The Real Estate Espresso Podcast

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What Insiders Are Saying Apr 23, 2020

Show notes

So many people are trying to read the market conditions and restore a sense of certainty in their own minds, despite the current reality. Frankly, it’s hard to make sense of it all.

In an effort to gain greater insight, I’ve been in discussion with family offices, and attending invitation only meetings to get a reading on what some insiders are thinking.

On Tuesday evening I attended an invitation only session with John Stackhouse, Senior Vice President, RBC and Craig Wright, Senior Vice President & Chief Economist, RBC

In their remarks, they shared their perspective on what is happening in the economy. As Canada’s largest bank, they have direct visibility on what is happening since much of the cash in the economy flows through their bank accounts.

Examining the value of transactions for both Visa and Debit cards, the bank has observed that after the initial surge of buying at grocery stores subsided, the current dollar volume of Visa credit card and debit card transactions is down by 60% compared with normal for this time of year.

That’s at the consumer end of the market.

When the economics team at RBC plugged this into their model for the economy, it looks like a 32% drop in economic activity in about a month.

The RBC economics team sees a slow and gradual return to work. They don’t see the flash restart of the major sectors of the economy. Music festivals, crowded restaurants and bars, places of intense social interaction will be among some of the last to open up.

In the month of March, there were a number of notable, albeit predictable patterns in consumer spending.

Consumers spent 88% less on apparel, gifts, and jewelry in the week ended March 30.
For the last week in March, department store sales were down 40% versus a year earlier.
Spending on software and data was up 30% compared with a year earlier as people outfitted themselves to work from home.
After a brief 5% surge in household goods, these sales were off 53% in the last week of March.
Sales of books, subscription music and streaming content remained relatively flat compared with last year.
Naturally, sales of movies and other entertainment was down 79.8%.
Restaurant sales are down 75% as a handful of restaurants attempt to maintain some revenue with take-out meals.
Grocery store sales spiked in the middle of March, and by the end of March were down 11%.
In real estate home sales, prices were holding firm across Canada except in areas with high economic exposure to the oil and gas industry. Sales volumes were down 14.3% in March compared with February. A sneak peak at the first week of April results showed resales running at about half normal levels across Canada.

We expect both buyers and sellers to lay low while extraordinary containment measures are in place. This will maintain a certain balance in most markets and help home prices stay afloat. Inventories have grown in some markets, but not dramatically.

I don’t have the exact comparable data for the United States, but the shelter in place policies between Canada and the US are fairly similar and I would expect to see similar impacts in the US economy.

Location, Location, Location Apr 22, 2020

Show notes

Markets are becoming increasingly hyper-local. That’s more true today than ever. Global transportation has been the great equalizer and has made so many things appear to be commodities.

That’s why real estate is hyper-local. You can’t just pick up an office building that has high vacancy and move it to a place where there is a shortage.

In the absence of a differentiated value, the discussion always degenerates to price. That’s why a pound of sugar tends to cost the same in Portland, Maine as in San Diego, California. A pound of sugar is a pound of sugar. There is no real dominant brand in sugar that distinguishes one supplier from another. It’s a true commodity.

But when we describe real estate we describe the property in terms of its characteristics, its amenities, and most importantly, its location.

Yesterday, the futures contracts for oil went into uncharted territory. Some prices went negative.

Let me take you through a sampling of prices.

Saudi Arabia light and heavy oil are both trading in the futures market at $19.07.

Oil in Mexico from the Mayan region varies in price depending on the destination. If the oil is destined for the US Gulf Coast, the price is negative $1.18. If that same oil is heading for Asia, then the price is $21.79. That difference in price is a reflection of differences in both transportation and storage costs. The US has so much oil at the Gulf coast right now, that they have no place to store it.

North Texas Sweet Crude is selling at a negative $41 per barrel. Arkansas Sweet Crude is selling for $11.50 per barrel.

Central Alberta Crude is at $10.93

These prices are all over the place. The only distinguishing factor is location and the local supply / demand balance in that market. The price difference is a reflection of the cost of storage and the cost of transportation to get the oil to where it is needed.

We’ve experienced an unprecedented collapse in global oil consumption in a matter of weeks.

When you take transportation systems out of the market, you create inefficiencies all over the place. Those who aren’t paying attention will be surprised. Those who understand the relationship between transportation and price will make sense of the inefficiencies in the market.

Now is the time to figure out where the supply chain disruptions are happening. They’re all over the place.

