that time. You're more than welcome to check that first episode out. But for those that didn't catch that one for listeners. Maybe you could give a little bit of a background on yourself and then kind of on the company itself.
Ian (1m 47s): Sure. Happy to do so. So my personal background is entirely so for the entirety of my career, it's in investing in one form or the other. I started my career outta college as an equity options market maker. I was actually an exchange floor trader I traded on the, the floor for a number of years. I made market and equity options did that for about six or seven years up into and through the.com bust of 2001 started to pivot into, to commercial real estate.
I should say, really at the beginning, residential real estate buying and managing it, renting it, fixing it and flipping it just like a lot of investors started in the single family space in the early two thousands in the state of California, built a little portfolio, ended up selling that, looking to transition into 10 31. That's what led me into my first four in into multi-family did that for a number of years, all the way up into the downturn build a mil multifamily syndication platform was doing class B and class C garden style apartment deals all over the United States did about 800 doors or so.
And in the downturn, you know, properties were doing okay, wasn't really syndicating new. There was a lot of new deals to be had in 2009, but class B and class C was still hanging in there. And, you know, we were, we were covering the debt, paying the rents and so forth, and then transitioned coming out of the downturn into commercial real estate at the larger, in, you know, institutional scale worked for, with a group for a number of years, doing what we would say is GPLP deals in the large institutional space doing total cap deals from 25 million to 150 million on a single transaction partnering with a lot of household names around the, around the country.
And then that totality of experience kind of positioned me to go join crowd street in 2014, the two co-founders had gotten the platform live and they were looking for somebody to basically serve as the chief investment officer. So somebody who had done a lot of different real estate deals knew how to raise capital, knew how to work with investors and could serve as the arbiter of all the deal flow that they would hopefully bring to the platform over the ensuing years. That was a pretty exciting pitch. I saw the opportunity in the space. I liked what the future of online real estate capital could look like.
And so from my vantage point seemed like a good, a good place to go. And so I joined those two co-founders in the summer of 2014 and joined another, a third kind of another executive. So kind of the original founding for, as we say, to go build crowd street and get it to, to where it is today. So now today, fast forward from those, you know, that first inception of those couple deals, crowd street started off as a couple deals trying to raise a million dollars here or there. Now we've done. I think at this point almost 680 deals, we've raised about 3.6 billion in equity.
We raised 1.2 billion in equity last year. And then we also actually have an advisory group, which you mentioned at the top of the show, which we manage a little over 400 million of discretionary capital on behalf of high net worth investors all over the us. So it's been a fun journey so far, but yeah, my background is always in investing in one shape or form.
Jesse (4m 56s): No, that's great. I appreciate that. Now for those that aren't familiar with crowd street, maybe you could take us into kind of the main business and how crowd street works and, you know, for those interested in more detail, you can always go to the website. There's a lot of great resources there, but yeah. And if you could give kind of a high level overview of crowd street and how it evolved to where it is today.
Ian (5m 16s): Sure. So the crowd street marketplace launched in April of 2014 with a vision to bring institutional type real estate deals, private equity deals directly to individual investors all over the country, you know, coming outta my institutional, you know, CRA background. You know, I saw that a lot of the, a lot of the checks, you know, the, the capital behind the deals that we were doing were coming from, you know, large groups all around the country. And they were assembling, you know, we were looking for equity checks of 30, 40, 50 million.
And so back then you really to get to that size of capital on a per transaction basis, you really had to go to those kind of household names. So the vision was that if you could assemble syndication at scale, that could be the catalyst for bringing the types of deals that would historically go to those institutions. Now you could potentially bring those to the individual investor, but individual investors historically had been capitalizing deals in what we would call the country club model, smaller deals, regionally based, somebody that you knew, or maybe that your friend knew who could introduce you to a small, you know, ground up, you know, development deal, or maybe an acquisition, but typically speaking, you know, in your backyard somewhere, if not in your Metro, definitely in your state.
And so our vision was that if we could build technology around a change in legislation that took place in the fall of 2013, which was that for the first time, since the, you know, basically the securities act of 1933. So the jobs act and title two of the jobs act, which was kicking in would enable the public dissemination of a private equity RegD deal, right? That is what we call that's five oh six rev reg D. And now what was changing was that 5 0 6 C was gonna be coming online and enabling that, that public dissemination or advertising really what it really boiled down to was advertising of a deal.
So advertising of a deal enabled the possibility of a platform to come along and say, well, if we could take a deal and we could now advertise it, we could put it on a website. We could talk about it publicly. That's what really, what you needed to break into online syndication. And then if you could build technology around that, and you could create a mechanism by which hundreds, and then perhaps thousands of investors could come into a single transaction. Now we have a scale that would allow for individuals to come together in large numbers and actually syndicate at record levels numbers that have never been, you know, kind of conceivable before.
