The Real Estate Espresso Podcast

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**The Real Estate Espresso Podcast**

Welcome to The Real Estate Espresso Podcast, your morning shot of what’s new in the world of real estate investing. Join investor, syndicator, developer, and author Victor J. Menasce as he shares his daily real estate investment outlook. Our weekday episodes deliver 5 minutes of high-energy, high-impact content to fuel your success. Plus, don’t miss our weekend editions featuring exclusive interviews with renowned guests such as Robert Kiyosaki, Robert Helms, Peter Schiff, and more.

Latest Episodes:

Chaos in Washington Jan 07, 2021

Show notes

Some personal reflections on the scenes we all witnessed at the Capitol on January 6.

Silicon Valley Unions Jan 06, 2021

Show notes

On today’s show we talking about a cultural shift that is underway in one of the technology companies that defines the current era in which we live.

On today’s show I’m going to connect the dots as a thought experiment.

I’m going to draw a parallel between the post office and Google.

The post office is a utility that provides some of the basic plumbing for our society. There are private companies that have tried to compete with the post office in providing this basic transportation of goods. It’s a commodity. You know that it’s a commodity because you simply expect it to be there. The postal service is ubiquitous. It’s not conspicuous. Nobody drives down the street and says “oh cool, there’s a mailbox.”

The post office would be more conspicuous by its absence. The post office is also unionized. The collective bargaining for employees by unions has tied the hands of the leaders at the postal service

In this discussion, the outcome has been pretty consistent across nations. We could be talking about the US, France, England, Canada. Attempts to innovate within the postal service have largely failed. This is the world of slow decision making and bureaucracy that has come to exemplify quasi government organizations.

The technology world on the other hand is the world of innovation, of experimentation. Technology companies create new prototype products and services in a race to create value ahead of the competition.

In some cases, the technology companies will develop the new capabilities internally. If they move too slowly, then acquiring and integrating a startup can be an effective shortcut.

Google acquired YouTube. Facebook acquired Instagram. You get the idea. These moves were made with the speed and agility of a startup.

In an earlier part of my career As Vice President of Engineering, I was leading the microprocessor development team that my company acquired from IBM. This was back in 2004. There were two parts of the team located in France. We had a team outside Paris, and a team just outside of Nice. I used to spend a week a month in France with the team face to face and naturally on the phone with them on a daily basis. I can tell you from first hand experience that the goals of the business leadership is to maximize the growth of the business in order to create the opportunity for all the stakeholders of the business to benefit. That means healthy compensation for the employees, it means employee stock plans and stock options for employees. The goals of the union are not shared with the goals of the business. The net result was that the union representing the roughly 10,000 IBM employees in France filed a lawsuit challenging the validity of the acquisition in the courts. The net result was that all 110 employees in France ended up back at IBM and I built a new microprocessor design team in Austin Texas and in Silicon Valley. Only a handful of the people in France chose to relocate to the new design centres in the US. So when I heard this week that more than 225 Google engineers and other workers have formed a union, I was surprised to say the least.

The Alphabet Workers Union, which represents employees in Silicon Valley and cities like Cambridge, Massachusetts, and Seattle, gives protection and resources to workers who join. Those who opt to become members will contribute 1% of their total compensation to the union to fund its efforts.

For now, this is a minority union. It will not have the power to negotiate compensation on behalf of employees.

I find this particular effort to be important because we see a company that has maintained its startup culture now being bogged down by increasing public scrutiny, a justice department anti-trust lawsuit, and now a union movement. Companies that have their hands tied through government bureaucracies are destined to be about as agile and as innovative as the post office.

AMA - Housing In The San Francisco Bay Area Jan 05, 2021

Show notes

This question is from Anu in San Diego.

I am a big fan of your show and i listen to all your episodes.