Expect a significant portion of the 6,000 independent oil companies to go bankrupt or be acquired in a distressed sale. The oil won’t disappear. The change will be in the ownership.

Don’t expect to see prices recover to the $50-$60 range for at least another 18 months.

Even the price of commodities vary by location when you take transportation out of the equation.

I Am Certain Of One Thing Apr 21, 2020

Show notes

On today’s show we’re talking about the mental aspects of navigating these uncertain times. I find myself going through all kinds of emotional swings in these days. Those who know me would describe me as someone who is very tempered, pretty unflappable.

Over the past several months, I’ve been asking myself a lot of questions. I’m asking questions like:

Will there be a shortfall in rental income, and if so, how much?
When will we see revenue return to our short term rentals?
Will our current construction projects be impacted by the mandated shutdowns?
Will any of my friends or family get sick?
Will we experience food shortages?
Will we exhaust our financial reserves?
What will the market look like when we emerge from this period of social isolation?
What will happen to the capital markets?
Will people stop investing out of fear?

What I discovered in these questions is that all of these questions have one thing in common. They are rooted in a basic human need to bring certainty to the most fundamental aspects of living.

We all crave certainty to some degree. If everything is certain in life, then there is no variety and life gets boring. So we need a little uncertainty, but we want that uncertainty to add a little spice to life. My wife loves to be surprised by a gift of beautiful freshly cut flowers. That should be uncertain.

But in areas that are core to living like: “Where is my next meal going to come from?” We want that to be certain.

In fact we need certainty so badly that some people will do just about anything to create certainty in their life. They will lie to themselves, they will create a narrative in their own minds that synthesizes a suitable level of certainty. If the certainty isn’t there, they will invent the story that brings an acceptable level of certainty.

I’ve observed the full spectrum of reactions. There are those who go to sleep at night in a hazmat suit at one end of the spectrum, and then there are others who are in complete denial and believe that this is all a hoax.

Both ends of this spectrum are trying to accomplish the same thing, to bring certainty to an uncertain situation.

I reality, nothing has changed. Life is uncertain and always has been. Even those who embrace the thrill of the hunt, the adrenaline junkies out there. They too at a deeper level require certainty at the very core.

My own response to the current Covid-19 pandemic has been to get as much information as possible. Armed with knowledge of what is really happening is my best path to certainty. I believe that I can’t change reality on a large scale. I can control my own expectations. The closer my own thoughts are aligned with reality, the less stress I will experience.

There is a natural human reaction to any bit of new information. The first step might be denial. At the other end of the process is acceptance, and finally action taking. In between there are a number of steps which include shock, anger, rationalization, confusion, rationalizing.

Some people get through that process to acceptance quicker than others.

I’ve discovered for myself, that the best path to certainty is to remain grounded in reality, to constantly question my own beliefs to make sure I’m not engaging in confirmation bias. It’s a difficult process. Sometimes I catch myself looking at wrong data, simply to make myself feel better.

Check in with yourself and how you are managing the uncertainty, that has been present in your life all along whether you recognized it or not.

AMA - Where To Invest? Apr 20, 2020

Show notes

On today’s show we’re talking about investing versus speculating, and we’re answering a listener question about where to invest in today’s environment. This question comes from David in Great Falls Montana.

David asks,

I want to thank you for all the hard work you put in on putting out great content that is filled with such helpful information. I had a question on the podcast you put out on April 14th about stagflation. I was wondering what are good assets to buy to hedge against stagflation in the economy.

David this is a great question.

One of the best short term hedges against inflation is precious metals. I definitely recommend parking cash in precious metals during a time like this. But I have to tell you that it’s extremely difficult to buy gold or silver at the retail level today. The supply has completely dried up and almost all the dealer’s I’ve researched have zero inventory.

I like the way you phrased the question. Instead of asking where to invest, you asked what asset you should buy.

In this context, I’m going to use Robert Kiyosaki’s definition of the word asset, where he defines an asset as something that produces positive net income. We are of course at a moment in time where problems are everywhere.

I’m continually shocked by the fundamental lack of understanding of what investing is really all about. Some people just focus on buy low, sell high.

The true investor mindset understands the value of an asset, but not just because it sold at a certain price.

My thought is to focus on tactical problem solving. We are going through a global problem with supply chains right now. These are not going to resolve quickly. The recovery which is months away will be incredibly messy and inefficient.

The path to earning is to solve problems that people are willing to pay money to have solved.

