The Real Estate Espresso Podcast

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Universities That May Disappear Oct 19, 2020

Show notes

On today’s show we’re taking a look at what’s happened in secondary and post-secondary education. Late last week The National Student Clearinghouse Research Center published data on the enrolment levels at universities and community colleges across United States.

In most economic downturns there is a loss of employment and out of work people use the opportunity to retrain. In past downturns, university enrolments have been seen as recession resistant. Enrolments have gone up as out of work mature students decide to focus their efforts on an area of the economy that has higher demand than their previous job.

This year has been different. Undergraduate university enrolment is down 4% compared with the same time last year. First time enrolments are down 16.1%. This number is significant because it will trickle through the system for the next four years.

Graduate student enrolments grew by 2.7% this year. So perhaps students who might have entered the work force elected to take their education one step further. Graduate students usually make up about 15% of the total university and so the positive contribution of these new graduate students to the overall student population is estimated at 0.4%.

Enrolment of international students is down by 7.5%. This makes sense with the global travel restrictions that come with the pandemic. But the percentages mask the economic impact. Tuition levels for international students are traditionally higher than those for local students. So the economic impact is disproportionately high.

The profit margin at most universities has historically been estimated to be in the 10% range. In the wake of the 2008 financial crisis, these grew to about 15%. At the end of 2019, profit margins across the industry were at an alarming 3.5%. Today average profits margins are averaging below 4.5%. So if enrolment is down in these bricks and mortar universities that have high fixed costs, many of them will be falling below profitable levels.

Universities are real estate anchors in most communities. Neighborhoods and commercial main streets are built around them.

The schools at greatest risk are the public schools and the private non-profit schools. But virtually no school is immune. The story of James Madison University, in Virginia is one of many possible case studies. They made the decision to extend spring break and graduation. By the middle of March, they had transitioned all of their classes online. They might be considered one of the most agile schools during this pandemic. They issued refunds for housing, food and parking and no refunds for tuition. The school lost $30M dollars in just 9 weeks.

According to credit rating agency Moody’s, 30% of colleges were running deficits before coronavirus. Not only that, 15% of public universities had less than 90 days of cash on hand!

This is despite the fact that college tuitions for a four year degree have multiplied by 1600% over the past 40 years. Universities used to rely upon the notion of scarcity. You could only have so many students in a class. For example, the law school at Yale has about 200 students. The classroom was only so big. That scarcity meant that they had to limit enrolment. But now, with the global reach of the internet, there is no real limitation on the number of students that can be reached. The incremental cost of adding a student in a virtual environment is small.

There is a prediction that as the internet democratizes knowledge, about 25-30% of universities will close permanently in the next few years.

As you are evaluating communities to invest it, you’re probably still assuming that the university is an anchor tenant in the community and more importantly that it will endure past the pandemic. I want you to examine the financial viability of the local college or university as part of your due diligence in any local community in which you invest.

Physician burnout with Dr. Tom Burns Oct 18, 2020

Show notes

Dr. Tom Burns is founder and partner in Presario Ventures, an Austin Texas based apartment development company specializing in Class-A new construction projects. In the mornings, he is a practicing orthopaedic surgeon. Tom just wrote a book "Why Doctors Don't Get Rich" which illuminates the path for other doctors, dentists, lawyers to replace and displace their professional income so that they can practice their profession for the love of it, and not for the money. This is such an inspirational story. You will hear Tom's humility in this interview.

The book launches on October 27 and you can be one of the first to get a copy at richdoctor.com.

John Cooke - ServiceMaster Oct 17, 2020

Show notes

John Cooke specializes in disaster restoration and hazardous materials situations. His team of over 400 staff get involved in all aspects of property maintenance from commercial cleaning to assisting families during the depth of insurance claims. On today's show John and I are discussing how to clean in a Covid-19 environment. What are some of the right solutions and how to apply them. This was a very insightful conversation and I learned far more than I was expecting to.

You can reach out to John at inquiry@smottawa.com or directly by phone at 613-244-1997 where he can connect you with trained specialists in virtually any market in North America.

AMA - First Commercial Deal Oct 16, 2020

Show notes

Today’s show is another AMA episode. Today’s question comes from Saadya in NYC.

“I’m looking to conduct my first commercial deal. What is the most important thing to look for in that first project?”

Well Saadya, this is a great question.

When it comes to having a successful project, there are three main factors to consider.

