The Real Estate Espresso Podcast

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Sturgis Motorcycle Rally Sep 09, 2020

Show notes

On today’s show we’re talking about an event that took place about a month ago. It made a few headlines at the time, but there’s been very little said about it ever since.

There’s a global debate raging on the best way to handle the global pandemic. Let’s be clear, there is no good solution. There are three trade-offs to be made.

1) Protecting health for people who might be susceptible.

2) Minimizing damage to the economy through social isolation and quarantine activities

3) Protecting the health care system from being overwhelmed with hospitalizations

Unfortunately, what is a scientific and economic problem has become politicized. At the end of the day, the virus doesn’t care what passport you hold, what political party affiliation you have, where you live, whether you’re old or young.

Last month, there was a motorcycle rally that was held in Sturgis South Dakota over a 10 day period in which nearly 500,000 people descended upon a small town of about 7,000. This annual event brings people from all over the country.

A new paper which examines this event was published last week by the IZA Institute for Economic Development, funded by The Deutsche Post. The paper is DP No. 13670 entitled: "The Contagion Externality of a Superspreading Event: The Sturgis Motorcycle Rally and COVID-19".

The Sturgis Motorcycle Rally represents a situation where many of the “worst case scenarios” for superspreading occurred simultaneously: the event was prolonged lasting 10 days, included individuals packed closely together, involved a large out-of-town population. Attendees to the events were only required to show that they had a mask in their possession, but were not required to wear it. The only large factors working to prevent the spread of infection was the outdoor venue, and low population density in the state of South Dakota.

A month after the event, it looks like the number of cases in the community multiplied by a factor of 4-5. To be clear, the case counts in Meade county prior to the motorcycle rally were low. There were approximately 2 cases per 1,000 population. After the rally, the number grew to 9 cases 1,000 population.

Not only that, but the event was also responsible for the spread of the disease in the communities where attendees originated from.

The study used anonymized smartphone data from SafeGraph, Inc. They used the SafeGraph data to measure the number of non-resident visitors to the census block groups (CBGs) where Sturgis Motorcycle Rally events took place, (ii) trace those attendees back to their home counties, and (iii) measure stay- at-home behavior among residents of Meade County.

South Dakota is one of the least densely populated states in the country. They naturally had social distancing built into their society. For that reason, South Dakota has had no restrictions on restaurant closings, no restrictions on social gatherings, no restrictions. They put the responsibility in the hands of residents and visitors to act responsibly. There is no mask wearing mandate, and there is no work from home requirement.

The makeup of attendees was 0.9% from the local county, about 8.5% from other counties in South Dakota and close 90.7% from out of state. All of this data was provided by the smartphone pings.

The authors of the study concluded that the Sturgis Motorcycle Rally generated public health costs of approximately $12.2 billion. The authors financial conclusions were flawed in my opinion, but the rest of the study was solid.

This study is the first real petri dish experiment of a large gathering involving large numbers of people to a live event, and involving travel from many parts of the country into a single location. Since the study was published last week, I expect that it will play a role in shaping public health policy for governments around the world.

Industrial Market Update Sep 08, 2020

Show notes

There’s no question that there is a monumental shift happening in the world of commerce. Much of this is driven by the continual need to cut costs. Retail space which touches the end consumer is still relatively expensive. In fact, rent for a retail business rates among one of its top expenses. Not only that, the density of merchandise per square foot is quite low. After all, you want to be able to browse the aisles and see what you are about to buy without visual clutter. Clutter creates confusion, indecision, and ultimately undermines the buying experience.

We know that e-commerce is gaining market share. It’s not just the convenience of buying online. Even the bricks and mortar retailers are realizing that they need to reduce their retail footprint in order to compete. The purpose of the showroom has changed. It’s now just what’s required to showcase the merchandise, and not to hold inventory. The space is too expensive.

If you want to have a large catalog, and you want to drive a lot of volume, then you need a large space. Customers want to be able to enter a store without feeling crowded. Think of Ikea furniture stores from Sweden that have designed their stores to showcase how to use their product. But the stores themselves relegate the majority of the inventory to an attached warehouse where the product is flat-packed and stacked to minimize the warehouse footprint.

