Capital Calls and RESCUE Capital

A guide to thriving during the coming real estate crash for real estate syndicators and their investors.

Darren Powderly, Co-Founder CrowdStreet

The Impact of Coronavirus on the Commercial Real Estate Industry

Today's Guest Darren Powderly

Today’s special Day in the Life of C-19 episode is a critical one for every commercial real estate developer to hear. Joining me is the Co-Founder of CrowdStreet, Darren Powderly. 

Crowdstreet recently announced they had crossed over the $1bn barrier in equity raised. In his position running Crowdstreet, Darren probably see more sponsors, deals and investors than anyone else in commercial real estate and so is perfectly situated to discuss how the current coronavirus panic is impacting the industry.

Our conversation ranges from the proper ethics of CRE developers during this strange time to what exactly every investor needs to know to make it through this downturn in one piece. It’s a practical, pragmatic conversation that largely dismisses the hypotheticals in favor of what you can actually do today to cope with and ultimately succeed during the COVID-19 pandemic.

What You're Going to Learn


  • A Strategic Plan for Communication During COVID-19
  • Balancing Profits with Humanitarianism During the Coronavirus Crisis
  • The COVID-19 Impact on CRE Development
  • Crisis Communication Advice for Real Estate Developers
  • How Coworking Will Fare Post Coronavirus
  • Key Characteristics of Best-In-Class Real Estate Sponsors
  • Professional Advice for CRE Sponsors During COVID-19
  • What Real Estate Investors Need to Know During the Coronavirus Crisis
  • And much more!

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Show Highlights

A Strategic Plan for Communication During COVID-19

Adam: How are communications in the industry changing during this crisis period or this period of crisis? Let's start with how CrowdStreet is changing its communication patterns.

Darren: That's a key question. I mean, the common knowledge is to over communicate during times of distress or crisis such as we're experiencing today, with COVID-19. CrowdStreet was fortunate to have some contingency plans in place prior to this current crisis. We did not have an epidemic plan in place, but we did have a contingency plan in place. We're also a high tech company. We have a distributed workforce throughout the United States. And we have, you know, a bunch of great tools. We use Slack and we use all of Google Docs. And, you know, most of us have laptops and we work all the time. And so we work wherever we are. But we do have one hundred and ten people, most of which are based in Portland, Oregon. And so we started to roll out our contingency plan within the team itself. And so I'm addressing your questions first, starting with CrowdStreet Inc. and taking care of our people. And of course, all of our customers are owners, commercial estate owners. We call them sponsors. And then all of our individual investors. We have ninety thousand individual investors. You know, I'm going to get to them in a second and I'm going to get to the industry as a whole.

But like, you know, what I think was is really critical, and what we've been very encouraged with is that a number of customers and commercial real estate owners had similar contingency plans. Right? And so we kind of phased ours. We said optionally you can work at home. And here's the criteria. Right. And here's the work-from-home best practices. We want you to feel comfortable. We want you to feel healthy in a safe environment. And then the next week was we're going to recommend that everyone work from home. And then one week after that, it was the office is closed and nobody's coming in. And we did, you know, deep cleaning of the office and so forth. Nobody's allowed in the office today. And what we're saying that roll out with all occupier's, commercial real estate occupiers, across the United States right now, is that they're doing similar things. And landlords, we're coaching our landlords. We're expressing best practices across a wide variety of elements in the real estate business right now. But one of the things is that we're all in this together. Right?

If there's a silver lining of COVID-19, Adam, it is that we are all in this together. There's no villains here. Right? I mean, we're all just trying to deal. So, landlords take care of your occupants. Take care of your tenants. Take care of your employees. And so, we're trying to do our best as teachers, as a really good resource, you know. We're not selling anything right now. We're just here to service our community of real estate owner operators and individual investors. And the other participants that we're in. We're doing a ton of communication. So, yeah, it could be everything from, you know, like simple things like use hand sanitizer. But of course, that's like a no brainer. Right. But but there are other more complicated things like, you know, currently processing the stimulus package announced two days ago, tomorrow, apparently being signed in, a two trillion dollar complex, biggest in the history of the United States. Who's interpreting that? Well, we are. We're helping interpret these complex, you know, developments, right, that are critical that the two our individual investors, to our landlords and helping them communicate to their occupants as well.

Balancing Profits with Humanitarianism During the Coronavirus Crisis

Adam: Tell me something about what you're seeing sponsors are doing in terms of the way they're communicating differently.