The most trivial example is the guy walking through the crowd at a summer music festival selling cold bottled water for $2 per bottle. They paid $0.30 per bottle and are making a healthy margin. But they’re solving a problem.

The problems abound right now. 90% of the doorknobs in the world are manufactured in China. There is a global disruption and everyone in construction is experiencing shortages of hardware for doors. That’s a problem that needs to be solved. Supply chains are going to be re-evaluated in the coming months with a greater emphasis on security of supply. It used to be that everything was being commoditized and lowest price always wins. That may change in the future.

There will be a shortage of spare parts, globally. Anyone with a machine shop who can manufacture spare parts from a CAD file will do very well. Any machine shop that can create the CAD file by copying an existing part that might be broken by digitizing the dimensions will do very well.

There are shortages in the food supply that have opened up and will become increasingly acute in the coming weeks and months. Someone with a few hundred thousand tomato plant seedlings would probably get a good price for them. It would only take a couple of acres to produce a few hundred thousand seedlings.

It likely that many men in North America are going to be reluctant to go to the barber shop to get their hair cut anytime soon. Sales of hair clippers have gone through the roof. Inventories are sold out and many orders are experiencing long lead times. Here’s another problem to be solved. They’re literally everywhere.

You get the idea. It’s about discovering the real problems and finding a way to add real value, not just being a middle-man in the transaction.

I want to thank you David for a great question. This is a question that we’re going to be looking at repeatedly over the coming days and weeks.

Reed Goossens Apr 19, 2020

Show notes

Reed Goossens moved from Australia only 8 years ago. In that short time he has assembled a portfolio of 2,000 apartments in San Antonio and Austin, Texas. On today's show we're talking about the current market conditions and how he sees the market unfolding, rent collection, and managing the lender relationships. Very valuable conversation for anyone who invests in multi-family apartments. You can reach Reed at reedgoossens.com

Russell Gray On Popping The Bubble Apr 18, 2020

Show notes

Russell Gray is a financial strategist and co-host of The Real Estate Guys Radio Show, now in its 24th year on the air. In this first part of a multi-part conversation, Russ and I discuss whether the pin is to blame for popping a bubble, or whether the construction of the bubble is in fact the problem.

You can hear more from Russ at realestateguysradio.com

What Hotel Owners Are Saying Apr 17, 2020

Show notes

Last week Colliers International had a private webinar for its clients focused on the state of the hotel industry.

The numbers of are absolutely devastating. There is no comparable period in history.

During SARS in 2003, the occupancy fell to 42%. We saw a 10.9% reduction in Revenue Per Available Room (REVPAR) during the financial crisis.

In the aftermath of the 2001 terrorist attacks REVPAR fell 2%

Most hotel groups started to prepare in the first week of March, a full 5 weeks after the China lockdown.

Many hotel groups had already started planning for a business slowdown when occupancies had started to fall in Q4. But all of the planning had focused on a reduction along the lines of what had been observed in previous economic downturns.

Many of the hotel groups had started to communicate with lenders in the past two weeks to keep them up to date on the state of their business.

Majority of institutions have been providing 3-6 months of interest only concessions. Many of the lenders are offering interest only relief and allowing principal payments to be deferred.

One perspective when it comes to hotel valuation is that many hotels will lose a year of net income. At current cap rates, a complete loss of a year of income could translate into a 5% reduction in valuation.

There is a lot of pent up demand for events. Weddings scheduled for the Spring are being rescheduled for the fall.

Hotel rates are not falling in today’s environment. The reason for that is that dropping rate won’t stimulate demand, so there’s no reason to drop rate.

The combination of the property tax deferrals, loan principal deferral, government wage subsidies, some amount of workforce reduction, capital project deferrals, the hotel owners who were on the panel seemed to feel that they can weather this storm for a period of time. However, they will need additional government help.

Hotels are reaching out to health care workers who need alternate accommodations to protect their families from possible infection.

Some hotels are also reaching out to hospitals to provide accommodations to patients as overflow for hospitals

Some scattered demand exists for airline crews and for repatriation quarantines.

The short term is focused on cost containment, preservation of capital and maintaining liquidity.

The hotel owners on the panel see a lot of pent up demand as witnessed by the number of events that were scheduled and are being rescheduled for the fall. That means the chance for a V-shaped recovery in travel is there. Most of the hotel owners had run several scenarios ranging from a fast recovery after a couple of months. Most of the worst case scenarios don’t see a recovery any later than the fall. All the major operators on the panel were ensuring they had the liquidity to survive until the fall.

