The Real Estate Espresso Podcast

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A Trifecta of Inflation Forces Feb 16, 2021

Show notes

On today’s show we are taking a closer look at the macro economy. A trifecta of forces are amplifying the trade deficit which will ultimately cause price inflation in the West.

A critical shortage of containers is driving up shipping costs and delays for goods purchased from China.

The pandemic and uneven global economic recovery has led to this problem cropping up in Asia, although other parts of the world have also been hit. Many desperate companies wait weeks for containers and pay premium rates to get them, causing shipping costs to skyrocket.

This affects everyone who needs to ship goods from China, but particularly e-commerce companies and consumers, who may bear the brunt of higher costs.

Containers from Asia would normally be returned full with exports from the US or Canada or Europe.

But there is such a shortage of containers that the owners of these containers are not willing to keep them in the west for even a few days. These containers are being turned around empty. We already are facing a massive trade deficit with China that is now being amplified by the container shortage.

But it begs the question, if the world had enough containers in the past, why is there a shortage now? Where did all the containers go? Many of the containers are stranded in the west. Oddly enough, I’ve seen prices for used shipping containers in Canada drop to about $1,400. They still exist, but they are in the wrong place and somehow they don’t know how to get them back to Asia. Manufacturing of new containers slowed during the pandemic, which has further amplified the problem.

So shipping costs have tripled in a very short time.

We have oil prices now up at nearly $60 per barrel. US oil production is down by 1/3 compared with this time last year, making the US far more dependent on imports of expensive foreign oil. This will widen the already large trade deficit even further.

I predict that oil prices are heading even higher this year. $80 is easily within sight and $90-$100 a barrel is not out of the question.

The rising price of oil will widen the trade deficit once again.

There can only be one outcome from such a large trade deficit, and that is a fall in the value of the US dollar against the other currencies including the Canadian dollar, the Euro and the Japanese Yen.

When that happens, the direct impact to consumers is an increase in price for all these imported goods. I’m not talking about one or two percentage points. I’m expecting a 10-15% drop in the value of the dollar compared with the major trading currencies of the US.

Eventually the supply chain returns to normal and the extra inventory is going to be reduced. When it’s time to reduce inventory, the orders drop to zero for a period of time. This is the natural cyclical nature of many supply chains.

In the meantime, the government is busy claiming victory on the economic recovery that has been artificially created through the printing of Monopoly money.

As soon as the stimulus stops, so too does the illusion. The economy is like a hardcore drug addict, completely dependent on the next hit.

Expect higher prices for just about everything this year.

What a mess.

Digital Surveillance Feb 15, 2021

Show notes

On today’s show we’re talking about how easy it is to purchase and configure a remote security camera system that can be monitored from anywhere in the world for the cost of not much more than an internet connection and a couple of hundred dollars per camera.

Security is one of those expenses that will rarely make you money. It can only cost you money, and on the rare occasion, save you from experiencing financial loss.

The most expensive form of security involves having a live person on site, either on a continual, or rotating basis. The problem with live patrols is that you can’t be everywhere all the time. You never know when an incident will occur.

Traditionally, security systems have been proprietary and costly. But the technology has improved significantly and it’s now possible to design systems that deliver campus wide coverage for a reasonable cost.

The traditional criticism of security cameras is that they don’t capture enough detail to clearly identify the people involved in an incident, especially in low light conditions.

The technology has advanced in several ways that have made security cameras a compelling choice for security.

One of the other criticisms is that crooks will intentionally disable cameras if they’re about to commit a crime. But here too, there are advances in technology that can make these tactics easier to catch.

Cameras are offering much higher resolution these days. This is critical when it comes to zeroing in on details in an image.

Today, the images are incredibly clear. More importantly, the software that controls the cameras is becoming smarter. Some software systems will use motion detection to zoom into the area of an image that is changing from one frame to the next. The static portions of an image rarely contain the relevant information about a crime in progress.

The software can trigger alarms based on a variety of events. The newest systems can detect the loss of signal at a camera and signal an alarm based on this. If you design your system so that a given area is covered by more than one camera, then it becomes difficult for a crook to disable a camera without being detected.

The latest software systems incorporate license plate recognition that is as good as the systems used by law enforcement.

