The Real Estate Espresso Podcast

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Big Brother is Watching Mar 18, 2021

Show notes

On today’s show we’re talking about government playing a central role in monitoring every single financial transaction in a nation. Crypto-currency has been hailed as a way to break free from the chains of government based fiat currency. So far, many nations have not weighed in on crypto-currency. The two best known forms of crypto-currency are Bitcoin and Etherium. But in truth there are several thousand such currencies in existence. They vary in their features and functionality.

Governments are clearly afraid of losing monetary control over their economies. They are not about to surrender control of the money supply to a merry band of independent software programmers. I expect we’re going to see governments start to implement their own version of a crypto currency in order to sell the benefits of crypto to the general public. The first country to start the rollout of a digital currency is China with the digital Yuan. So far, the country has the currency undergoing limited trials.

Benefits that some users report include the convenience of paying with their smart phone. This is similar to the convenience of paying with something like Apple Pay on your phone. But in this case, there is no middle-man, and there are no transaction fees that are typically associated with digital wallets.

Digital wallets like Ali-pay or Tencent’s WeChat Pay have received wide adoption in China with over 700 million users of these systems today. Both companies are required to share transaction information with the central government if requested.

Right now, the central bank has the a trial with about 700,000 users participating in a trial. The central bank has said that they intend to protect privacy. This means that privacy may exist horizontally. If you buy groceries at the store, the grocer won’t have any information about your identity. But vertically the government has full visibility of all of your transactions and funds.

Now I’m not a huge conspiracy theorist. But the fact is, giving government full oversight over every single transaction in the economy represents a massive invasion of privacy.

In case you think this is only happening in China, think again.

The president of the Federal Reserve Bank of Cleveland made comments last September at the Chicago Payments Symposium conference. In her speech, she outlined a number of initiatives underway at the Federal Reserve.

Legislation has been proposed that each American has an account at the Fed in which digital dollars could be deposited, as liabilities of the Federal Reserve Banks, which could be used for emergency payments.

Other proposals would create a new payments instrument, digital cash, which would be just like the physical currency issued by central banks today, but in a digital form and, potentially, without the anonymity of physical currency.

The Indian crypto community is closely watching whether the Indian Federal government will ban cryptocurrencies, including bitcoin.

The latest information regarding the Indian crypto ban comes from Reuters which reported Sunday night that “India will propose a law banning cryptocurrencies, fining anyone trading in the country or even holding such digital assets.”

If you’re keeping you cash in your own Digital wallet that is located on your phone, what happens to all the bank deposits? If there are no bank deposits, how is the bank going to have sufficient funds to lend money out? Of course they don’t have enough money now. They only keep 10% of the loans on their books in deposit reserves now, and in some countries in Europe, only 3%.

Is The Hotel Industry Recovering? Mar 17, 2021

Show notes

On today’s show we’re looking at the fragile recovery in the travel and hospitality sector. This week was March break in much of North America.

The signs of recovery are starting to show. This is clear from anecdotal reports, as well as from the hotel analytics firm STR Global. STR issues a weekly report on the health of the hotel industry which can be viewed on the data insights portion of their website. The leisure-and-hospitality industry added 35,700 jobs in February.

Hotel occupancy for the first week of March was 49%, a 20 week high.

The increased willingness to travel seems to come down to a number of factors.

Falling case counts across the nation.
Increasing number of people being vaccinated.
Fatigue with the whole pandemic.
Some states have opened up their economies

Overall, occupancy has recovered to 70% of pre-pandemic levels and REVPAR has recovered to about 55% of pre-pandemic levels.

One hotel that we monitor closely is the Golden Nugget Hotel and Casino in Lake Charles Louisiana. One of our team members attempted to book a room this week at this 1,100 room property and found that there was no vacancy mid-week.

Even in our own portfolio of short term rentals, we’re seeing climbing occupancy. Throughout ski season, we experienced occupancy of close to 90%. We’re seeing longer term reservations and rising nightly rates. All of this seems positive for the upcoming summer season. But we don’t believe that occupancy levels will return to pre-pandemic levels until international travel returns in a big way.

Many countries have still closed their borders and many are grappling with the whole question of vaccine passports. While none have truly implemented this, we have yet to see how international travel will be held back by rates of vaccination.

There are obviously ethical questions about whether restricting travel based on vaccine status is an infringement of human rights. No doubt there will be legal challenges on this question.

We are starting to see capital transactions happening in the hotel business.

Blackstone Group Inc. and Starwood Capital Group said Monday they had teamed up to buy Extended Stay America for $6B.