Last month, Colliers International published their industrial market update for the second quarter. This year, despite the pandemic, there has been a market absorption of 104M square feet of industrial space so far in 2020. There is 170M square feet of new supply that has entered the market during the period, and there is a further 314M square feet under construction. The new supply represents the eighth quarter in a row where supply has exceeded demand. Vacancies are trending upwards, despite the robust demand growth. Vacancies were 5.5% for the quarter up by 0.5% from the same period last year. Clearly supply is getting ahead of demand in some areas.

You see, in every sector you need to look at both supply and demand. Some cities have a very large industrial footprint. I’m thinking cities like Dallas and Houston which each have about 896M SF and 615MSF respectively. Now industrial demand breaks down into several sectors, including warehouse, flex, and manufacturing. The growth in the Dallas market in Q2 was 10M SF which represents an addition of 1.1% of the total market inventory in the second quarter. But if you compare with other markets like Austin Texas which only has 56M SF in the entire market, it looks like Austin is under-supplied compared with its population. Austin does have some major players with companies like AMD, Dell, Whole Foods, having sizable industrial footprints. The announcement of Tesla’s new factory in Austin is sure to bring more activity to the market. There is a shortage of industrial zoned land in the community and there is a need for additional last mile logistics space for many e-commerce businesses.

As with any business, you need to understand your customer, and you need to understand the supply demand dynamics of the local market.

Like retail, industrial projects are often tailored to a specific customer’s needs. Making an investment requires a deep understanding of the market dynamics for both supply and demand. Repurposing a warehouse from one customer to another is generally not that difficult. But location is important, outdoor storage is important, turning radius for trucks is important, freeway access is important, and transportation for employees to get to work is important. For example, if the employees in a warehouse need a car to get to work, then they will need to earn more than those who can take public transit.

Job Loss Ripple Effect Sep 07, 2020

Show notes

While the August numbers for unemployment look encouraging, there are signs on the horizon of a fresh wave of corporate layoffs that will deal another blow to the global fragile economy. Some of the layoffs are merely announced and have not taken place yet, so they won’t appear in the official statistics until September, October, and in some cases after the US election.

Some businesses in the resorts and hospitality industry have now started to make temporary job cuts permanent. MGM Resorts sent layoff notices to 18,000 people a little over a week ago. The airline industry is poised to cut hundreds of thousands of jobs starting on October 1. The US Federal government’s cash injection for the airlines runs out on September 30 and there is no new money on the horizon that would seek to prevent a massive shrinking of the airline industry. United Airlines is letting 16,000 people go. American is letting 19,000 people go on October 1. Boeing is cutting 10% of its workforce. That’s going to have a trickle down effect to the hundreds of companies that supply parts to Boeing.

But it’s not just airlines and hotels. Ford Motor company is letting 1,400 people go through early retirement, a reduction of 5% of their workforce. Daimler, which owns Mercedes Benz may cut up to 30% of its global workforce. Coca-Cola is offering buyout packages to 4,000 people. We don’t know yet how many will take up the offer and how many will be forced to leave in the end.

Salesforce.com is letting 1,000 people go. LinkedIn has cut 6% of its global workforce. Warner Media is letting 600 people go starting in August. NBC Universal is expected to cut about 10% of its workforce.

The big issue for most of these businesses is the massive amount of debt that is being carried on the balance sheet. When revenues are a fraction of the pre-pandemic levels, these businesses are insolvent. They had the ability to withstand a few months of bleeding, but we’re now 7 months into the pandemic with no clear end in sight.

Frequent listeners to the show will know that I went on record early this Spring and predicted an 18 month economic winter. If my prediction is correct, then we will start to come out of this mess sometime in mid 2021.

We are in the middle of an election campaign in the US. Despite this, there are signs that the government will not be able to prop up the economy through the length and breadth of this pandemic induced downturn. They can prevent distressed properties from coming on the market by artificially freezing evictions and foreclosures. But they can’t do that indefinitely. Otherwise they create an environment where there is no consequence to defaulting on debt. The Fed simply won’t buy all the toxic debt in the world. This means that there will be a downturn in real estate. We’re seeing the beginnings of it in the hotel industry, in retail and in office asset classes. Eventually the job losses will cascade the pain into the residential housing market. That’s unavoidable, even if the short term metrics show a hot market. These job losses will ripple through the economy and real estate prices will not be immune. Your job is to start amassing cash to rescue the right projects when the time comes. That will be an exercise in patience and waiting for the opportunities to arrive.