When a crime is committed, unless you happened to be observing the cameras at that instant in time, you don’t know what video footage to review. The longer time has passed from the time of the crime to the notification, the harder and more time consuming it is to review the camera footage to deduce what happened.

Motion detection allows all those times when nothing is happening, which is the vast majority of the time to virtually disappear from your review process. The amount of time saved by eliminating the dead time is huge.

Many real estate investors live at a distance from their properties. These systems can remotely monitored over the internet. They have apps for both iPhone and Android that make remote surveillance easy.

We sometimes encounter situations involving employees that require investigation. It might be an employee claiming overtime when in fact they were not on site. It might be a harassment claim by an employee, or perhaps a resident.

These camera systems also record audio. If an assertion is made about an employee or a resident, the audio recording can often resolve the dispute.

Finally, some residents make false claims about a property manager. If there is a recording of everything that happens in the leasing office, the audio and video evidence can often be useful in arguing a claim in front of the landlord tenant board.

Mitzi Perdue Feb 14, 2021

Show notes

I’d like to introduce Mitzi Perdue (Perdue Chicken fame). Her husband was Frank Perdue. We start with the story of her romance with Frank, fitting for the Valentine's Day edition.

Mitzi’s maiden name was Henderson and her father was the founder of Sheraton Hotels. I’ve spent considerable time getting to know Mitzi in recent months. So many powerful lessons in the creation and growth of the Sheraton brand.

Mitzi is a member of the NSA. She’s a Methodist. She’s a philanthropist. She’s a teacher of life skills. The Henderson family is a fifth-generation family business. She’s a steward of priceless artifacts with the singular purpose of stopping human trafficking.

Today's episode is filled with powerful lessons.

Enjoy...

Special Guest Martha Weidmann Feb 13, 2021

Show notes

Denver Colorado based NineDotArts.com is a curator of art for installations of all kinds. Our guest Martha Weidmann is the CEO of the company. They access a network of over 10,000 artists to design the art experience for all kinds of projects ranging from hotels, multi-family residential properties, and offices to large-scale, mixed use developments and interactive public art installations.

On today's show we're talking about how thoughtful art selection can create a unique user experience that bare walls cannot by themselves.

To learn more, reach out to Martha at NineDotArts.com

Heat Humidity and Hurricanes Feb 12, 2021

Show notes

On today’s show we’re talking about migration. Migration happens within the country for a variety of reasons. People have been slowly leaving the rust belt in favor of the sun belt. The trend has been alive and well for a couple of decades now. Today we’re going to take a deep look at Florida and what migration can tell us about real estate demand.

There are a lot of NY accents in the state of Florida and former New Yorkers make up 7.5% of Florida residents, more than any other state.

Florida has a very low proportion of native born residents, making up only 35% of the population. About 22.3% of Florida’s residents were born outside the US. This makes sense. Florida has long been a favored destination for people coming from Latin America. Spanish is widely spoken and I’ve had more than one Uber driver who only spoke Spanish and no English.

Over the past decade, Florida has averaged a net influx of population totaling 297,000 people a year.

2016 was a banner year for migration with nearly 2% population growth in a single year. That year 408,000 people moved into the state.

It’s projected that migration is going to average 305,000 a year over the next five years, a little above the average for the past decade. That amounts to 835 people a day moving into the state. That translates into significant demand for new housing. We’re talking about adding a city the equivalent size of Orlando each year.

That’s a big number.

In contrast, NY State lost 123,000 people in the past year. Illinois experienced a loss of 79,000 residents in the past year. The fastest losing state is California which lost nearly 200,000 to migration last year. Michigan lost 18,000 in the same time period.

So where are people moving in Florida? Where are they going?

The top growth market in Florida over the past decade has been the southwest cities of Fort Myers and Cape Coral. Jacksonville, Miami, and Port St. Lucie round out the top 5 cities in terms of growth.

The two largest home builders in Florida are Lennar and DR Horton. They consistently lead with the largest number of new building permits across all 5 of the major regions in the state.

In the realm of multi-family, South Florida lead the way with 12,000 units of new supply added to the market. The largest growth markets were Fort Lauderdale with 2,634 units of new capacity added to the market, and Downtown Miami and South Beach with 2,000 units and South Miami / Coral Gables with 1,700 units.

The greater Miami area picked up the lion’s share of the new growth.