So now we fast forward today. And so we, you know, we're still on that journey, but what the crowd street marketplace is doing is it is syndicating at scale in a 5 0 6 C or public dissemination format. The individuals on that platform are on average investing at about $50,000 per individual investment. So it it's more approachable. It's not, we're, we're not, you know, all the way down the road. So, you know, we think that there's gonna be better, you know, accessibility in the years to come. It is today, mostly for accredited investors, right?
So those are investors who have individual incomes that equal $200,000 per year joint incomes that equal $300,000 per year or a household that has a net worth of 1 million exclusive of their personal residents. So if you check one of those boxes, you are by definition accredited investor, that's an S E C definition. That's not a crowd street definition or an industry definition. That's what enables investors to participate on the crowd crowd street marketplace, which today has I think about 17,000 in counting, you know, active investors that are writing checks every day.
And that number grows, you know, there's over a hundred thousand investors that are actively looking at the website on a, on a monthly basis. And as, as I alluded to do earlier, that's, that's the, you know, the vehicle for what is really providing the, the impetus behind that 1.2 billion of equity that was funded last year. And we're growing again this year. So, you know, investors continue to join the marketplace and continue to invest and when they do so they invest on a repeated basis. We're almost up to, I think about seven investments for the average investor.
And we're almost, I think we're in the high 60% range for repeat investors on the platform. So it's a, it's a massive Indi, you know, syndication at scale type platform that powers, you know, deal by deal. So my job is the chief investment officer is to oversee all the deal flow that we bring to the platform. We've looked at, you know, thousands of deals over the last few years. I think our, our advisors went back to 2019 just to say, look, what have we done since then? And that translated into, you know, 5,500 deals and counting, which at this, point's probably over 6,000 that we've actually looked at for contemplation for bringing to the marketplace.
Jesse (10m 12s): So last time we spoke, we talked a about the kind of four major food groups, retail, industrial office, and multi res on the CRE commercial real estate side of things, believe it was February, 2021, where we had that conversation from even just, you know, from then to now, in terms of the, your outlook or your thoughts on these asset classes, how have those changed if at all, and how has that been informed by, you know, what's gone on in the last year?
Ian (10m 42s): Yeah. Well, from February 21 to now, I think there's almost kind of like two periods that we should discuss because there was the February to call it about February of this year period. And then there's been February of 22 to, to now, you know, the beginning of September. So over the course of that 20, 21 period, I mean, when we, when we talked last time, you know, as a platform, we were pretty bullish about, you know, what we saw as momentum coming out of the depths of the pandemic. There was, you know, green shoots kind of all over the place in terms of, Hey, I think we're seeing, you know, demand come back for real estate.
We were seeing capital velocity come back. And that made us optimistic over what that, that ensuing year was gonna look like. And in retrospect, I guess we weren't bullish enough because that the market absolutely ripped as we all saw last year. And if we think about it from like a, each of those food groups, you know, we saw industrial pricing up 41%, you know, on, on a year, over year basis in 2021, we saw multi-family up, you know, over 42, 40 2%. According to RCA, you even saw retail start to bounce back, you saw, you know, hospitality markets start to show some signs of life.
I think the only major food group that was, you know, kind of continuing to languish a little bit was the was office for kind of all the obvious reasons, you know, post pandemic coming back to office kind of keeps kicking the can. And when people are really gonna get back into the office, but you know, really it was, it was a record year when you blended it all together, you know, it was, it was just, you know, it's just a, Sensable up 88% year over year in 2020, over 2020 in terms of volume by RCA. So, you know, I think what, what we saw was we were, we were really optimistic in the multifamily industrial sectors and we were, had some cautious optimism when it came to retail and office.
I think retail kind of came in a little bit, I'd say maybe in line or a little bit better than we thought. I think office was probably the one where it just continued to trade somewhat sideways, but you know, way more demand and way more asset appreciation for industrial multi-family than we had thought going in. So that kind of brings us up to, you know, up into 2022 and then from 2022 of say February or so until now. Well, now what we've seen in the market is kind of the, I'd say it's kind of a two part, you know, adjustment to everything that's going on.
And what I mean by that is, well, the, in the earlier part of this year, what we saw, you know, come through and have to get processed by the market, was everything changing in terms of pricing based upon, you know, inflation, leading to increases in interest rates, leading to decreases in what lenders were willing to do in terms of a loan cost percentage. Also, you know, obviously we're saying we had to have the debt kind of get refactored in through all those deals and when you factor in debt and when debt prices change, there's really kind of two things that need to account for one is the spot price.
So if the rate goes up 50 or 60 basis points, you have to factor that in right now. But what you also have to do is you have to think about on a forward going basis and a lot of deals that we do have variable debt. So when you change the price today, well, really what you have to really think through from a real estate business model perspective is what is that going forward interest rate? And if it, if it come, if it increases today and the expectation's gonna increase a little bit more tomorrow, well then that has downstream ramifications. We had to factor all of those in. So what you were seeing in the early part of this year was, you know, that getting processed through slowed some deal velocity down, it did start to create what I would say is the peel off of some of the, the peak pricing that started to look, you know, more, I would say single digit percentage ranges is based upon our experience and what we were seeing transacting out there.