Extended Stay is a midprice hotel chain that focuses on lodging for guests interested in staying for weeks or longer, offering kitchen facilities and more space than a typical hotel room. During the pandemic, its rooms and suites attracted essential workers, healthcare professionals and others who needed to travel.

That business helped Extended Stay achieve a 74% occupancy rate last year when occupancies industry wide were running below 45%. This says that the inclusion of full kitchen has made the properties a more desirable product in the market. It mirrors the experience we have had in our own portfolio of short term rentals that happen to be located in hotel properties with rich amenities.

Blackstone are experts in the hotel business. They’re a savvy buyer. They used to own Hilton hotels from 2007 to 2018. They bought Hilton at the peak of the market and within months were deep underwater on their investment. Through hands-on management, rolling up their sleeves, they learned the hotel business. By the time they turned it around, Blackstone turned a catastrophic loss into a $14B gain.

This is a savvy purchase. The market place should pay attention. I predict that this is not the last move that Blackstone is going to make in the hotel industry. They might make further acquisitions. They might reposition the brand. They might use the Extended Stay America brand as a launch point to purchase distressed assets that can complement the existing portfolio.

AMA - Parking In The Tropics Mar 16, 2021

Show notes

Today's question come from David in Belize.

Love the show and thanks again for all the work you put into it. We always hear if you see a problem, find a solution.

I see a big problem in Ambergris Caye Belize in parking. I think we could help the downtown area since there is always no parking and streets very congested.

We would have challenges as to locating a lot. The lot if we found would be around 50’ x 70’ . The garage would be for golf carts and we can do 4 or 5 floors.

We could do concrete, steel or a combination of them. I would want an elevator or 2 and maybe 2 entrances and exits. But 1 may work. So, 2 people working 2 shifts so like 5 people. Plus, maybe a maintenance person.

I feel we would get a lot of long-term workers paying and then the tourist.

The other challenge is the hourly or daily fee. I see some parking lots lot’s charge like $25 USD a day. The airport charges $2 just to go in and $25 USD a day as well. I need to do some more research but there are no garages here other then just empty lots they rent spaces out in Belize City and places like that.

I was wondering your thoughts on a syndication on a parking garage. The payback would be a bit long

The spaces would be like 100 for the 5 floors. After the setbacks, road drive paths. Maybe $800k to $1M to build. At $12.50 per day average Seems like the umbers work at 50% occupancy.

David, thank you for the kind words and this is a great question. I’ve been to San Pedro in Belize and I know exactly of the parking problem you’re speaking about. It’s a dense area and there is very little parking. There are narrow streets packed with small shops and lots of pedestrian traffic competing with golf carts for a clear lane. The town has lots of character, even if it seems a little chaotic a times.

Parking is one of those real estate plays that are not very sexy, but can be a great investment.

In fact, one of the largest companies in France called Vinci made its’ wealth globally by investing in parking lots all over the globe.

The problem with parking lots is that when many of the transactions are done in cash, for whatever reason cash has a tendency to go missing and not be fully accounted for. If you have a parking lot attendant who is handling a lot of cash and they’re earning only a few dollars an hour, the temptation is simply too great for them to pocket some of the extra change.

Even if you make the parking lot attendant a partner in the business, they could still steal from you. In tropical locations like Belize you could experiment with electronic payments exclusively, but I don’t know if that would be a barrier to adoption. It would probably work with tourists who regularly carry credit cards. But the locals may choose not to use it.

I would test market your idea on a limited basis with an existing ground level parking lot. Structured parking is expensive and you need to gain some operational experience in the local market to determine whether the idea will work. That will make for a much more compelling value proposition when it comes time to raise the capital for the construction.

Finding the right location for a parking lot can be a challenge. Sometimes, you may find an old building that is condemned or functionally obsolete. Parking can be a very viable temporary investment. You buy the derelict building, demolish it and build a temporary parking lot for a year or two while the developer who will ultimately develop that location gets their plans and financing together.

You may be able to propose a deal with a local developer to operate the parking on their behalf in order to gain first hand experience with managing a parking operation on the island.

The Beauty of a Stale Listing Mar 15, 2021

Show notes

On today’s show we are talking about how to win in a super competitive environment. There is no question that today’s environment resembles more of an auction than a true market place.

We see it consistently in the single family home market and even in the market for multi family apartments. Last week a colleague of mine was shaking his head at the sale of a rural single family home with no municipal services that sold for $500,000 above its fair market value. The buyer was so frustrated with attempting to buy in the core of the city that they overpaid simply to buy some acreage.