Carina Guzman Sep 06, 2020

Show notes

Carina Guzman hails from Ottawa Canada where she specializes in all forms of land development. This includes land assembly as well as raw land development. In particular she has specialized in transit oriented land plays. This is a very smart strategy that can work in any community that has a strong transportation infrastructure.

Melanie Finnegan Sep 05, 2020

Show notes

Melanie Finnegan is based in Orem Utah where she specializes in tax lien investing, specifically on land. You can learn more at taxlienprocess.com or at taxlienwealthsolutions.com. Today's conversation was packed with valuable strategies on how to multiply your investment.

Stress At The Office Sep 04, 2020

Show notes

We’ve been saying it for a while. There is no such thing as returning to normal. What will emerge from this pandemic is a new normal. Exactly what that will look like is anybody’s guess. But there are some clues that the pandemic has amplified.

If you are the Owner of Class A office space, that has become a hazardous occupation.

Existing deals are getting undone on a weekly basis. Back in May, Shopify announced that all 5,000 of its staff would be working from home permanently.

Last week, Pinterest Inc. announced it has terminated a 490,000-square-foot lease signed just last year. It’s a mixed-use development slated to replace the San Francisco Tennis Club near the company's headquarters campus.

Pinterest's agreement involved a one-time payment of $89.5 million in the third quarter of 2020 to break the lease. The termination means that Pinterest will no longer be liable for future minimum lease payments of about $440 million.

One of the largest law firms in Toronto made a decision which we don’t believe has been publicly announced to keep their lawyers working at home. They are planning to reduce their office space requirements by two floors in a Class A office building. The resulting savings are estimated at about $1.4M in leasing costs per year.

Moody’s Analytics estimates that the value of office buildings across the U.S. will fall by 17.2% in 2020.

A recent report from CBRE shows that on average, new leases are being signed with an average rent concession of 8.9 months of free rent in the second quarter of this year. That’s up from an average of 8.4 months of free rent prior to the pandemic.

Facebook announced that they expect half of their workforce to work from home over the next decade.

Suburban office parks have lost their luster for a variety of reasons, including a growing preference among younger workers for life in more dynamic urban centers than in sometimes staid and sleepy suburbs. And the rapid pace of technological advancement has made the need for many clerical and processing jobs and the real estate to house those workers increasingly obsolete.

These buildings are about as useful as the fax machines that you can still find hidden in the closets of some of those buildings.

Many companies chose to relocate their offices into the downtown core in order to attract a younger workforce that wanted to be located in an urban setting. So the trend was back into the urban core.

But today, if you drive around NYC, you will see that nearly 90% of office workers are not coming into the office. WeWork has about 2M square feet of empty space in NYC.

The folks at Twitter have told their workforce that they can work from home if they choose. When they do re-open, they expect to occupy only about 20% of their current office space.

Google announced a month ago that they would keep nearly 200,000 employees and contractors working from home until at least next July.

Is the office model dead? No. But the model for working is changing and companies are definitely going to reduce their footprint. They will reconfigure office space to include more meeting rooms, temporary offices and more configurable flex space for those times when collaboration is needed.

What we’re seeing right now is an acceleration of a trend, and a significant downward shift in the value of office space, not only the suburban office space, but also prime office space in the urban core.

AMA - Analysis Spreadsheet Sep 03, 2020

Show notes

Today is another AMA episode.

Carolyn asks. I’m not an expert in Excel and I paid to purchase an Excel based tool for analyzing multi-family apartment projects. I’m still learning about everything the tool can do. What is your recommendation for analyzing project?

Carolyn, this is a great question. In my experience, there are several different types of analysis that need to be performed depending on the exit strategy for your project.

It’s that exit strategy that fundamentally changes the type of analysis you’re going to do. If the project has a long term hold component, then you want to model the construction phase, the leasing phase, the steady state operation, and finally the exit. But the exit will be different depending whether you sell the building, or refinance it.

We tend to break down the project into those individual phases. Each phase has to be analyzed separately and each phase has to work on a standalone basis.

For example, it won’t help to have a great long term hold if you can’t get through the leasing phase. Leasing won’t matter if you can’t get through construction, and so on.