And then I think as we transition more into the summer period, and now where we sit today kind of coming at the end of the summer is now a little bit more to that that go forward. What do we, you know, what does the future look like? You know, I think from a macro perspective, there was a lot of people earlier this year who were wondering and thinking, are we already in a recession or is a recession happening? Is it about to happen? And then, then some, you know, jobs, data came out to continue to suggest that maybe we weren't in a recession yet, but, and I think that big, but is now going forward, Q4 leading into Q1.
Now there's more credible groups starting to think about, are we about to head into a mild recession conference board, for example, which is a pretty conservative group, they're expecting mild recession by the end of this year or early part of early next year. And so I think what we're seeing now in the marketplace and on a transaction, you know, by transaction basis is that now those expectations of maybe we really are about to go into recession if we aren't yet. And what will that do to demand leading into a little bit of cap rate expansion, as we've seen this year, we've already seen, I'd say call it 25 to 50 basis points on certain deals, 50 basis points being maybe in some of the most, the hottest markets that are cooling off.
And so now what we're seeing is that, that, you know, what was, and a low to single digit, you know, three to 5% kind of price reductions are now starting to look more like five to 10, even 10 to 15, even up to 20% on a, on a kind of one off basis. But again, I think if we see that 10 plus percent price reduction, it's in a market that was probably bid overly bid coming into this year. So I think it's just more of overall kind of a correction, you know, into, you know, into a, a more normalized market.
And I think when we roll it all up, that's kind of what we're seeing is that I think there was too much momentum coming into this year. I think that momentum has now been kind of stopped, you know, kind of cold in its tracks, you know, green, Street's a good, pretty good place for, you know, kind of like when you roll it all up, they have their C P P I, which is their commercial property price index. That's now down, you know, just under 5% of the year from its peak. And I think that's probably relatively where it should sit. And so now on a go forward basis, I think we have more normalized assumptions.
Yes. We can still have rent growth. Yes. There's things are still looking pretty good overall, but we have to get back to much more kind of a sober approach to real estate when coming into this year, the demand was just pretty insatiable.
Jesse (17m 4s): Yeah. And then especially those really high or more expensive markets, you just had this, I, this for the last, I don't know, five, five years where it was just kind of, the pricing started to get a little crazy and you didn't have the, or you didn't even need the, the diligence and the back to principles that underwriting takes. So if, if we go into this trend of, you know, more realistic pricing so that we actually see cap rates expand, which in most markets definitely in this market have compressed for years now, what does that look like from a leverage standpoint?
You mentioned that a lot of what you do is variable debt, but do you find that de-risking in the sense of loan to value? Is, is that something that you consider how much equity is being brought in and then obviously that has, you know, know downward impacts on levered returns. So how do you look at that in terms of lowering or de-risking in the event that we're preparing for, you know, even, even a mild recession by the end of the year?
Ian (18m 2s): Yeah. So I'd say from our standpoint, how we look at it is, you know, it's, it's pretty simple to us that I think that if the market is not gonna grow as quickly as it has been growing, you know, lower leverage ratios overall make, make sense, it's prudent. And so, you know, we look at it from a debt coverage percentage, you know, ratio, right? Like what was our debt coverage on this deal going in and what what's, what do we think we can get to? And how do we make sure that we maintain debt coverage, you know, over the early to mid part of the holding period.
So anything there was, there was this telltale sign. I, from my, my perspective that earlier this year, something was gonna change pretty quickly. And what I mean by that is we, we were seeing these deals show up at the beginning of this year with negative leverage, right? And so for people who are super familiar with what, what we're really talking about is when the going in cap rate is markedly below the cost of the debt, then you're, you're paying more for the debt than what you're getting in unaged yield in the asset.
And what that tells you, if you're gonna, if you're willing to pay, for example, a three cap, but bar with at 4% interest, what, what you're basically betting on and saying is, I think the growth of this asset is so strong, but by the time I get to year two or year three of this asset, I'm gonna have not only just a 4% unaged yield, which by the way, I was buying a 3% unleveraged deal right now, I'm gonna be at a five, five and a half. I'm gonna be in the positive zone.
And, and it's going to take me paying the 3% unleveraged deal today to get this asset so that I can get to that growth. That's that's the negative leverage bet. And so when you, if you were to perpetuate what was happening in 2021, then sure. If you could, if you could do that for two or three more years, I guess that, that would've made sense. Now, my perspective coming into this year is that if we had actually perpetuated what had happened in 2021, even another one and a half years to two years, we were probably in a market condition that would crash because you would just get to simple, you know, levels of unaffordability.
