The Real Estate Espresso Podcast

Latest Episodes:

Energy Efficiency Is Back In Fashion May 12, 2022

Show notes

On today’s show we talking about the impact of energy policy on housing. The fact remains, the US has underinvested in oil and gas since 2015. Despite the high prices currently in the market, the number of new wells being drilled is not quite enough to keep production levels constant on a year over year basis.

The US currently produces about 20% of the world’s LNG, and over the next 6-7 years that will increase to producing about 30% of the world’s LNG. That will make the US the dominant player. Even with that, the US will still keep the majority of it’s natural gas for domestic consumption. The constraint on liquefaction capacity will ensure that domestic prices for natural gas will still be lower than global prices for natural gas.

We still have 40% of the world’s energy being consumed by 15% of the world’s population. As emerging market economies grow, so too will their demand for energy.

There are a lot of movements across the political spectrum to invest in green energy technologies. I’m here to tell you that these will only truly win when the economics of energy efficiency.

When you can convince the guy on the streets of New Delhi with two bricks of coal that there is a cheaper alternative than cooking on two bricks of coal, then you have a realistic shot at true improvement of greenhouse gas emissions.

We don’t have viable sources to make up for the structural shortage we are experiencing globally at the moment, let alone displace oil and gas with green alternatives at a rate that will replace expansion of emerging market economies like China and India.

Energy prices have the makings of protests in Europe and these are spreading all over the world.

North Americans are the largest consumers of energy per capita in the world.

While the pain of $7 a gallon of gas is real in many parts of the US, we have not seen riots over this yet. But it’s possible. I believe that higher energy prices are here to stay for the foreseeable future.

Much like in the 1970’s when the US lost its dominance of the auto industry by resisting energy efficiency, we are at another inflection point where energy efficiency and energy transitions become important.

In the world of real estate, this is best addressed through design in new construction, but is difficult to retrofit to existing buildings.

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Host: Victor Menasce

email: podcast@victorjm.com

AMA - High Pressure Wholesale Transaction May 11, 2022

Show notes

Today’s show is another AMA episode (Ask Me Anything). Today's question comes from John who asks:

I have an acquaintance who has a land assembly under contract that has development potential. The assembly consists of two properties on a main street with close proximity to a river. The property will need to be rezoned and I’m being told that the property will sell to a backup offer with someone else unless the current contract is completed. The timeline for waiving the conditions on the existing contract is too short to complete my due diligence. The property is in an amazing location and I’m scared to let this one go. At the current price, I think the property is a good deal. What are your thoughts on buying from the wholesaler?

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Host: Victor Menasce

email: podcast@victorjm.com

Office To Residential Conversion May 10, 2022

Show notes

On today’s show we’re talking about changing the use of real estate in the downtown core in many cities. It’s no secret that the world is swimming in excess office space since the start of the pandemic.

I’ve been involved in direct discussions on several major office buildings that are candidates for conversion to apartments.

A recent report from CBRE puts the amount of sublease space available for rent at 159 million square feet across the US. That's in addition to the 144M square feet of new construction in the pipeline and the 15.9% official office vacancy rate. On today's show we're looking at some of the variables in office to residential conversions.

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Host: Victor Menasce

email: podcast@victorjm.com

Are Market Conditions Changing? May 09, 2022

Show notes

On today's show we’re taking a look at the extent to which our housing market is completely addicted and driven by the availability of debt.

There are some powerful lessons to be learned from the financial crisis of 2008. It was the near insolvency of thousands of banks and insurance companies that precipitated a massive lack of liquidity in the lending market. The unprecedented bailout of banks and insurance companies by the federal government and by extension the federal reserve came with some very stringent underwriting criteria. On today's show we look at the market statistics from two markets and try to make sense out of the data.

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Host: Victor Menasce

email: podcast@victorjm.com

Brian Scudamore May 08, 2022

Show notes

Brian Scudamore is a living legend in the world of entrepreneurship. He's the founder of 1-800-GOT-JUNK, and WOW 1 Day Painting, and Shack Shine. His brands are world renowned in their segments. He has taken the ordinary and figured out how to create exceptional.

Brian recently wrote a new book called "BYOB, Build Your Own Business, Be Your Own Boss". It's a book designed to inspire those with an entrepreneurial bug how to build and scale a business. You can connect with Brian at BrianScudamore.com and you can buy a copy of his book anywhere books are sold.

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Host: Victor Menasce

email: podcast@victorjm.com

Kim Radaker Bays May 07, 2022

Show notes

Kim Radaker Bays is based in Dallas Ft Worth where she runs the Exponential Property Group having invested in approximately 10,000 apartments since inception a little over a decade ago. On today's show we're talking about managing risk in today's rapidly changing environment. To connect with Kim visit https://exponentialpropertygroup.com/ or email invest@exppg.com.

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Host: Victor Menasce

email: podcast@victorjm.com

A Category of One May 06, 2022

Show notes

On today’s show we are talking about how to design a product for the market when the spreadsheet is telling you otherwise.