I’ve observed sales of apartment complexes that frankly make no sense. Some sellers are demanding that buyers deliver a firm offer with no conditions, or a conditional offer with $200,000 non refundable deposit in order to be eligible to bid on the purchase. Offers without these conditions will not be considered in the words of the listing agent. The apartment complex in question is an older property with obvious deferred maintenance in a lower income area of Dallas.

I personally would never make a purchase under those conditions. Yet it appears that some buyers are willing to go there. So if you are a sane rational buyer, how do you win in this environment?

Do you lower your standards and succumb to the insanity?

The best deals are done off market so that you stay out of the auction environment. But what if you can’t seem to find these off market deals?

The auction buyers are obsessed with speed. They want to see a new listing. They will offer on a listing that is hours old. If a listing has been on the market for 30 days or longer, the auction buyer automatically assumes that there is something wrong with the property, that the property has been rejected by the the competitive buyers. It can’t possibly be a deal if it’s still on the market after all this time.

What if the assumption is incorrect?

You have the entire auction marketplace looking with anticipation at new listings. They want listings that show 1 day on market. They are not focused on the listings that show 25 days or 35 days on market, or 60 days on market . Those listings are stale. In truth, some of those 25 day old listings were on the market for one day, they were conditionally sold for several weeks and then reverted back to being an active listing. In truth they’ve been on the market for two days, but the listing shows 25 days because they were conditionally sold for 23 of those 25 days.

The number of buyers for the stale listing is reduced dramatically. You might be the only bidder for a property that just came back to active listing.

So how do you ensure that you get a good shot at these properties? You track the properties that show as being under contract. You let the broker know that you are a patient buyer and that you are interested if the property goes back on the market. You are in a different category than the other offers that were ultimately rejected 25 or 30 days ago. Those buyers have moved on to other properties. You are at the front of the line to buy a cancelled contract.

In an environment where properties are selling above asking price, some relative bargains are possible.

If you want to get out of the auction environment, then your first choice will certainly be the off market property. A close second could be the cancelled contract that is unfairly labeled as a stale listing.

Mitzi Perdue Part 3 Mar 14, 2021

Show notes

Today's show is the third in a series with Sheraton hotel heiress Mitzi Perdue. On today's show we're talking about growing up in a hotel family overcoming personal adversity, multi-generational wealth, and legacy. If you haven't heard the first two segments, you may want to go back over the last two weeks and listen to those first.

To connect with Mitzi and to support her efforts combatting human trafficking, visit her website at winthisfight.org.

Special Guest, Justin Sliva Mar 13, 2021

Show notes

Justin Sliva specializes in buying land that people have largely neglected. This is a fascinating story of how parcels of multi-generational land get forgotten and can be purchased for a bargain price.

You can connect with Justin at CasualFridaysREI.com where he also hosts a weekly podcast.

AMA - Extended Stay Hotel Mar 12, 2021

Show notes

This question comes from Tomas.

I believe that on a previous podcast you mentioned that there is an expanding opportunity in the market for short stay accomodations. There are folks that are looking for 1-3 month stays in their local markets to fill the gap between moving from one property to another.

Do you think that it is possible to have a small boutique hotel with regular guests and a floor of longer term (1-3 month) guests all under one roof? Or are there simply too many negative issues. If so, would such an arrangement even be desirable from an asset management perspective?

I would love to get your perspective on this.

Best,

Tomas

Tomas, this is a great question and I love the way you’re thinking. What you’re describing is following one of the basic rules of business. That is, you’re solving a business problem.

The question is whether the hotel product in question is a suitable solution for the problem you’re outlining.

The problem exists in a number of specific areas. In business the more precisely you can speak to your target customer, the better the connection. You have a few distinct problems that can be solved here.

A seller is reluctant to sell because they know it’s going to take a while for them to find a replacement property. What if the realtor could present a solution to the problem of the seller has no place to go. So they don’t put their property on the market.
Maybe their replacement property is a new construction home and it’s going to take months for the new house to be built. But they don’t want to carry two loans. It would be better to rent during the period of construction so that the capital from the sale can be used to build the new house. Carrying double the debt might feel high risk for some home owners.A tailor made rental for the temporarily displaced homeowner could be perfect.
Maybe the seller has a new house under construction and the builder is delayed. This happens with alarming regularity. There is clearly a market for solving this problem of delayed new home closings.

So the question is what is the right product to meet that needs of that target client.

When you say a hotel, I would assert that this would need to be a suite hotel with full kitchen, a large enough work space, and enough breathing room to be a viable location for a few months. There are very few hotels that meet that description. If it’s an extended stay hotel with high quality beds and high quality amenities, it could work.