1) The submarket

2) The people involved

3) The deal specifics

You’re based in Brooklyn. The NY area is highly transient. It’s such an expensive market that people tend not to stay for long unless they really have to. It takes a strong consistent income stream to justify the cost of living. I know of so many people that live in NYC for just a short period of time.

Real Estate is hyper local. I would recommend you choose a location that is experiencing population growth and job growth behind it. I would stay away from areas that are losing population. I like Philadelphia which is not too far from where you’re located. I would stay away from the expensive bedroom communities North of NY and in Connecticut. The taxes are too high, despite the fact that many people from NYC have moved to those communities this year during the pandemic. I don’t believe the growth in those communities will be sustained. I would choose a community that had strong growth prior to the pandemic, and then that growth continued or accelerated during the pandemic.

2) I’m fond of saying that a good deal badly managed is no deal. So the key is to make sure that you recruit the best quality people into your team. There are a shocking number of poor quality people in this industry, and a few outright crooks.

3) The deal itself. This is where most rookie investors start. They make it all about the deal. Let’s be clear, on your first few deals you will make some mistakes. It’s super important that those first few deals have next to no downside risk and lots of upside. You will need that to act as a cushion against the inevitable mistakes that will happen.

So you’re looking for a deal that is off market. Even in today’s environment we have a lot of money chasing deals. It’s still an auction environment. You don’t want to be bidding against other more experienced investors who might be willing to pay more. You almost always end up paying too much in that environment.

You want to find those special cases where there is a problem to be solved. It might be an estate sale where the property is physically distressed or financially distressed in a good area with strong fundamentals. It might involve rescuing a property that is in pre-foreclosure. You would have the opportunity to be solving a problem for a family that is in a difficult spot. The moratorium on evictions and foreclosures is masking the depth of distress that is just beneath the surface. These business and real estate failures will create a re-pricing of assets in the near future. I can’t tell you exactly when that will happen. It could be in the next 90 days if government continues to gridlock on any decision making. It might be longer, perhaps 6-9 months away. But the tidal wave of distress is coming. It might involve a property that must be sold because of a divorce, or a discord between family members. That represents an opportunity to step in a save a family member from financial ruin. A friend of mine calls that doing good, and doing well at the same time.

Economic Vacancy In Senior Housing Oct 15, 2020

Show notes

This year is creating a number of precedent setting situations.

The Senior Housing industry is under extreme financial pressure these days. Prior to the pandemic they were experiencing dropping occupancy as more and more new supply entered the market, faster than demographics could support increased demand. Some markets have experienced occupancies in the 80’s and 70’s. The most over-built market in the US right now is San Antonio Texas where occupancies were averaging in the low 80’. Then the covid-19 pandemic hit.

The combination of a tight labor pool and falling occupancy are the main pressures senior housing operators currently face, and those pressures are not going away anytime soon. Staff who are concerned about workplace safety and contracting Covid-19 are demanding higher pay.

The increase in expenses, combined with falling occupancy and price concessions has hampered providers’ ability to raise rates. That’s resulting in NOI erosion and margin pressure.

On today’s show we’re talking about the impact of the moratorium on evictions on senior housing. Senior housing is partly a residential situation, but it’s primarily a service business. To be clear, we’re talking about the private pay, premium end of the market. In those properties, the real estate component represents maybe 20% of the cost of delivering the service in most cases. Labor typically accounts for about 60% of operating expenses, and providers are facing major workforce pressures at the moment. Of course the pandemic itself has increased operating costs for assisted living and skilled nursing operators as additional protocols have come into play.

If a resident stops paying, the question is “What is an operator to do?”

Does the operator put a claim on the estate of the senior citizen? Do they seek a court order to garnish social security payments? Do they seek a court order for capital encroachment if the senior has any savings? Do they evict? The image of an eviction of an elderly person with multiple infirmities is horrifying to say the least.

It may be too early to determine what the law means for residents of senior housing communities across California and similar rules across the nation, but those in private-pay senior housing should be studying its details.

We have a situation where there are millions of people unemployed. It’s often the adult children of seniors in assisted living who pay the bill. The seniors themselves are already on fixed incomes.

Overall, the California law gives tenants broad protections from evictions,

The new law provides eviction protections through January 31, 2025, but in order to be protected you must (1) return the declaration of COVID-19-related financial distress hardship declaration within 15 days after receiving any eviction notice, and (2) pay 25 percent of each month you could not pay from September 1, 2020 through January 31, 2021 by January 31, 2021.

This raises a number of legal questions regarding how services are delivered in senior housing. Should there be a residential lease for the accommodation portion, followed by a separate contract for health care services?