I would like to know your opinion on the relative effect of upward vs downward forces on SF home prices. There is upward pressure on SF homes currently because of low interest rates and pent up demand. In the coming months, there may be downward pressure due to job losses and overall bad state of the economy. But there may be additional demand for bigger houses because of many more people working from home and thus needing more space. In my local market, I am seeing a ton of folks upgrading their houses because a 3-4 bedroom house is not enough anymore as both spouses require a separate home office now. This trend may be here to stay as more companies announce permanent work from home options. I would love to know your opinion on how this may play out in future. Will some category of homes see increased demand vs lots of delinquencies in another segment? Or do you think the delinquencies will have an effect on the entire housing market?

Anu this is a great question. In fact there are several questions. You are correct in pointing out that very few existing houses were designed with work spaces in mind. Some homes had an office designed into them. My house was a rare exception to that trend. Most of the time, people are repurposing a bedroom as an office. If you live in an apartment, then the dining room table is one of the few options. San Francisco itself is a small market, but the SF Bay area consists of many markets and spans nearly 2 hours driving distance from one end to the other. The Bay area seems to be mirroring many of the same migration characteristics that we’ve seen in other hub cities like NYC, Toronto and Seattle.

Those who have been renting luxury apartments in the city left the high density environment when it was clear that they had no reason to be a short distance from an office that was closed anyway. They can afford to buy a much larger property in a lower density environment, but don’t necessarily want to leave the metro area altogether. After all, they’re not quitting their job.

People are shunning downtown apartments. Conversations with people I know who live in San Francisco are showing the trend clearly. The same has happened in NYC and Toronto. Toronto currently has 30,000 vacant apartments for rent in the core of the city. That’s a huge number. People are leaving their rental apartments in droves. Vacancies in some buildings are approaching 50%. Rents have fallen 35% across the city. I’m hearing that it’s like a ghost town in the core of the city. People simply don’t want to be confined to a box in the sky with no amenities during a lockdown situation where they have to work, eat, sleep and exercise. All of this seems like a prison.

For half the price of a rental 1BR apartment in San Francisco, you can buy a 3BR 1,400 SF townhouse in San Rafael with a patio, plenty of amenities including a swimming pool and gym, a two car garage.

The suburbs don’t have the problem of homeless people. You don’t see protest marches in a residential neighborhood. But you do in the core of the city. People feel safer in the suburbs. The reasons for exiting the core of the city just keep piling up.

We are seeing millennials who had been living in the city finally getting married, starting families and now looking for a bit more space to spread out. The condo market, in particular the luxury end of the condo market is over-supplied in the short term. The luxury apartment rental market is also oversupplied for the next while and this is where we are seeing a massive correction.

I believe the correction we are seeing is confined to select segments of the market. This change is going to be with us for another 3-5 years before we find a new market balance point.

AMA - Development Charges Jan 04, 2021

Show notes

David in central valley California asks

Hi Victor.

I'm looking to develop a build to rent community of apartment sized single family homes. This will go from un- entitled vacant land all the way through to the sale of the built homes. My question is at what point are the impact fees paid. Is it while performing the horizontal land improvements and utility hookups? Or is it during vertical construction?

Thank you!

David, This is a great question.

For the listeners at home, let’s take a minute to describe impact fees or what in some places are called development charges.

These are fees that are charged to developers for the benefit of having the opportunity to make a profit from the expansion of a community. These fees are only assessed on new units that are added to a community. For example, if you demolish a house and replace the house with a new single family home, you would not pay any impact fee because you are not adding any density to the community. If instead you replace the single family home with a duplex, then you would pay an impact fee on the one additional unit and no fee for the existing unit you are replacing.

Impact fees pay for the municipal infrastructure that makes it possible for you to build your property. We’re talking about the roads, water infrastructure, sewers, schools, parks, public transit, community centres, expansion of policing and so on.

These fees vary widely from one community to the next, and they can vary widely within a community.

Some cities have zero impact fees. Impact fees are extremely common throughout California where you live.