If the hotel guests and the medium term residents are segregated on separate floors, that may be enough to entice medium term guests.

I think that the first reaction from a potential guest at the thought of staying in a hotel room for 6 months would be negative. So it would need to properly positioned.

But if you can market it as an extended stay residence that happens to be co-located on the same property as a hotel, it could work. It’s increasingly the trend in hotels to double brand a single hotel property with two different brands within a hotel family.

You will see a Residence Inn co-located with a Marriott Courtyard on the same property.

Another key to marketing this to clients would be a word of mouth recommendation from the real estate agent who is brokering the deal, or the builder who is responsible for the delay.

One of the objections is the perception that a hotel room priced on a nightly basis is going to be too expensive compared with a monthly rental. While the hotel might be willing to discount the nightly rate when renting by the month, the perception is still that the nightly rate is going to be too high.

In order to satisfy the client that you have the right product, I believe the product will need to be branded and positioned as a monthly, all inclusive, medium term executive rental.

Office Towers Are Falling Like Dominos Mar 11, 2021

Show notes

On today’s show we are taking a look an how office buildings are falling over like dominos. Of course I’m speaking in metaphors.

About three years ago I was presented with the opportunity to purchase a medical office building that was 50% vacant. The price was great. The building was owned by 8 partners that included doctors within the building, a dentist and a pharmacist.

This 27,000 square foot building had a lot of potential. The increasing number of small businesses that provide independent consulting services to government and the tech industry would be perfect for such a building. Technology startups would be perfect tenants. The vision painted by the seller was amazing.

Well, I didn’t quite see the vision. I saw a dying building. The dentist who was a part owner in the building rented space across the street in a brand new construction ground level commercial space with more parking and large modern windows. Dentists are great tenants. They put a ton of money into tenant improvements. They put lead lining in the walls to provide Xray shielding. They install plumbing, high pressure compressors for their air drills, air handling. A dentists office is not a transient tenant. Once they’re in, they’re not moving. But here we had a dentist who was a part owner in the building who had a financial incentive to not only have a thriving dental practice, but also a successful business. When the dentist moved across the street, it said to me that the dentist saw the building as a liability to his business, not an asset.

That was all I needed to know and I didn’t buy the building.

Fast forward to 2021 and in hindsight that decision not to buy is looking better than ever. Office buildings all over North America are experiencing falling occupancy. Our market was already oversupplied with office space. Office vacancy was averaging 12% for the five years prior to the pandemic. By 2019 vacancy was 8% just prior to the pandemic, and then we saw vacancy steadily increase throughout 2020. But understand that commercial office leases are usually multi-year leases. Decisions to vacate space made in 2020 may not appear in the market until this year, next year, or the year after.

A year ago, Interrent REIT purchased a 50 year old 11 story office building for $21.8M on the edge of the downtown with a plan to convert the building into 153 apartments. A 50 year old office building would have a difficult time competing with new product in the downtown core. It would take a substantial refit to turn it into Class A space. Even then, it would never capture top rental rates. When you layer the high rate of vacancy on top, maintaining the building as an office building would not make financial sense.

In the latest news, the developer of a planned new office tower in San Francisco announced that Salesforce has apparently withdrawn from plans to lease a major block of space at a planned San Francisco office tower, according to comments made by one of the developers during a public hearing Monday.

At that meeting it was disclosed that the “initial lease commitment” that the developer had for the unbuilt 61-story Transbay Tower “is no longer in hand.”

Another project, Oceanwide Center — a 2M SF project near the Salesforce tower was proposed to be the city’s second tallest tower. Construction is now stopped. The GC is a company called Swinerton. There is currently a dispute on the roughly $60M that is allegedly owed to Swinerton on that project.

It doesn’t matter whether we’re talking about a 27,000 SF medical office building, or a 1.5M square foot project, all of these offices are struggling. These buildings are an endangered species with the pre-pandemic economic model. It’s going to take some price discovery to find the new equilibrium of fair market value.

My Favorite Hotel Is Closing Mar 10, 2021

Show notes

Today’s show is a retrospective look at one of my favourite hotels in North America. It’s a hotel that I’ve stayed at many times over the years.

The Fairmont San Jose — Silicon Valley's largest hotel — has filed for bankruptcy and is closing its doors, at least temporarily. On Friday of last week, the hotel informed guests rather abruptly that they needed to leave. That included an NHL hockey team that was in town to play against the San Jose Sharks.