What is classified as rent perhaps should be brought into alignment with the actual cost allocation between rent and services. Considering that the average stay in assisted living could be in the range of 24-36 months, the idea that residents could choose not to pay their fees for 17 months and then only be required to pay 25% in order to extend the eviction moratorium for another 4 years. It would then require the senior living operator to sue the estate in order to get paid.

Why Are Interest Rates Rising? Oct 14, 2020

Show notes

We’ve been hearing for months how interest rates are going down and how the Federal Reserve is going to maintain rates at near zero levels until well into 2022.

That all sounds like good news for real estate investors who are looking to borrow funds at the lowest possible interest rates.

As we’re talked about before, the interest rate charged by the banks is often tied to one of two benchmark rates.

Shorter term loans and variable rate loans are usually tied to a short term benchmark like LIBOR which is the London Interbank Overnight Rate.

Permanent financing is usually tied to the yield on the 10 year US Treasury Bill.

When the Congress enacted legislation back in March to protect the US economy that involved a massive amount of printing of money. The total in new spending was $2.3T dollars. Most of that money was issued in the form of Treasury Notes having a short term of one year or less. As those notes become due, they are being repriced as longer term debt which carries with it a less frequent need for renewal.

Over the past 80 days, the yield on the 10 year treasury has gone from 0.52% to 0.79%. That increase in almost 1/3 of a percentage point translates into interest rates for permanent financing that are 1/3 of a percentage point higher.

There are three scenarios to consider.

1) A Republican sweep of the White House and both chambers of government

2) A split of the chambers of Government. It may not actually matter as much who wins the White House.

3) A Democratic sweep of the White House and both chambers of government.

Let’s look at all three of these scenarios. According to the polls, a Trump victory in the White House is looking less likely. It’s highly unlikely that Republicans would win all three. Whether Joe Biden or Donald Trump is the next President, both will continue printing money. The big question is how much.

The second scenario with a split between the House and the Senate will result in legislative gridlock. We’ve seen that in the past 7 months with no new money being pledged to recover from the pandemic. The level of acrimony between the parties has become the new normal in government.

The third case, involving a Democratic sweep of the White House and both chambers of government has the potential to unleash an unprecedented level of spending. It’s that third scenario that has the markets worried. We are already seeing signs of inflation even though it’s being downplayed by politicians. Inflation is the hidden tax that most people can’t isolate. When a can of tomatoes at the grocery store goes up by $0.50 most people blame the grocery store for the price increase. They rarely put the blame on the Secretary of the Treasury, or the Chairman of the Federal Reserve, or their representative in Congress.

When those trillions of dollars get printed, the debt goes somewhere. So far, the US has been able to export the debt over the past 30 years. China’s central bank and Saudi Arabia have been willing buyers of all that debt. But the willingness of those countries to fund US deficits seems to be evaporating.

For now, we’re in the middle of a global pandemic. All economies are suffering. When asked the question about which currency to buy, there doesn’t seem to be a stronger currency emerging. The Euro is in bad shape, the Yen is hopelessly over-leveraged, and international investors are not about to put their trust in the Chinese Central government.

As we get closer to the election, and even after the election whoever wins we can expect the yield for 10 year Treasuries to go up. You have a small window in which to lock in historically low interest rates. Even if the Fed keeps rates low, I believe Treasury yields will go up, and therefore interest rates for investors.

CBRE Market Survey Oct 13, 2020

Show notes

Commercial brokerage house CBRE conducted a survey of CBRE investment and valuation professionals in the last two weeks of August.

One of the top items that I saw in that survey was the word risk. As we’ve talked about several time recently, risk has become top of mind for most investors this year.

There are a number of sentiments in the survey that are worth noting. We’ll start by talking about investment market conditions.

Survey respondents report that a disconnect between buyer and seller expectations has emerged, with more than 60% of buyers looking for discounts from pre-pandemic prices versus 9% of sellers willing to offer them.

One-third of survey respondents were underwriting with the same rental income assumptions as in Q1, with the remaining two-thirds adopting more conservative assumptions. Half of those with unchanged underwriting assumptions were in the industrial sector.

CBRE professionals indicate that investors are placing greater importance on certain investment criteria than before the pandemic, particularly tenant credit quality (cited by 85% of respondents), length of remaining lease term (64%) and building occupancy (64%).

Roughly two-thirds of survey respondents believe that investment activity will recover to pre-pandemic levels within one year. But that sentiment varies widely by asset class. Let’s dig into the details.