That would be so egregious that every, that you would have this capitulation in the market, that was my personal thesis. So when these deals were showing up, when we were already starting to see signs of deceleration rate, decelerating rates of growth, I should say, you know, but understanding that we were still in a, you multifamily sector, for example, solidly, we were gonna be in the mid to high single digit percentage year, over year growth rates. We felt, but over the ensuing years, we expected rent growth to come down more towards, you know, inflationary, you know, year over year kind of inflationary normalization level is of call it 3% or so it just simply didn't make sense.
Some of the, you know, the, the, when, when capric were starting to trend in a market like Phoenix, for example, below 3% on a, on a going in basis, I just couldn't make heads or tails of that deal. And so I think that's what I, when I thought is like, look, now, now when we were getting into March, April of this year, we were starting to see interest rates really increase when that negative leverage fed was starting to, you know, bump out. And when you get, ultimately my, my opinion is that when you're negative leverage, something's gotta give, you're either gonna have growth in the assets.
That's gonna get you there, or you're gonna have, you know, asset pricing come down and cap rates expand. And so, you know, and, or you're gonna have you're, you're either gonna get to also debt. That's gonna come down in price to meet that cap rate to kind of even things out. So knowing that interest rates weren't gonna come down and knowing that the growth really wasn't gonna be there as we thought, you know, at a level that would really justify it. Well, then the thing that's gonna have to give is that cap rates are gonna have to expand to get back to a more normalized market.
And I think when you bowl it all up, what we felt was, if we're gonna go back to interest rate environment, that's gonna feel more like 2018, then we're gonna have to go back to cap rate's assumptions and pricing, and some other things that are gonna look more normal, look more 2018, like, and that was kind of how we navigated, you know, the early to middle part of this year and, and how we still look at it today. The deal has to make sense in a, in a very normal looking go forward period, even with what might be now, 12 to 18 months of, you know, lackluster rate of growth in front of it.
Jesse (22m 29s): Yeah. And it's a good way for someone to do an initial analysis, just seeing that negative leverage on a deal, or you see some exit cap that, you know, is, or lower than the, you know, the entry cap cap rate. There's a number of different ways that as you know, we can manipulate these models and it's, it's important to make sure that, you know, when you do look at these things, you see the assumptions and if they are, if they make sense, I wanna talk a bit about the, the report, best places to invest. But before we get there, we, we touched on these asset classes and obviously, you know, I'm biased working predominantly in office commercial real estate, but I think it's topical.
The office is one of those, one of the four that is still in this kind of odd place, depending on the market, obviously, but I'd like your thoughts just generally on the, the office market in general, if you think that a lot of us who've worked in this industry saw that the moving to digital or, or more conferencing was more of a secular trend that was kind of going in that direction, that kind of got shoved into that direction. But now with companies like apple and Comcast mandating, some sort of hybrid model and other companies following suit, what's, what's your general thoughts on the office sector?
Ian (23m 42s): Yeah, so my, my, my general macro thesis on office is that it, it's not dead. I do think people are gonna work in offices going forward, but I do think that it will look somewhat different than it has looked pre pandemic. And so to me, office is in this period of transition. And when we, when we roll it up, I do think that if you, if we fast forward to 2025, I think we're back into a more normalized, you know, 20, 20 decade, you know, office market.
And what I mean by that is, is that, you know, do I think that certain types of office are gonna struggle and will continue to struggle? Yes. I think the part of the market that struggles indefinitely is what I would call the class B commoditized office space. The reason I think that there's this transition going on is that, you know, what we've had the benefit of during the pandemic period is the flexibility that we get by being able to work from home and, and, and what that's done for us. Okay. So now when we think about going to an office, when we go back to that office, I do think we, people are gonna wanna go back because working at home while it's very flexible, it's not very exciting.
It is you are relatively in isolation. And so, but if you're gonna go back now, what we got during the pandemic was that time back, if we're not commuting anymore, you know, depends upon where you live and how far your commute is, but the estimates are that on an annualized basis that could translate in anywhere from kind of like two to three weeks to even four, five weeks of time back. So four weeks over the period of a year is a lot of time. So if we're gonna give that time back, I think there has to be something that you're gonna get in, in exchange for going back in.
And I think what you would want to expect. And I think what employers will ultimately need to contemplate giving those employees is a more compelling office environment we're in, and also a more in a hybrid office environment, which is gonna translate into a more hotel type of environment. So when, when I think about how office will change, I do think that it will look like it'll look somewhat different. Like I think, you know, the number of dedicated desks, I think go down, I think the number of flex desks go up, I think that the amount of collaborative space needs to probably increase if we retrace back to 2018 or 2019, and we were jamming a lot of people into offices.
I think my company was an example of that and say, when you ha, when you get down to 110, 120 square feet per employee, and what that office environment looked like, and when we come back outta the pandemic, are you really gonna have that number of employees per square feet? I think the answer is no. I think, you know, we are already seeing the signs of the highly impacted collaborative open office, trying to show signs of weakness in terms of, it was hard to think it was hard to get space, to actually meet with somebody. It, it was challenged in a lot of ways.