But as always, real estate is hyper local. Northeast Miami has earned a reputation of being a bit of a rough area. NE Miami experienced a net absorption loss of 683 units at the same time that south Miami absorbed 762 units.

Some investors, particularly out of state investors tend to get into trouble by simply looking at the macro migration numbers.

I’ve noticed that the number one factor influencing local population growth is the quality of air service. The further you get from a major airport in Florida, the lower the property values, and the lower the percentage of population growth.

You have two major airports along the Gulf Coast. You have Tampa, and Fort Myers. Property values are at their lowest in Englewood which is about the midway point between the two airports. There are still waterfront properties In Englewood and Venice that can be purchased a surprisingly affordable prices. But with 800 people a day moving into the state, low cost of borrowing, low cost of living compared with the major NE cities, there’s continual upward pressure on prices.

Affordable Housing On The Move Feb 11, 2021

Show notes

The discussion of housing affordability is at the forefront of many community meetings. Three things stand in the way of affordable housing.

1) High cost of land

2) High cost of construction

3) Cost of servicing the land with the infrastructure

Unless you can dramatically reduce the cost of these three items, the cost of housing will continue to be high for those who are on fixed incomes and those who are lower on the income ladder.

It doesn’t matter who builds the house. It’s not the fault of the builder. If materials and labor dictate that new construction costs $130 per SF in many areas of the US, and if land contributes another $50 per SF of finished floor area, someone buying a 1500 SF house is going to need an income of $36,000 minimum in order to afford such a really small house. If a household is close to that income level, housing affordability is going to be a challenge. Two people in a household earning minimum wage will roughly afford to live in a mobile home and not much else. At $10 an hour, you’re looking at $18,000 a year in income per person. Very hard to make ends meet at such a low income level. We’re not talking about a teenager living at home, working at McDonalds part-time for a bit of pocket change. When you have independent adults in minimum wage jobs, they will quickly become the working poor.

On today’s show we’re taking a look a mobile home parks. Today about 10% of US households live in mobile home parks. They represent about 20 million home sites.

Most of these parks started out as mom and pop owned projects. Today, they’re a corporate affair with big business and family offices investing in them.

Mobile homes provide the largest inventory of unsubsidized, affordable housing in the nation, but many began as RV parks in the 1960s and 1970s and are now old, with rundown water and electric systems and trailers that have been long past “mobile” for decades.

As a park owner, the profit is in the lot rent, not the structures. Their prevalence varies widely by state.

Some states like Colorado have a lot of them. More than 100,000 people live in more than 900 parks across Colorado.

Many started as RV parks and then were converted to mobile home parks. But the infrastructure requirements for RV’s and mobile homes are different. Rv’s require 30A and 50A electrical service. But the building code treats a mobile home the same as a detached home and requires 200A service. The reality is that a mobile home will draw almost the same amount of electricity as an RV. The biggest demand for electricity comes from heating or air conditioning. Lights and kitchen appliances are insignificant consumers of energy by comparison. Nevertheless you will need to completely redesign the electrical system for a park in order to handle mobile homes if the park was not designed for it.

The next major areas that can be costly to upgrade for the long term are the water and sewer infrastructure. Most of these parks are outside the dense urban environment and rely on well water and septic systems rather than municipal services.

So why are these types of assets attractive to institutional investors?

The largest cost of operating a park like this is the staff. If the park is small at say 50 units, there is not enough income from the park to pay for the staff required to operate it. These only work as owner operated parks.

The cap rates for a well run, large sized park can be easily 14-15%, provided they are purchased at a good price. The specialists in operating these parks have developed strong systems for owning and operating them.

Help if you don't need it Feb 10, 2021

Show notes

On today’s show we’re going to be talking about a proverb that you’ve probably heard you parents, or maybe your grandparents say. There are several different versions of it. But it goes something like this.

They will only help you if you don’t need it.

Strangely, banks have more cash on hand than ever. Consumers have been using stimulus checks to pay down credit card balances. The new loans from the SBA disappear from bank balance sheets once they’re forgiven. The residential mortgages that have been written in the past year, a record year for originations and refinance activity are usually securitized and sold into the secondary bond market.

Businesses are not borrowing to expand. They’re accessing lines of credit to hang on, but they’re not really investing.