Darren: Yeah, well, so they're trying to, you know, every occupier's in a different situation. Right? Clearly, retail and hospitality, just getting clobbered right now. Just absolutely clobbered. You're gonna deal with your retail tenants in a very different way than you're going to deal with, say, an industrial tenant that might actually be experiencing an uptick in their business because they're the last mile to home delivery. And that's in demand right now as people are in self-quarantined situation. So I think that it really depends on who your audience is. If you're a landlord and trying to determine, is my occupier, my tenant going to be able to pay rent? Right. How should I deal with them? It's still a, obviously, for-profit business. If you're a landlord, you're you're in this business to, you know, make profits. But it's also, in this humanitarian crisis, you know, they are, you know, going above and beyond, probably like I've never seen before. But they're definitely all asking questions. And, you know, today's questions are like, OK, have we studied the stimulus package? Right. Three days ago, the question was, is this stimulus package gonna be passed? Well, here we are. Well, we got it, right. And there's a ton of information to dissect. Right.

Thankfully, the package is going to include a lot of relief for the real estate industry. Right?

Whether that be rental relief or, I've heard actually a state basis, I've heard no more evicting tenants during this time. The landlord cannot evict their tenant. Right? So thankfully, there's some rent relief in there and there's payments directly to individual investors. Right. And then there's mortgage relief as well, either pushing out the mortgage payments that a landlord needs to make. Obviously, they're not getting rent. How are they going to make their mortgage payments, right? And you're seeing this not only from little mom and pop tenants. I just saw the other day that Subway, the most popular sandwich shop in the United States, has came out unapologetically and said, we're not going to be paying rent in full on all of our stores.

And, you know, so it's with the most stable tenants all the way down to normal, everyday people.

The COVID-19 Impact on CRE Development

Adam: Now, as you are reigning in your sales efforts in order to shift to more of a servicing and support orientation, right, to help the community you have, in what way are you seeing sponsors doing the same thing? Are they still trying to raise capital or are they adjusting... how are they changing things up as far as their investors are concerned as well?

Darren: Yes. So this happens so quickly. Obviously, a record 30 day plunge in the stock market. Everyone just  being sort of dumbfounded about how fast this all took place. So what we have heard from our participation in the market, and we've been just like doubling down on communication ourself, seeking to understand what the activities are, whether it be from tenants or owners or lenders, right. What's going on in the debt markets? What we've heard, a couple of themes is that the deals that we're in process are still, you know, heading toward getting closed. Right. So lenders aren't saying, well, well, you know, I was going to do that loan for you, Mr. Buyer of Real Estate, but now that COVID hit, I'm pulling out. We've seen less of that. We've seen some of that. Wall Street Journal just announced a very large deal in Manhattan that fell apart. It was an $800 million deal. And Deutsche Bank pulled out, right. So, it's not like it's completely absent in the market. But for the most part in the middle market, we're seeing deals that they're continuing to close.

I did just hear about another deal today that it was more so that the buyer had less confidence closing because of the COVID impact, the leasing and so forth.

And so they went to the seller and said, we need more time. We need 90 more days. And so that's another theme. Deals that are still alive but aren't at the finish line of closing now, everything is being delayed 30, 60, 90 days. Give me more time to interpret what is happening here. And of course, sellers have that option to say, well, there's no other buyers at all. So there's not there's not a new buyer. So I'll give you the extra 90 days, Mr. Buyer. And we've seen a little bit of price negotiations, I think, across the United States, right now. I anticipate it to increase more in terms of buyers, you know, retrading or buyers coming in at lower prices than what the seller was asking for. So the bid ask spread is going to continue to increase, I think, as this as this downturn continues to last. But but delaying rather than killing is is it is a theme in deals. And then also price negotiations, probably in that five to 10 percent range right now. But we really still obviously don't know how this stimulus package is going to help landlords and occupiers of real estate.

And that's going to become evident in 60, 90, 120 days.

Crisis Communication Advice for Real Estate Developers

Adam: I'm interested to know what you are seeing and what you think based on your, you know, aggregation of all these sponsors, what you think is being done well.