So I think that's that to me, that goes away to some degree. So I think there's there's space that will need to be repurposed to a degree, but that space will, so maybe we don't need as much physical space than we thought we used to need, but then maybe there's gonna be like this flex in between maybe if instead, if it was 10,000 square feet of space that we needed before, maybe it will be eight or nine, but that eight, or nine's gonna be very well built out. It's gonna, it's gonna contemplate that 60% of my workforce is gonna attend on a daily basis, but they're gonna filter in filter out, but it's gonna be really nice.
It's gonna, it's gonna allow for the clients to come into the office. It still needs the conference space. It still needs really good collaborative breakout space, and it needs some hotel space. So to me, that's kind of where that, like, I think that is a part of the future of office. I also think that coworking gets blended into this because while there may be these hubs, now, maybe there'll be, you know, there's a little bit more spreading out of the workforce too, but maybe for the people that are in, in the outer stretches, maybe they've moved out of the HQ market and they're working remotely because they could, but they want to go back into an office environment.
And you're now you're two states over from the HQ. Well, maybe you're gonna go into a co-working space with a few of your other colleagues that are in that Metro as well. I think those are all the types of things that come back. So I do think that we get there and why I think that there is this bifurcation that continues to occur in the office sector is if you think about that really nice hotel type environment, great breakout collaborative space, you know, we're, we're now. And we're now thinking about where are we going back into work? Well, we also want adjacencies of good restaurants, you know, good cafes, you know, things that are available, you outside that office building.
I think these are all the things that go into like what the future of office will look like and to get those people back in the office and feeling good about it. It's like, you know, think about the amenity set. So the thing that can fail a little bit is if that office space was that class be commoditized. It wasn't very exciting. It, it had bad light had bad window lines. It was the kind of place that people were, you know, going into just for the price of it. That to me is the thing that will probably continue to languish to some degree, maybe some of that actually gets repurposed.
But when we think about class, a newer property, good window lines, well located and with a host of amenities around it, to me, that's the type of office place that comes back and, or the, you know, and then I think the, the next layer of that is that if you have, you could still have some older office buildings, but they're gonna have to be kind of revitalized to, to be more vibrant, look more newer in class a and if they're in good locations and they can kind of go a little bit more, you know, toe to toe with the class, a space, but at a bit of a discount now, I think you've got that next layer of, of what can be viable in the future.
So that's what I, that we generally look at it. So when we look at deals today, right now in the marketplace, I think we think about it, it, through those lens, who, you know, who are the tenants in place, what is, what is their need on a go forward basis? How, you know, where does this thing sit within a, within a submarket, how vibrant and, and, you know, will that sub, is that submarket today and will it be in the future? And we can get to a, you know, a general thesis that, Hey, this is one of a, an asset in a good location that I think would actually survive in the new office environment.
Then I think we're reasonably bullish, but I do think it, it may take us a couple years to get there.
Jesse (30m 13s): Yeah, no, that's a, that's a great insight. And I think it, you know, we've done over the years, all these utilization studies with different companies and how often we have these large board, excuse me, large private offices that never get used. And how I think as a positive going forward thing, I think for the market would just be healthier, having more efficient space use. And whether that as a total has companies taking on less rentable square F square feet, cuz you know, there's both sides of it spread out more but more efficient and what that actually shakes down to, I think either way, whatever it does, it'll promote a more efficient layout if in fact the workforce goes in that direction.
So in, in terms of the geographies that, that you look at or that you invest in, maybe you could talk a little bit about this annual report, best places to invest that you came up with and yeah. What, what are your thoughts on that? And you know, what was the, the thesis of the report?
Ian (31m 7s): Yeah. So we do publish this report on an annual basis. We've done it for, you know, we're just two years in running. So we'll come up with our third annual publication here at the beginning of the, of this next year. And what we try to do at the beginning of the year is communicate to the crowd street investor community, how we assess the geography of the United States, because as we all know, not all markets are created equal. There are certain markets that are absorbing, there are certain markets that are, that are, you know, vibrant and growing, but then they also have a lot of supply that's coming at the same time.
So what we try to do is we, we first we take a global macro approach. I mean, I think in essence as a, as a platform and as you know, the investments group within crowd street, I think we're we're first and foremost, a little bit of a macro thesis driven platform. Generally speaking, we wanna be in the types of markets where we see job growth and population growth consistently, we see kind of a, a burgeoning and further creation of a there, there, we would say, you know, like, why live here? Why move here? What is the compelling aspects of this location?
Because ultimately like we're tracking, you know, population flows and we're also tracking where do companies want to reside and where companies want to reside increasingly and where those people wanna live to work with those companies. Then you have what we think is basically the underlying fundamental thesis behind why you would want commercial real estate, because we're either looking for something to build, whether that's multi-family and office or strip center, whatever it is, right. We wanna think about where do people wanna be? Where are they gonna live? Where are they gonna work?