As many as 8% of homeowners in the United States have accessed some form of forbearance agreement with their lender on their residential property. A forbearance agreement is when the lender says,

OK. I can see you’re having temporary financial trouble. Let’s postpone a portion of your loan payments. Maybe let’s have you pay only the interest payment, you can defer the principal portion of the loan payment for six months and we’ll extend the loan by six months. That would be an example of a forbearance agreement.

Today, less than 5% of the homes in the country are still in a forbearance agreement. Many have managed to exit the forbearance. The banks were encouraged to extend these types of terms to borrowers and at the same time, the Federal government issued a moratorium on foreclosures, in addition to the moratorium on evictions that protect tenants from eviction during the pandemic.

Those forbearance agreements have a term of 12 months. Over the coming 90 days, many of those forbearance agreements are going to be coming to a an end. So the question is, what happens at the end of the 12 month term? There is still a moratorium on foreclosures. The foreclosure process is not fast at all. But still it’s not clear what will happen to these millions of homes?

Will the lender extend the forbearance agreement? Will the lender modify the loan and extend the term of the loan, or lower the interest rate? Or will the lender move to put these loans in default?

It turns out that in order for the lender to approve the modification, they will need to re-underwrite the loan. If you don’t have a steady income stream you won’t qualify.

If you are receiving an unemployment check and you’re going to have trouble making payments on your home loan, you won’t qualify for a loan modification. You have to not need the help in order to qualify for the help.

Now the contradiction in terms should not be lost on you.

About a quarter of the forbearance agreements in existence will expire in the next 6 weeks.

I can tell you know from first hand experience that the permanent economic damage is starting to appear in a big way.

I’m seeing first hand businesses closing down, and I’m seeing these business assets being sold. I’m now seeing asset sales from businesses that are closing cross my desk about once a week. My team is conducting due diligence on multiple businesses right now as we speak.

I speak regularly with a specialist in asset disposal. These are the folks that will come into a business or a restaurant that is closing and remove all the equipment and cart it away to a warehouse to be sold at auction. They’re running out of warehouse space. They’re busier than they’ve ever been.

So the impending housing crisis of foreclosures on the scale of 2008 seems to be a distance away. Governments are trying hard to prevent the carnage in the housing market that was experienced following the 2008 financial crisis. All we can say right now is that government will continue to shovel cash into the system. Where this cash will ultimately end up nobody knows.

AMA - Park Avenue Luxury Rental Feb 09, 2021

Show notes

We have a great listener question today.

What are your Key Performance Indicators for underwriting a rental building (100m+) on Park Avenue NY in the current market conditions (decrease in occupancy and increase in concessions). There is also few sales comps in the last decade.

Thanks in advance

This is a great question.

This is an area of NYC that I know well. My father had his dental practice on the corner of Park Avenue and 73rd Street. My mother was an architect on the Pan Am building, now called the Met Life building on Park Avenue and 43rd Street.

Park Avenue luxury rentals are complex buildings to own. Most of the land underneath those buildings, North of Grande Central Station is owned by the Pennsylvania Railway and leased to the buildings.

Those ground leases are expensive which is part of what contributes to the high rent needed to merely break even on those assets. Eventually those buildings could be turned into condo buildings, or rebuilt to even higher density.

You are correct that these buildings don’t change hands very often. Most of the luxury apartment buildings that are rentals along Park Avenue have not experienced a large increase in vacancy. Many of these older buildings date back to the early 1900’s.

These buildings along Park Avenue are not a commodity. Those who are renting in those buildings are paying $5,000-$7,000 per month. They’re paying that because they want to be in that location. At the purchase price of several million dollars, even a rent of $7,000 a month is a relative bargain. So these tenants are not moving out in search of something cheaper. The turnover in these buildings is extremely low.

Some have been updated and converted into condominiums in the process. Those that have been converted to condo are pricing around $6,000 per square foot.

However, given the excess of supply that has opened up in Manhattan in the past two years, it’s going to take several years for this market to recover. I don’t believe we’re anywhere near the bottom of the market in NYC.

Even before the pandemic hit, there was a lot of new supply having entered the market. There was an estimated inventory of about 9,000 vacant brand new construction condos in the market. That represents about 7 years of inventory at 2019 absorption rates.

So who would be buying buildings like this at such inflated prices?