The new financial model for 2020 assumes 50% occupancy for the year and a daily rate 15-20% lower than historical. That assumes a 0% occupancy for the next 60-90 days.

A Really Big Refrigerator Apr 16, 2020

Show notes

We haven’t had a lot of good news lately. Or, more precisely, we haven’t seen a lot of good news lately, though it does exist. We don’t see it because both regular media and social media usually focus on the bad. That’s not entirely wrong. The survival imperative makes humans watch for threats, and sometimes threats are real.

One of the powerful lessons of this past month has been that you really can’t count on anything to be certain in the world of business.

Only a few short months ago, if you had any rational risk manager argue that we could see a simultaneous large scale situation where retail revenues went to zero, where hotel revenues went to zero, where airline revenues went to zero you would have been sent for a psychiatric evaluation.

Well, here we are.

So where is this good news that I spoke about? Who will win in this economic environment? I take the perspective that a successful business is all about solving real business problems.

On yesterday’s show we talked about the massive supply chain disruptions that are poised to hit our global food supply. At lunch today, my wife went to our freezer and took out a package of frozen kale which she added to her home-made carrot soup. The package indicated that the frozen kale originated in Ecuador.

I don’t know how in a world of reduced transportation, as companies re-think their global supply chains, how we will kale get from a field in Ecuador into a freezer bag and ultimately to my dinner table in Ottawa Canada.

On today’s show we’re looking at a new report issued this week from industrial real estate firm CBRE predicts that demand for local domestic refrigerated warehouse space is going to increase in the short term and over the next 5 years.

CBRE also cited a Brick Meets Click/Shopper Survey, which saw 46% of respondents indicating they will continue to purchase goods online after the COVID-19 pandemic subsides.

What’s more, the report pointed to what CBRE called long-term impacts for the industrial cold storage sector, due to COVID-19, including:

E-commerce groceries will become more widely adopted as consumer comfort grows with the practice. This will trigger heightened demand for cold storage capacity;
Multi-tenant refrigerated warehouse companies will likely consolidate to gain more control of the cold storage footprint;
Since e-commerce is typically fulfilled by local grocery stores, retail footprints will include more storage and fulfillment space, including a greater need for infill temperature-controlled facilities in proximity to consumers;
Automation will increase, prompting higher-density, greater-height and smaller-footprint buildouts that will be required for around-the-clock operations

The cost of building new cold storage is a huge barrier given that construction costs are two-to-three times higher than that of regular warehouses.

It stands to reason that more and more people will shop using online grocery stores. They are going to use them first out of necessity during the Covid-19 outbreak. Once the initial objections are overcome, they will continue to use the online grocery for convenience. The result will be a significant and permanent shift in the retail landscape for food. We’re talking about the last 5 miles of the supply chain between the point of production and my dinner table.

Those online grocers will need a big fridge, the size of a warehouse. The entrepreneur who invests in these facilities in high density and high population markets stands to be ahead of the game and potentially a big winner out of this disruption.

What's For Dinner? Apr 15, 2020

Show notes

Today’s show not about real estate. We’re talking about taking action to protect your family’s food supply.

I remember watching the news on television in the 1970’s as a teenager seeing the two hour long lines as people waited patiently to get a loaf of bread at the bakery in Moscow. The notion of food shortages in the US, Canada or Western Europe seemed unimaginable.

Well last week, I waited in line for 40 minutes to get into the grocery store. Once inside, some shelves were fully stocked, and others were 90%-100% empty.

We have been hearing about supply chain disruptions all over the world for components, for manufacturing, and now for finished products.

It stands to reason that the food supply would be similarly impacted. Whether the cause is labor shortage, transportation disruptions, or problems with logistics, supply chain disruptions are happening now in the path to your dinner table.

The United States relies upon 3 million migrant workers each year to work in agriculture. They come largely from Latin America. Western Europe relies upon migrant workers to work in their fields, largely from Eastern Europe. Border restrictions are already creating workforce shortages in a number of sectors of the agricultural industry.

We have millions of unemployed, but the question is are these people going to choose working in the fields versus sitting at home collecting an unemployment benefits check?

In a world of travel restrictions and closed borders, I’m not seeing those migrant workers materializing.

China exports millions of bees each year all over the world to help re-supply the declining bee population which are key to pollenating many crops. In the absence of bees, the only solution is for humans to hand pollenate the flowers with a cotton swab. I’m not seeing those millions of people, Q-tips in hand making their way out into the fields.