I read a recent paper on the state of impact fees in the Central Valley in California where you live. I put a link to the study in the show notes. This 84 page report was authored in 2019 and gives a pretty good overview of the issues surrounding development impact fees in the Central Valley. It specifically studied 10 municipalities in the Central Valley.

https://www.hcd.ca.gov/policy-research/plans-reports/docs/impact-fee-study.pdf

Only a little over a quarter of the communities actually published the studies that were used to assess the impact fees. This lack of transparency makes it difficult to determine whether the assessment of impact fees is fair.

The schedule of fees was also not readily available in many of the communities. When you finally do get hold of the schedule, determining which payment applies to you can be incredibly confusing. Often the preliminary feedback and estimate from the planning department doesn’t match the final assessment of fees.

The net result is that many developers have a hard time predicting the correct fee structure for their financial pro forma.

In the absence of an accurate number, the only prudent thing to do is to estimate high and hope that the real impact fee comes in below your estimate. But there is also a chance that the project becomes unattractive with a high estimate for the impact fees. You might end up talking yourself out of a project simply because the municipal government is doing a poor job of being transparent about their development charges.

This is an excellent question and unfortunately it’s an area that is full of complexity and potential land mines. There is no quick or easy answer to your question. Hopefully this discussion helps you navigate through the maze and ask relevant questions from the decision makers who can answer the specific questions pertaining to a particular property and proposed development.

Invest On The Right Side of History Jan 03, 2021

Show notes

Today's show is one of the most important shows on investment strategy you'll hear this year.

AMA - Steff Boldrini on New Construction Jan 02, 2021

Show notes

On today's show we're talking with my good friend Steff Boldrini from San Francisco about how to structure a construction loan for a new construction project.

BOM - This is Marketing by Seth Godin Jan 01, 2021

Show notes

On today’s show we we are taking a deep look at the book called “This is Marketing” by Seth Godin

For the longest time there has been confusion between the various words that surround the topic. What is selling? What is advertising? What is marketing?

So many of the manipulations that we have accepted as normal we now almost universally reject as ineffective.

My friend Kyle Wilson says it well when he says

“Don’t use a tactic that violates a principle.”

It doesn’t make any sense to make a key and then run around looking for a lock to open. The only productive solution is to find a lock and then fashion a key. It’s easier to make products and services for the customers you seek to serve than it is to find customers for your products and services.

Marketing is the generous act of helping someone solve a problem. Their problem. It’s a chance to change the culture for the better. Marketing involves very little in the way of shouting, hustling, or coercion. It’s a chance to serve, instead.

So many people think that marketing is about getting the word out. That’s one of the last steps in the process.

It starts with creating change that solves a problem. When that change defines the culture, then you have the ingredients for marketing.

If you want to make change, begin by making culture. Begin by organizing a tightly knit group. Begin by getting people in sync. Culture beats strategy—so much that culture is strategy.

This is marketing by Seth Godin creates a new definition of marketing by turning the industry on its head. You see Seth has tried almost every method known to man. A few have worked, and most have failed. In some cases, the product succeeded despite the money wasted on advertising that nobody saw.

He won’t give you a step-by-step step formula. Instead the book is a compass that keeps you grounded in timeless principles that honour the relationship of trust between you and the people who you seek to serve.

The Year In Retrospect Dec 31, 2020

Show notes

It’s hard to believe that 2020 is almost in the history books, the year that seemed to bring one surprise after another. The news media are filled with retrospectives on this most unusual of years, 2020.

They’re bringing you stories that got the most air time over the past year. What was it that defined 2020? For some it was the pandemic. For others it was the protests against social injustice that gripped many communities around the world. Some will state with great fervour that the Presidential election combined with the pandemic that was the defining event of 2020.

Yes, all of those things happened. There was economic carnage. There were massive job losses on a scale we have not witnessed in history. If your family lost a loved one, or if you lost someone you know to Covid-19, this year 2020 will be forever etched in your memory.