Buildings like this are considered to be trophy assets. The buyer of such a building is someone with a lot of cash to put to work. They’re looking for an asset where it’s more important to tie up a large amount of cash to protect it for the long term, rather than simply maximizing the rate of return.

Some international wealthy families have their money in places like Brazil or Argentina where they face considerable ongoing currency risk. More important than earning a high rate of return, is protection from 10-15% annual foreign exchange loss. These families sometimes like to park cash in a stable asset that is safe by virtue of being in a high demand location in a global gateway city like NY.

Some of these buildings are being valued at cap rates in the mid 3’s. That means the cash on cash return would be approximately 3.5%, with zero leverage. At that price the property won’t generate enough free cash flow to service any debt.

It all comes down to being clear on your investment criteria. We would not buy a building at a 3.5% cap rate. That’s not for us. We prefer to build new construction at a 6.5-7% cap rate and then refinance the property at a lower cap rate that is consistent with the market valuations around 5%. Remember, the difference in price between 3.5% cap rate and 7% cap rate is double the price. One of the key metrics is price and the ability to use debt to finance these buildings. But we’re comfortable building new construction. That’s not for everyone.

Advertising - What's old is new again Feb 08, 2021

Show notes

What is old is new again. On today’s show, we’re taking a deeper look at digital marketing. Why? Because every successful business needs to be known by its customers and real estate businesses are no different.

Some of you may be wondering why there is not a lot of advertising on the real estate espresso podcast. We have had advertisements in the past on the show. At most they were 30 seconds long. These days, the show is free of advertising.

Back in the good old days, marketers would spend money on advertising. They would run an ad on Television. We just finished watching the latest crop of advertisements during the Super Bowl broadcast. The ads that make their debut at the Super Bowl are aimed at a broad audience.

The advertisement for Doritos corn chips can’t directly be measured. We don’t know who will go out and buy corn chips as a result of the commercial.

Google had a very simple business model when it got into the paid search business. It charged $0.05 for the opportunity to be placed above the organic search results. Then some businesses realized that their competitors were buying that ad space. Every time someone searched for Home Depot, an ad for Lowes would appear. So Home Depot would offer to pay a higher price for that same ad. Eventually it became an auction environment. The advertising auction price would rise to the point where the equilibrium would be reached.

Google rose to becoming one of the most valuable companies on the planet with zero sales force. Think about it. They had zero sales force to achieve that market position. Yet, they managed to siphon almost all of the marketing value out of the system with zero sales force.

Business is changing. It used to be that commerce was sold through platforms. If you wanted your product to get to the consumer, you needed a platform. In some cases, you needed a company like Walmart to choose you. Or maybe a national supermarket chain needed to choose you. The business model was rarely direct to consumer. Google enabled companies to cut out the middle man and made it possible for smaller companies to go direct to consumer.

But there was still a large percentage of commerce that was not using search in order to reach the end customer. Nobody uses google to search for Coca Cola, or Pepsi.

With pay per click, the ROI is easily measured. The advertising is direct to consumer. There is no middle layer obscuring your view of the transaction. But some businesses are starting to experience a loss of return on these platforms. Competitors are hiring services to covertly click on your ads to waste your ad budget.

Some behind the scenes I’m hearing that Google plans to change the emphasis on new forms of advertising that are tailor made for the kinds of businesses that today are advertising on television, or on billboards.

The world of television has not changed its format in 50 years. They still subject the viewer to 5 minutes of advertising every hour. Google on the other hand has figured out that viewer attention span is much shorter than 5 minutes. Most viewers will not tolerate 5 minutes of advertising without changing channel. Google ads on the other hand are no longer than 15 seconds. Many are under 10 seconds.

What does this mean for you, as a business owner? It means that the already saturated online world is about to get even noisier. In my view, the world of interruption marketing is becoming less and less effective.

Those who master the art of building a relationship with their customers and with their audience are those who ultimately win.

Wes Hill Feb 07, 2021

Show notes

Wes Hill hails from Chico, California (about 100 miles North of Sacramento). Wes and his partners own about 1,400 apartment units across several states. On today's show we're trying to gain insight on rent collection statistics across multiple geographic areas. Today's discussion highlights the plight of landlords across the country.

You can connect with Wes at MultiFamilyAssetAdvisors.com.

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