I find that most of the pre-packaged software solutions assume a single model. They assume a straightforward purchase, improvements, and sale. But the truth is that most projects are really executed in phases. The financing of those phases will often vary. For example, you might purchase the land with a small amount of equity. You might raise additional financing to go through the zoning process with a small interest reserve for the debt during that phase. From there, you will raise additional equity and debt for the construction phase. Once construction is complete, you might have a short term bank financing, and then after a seasoning period you would re-appraise the property and replace the financing with permanent financing.

For that reason, we create our own custom spreadsheet each time we undertake a project. Each of these phases look like a separate project with their own financial metrics and criteria. A separate financial model is needed for each phase of the project, and then they need to tie together.

When you add the different types of financing terms, that affects how the project is modelled. I’ll give you a simple example. Let’s say that you have two classes of investors, the first class of investors are straight equity investors who have a share of the ownership of the project. The second class of investors might be preferred investors. They have a rate of interest calculation on their investment and perhaps a lower ownership. Maybe their interest rate only starts to accrue when you get the building permit and then becomes payable to the investor when you get your occupancy permit, and then the interest accrual terminates when the refinance into permanent financing is complete.

What I’ve described is a perfectly normal situation. But I can guarantee you that very few of the canned software solutions out there will model this correctly.

By the time you’ve figured out all the formulas in the spreadsheet you just purchased don’t model your specific situation properly, you have expended the same effort as if you would have created the spreadsheet yourself.

When you’re dealing with investors, or even if it’s your own money, you need to understand the formulas in the spreadsheet and make sure they accurately reflect what is actually going to happen in your project. If the financial model is different from your assumptions, then you’re going to have a problem. It’s a problem that could have been avoided if you had an analyst who is an expert both in Excel and underwriting projects of your type. That analyst needs to audit the spreadsheet multiple times until they are no longer finding mistakes in it.

I realize this is probably not what you wanted to hear. But it’s my best advice based on seeing many projects.

AMA - Bad Construction Foreman Sep 02, 2020

Show notes

Today is another AMA episode (ask me anything).

Kristi from Dayton Ohio asks:

I had to let my most trusted foreman go. I was really sick for 3 months last March and this man became my right hand man. I let him have more control of my job sites than I normally give any employee because I trusted him.

He also became our friend and would frequently send food and candy home for me and my husband. I stopped talking directly to my employees and only communicated with my foreman.

We went through 38 employees since January. I had multiple complaints from my employees that my foreman would yell at them, have unrealistic expectations, and wasn't doing any work on any of the job sites, he was only giving orders.

My first mistake is that I thought the job my foreman was doing for me was more important than listening to my employees who had reached out to me. I let my foreman fire the people who weren't working out.

I decided to watch the work he did during a course of a week.

During this week of observation, hardly anything got done, the work he did was shotty, and he tried to take credit for others work. There was no one else to blame for the short comings. He had to go. Where did we go wrong?

BOM - Dream Big by Bob Goff Sep 01, 2020

Show notes

Our book this month is Dream Big by Bob Goff. Bob is someone who lives his own life out loud.

After graduating law School, Bob decides to take a 3 month vacation with his family and visits a remote part of British Columbia.

He has taken the personal initiative to build a lodge in a remote ares of British Columbia. He buys a 2500 acre parcel of land and spends 5 years building the lodge.

On a visit to Uganda, he witnesses the atrocities being committed by so-called “witch doctors” against young children. He influences the Ugandan parliament to enact legislation to outlaw these practices and then undertakes to prosecute one of the witch doctors under that new law. He then realizes that prosecution is not the answer, so he starts a school for Witch doctors so that by educating them to be better witch doctors, they will no longer commit atrocities against children.

He started a school in Afghanistan for girls.

He has brought warring heads of state to his lodge in BC and negotiated peace treaties with zero authority to do so.

A short time later, he was appointed as the Ugandan ambassador from Uganda to the United States. He is a US citizen, an non-Ugandan, and is representing the Ugandan nation as Ambassador to the US.

Bob has truly done the impossible, simply by daring to dream big. But when he talks about dreaming big, this is not the idle dreamer he’s talking about. He’s talking about becoming clear on your life’s purpose and then aligning your actions to be congruent with your life’s purpose.

This book is not a typical formula based self help book, even though it might sound like it from the outset.

Before you can awaken to your life’s purpose, you have to get clear on who you are, and who you want to be. This is a deep exercise in introspection and self awareness.