As you conduct your retrospective on the year, don’t look to the news media to interpret the year for you. It was your year, nobody else. The only year that counts was your year. The purpose of conducting a retrospective is for you to learn and grow from it. If you spent the year watching youtube videos waiting for the pandemic to be over, then chances are you’re not listening to this podcast. That’s not the culture here, and I suspect not for any of our listeners.

I’ve discovered something extremely important in life and I’d like to share it with you. It’s a perspective on living that has almost nothing to do with what actually happens.

For some people, 2020 was a year of financial hardship. For others the exact same circumstance was a test of resourcefulness.

As I conduct my retrospective on 2020, I’m seeing accomplishments that I’m proud of, and others that didn’t go my way.

For many people, 2020 was a year of adjustment. They didn’t have a routine for working from home. They were not accustomed to holding meetings using video conferencing.

For us, 2020 was a year of adjustment. It was stressful, simply because there was a wide gap between the expectations we had going into the year, and the reality on the ground. We had to accept the current reality was not going to meet our expectations.

We experienced delays on virtually every project. We experienced higher than expected expenses.

We experienced drops in revenue in some areas of the business. We experienced two hurricanes only 5 weeks apart. We also experienced new opportunities that were not present at the beginning of the year.

We had zoom meetings for family gatherings. We got to experience moments over zoom that would never have happened any other way.

Our regular monthly real estate meetups went online as well. While the quality of the relationship building suffered, going online enabled us to bring guests from all over the world would not have travelled all the way to Ottawa Canada for a 45 minute speech.

Our regular masterminds went from being a conference call to a zoom meeting and we had much more engagement.

Conducting a retrospective is a little like mining for gold. You have to sift through a few tons of rock in order to extract a few ounces of gold. The gold we’re looking for are the lessons that are buried deep within the thousands of memories in 2020. The art is in extracting the gold and letting go of the tons of rock and tailings from the mining process that will only weigh you down. The tailings are those feelings of regret, of shame. You did what you did. You didn’t do what you didn’t do. You can’t change it. You can only learn from it and aim to do better in the future.

As I look to 2021, my resolve is to strengthen three habits. This year, my sleep has been thrown off, my morning routine is not where I want it to be, and my exercise has suffered. This is my focus in 2021.

Let's Go Out For Dinner Dec 30, 2020

Show notes

What does it mean when restaurants close? What does it mean when restaurants close for real estate investors?

On today’s show we’re going to take a deeper look at the restaurant industry. This year, 76 restaurants closed in Dallas, never to return. It’s common for some restaurants to fail even in a strong economy. But this year was different.

Several estimates from earlier this year suggest that 10% of restaurants closed permanently in Q2 of this year.

OpenTable is the company that makes it easy for you to book a restaurant table online. So not only are they convenient, they’re a great source of real industry data. They maintain data for each city in which they operate, each state, each country and even globally.

So far this year, the number of seated diners in 2020 is down 58.4% on a global basis. Seated diners are down 60.39% so far this year in the USA, and 60.98% in Canada. Diners ate 49.38% fewer seated meals in the UK this year. Some of the business was offset by take-out business for which we don’t have an accurate global statistic. Needless to say, there are few businesses that can survive a 60% decline in business. If people aren’t reserving tables, then servers are not needed. Dishwashers are not needed. Bartenders are not needed. In California, table reservations are down 65.6%. In Illinois, table reservations are down 70%, and in New York state they’re down a whopping 75%. The data for NYC is down an astonishing 83% for the year.

It goes without saying that the PPP assistance that came at the end of March, consisting of 10 weeks of payroll is not sufficient to cover a drop in revenue of 83%. Most of these businesses will have fixed costs that are simply too high for the small amount of government assistance to cover.

The restaurant needs to negotiate with the landlord. The landlord in turn needs to negotiate with their creditors.

For many businesses, deferring the rent isn’t enough to save the business. If all the money is ultimately owed to the landlord, it might take a restaurant 10 years to make up that back rent out of excess cash flow from the business when dining returns to normal. The owner might simply choose to throw in the towel and determine that they don’t want to spend the next decade working for their landlord and essentially making no money. It might be easier to shut down and start again with something new when the time is right.