Where are they gonna play? And ultimately when there are more people wanting to do that in one in the same location and there's upward momentum in what those people are earning that's when rents grow, that's when properties absorb, that's generally speaking when commercial real estate values increase. So with that said, now we have to break that down to markets. Now for years at crowd street, we have had a, what we call a growing secondary markets thesis. When we think about around the places around the country, and we kind of found our way to this thesis probably around 2017 or so, you know, we were looking at markets like Denver and Charlotte, you know, we were even starting to look at Nashville back then in Austin.
And what we were seeing is these are markets that are attracting people. They're becoming, you know, more mature and more compelling, you know, metros in, in and of themselves, right? They're getting more sports teams, their airports are growing. You know, people are moving, the people are moving, are educated. Companies are coming. Those are all the things that swell around to us create a vibrant Metro. So, and when we were thinking about where do we wanna invest? And again, taking that macro thesis into, into account, we really wanna be in those locations because a lot of what we do is multi-family driven.
We also do some industrial. Those really are driven on like on where people are moving to where, you know, and if we're building a new multi-family building in a given location, for example, we wanna make sure that, that we feel like there's people who are gonna show up, they're gonna lease it. They have the incomes and there's, there's the reason for them being there. So that is translated into, you know, we have, we're also a fan of a market like Orlando. Orlando was a really good example of a market that we thought had a lot of momentum coming into it before the pandemic, we saw that momentum go relatively sideways during the pandemic, but we saw the population growth that was coming there year over year.
My recollection is, you know, was hitting like 2% per year. So we were bullish on Orlando coming out, the pandemic we leaned in last year, we did some multi-family deals. Those are now, you know, those are now leased up at well in excess of what we thought going in. So those are the types of markets. So, you know, for this last year, a Austin was our number one market, right? We were also really bullish and we have been bullish on Raleigh Durham, Raleigh Durham is a market that still stands out to us. Our team actually spent, we had probably 30 people that we spent time in Raleigh Durham just earlier this year in April.
My takeaway from spending a week in Raleigh Durham was that that was a market that you could invest in for the next decade. It's a great place. It obviously has, you know, it's always had research triangle, you've got universities. That's another thing that, that when we think about things are checking boxes for like where we wanna invest, look at that diversity of demand drivers. If you have certain industries that gravitate towards there, if you have research, if you have, you know, and again, if you have top tier research universities, so you've got those in Raleigh Durham in the form of duke and, and, and chapel hill, you know, in other places, we also think about like the, the anchor that you get when you are the state capital.
It's one of the reasons Austin has been a perennial favorite for us is because not only do you have all the tech growth, but you've also got the, the state capital there you've got UT Austin there. There's just the, what we would say is these unfair number of advantages relative to some other cities. Now, again, we, we do have to think about this on a year, over year basis, because what can happen in a year or two is that you can overshoot, we've all seen markets overshoot in terms of supply. We can see overshooting in terms of pricing, right? If, if the market gets so, you know, over zealously bought that, when you start to really think about it from a rational perspective, you say, well, I think this asset in this location is what we would say is price to perfection.
Well then that's when even an asset in a location like Austin can maybe be a bad buy because it's just too expensive for yo the next year or two, six or seven years from now. It probably looks okay, but that can dilute returns. So now when we think about, you know, as we're starting to think about our markets for next year, you know, some things that have stood out to us this year that were a little bit different than last year were that we're seeing some resurgence into some cities that are, that are a little bit larger, you know, one market that also stood out that we spent some time in this year is that, you know, while we were doing an east coast tour a little bit, so to speak, we spent some time in Philadelphia and Philadelphia to us was a market.
You know, we're a little bit focused in an area on the north end of downtown called Fishtown. And then there's another market adjacent to it. And, you know, the vibrance of what's happening in Philly like Philly is, is, you know, it's got a lot of momentum behind it. There's a lot of redevelopment that's occurring. There's a lot of investment that's coming to that city. And I think there's also this, like, you know, resurgence of some of the cities, you know, another market that is, you know, kind of almost, you know, if there's one market out there that I would say that has a bit of a difference from the headlines versus just the data and what it looks like to actually look at the deals is Chicago.
You know, Chicago's got a really bad kind of national rep right now. It's had it, had it had its, you know, share of dislocation during the pandemic. It had some bad news associated with it in terms of the riots and the, and you know, and so forth. But then this year, Chicago office market absorbed 2.4 million square feet in Q2 of this year. That's according to Moody's. And so I think there's this underlying data rents are growing in Chicago, multifamily is absorbing. And like I said, offices absorbing.
So I do think there's a little bit of, of, of resurgence of some of the cities. We're also, we've been looking at deals in New York recently, you know, from, you know, multi-family rents in New York are already back at the highest in the country. And from our perspective, if we can find not only multi-family deals that make sense, I think there's, there's a reason to, to be bullish on the future of multi-family in and around, you know, one, one of the boroughs we're starting to look at office in Manhattan, you know? Yes, the, the, the utilization rate is still low today, but as I always like to point out last time I checked New York is still a world class city.