We’re developing a storage facility in a tertiary market up in the Rocky Mountains. Most of the existing storage facilities in town are older and date back to the 1980’s and 1990’s. The newest facility was built in 2019. The market has very high occupancy and we see demand in excess of the existing supply.

The interesting thing is that none of the facilities are climate controlled. When we rely on a spreadsheet analysis alone we would come to the same conclusion that climate controlled storage would not make financial sense. There is considerable additional cost associated with insulating the space and then outfitting the HVAC infrastructure. The electrical requirements for the entire site would increase considerably and the additional revenue when balanced with the additional costs would not return additional profit to the bottom line.

We would be reaching the same conclusion that all the other storage facilities have. Climate controlled makes no sense.

But this is where market positioning becomes important. If you don’t want to be differentiated in the market, then it’s easy to treat your product as a commodity and play the same game as everyone else.

In a commodity market, all of the products are the same. They all offer the same value and the only differentiator is price.

One facility might be more conveniently located and will win the business. But apart from location, these facilities are completely interchangeable. Will someone drive an extra mile to save $20 a month? Some will, and maybe some will not. It’s the race to the bottom.

But if someone has prized possessions that they want stored in a climate controlled environment, they will pick you and only you if you are the only one offering that in the market. There is a real benefit of being in a category of one, rather than just one of many.

They will call you first. They may ultimately not choose the climate controlled storage unit. But they still will call you first. That is a tangible marketing advantage that is otherwise intangible in a spreadsheet.

Customers may choose a small climate controlled storage locker for those few prized possessions and keep the remainder of their items in a non-climate controlled locker. There are opportunities to bundle two lockers in a packaged offering that other facilities don’t have.

When you build a building, you are not just undertaking a bricks and mortar exercise. You are designing a product for a specific customer. Product design involves thinking through the product usage from the customer’s perspective.

The Fed Increases Interest Rates Again May 05, 2022

Show notes

On today’s show we are talking a deeper look at the rising interest rate environment and making sense of the current market conditions.

Yields on the 5 and 10 year treasury have advanced faster than the actual rate increase. Bond investors are clearly looking into the future and trying to telegraph the destination of the rate increases the Fed has planned over the next two years.

The rise in rates has already decreased demand for debt in the residential market. As we reported yesterday, the demand for residential mortgage loans has already fallen by 33% as reported by Wells Fargo.

But we need to distinguish between the residential homeowner mindset and the investor mindset.

The residential homeowner is focused on ensuring expenses are minimized and cash flow is strong enough to afford the daily necessities and perhaps a few luxuries. This is analyzed simply, crudely as a snapshot is time. Is the cost of home ownership below 30% of households income? Yes or no.

But as investors we take a step back and look over a longer time horizon.

If borrowing costs are at 5% and inflation is currently running at 8.5%, then we are actually experiencing a period of negative real interest rates. The value of that loan is falling with each passing month.

If these inflation rates remain elevated for any sustained period, borrowing makes a lot of sense as an investor. The interest is deductible on an investment property and the lender is actually putting cash in your pocket each month. I realize that there is no actual cash transaction happening. But if you are repaying the loan with future dollars that are worth less than today’s dollars, and the interest rate is less than the rate of inflation, the bank is virtually giving you free money for the entire time that inflation remains elevated above your interest rate.

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Host: Victor Menasce

email: podcast@victorjm.com

The Entire Industry Is On Strike May 04, 2022

Show notes

When I was a teenager growing up, my parents used to listen to the nightly news on the radio at 6PM every day during our dinner hour. That was in the late 1970’s and early 1980’s. Inflation was out of control. There was fuel rationing across the US and lineups around the block to get fuel from the few gas stations that had any. I was accustomed to hearing news of labor unions going on strike in search of higher wages.

On Sunday of this past week, 15,000 construction workers in the city of Toronto went on strike bringing the entire construction industry to a stop in the city of Toronto and many other parts of Ontario.

But the problem is not confined to Canada. In the middle of April, 600 Kansas City-area construction workers went on strike to demand substantial wage increases after rejecting a contract proposal from the Builders Association, a construction trade association.

The purpose of highlighting this is to help you see around corners. Trends start slowly at first in isolated cases, then spread. Those first cases can be a canary in the coal mine, an early warning system for similar situations emerging elsewhere in the economy.

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Host: Victor Menasce

email: podcast@victorjm.com

Refreshing The Financial Model For Existing Assets May 03, 2022

Show notes

You own a property that has been performing reasonably well for a number of years. But let’s face it, a few things have happened in the past 24 months. We’ve gone through a protracted pandemic, we have experienced supply chain disruptions, and a substantial period of very high inflation.

It’s probably been a while since you refreshed the entire financial model for that property since you acquired it a number of years ago.

In fact, you have probably evolved your spreadsheet for your financial model since you first went through the underwriting process for the property.

The question is simple, if you were to analyze that same property today with today’s market conditions what has changed?

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Host: Victor Menasce

email: podcast@victorjm.com