Darren: We have hundreds of what we call institutional quality, commercial real estate owners, operators, developers. Right. And these are larger firms. These are some of the best firms in any given city across United States. We sent out a best practices e-mail. We said in addition to giving the you know, everyone wants to know health and safety. OK, get that out of the way. It's number one. It's tjhe reason why we're doing this lockdown. Right. Is for the good, you know, the moral choice that we've made to lock down and suffer this sort of economic impact. And then get down to business. Right. What were your business continuity plans? What are you doing right now to implement the business continuity plans? At the operating company level, right. As well as that as that property entity level. Those are two different businesses, right. There's the mothership business, which is the sponsor company. And then they have entity levels for each property that they own. What are you doing in there? Distributions, right. Are the distributions going to be suspended or temporarily paused? Right. We assume that they are in almost every case. It doesn't matter if you own a hotel that's 5 percent occupied today or you own an industrial building that's leased to Amazon. Probably the Amazon leased building doesn't suspend distributions because it's on a long term lease and that thing just keeps going up 3 percent annually every year and it's never even going to record this massive V-shaped, hopefully it's a V-shaped, recession that we're in. So talk about distributions. Right. Investors want to know. Investors want to know. OK. Clearly, your business plan is going to be impacted.

What's the new plan? How has the business plan on the property changed? Right. And also, you know, tell us about what is going to happen with the cash burn at the property level entity. Does this mean that I'm going to have to be part of a capital call? In real estate, private real estate, when the reserves run low, who funds the gap? The investors do. They get a capital call. Well, investors don't like surprise capital calls. They don't like capital goals at all. They hate surprise capital calls. So we're coaching the sponsor to say if in fact, you run, you're running a higher cash burn, which you most likely are in today's environment. You know, what is this sort of capital call scenario when it's going to happen? Do not surprise investors. They need to prepare for it, right. And then there's a number of other things like right now we're in tax season. And the tax, you know, filing was delayed, but it had it not been delayed, and the delay itself is a form of communication, we have to all get on the same page, especially with our investors. But the sponsors now have more time. They're going to have more time to issue the ones. How are they going to communicate to K-1s. Another benefit of having an online platform and sort of a work flow that is all digital is that we didn't issue those K-1s in the same format that we had before and monitor exactly which sponsor has or has not updated their K-1, just as an example since it is typically tax season this year.

How Coworking Will Fare Post Coronavirus

Adam: So, it's interesting you say that because, look, I understand that WeWork has had its problems already, but this whole complete shift, working out of your house. Now everybody's working remotely. It seems to me that we might actually come out like that. Not necessarily working out of your house, but not having to commute to an office. But you still want to be around people. So one area that seems like it might be a growth industry is co-working, where you can go somewhere super close, work with people who aren't actually in your company. Is that, I mean, just a personal opinion, what do you think?

Darren: I mentioned the coworking because I think that, you know, that, you know, WeWork is probably in some trouble right now, unless they totally restructure everything. But I actually like, I love the experience of WeWork. I've been in many of them all around the United States, and I love the experience. I personally work out of a co-working facility. And so I'm flexible.

I work from my home some days, but most often I'll go in for to a co-working facility. You know, Portland, our office and Portland is like a traditional office space. But we're growing so rapidly. We have needs, you know, flex space and so forth.

I think it's absolutely a trend that's here to stay. But I do think that the credit worthiness of some of the biggest players out there are going to be impacting banks' abilities to loan. And we'll start to see some cap rate impact or valuation impact for buildings that are, sort of, primarily, you know, or a majority co-working tenants in that building.

So it's just going to be an interesting change. I think also, you know, it'll be interesting to see. Real estate leases are still somewhat inflexible. They don't really react well to the market, you know. So they don't expand and contract as much. You know, you're locked in a five and 10 year leases still. And that was one of WeWork's biggest benefit, why companies like can we work. And it totally makes sense, actually, because, you know, traditional old school, you know, five, 10 year leases, they're almost always being renegotiated in another term. Like almost everyone is unhappy with their lease, if you're on a 10 year term, unless you're a big Fortune 100 company.

Key Characteristics of Best-In-Class Real Estate Sponsors

Adam: Right now, for investors, is a tremendous opportunity, actually, to identify best-of-class sponsors. Why? Because during an upturn, when the market is on a roaring bull market, it's hard to miss. Right now, when the chips are on the table, I don't know how many metaphors I'm going to mix, but, you know, when the times are tough, it's a great time to really see how the strong perform. And a great time to think. So getting back to communication, how are the best sponsors showing their mettle right now?