If it does reopen, though, it likely will be under the flag of another brand.

FMT SJ LLC, which operates the hotel, filed for Chapter 11 bankruptcy protection Friday. The company expects the iconic 33-year-old hotel, located downtown on the east side of Plaza de Cesar Chavez, to remain closed for two to three months. The company hopes to use its bankruptcy to get an extension on its mortgage debt, end its agreement with Fairmont Hotels, and find a new hotel brand to partner with that will provide the hotel with new financing.

The company purchased the hotel from Maritz, Wolff & Co., a real estate investment firm headed and co-founded by Lew Wolff, one of downtown San Jose's most influential developers.

Wolff's firm purchased the hotel from the San Jose Redevelopment Agency for a reported price of $36.7 million in 1996. At the time, the hotel was at risk of falling into foreclosure; Maritz, Wolff & Co. helped to stabilize its business. It also constructed a 14-story annex to the hotel that was completed in 2002.

This is a marquis hotel. It’s in a great location. It’s a terrific property. The dispute at this stage is about money. It’s not a question of whether this hotel will re-emerge as a going concern. Of that there is little doubt. What’s not 100% clear is the ownership structure of the hotel. Will it be the same owner operator? Will the lender take a haircut? Or will the lender attempt to foreclose and take possession of the hotel? Will the hotel owners require an injection of capital to stay alive and retain their ownership position?

At a time when about 20% of the hotels in North American are in default on their mortgage debt, we can expect to see more surprises like this.

Three Major Technology Innovations That Will Affect Real Estate Mar 09, 2021

Show notes

On today’s show we’re talking about the three areas that I am seeing the most technology investment with venture capital and angel investors.

The pandemic has served as an accelerator and has exposed weaknesses in a number of sectors. All of these areas of innovation were on a growth trajectory through the natural evolutionary course of the marketplace.

Innovations get funded when they solve specific problems. This requires a clear statement of the acute problem.

The first area that was dramatically impacted by the pandemic was healthcare. Many family medicine doctors and specialists had to adapt to new protocols. In particular, we saw many doctors resorting to telemedicine, attempting to diagnose over the telephone and limiting in person patient care to the absolute minimum.

Tele medicine is one area that is begging for innovation. The US military has been using telemedicine within its own proprietary communication systems for years. But there are very few well developed solutions for public health or for family medicine.

Would it be possible to integrate certain diagnostic or measurement apparatus into a smart phone app that the doctor can rely upon? While large advances have been made in electronic medical records, significant delays still exist between pathology testing labs, x-ray labs, and the attending physician’s desk.

The second area that is crying for innovation is educational technology. The classroom on zoom is better than a webinar, and it’s better than watching a movie. But it’s a long way from optimum. Zoom was not designed to be an electronic classroom, nor was Microsoft Teams. This is an area with lots of opportunity for innovation. An integrated platform for teaching and testing doesn’t exist.

There are a handful of trends underway in edtech. The biggest area where technology stands to improve education is by personalizing education. We’ve gone from a world that focused on everything for the masses to a world that is focused on the individual. Academic records are being sent electronically these days. But these records are prone to tampering. Blockchain technology can solve this problem.

The third area is retail sales. The internet has enabled an increasing proportion of sales to go Direct to Consumer (DTC). The question is which search engine should be used to find the product you’re looking for? Amazon is a search engine, an e-commerce engine, and a distribution channel.

The direct to consumer model doesn’t require a platform like Walmart or Amazon. You want an organic eucalyptus based insect repellant made by monks in Tibet? What’s that? Walmart doesn’t carry it? No problem. In the world of direct to consumer, you don’t need Walmart or Amazon or Alibaba. You simply need to be able to find it using a search engine. There are emerging specialty search engines out there. It’s not just the world of Google. Pinterest is a search engine. Etsy is a search engine. Direct to consumer is an area that is still a wide open field waiting for improvement. Shopify is one company that has made significant inroads in the new world of direct to consumer.

So why am I telling you this? What does this have to do with real estate? As I’ve said on previous shows, the next shift in real estate will come from the world of online innovation.

Let’s imaging that 1/3 or 1/2 of visits to the doctor’s office can be replaced with telemedicine. Would that affect the design of doctor’s offices, of medical clinics, and possibly of hospitals? I think the answer is yes. A medical office building that ignores these shifts is destined to become a dinosaur faster than necessary. Will the design of a classroom change with innovations in edtech? Will the design of a university campus change if 50% of the classes are held online? Will the world of retail be further affected by direct to consumer model? The answer to all three of these questions is clearly yes.

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