Every time somebody is called the end of New York and people love to kind of, you know, they, they see weakness and they're like, is this the end of New York fast forward two to three years, everything's back to like record levels of demand pricing and so forth. I think this is the next go around. You know, if we can find, you know, you know, aggressively priced office in Manhattan, we're looking at some deals in the pipeline right now that look very compelling from that standpoint. I do think that again, if we fast forward to 20, 25 and 26, we've got a better office market in New York than we have today.
I think that there's a little bit of a resurgence of some of the big cities.
Jesse (39m 26s): Yeah. I think that's true. And we, we track a lot of this, a lot of the utilization from city to city. And I think a lot of this is going in the right direction. But like I was saying before, it really comes down to getting back to basics and having principled investments and making sure that the thesis aligns with the actual acquisition and, and falling through of it. I wanna be mindful the time here, Ian, but before we, before we wrap up, I would love to get your thoughts on for listeners, unless you've been under a rock for the last few years, you've heard WeWork before you've heard Adam Newman.
He started a founded a new company called flow. So some of you might not have heard of that, but basically I think at this point there was 6,000 or some odd or 3000 some odd apartments that were acquired would love to get your thoughts on the idea of this, because there's been a lot of these venture capitalists that have invested into this company. And for listeners, maybe you could give just kind of a, a brief overview of, of what flow is and yeah. Then would love to get your thoughts on it.
Ian (40m 32s): Yeah. So what was interesting about flow was that, you know, you don't hear a lot about it, there's this one announcement, you know, kind of coming out of, and, and they, and then you hear about the 350 million investment from Inre Horowitz. And, and then when the, the, the press release on flow was somewhat cryptic, but then from a commercial real estate, you know, operator developer perspective, when you you've been around the markets for all, you kind of understand what they're gonna do. And so my perspective on what flow will be is it will be essentially taking a multi-family asset and taking a little bit of like a, taking some of the WeWork philosophy and kind of bringing that sense of community, infusing it with multiple uses, more types of uses probably in, in a flow property than in a standard multifamily.
And if you think you, you just take your kind of normal kind of bread and butter podium deal, right. It's got retail on the ground floor and it's got apartment stacked above and has kind of a rooftop deck, right. And it's got some other amenities on site. So if I think about what flow will do, I think, think flow's gonna do some things first. It, it will bring branding to multifamily and by creating branding, they're gonna create, you know, we've already seen, you know, Adam's been buying properties in Miami and Nashville and, you know, and, and other markets, right? So they're going to now take and brand flow.
I think in multiple cities, they're gonna create this sense of, Hey, you might move from city to city, but stay at a flow property when you move to that next city and how they could incent stickiness in that residential tenant is this idea that they've started to talk about. They're, they're giving clues towards, I think the ability of equity share, right? Cuz they talk about how housing is unaffordable, hard to buy a house house. Now, I mean, we've already seen this, you know, affordability of a house is, you know, up 50 to 60%, you know, in terms of what it's gonna cost you on a mortgage payment from last year.
So if you're not buying the home, but you wanna live in an apartment, but rents keep going up. I think how they could ultimately get to giving some of their renters a piece of the equity pie is from the standpoint that what WeWork already proved they could do is take your normal rent and you can get a little higher rent on a, on a, you know, month, over month basis. And so if you, now, if you equate that to a multifamily property, let's just say, for example, a unit should rent for $2,500, but maybe it rents for 27 50 because now it's flow and they're gonna put some other amenities in the property so forth.
If you can you take that additional $250 a month, which would be $3,000 a year. And even in a five cap, that's $60,000 of additional value in that residential unit that you're getting through that excess rent. So I think the, the part of the thesis here is that you get more rent than you would otherwise. So I think flow in my opinion will be based on over market rents, which then could create additional value at the property level.
And if that pie grows by that $60,000, in my example, that's what you could give to some, to, to the resident in some share. Now the share part, I think will be interesting because my, again, my personal thought and I have no other reason to then my personal opinion to think this will be the case is that if I was gonna create a, an equity share program, I would make it vest over time. Just like you would do stock options. Yeah. So whether it's four years or five years, my, my model, if I'm Adam and I'm creating flow right now, I'd say we're gonna charge above market rents.
We're gonna fully monetize these properties though. And we're gonna bring more sense of community to them. We're gonna put, you know, communal gardens up on top. And remember Adam grew up on a kubutz. And so I think the idea of bringing that, like kubutz type living to a modern class, a multi-family building in, in a Nashville or, or a Miami, there could be a possibility there, but then I would, I would make that resident stay at the property for four or five years, or if they moved, moved to one of my other flow properties to continue to have that registered, you know that, or I should say that meter run.