Darren: Right. We have a great group, multifamily group in Chicago and they had a business continuity plan in place. It has been extremely smooth. You know, they've been over communicating exactly what's happening. They told people that they had a continuity plan. They're just implementing it now. It is helping, people will remain calm. They are sending financial updates on the property. They have, you know, ceased distributions. But that's a responsible act. And I think that's, we'll continue to see those. They're a really strong sponsor. And you're totally right, is that like, you know, it's these times that test, you know, who is the truly best in class, real estate, we call them sponsors, but the owner, operator, companies. And and who is, you know, just enjoying the ride. Right. You know, the good times. And really, doesn't have what it takes to survive during a downturn. As I said, I've been through three of them. And my business partner, Tore Steen has also been through three of them. We have a fairly seasoned, let's call it, old, might be another word, but a fairly experienced executive team. But, you know, when we look at sponsors, and they have to apply,as you probably know, they have to apply and the bar is very, very high and they have to be accepted. Right. We look at new sponsors coming on the CrowdStreet partners as they apply, we look at their application and we offer an acceptance to them. And then we enrol them to our online fundraising program. And they can get kicked out at any time if they misbehave. Right. You know, if they have done one or two deals with us in the past and we're monitoring their updates through our asset performance department and they're just like, they're off. They're off on what they told the investors they would perform with then, you know, they get kicked off the marketplace.

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Professional Advice for CRE Sponsors During COVID-19

Adam: Best advice that you could give today for sponsors. And then I'm gonna ask you the same question about investors. Just sitting here today knowing this is a moving target, what's your advice to sponsors today?

Darren: Well, sponsors are in a wartime situation. They need to be around the board meeting even if it's a virtual board room, right, via Zoom, which which it is. None of our sponsors are going into the office for responsible purposes. But they need to be, you know, every morning the decision makers at the sponsors, and we're usually talking about a partnership or a team. Sometimes it's led by a certain family member, but they need to be in the office every single morning tuned in to, you know, what's going on at the operating level. You know, how they follow through in their contingency plans? What's going on at his property level? They need to be interpreting the reports that they're getting from their asset and property managers. They need to be leaning on those professionals. They need to be, you know, getting the best advice possible from those third party professionals that they decided to hire in the first place. And that's what's best in class sponsors do, obviously. They surround themselves with the smartest, best service professionals in the industry. Now is the time where they earn their dollars. This is the time they earn their fees. And everyone's fees are going down right now because rents are going down or people are paying their rent. But they're around the table at the boardroom level. They're getting debriefed on everything on a daily basis. They're turning around and they're taking action. That's actually before they're communicating back to the investors, then they're taking action all day, every day on whatever they can do. Many of them own their own property management teams. They might have hundreds of employees. They got employees at every property. We're in different cities around the United States. They are taking action at the proper level for whatever they can do. They're communicating with their lenders. That that's like a key group. If you are gonna get some relief from your lenders and maybe that the stimulus package is going to provide additional relief. That's key. No surprises from your lenders. And then, of course, after all this action is in place, they're doing the right things for their properties, for themselves and for their investors. And one of the nice things about private real estate is there is an alignment of interest, or at least there should be. The deals you see on Crowd Street, we talk about that alignment adventures. They have their own skin in the game. They have their own money in the game. And they're also managing third party capital from investors. So communicate to their investor community.

Exactly right. All this advice that you're giving to sponsors, make sure that you communicate what you're doing for your investors as well in real time.

What Real Estate Investors Need to Know During the Coronavirus Crisis

Adam: What advice to give for investors in these interesting times during which we live?

Darren: Real estate's a long term investment. In the last 30 days, the stock market has dropped 30 percent. It's the thing I like about real estate and the reason why real estate is a different investment than publicly traded stocks is that it's a long term investment. Not to say that real estate is not going to go down in value throughout this downturn, but I think it's during a time of stress or economic stress and recessions, you have the ability to look at different asset types and different managers and you have the opportunity to either ride it out. The sponsor doesn't need to sell out, the owner doesn't need to sell a particular building. Unless they have too much debt and unless the loan becomes in default and the loan gets called and that bank then takes over their property. That's where real estate owners and operators get in trouble. So, use this time as a lesson. If you didn't already know this, which most of you do, think about loan to value. Think about a stress test on rents. What happens? What's the worst case scenario on a property until the bank will will say, OK, you've defaulted on your covenants and your loan and we're gonna step in and take this over. That's where equity investors get hurt the most. Talk with sponsors about it in advance. So there are some things, Adam, that I think it's just like, you know, hold on. And just know that we're in this for the long term. Most of the deals are multi-year deals. And you don't need to sell at any particular time. And also use it as an to become a better investor. Think about, you know, the next deal you do. Ask all the right questions about how this deal will perform, how a sponsor will perform during the next downturn that none of us want to think about here in late March. But there will be another.

Adam: Exactly. So leave it on a bright note. Don't worry, when this is over, there'll be another one.

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