Knowing where you are is an essential part of developing that self awareness. But we’re not talking about where you are geographically, we’re talking biographically.

Once you know that, you want to get clear on what you want, what you really want out of life. No we’re not talking about a new Porsche. That’s a distraction. There’s nothing wrong with wanting a Porsche. But if that’s your driving ambition, then you’re not awake to your life’s purpose.

We’re not talking about what you want to do either. Some people wrap up their purpose in doing.

A better approach is to determine who you want to be and use that to inform what you want to do.

Now Bob, is a person of Christian faith. He does make references to that faith in the book. I’m not of the same religion as Bob, and his references to his faith might be problematic for some. They were not for me.

Regardless what you believe, his exercise in clearing your life of everything and putting back only the things that truly matter is critical to fulfilling your life’s purpose. You can’t accomplish anything of significance if your life if cluttered with too many distractions.

Bob Goff personifies the word Audacity. He takes the time to get clear and do the unconventional if it furthers his dream. But these are not just idle dreams.

You see if Bob had done just one extraordinary thing, like opened a school in Afghanistan, that would be cool. But he’s a serial dreamer who has figured out how to execute one audacious idea after another. Has he failed? Sure. He’s failed plenty. But no different than the best baseball players in the world are batting less than 500. Michael Jordan, one of the best basketball players of all time, has lost more games and missed more shots than anyone. But then he’s probably taken more shots than anyone.

The size of your ambitions don’t necessarily indicate the difficulty of achieving them. Think instead of the magnitude of the impact they’ll have on your life and the lives of the people around you.

AMA - Goals for 2020 Aug 31, 2020

Show notes

Today is another AMA episode - “Ask Me Anything”.

David asks,

I know that every year you have a goal setting workshop. You most likely established some very detailed short and long term goals.

How have these goals been impacted with the current change in world events?

David,

That’s a great question. 2020 is emerging for many as one of the most uncertain years in recent memory. It started with the Covid-19 back at the end of January.

Last week, it was Hurricane Laura, decimating one of the communities that I have several projects underway. I would not have predicted that I would spend days with my mental energy consumed by hurricane and its aftermath.

As you rightly pointed out, I’m a huge believer in goal setting. In fact, one of my goals this year is to hold my annual goal setting workshop in the first week of December. We plan to hold it in the beautiful Banff National Park area where we have a portfolio of properties and we can minimize the risk of disease transmission. But from where things stand right now, I’m not sure if we will get to even hold a face to face event.

I can tell you that it is difficult to hold an effective event that requires deep introspection when done over a virtual environment. There are simply too many distractions in the home office.

We will see if we hold the goal setting workshop this year, and if so, how we will do it.

So back to your question. In the last week of November of 2019 I spent three days on the beach in Mexico with a small group of like minded entrepreneurs setting goals. It’s a deep exercise in which you focus on getting alignment of your values.

There are two types of goals that you can set. You can set attainment goals.

These goals are things that have a tangible outcome. You might set a goal of buying a new house or buying your first investment property in 2020. That would be an attainment goal.

The second type of goal is a habit goal. This is where you might set a goal of meditating daily, or running two miles each day, or getting 8 hours sleep daily. That’s a habit goal.

So when we talk about goal setting in 2020, we need to look at both attainment goals and habit goals.

In my case, most of my attainment goals for 2020 are progressing but are delayed. The truth is, we are still on track to accomplish those goals on a later timeline.

One thing that many people struggle with is abandoning a goal when the original objective can no longer be met.

In our culture we have a highly competitive social conditioning on ideas like success and failure. So much of that definition is based on comparison culture. Did you meet your objectives for the quarter? Did you win the basketball game? Did you meet your sales quota for the month?

On July 1 we reviewed the book “The Infinite Game” by Simon Sinek as our book of the month. In that book, Simon distinguishes between the finite mindset and the infinite mindset. In the infinite mindset, you are not playing the win-lose game. You’re playing the game of continuous improvement. You’re focused on how you’re using your most precious resource, that is time.

The fact is, much as we would like to be in control of our lives, that are some things we can control, and other things we can’t. Getting clear on what we can control is essential to making those choices. It’s easy to get into a mindset that says your hands are tied. The truth is, you have a lot more choice than you might think. Surprises can invert your priorities in the short term. In an uncertain environment, my focus is on my habit goals.

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