So when all these properties are vacant, a new restaurant opening has a lot of negotiating leverage to demand rent concessions. The landlord faces the difficult choice of lowering their price to the point of tolerable pain or experiencing prolonged vacancy which incurs even greater financial pain. When a new restaurant faces so much choice in good locations, complete with a modern kitchen already in place, they can negotiate exceptional lease terms.

Restaurant statistics over the past week which includes Christmas Day showed a global average of 61% decline in tables reservations for the last week of December compared with the same period in 2019. The US Average was 62.25% down and Canada is 74.5% down compared with the same period last year.

In my opinion, we’re not going to see a recovery in the restaurant industry until the Spring. Until that time, I don’t see many people making significant investments in the traditional seated dining food service industry. The big question is how many businesses will be left standing in 3 months time.

Wall Street Versus Main Street Dec 29, 2020

Show notes

Wall Street and Main Street have had different philosophies for a long time when it comes to investing. Wall Street’s focus is securitizing the underlying businesses. They’ve created so many derivative products that create financial leverage. This is a packaging and re-packaging of investment vehicles into increasingly large opaque homogenized pools of assets.

What’s insane to me are the valuations being attached to these companies. I’ve long held that wall street valuations are far too high for the underlying assets. If a property is trading at, say, a 6% cap rate. If all the properties being held by that company are trading at a 6% cap rate, and the company is only in the business of holding assets like this, then how could the company be trading at 50x earnings, or the equivalent of a 2% cap rate? Yes, I understand that leverage can increase the yield. But leverage also increases the risk. That risk is already built into the cap rate for the property. How can a company be worth more than its underlying assets?

We saw crazy valuations in the early 2000’s with the collateralized debt obligations. These were nothing more than packaging of pools of mortgage loans into a new financial instrument that could be sold. It had the effect of moving the debt off the bank’s balance sheet and allowing banks to loan even more money. The opaque nature of those debt obligations nearly collapsed the global financial system. It all worked fine as long as the default rate on those debt obligations remained low. When things blew up in 2008, the fragile nature of these paper assets became apparent.

Wall Street seems to be at it again. The latest is a major push by Goldman Sachs to get into real estate, and the commercial sale leaseback game in particular. A unit of Goldman Sachs just purchased Oak Street Real Estate Capital for an estimated $2B.

Sale leasebacks are a way for some companies to strengthen their balance sheets. The buyer purchases the commercial real estate from an active business who in turn take the cash and pay down debt. Instead, the business pays rent rather than servicing the debt. In some cases, it’s a way for companies that have paid down the debt to raise cash without borrowing funds. It’s a game that makes it all seem like a massive shell game where very little of value is being added to the equation.

For the buyer of a sale leaseback asset, the key is in understanding the business health of the selling company.

If we look at the makeup of the Oak Street portfolio, they’re about 35% retail, 50% industrial and 15% office. That’s not a bad asset mix as long as their exposure on the retail side is not at the higher risk end of the spectrum.

Wall Street firms have to be seeing the crazy multiples in the market and are going in search of yield. While so much of Wall Street is focused on arbitrage of paper assets, the underlying fundamentals eventually rule the day.

Another player in the sale leaseback space is Realty Income Inc. This REIT has 16.4B of assets in their portfolio. Their largest shareholders include various Vanguard funds and Blackrock. Together, these two own about 22% of the REIT. This REIT is trading at 51 x trailing 12 months earnings. Another REIT in the space is VEREIT. They’re trading at 31.55 x earnings.

No doubt you’re going to hear about the risk in real estate investing when you see the prices of these stocks fall. Understand that the value of the underlying real estate is disconnected from the valuation of the companies that own them. This is no different than owning Tesla stock or Netflix stock where the market price is disconnected from the financial performance of the underlying business. I’m glad that I’m firmly grounded on main street and not playing the Wall Street game.

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