Vietnam is one of the top three producers of rice in the world. They put an export ban on rice.

Germany normally invites about 300,000 migrant workers into their fields. Last week, they brought 40,000 workers from Rumania to help with the Asparagus harvest. They plan to bring a total of 80,000 migrant workers. But between 80,000 and 300,000 there’s a gap. Germany hopes to close the gap with local labor that have been displaced from other jobs.

This week, amid reports of widespread outbreaks of Covid-19 at several of the largest meat processing plants in North America, we are starting to see disruptions in the supply of beef, chicken and pork to supermarket chains. The supply of animal protein in North America is highly concentrated in a small number of companies and a small number of massive processing plants.

My recommendation for listeners of this show is that you make a concerted effort to ensure security of your family’s food supply. I’m increasing my household supply of critical items from 60 days to 90 days. Even that is likely not going to be enough.

We are also planting a much more extensive garden this year than we have in the past. Every year we plant about 10 tomato plants, zucchini, cucumbers, peas, basil, oregano and so on. This year we will more than double the size of our garden. I don’t expect even that to be enough.

I realize that there has been a bucketload of jarring news over the past several weeks. I’m not here to spread negativity. Far from it. I believe that armed with good information you can make good decisions. Better to have a few extra cans of tomatoes and beans and not need them, rather than need them and be unable to get them.

Stagflation Is Here Apr 14, 2020

Show notes

On January 29 I reported to you that we were in economic recession, weeks before any economists uttered the words. I didn’t have any magic crystal ball to predict the future. It was just obvious that we had negative growth.

On today’s show we’re talking about the consequence of the government handouts. In the next 5 minutes I’m going to build the case to show you that we are now in a period of stagflation.

Stagflation is a combination of stagnant economic growth, high unemployment, and high inflation. It's an unnatural situation because inflation is not supposed to occur in a weak economy. In a normal market economy, slow growth prevents inflation. As a result, consumer demand drops enough to keep prices from rising. Stagflation can only occur if government policies disrupt normal market functioning.

Many people are treating these bailouts like they’re free. Nothing is ever free. But there has been zero discussion of who is actually going to pay for these handouts. If its coming from government, it ultimately means that we the population are going to pay. But nobody is saying how exactly.

A lot of people tend to measure the cost of government in terms of the cost of taxation in their personal situation. If they’re paying 50% of their income in taxes, then the cost of government is 50% of their income. If someone else is in a 10% tax bracket, then their perceived cost of government is 10%.

But that’s not the cost of government. The true cost of government is measured by government spending, not in the amount of tax collected. So for example if government brings in $100 in taxes, but actually spends $150 of those $100, the cost of government is actually $150, not $100.

You pay for government in two ways. You pay in taxation and in inflation. When government prints money, you pay for that spending in terms of reduced buying power, in terms of reduction in your savings.

So here we are, governments are spending cash in vast quantities to bail out various industries.
They’re spending cash they don’t have, so it’s being printed out of thin air.

If you’ve been listening to this podcast for a while, you’ll know my opinion on inflation. We have plenty of modern day examples of hyper-inflation. So we don’t have to dig too far in the history books to look and see what happens. We can look to modern day Venezuela, or Zimbabwe for current examples. You can look to Argentina in the mid-1980’s.

In a world of hyperinflation, there is so much currency being printed that the purchasing power of the currency gets eroded. It has the impact of eroding the purchasing power of those on fixed incomes, it devalues savings, and it devalues debt.

If you know that you’re entering an inflationary period, you would want to hold assets that will benefit from a devaluation of debt and a devaluation of savings.

Let’s say for example that you hold a piece of real estate that is generating income. That income property is producing positive cash flow, and its not over-leveraged.

Well guess what, we have the conditions for stagflation. We have governments the world over telling people that they should not go to work, that they should stay home, and that they should avoid social contact.

Don’t get me wrong, it’s all being done for a good reason, to save human lives. The social lockdowns are absolutely the right thing to do.

But we have to acknowledge that the vast printing of money will have an inflationary impact. Now some of you might be saying that the government has been printing money for decades and it hasn’t resulted in hyperinflation. Why is that?

I believe that we have exported our inflation through globalization. The extra printed money went to pay for goods that were manufactured in the East and imported into Western economies. We exported the extra cash, so long as they were willing to accept it.

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