When asked how it will take for market conditions to return to pre-pandemic levels, the answer varied widely by asset class.

In the office asset class, 72% of respondents said it would take more than 12 months for offices in the central business districts. For offices in suburban settings, 48% said it would be more than one year, versus 52% who said it would take less than a year.

In the retail sector, 58% of respondents said it would take more than one year for market conditions to recover to pre-pandemic levels.

In multi-family 84% said it would take under a year and 45% said it would take less than 6 months.

Industrial seems to have hardly skipped a beat during the pandemic.

When asked about the factors influencing investment decisions, respondents said that three new factors loom large when looking at new investments.

1) Building occupancy

2) Length of time remaining on leases

3) Credit worthiness of the tenants

These factors seem much more important than in the past.

There is no question that the business outlook is considerably more negative, especially in office and retail.

Restoring Order In Chaos Oct 12, 2020

Show notes

On today’s show we’re talking about chaos. This year has been anything but orderly. The handling of the pandemic by governments all over the world has been met with raging opinions across the board. There are those who believe governments are not doing enough to keep us safe. There are others who believe the entire response to the pandemic is overblown.

In order to effect the best decisions the right things need to happen, and they need to happen the right way. You will never please everyone. But if the rules appear arbitrary and inconsistent, that very fact will reduce faith in the rules and reduce compliance with the rules.

The level of frustration in the population stems from the seeming contradictions in public policy. It’s difficult to reconcile those contradictions.

There was the time when public officials told the population that masks were a bad idea. That guidance made no sense. It was not honest, and anyone with a shred of intelligence knew it. Now masks are mandatory in many places, but not all places.

A full scale lock down of the population was seen by many as being heavy-handed. Taking a walk in the forest, distanced from others was not putting anyone at risk of either spreading nor contracting Covid-19. But for a time, it was against regulations in many states, towns and nations.

It’s pretty clear that we are entering a second wave outbreak of Covid-19.

But our governments are acting in an inconsistent way. My own provincial government closed down restaurants, gyms, and strip clubs this weekend for at least the next month. But they kept schools and universities open. This defies logic. In response to the restaurant closure, I know of several people who chose to go out for dinner in a restaurant for one last “hurrah” before the restaurant closures. If it’s not safe to go in a restaurant on Saturday, then it’s probably not safe of Friday night either. If smart educated people are defying logic, then they’re not believing what government is saying to them.

We’ve been seeing that the majority of new cases in younger people. Yet, we’re doing nothing to reduce social contact in younger people. In our school system student in 4thgrade need to wear masks. Students in 3rd grade or younger need to wear masks. I know of one teacher who teaches a split class where half the students are in third grade and half and in fourth grade. Half the students are wearing masks and the other half are not.

In Europe, there is a patchwork of regulations that are difficult to understand, and again seem to defy logic.

The loosening of restrictions this summer helped Europe’s economy and partly saved the tourism season that is critical in countries such as Italy and Spain. But it also contributed to a sizable jump in the number of infections. Countries such as the U.K., France and Spain are now logging confirmed infections close to or above last spring’s numbers.

Restricting arrivals from outside Europe isn’t an effective containment method when you have a rampant pandemic like we are seeing right now in most of Europe. Travel restrictions from abroad work in places like New Zealand and Australia where the case counts are extremely low and they have effectively kept Covid-19 out of the country. But when you have a full-on pandemic and you can travel freely within the EU, the logic makes no sense.

If you’re confused by now, you’re probably getting the idea that governments are having a hard time getting their arms around making decisions.

I follow Dr. Chris Martenson and Adam Taggart at Peak Prosperity. They have a very solid science based video series on Youtube that is published regularly with the latest on what has been learned. I also follow the work of Dr. John Campbell in England who has done a great job of curating the scientific and medical studies on the pandemic.

Phillip Vincent Oct 11, 2020

Show notes

Phillip Vincent is the principal at MomsHouse.com where they specialize in helping families transition the elderly from their single family home to assisted living. During those moments, the families are experiencing a complex web of problems and Phillip's focus is on solving their problems. You can learn more and connect with Phillip at momshouse.com.

Valerie Malone Oct 10, 2020

Show notes

Valerie Malone is the principal at Quill Decor where she specializes in interior design for short term rental properties. Her clients are all across North America, even though she is based in Cambridge in the UK. On today's show we're talking about the design elements that make for a winning short term rental property. You can connect with Valerie at quilldecor.com.

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