And then if you live there for five years, then now you're creating towards equity share. And if you think about it, if you did that, now you have better occupancy probably than market standard. If that market is a 94% occupied submarket, you could probably occupy your, you know, operate your building at 96 or 97% occupancy because you have this really sticky tendency. That's either living there to keep a creating towards equity share, or if they move, they're moving into one of your properties relative to the property down the street.
Because if I've lived in a flow property for two years or three years, I have that like equity share light at the end of the, you know, the tunnel. And, and if I'm gonna go move to Nashville from Miami, I'm more likely to go move to flow. Because if I live in flow for two years in Nashville, I'm in the money. And maybe that additional $60,000 of, of, of, you know, equity value in that property. That, in my example, well maybe now I get 20,000 of that or 30,000 of that, like you could actually give own, you know, the renters, some ability to participate in some of that app side and the how and the so forth.
I mean, this is probably where they they're, they're gonna have to get a little bit more nuance because you know, now if we're really gonna monetize that and give it to the resident, theoretically speaking, you're typically selling the asset or so forth, my thought is, there's gonna be maybe now, now you're basically earning some, you know, you could, you could theoretically be earning some, like rebates back on that. There could be point systems. There could be a lot of stuff that you could do there. But I think that there's these subscription laws, cuz if you roll it all up, if you think about communal living, what kubutz has been, how you would, you would create like, you know, rewards point systems look at airlines and other things, right.
We could create stickiness in multi-family that hasn't quite happened in the way it has before. And if you could brand that, which that's what Adam's really good at. I mean, whether WeWork was a success or failure in your mind, what he, what he created was brand. So I think if you, if you take flow, you create brand, you create, you know, a, a populace of residents who are gonna be excited about what that's gonna become. There's some sort of idea behind that you could create something that would have value on a per unit basis, more than what's been created before.
Jesse (46m 59s): Yeah. It'll be fascinating to see how it rolls out and you know what or not, perhaps they go tokenized, if you know, crypto has a, has a piece of that action yeah. Remains to be seen, but no, that's great. So Ian, I think last time we already ran through the fi the final four. So maybe just to wrap up here, you could give listeners just a little bit of, you know, what are you kind of resources in terms that you're, you're finding useful right now, whether that's online podcasts, books that you're reading, maybe you could leave listeners with something and then we can, we can tell them where, where they can connect with yourself or crowd treat.
Ian (47m 38s): Sure. Let's see. Book I'm reading right now is Ray Dalio's latest book. I will, I, I think Ray Dalio's is a, you know, hugely insightful investor. So I'm always gonna pay attention to what he's saying. I'm going when it becomes available. I am definitely going to read David Rubenstein's new book coming out about, he's actually interviewed some other people about investing on podcasts. I love the insight. I'm a, I'm a regular listener of Scott Galloway in his prog series.
He's also got prop G markets, which I think has been hugely helpful to somebody like me, right. Who's always, always thinking about, I've been listening to the prop G podcast because, you know, Scott Galloway's insights into how he looks at, you know, entrepreneurship and markets and so forth. But now it's really, there is a, there is a segment on a weekly basis that is focused on markets that I think actually speaks a little bit more directly to what I'm trying to equate to in the commercial real estate market. So I think that that stands out. I'm also, I'm a fan of Lee Walker. I'm Al always gonna listen to his podcasts.
He's got great guests on a weekly basis. Those are some that stand out to me. I'm I'm, but I'm, I'm consuming stuff on a daily basis. And I'm just trying to look for, you know, intelligent people out there who have, you know, thoughtful insights and are trying to stitch together, all this kind of data out there. Because I mean, as we all know right now, what's hap we continue to proven to be in this, you know, unproven kind of uncharted territory, short term on what, what we're doing and what's happening. Obviously what the perception coming into this year is so different than where it sits now is the fact that nobody's figured it out.
And so I think the, the more that different data sources, we can all gain insight from the better chance we have at making reasonably informed decisions. And to me, that's just what it's about.
Jesse (49m 27s): No, that's great. And in terms of the aside from crowd street.com, is that the best place to, for listeners to check out or are there other locations that, you know yeah. Aside from a simple Google search
Ian (49m 39s): Yeah. Crowd street.com is, is a great place to just begin anybody who's interested. There's a lot of information on that website. There's a lot of education you can go to. You know, we're always posting on our LinkedIn site and on different forms of social media, you can go to our, our Twitter feed. I think there's just a lot, there's a many different ways that you can engage with the crowd straight newsfeed. And also, if anybody wants to reach out to me, you can always find me on LinkedIn. I'm the only Ian for Meley on that platform. Happy to chat with investors, as you can tell, I always love talking about deals.
Jesse (50m 12s): My guest today has been the only Ian for Meley Ian. Thanks for being part of working capital.
Ian (50m 17s): Thanks, Jesse. Pleasure to be here again. Look forward to the next one.
Jesse (50m 24s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you like the episode, head on to iTunes and leave us a five star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E. Have a good one. Take care.