The Real Estate Espresso Podcast

This question comes from Paul who writes: I have booked a strong capital gain as a passive investor in a syndication. The sponsor of the deal is asking all investors to come along for the ride in a 1031 exchange. The sponsor seemed to do a good job on this first project. However, the proposed replacement property is in Houston and I don’t have a good feeling about the fundamentals of this replacement property.  -------- Host: Victor Menasce email: podcast@victorjm.com

On today’s show we’re talking about my personal experience with the media. I also want to be careful to make sure this does not come across as sounding like a bunch of conspiracy theories.  There is an accepted social norm called social proof. This is based on the idea that if you say you are great, that is not as powerful as having someone else say you are great.  That is why reviews for a hotel on Trip advisor are more valuable than a glossy advertisement from the hotel saying how great the hotel is. We can also imagine that maybe not all of the reviews on Trip Advisor could be planted by people connected to the hotel. The long list of glowing reviews can sometimes overshadow the small number of negative reviews. The question is, “What is are more accurate reflection?” Are the negative reviews more accurate? Who knows? We tend to believe what we see, read and hear in the news. 

Andrew Abernathey is based in Phoenix Arizona where he develops storage facilities in Arizona and California. Working closely with a family office, Andrew and his team at Abernathey Holdings are scaling up aggressively. To learn more or to connect with Andrew, visit Abernatheyholdings.com --------------- Host: Victor Menasce email: podcast@victorjm.com

Anna Kelly is based in Lancaster Pennsylvania and she invests in several markets across the SE USA including multi family apartments and short term rentals. She has established herself as a leader in the space. On today's show we are talking about risk, and some of the lessons of the past three years. To learn more or to connect with Anna, visit reimom.com ----------------- Host: Victor Menasce email: podcast@victorjm.com

Today's question comes from Christian who asks: I’m small time RE investor and about to do my first long distance flip. Is it worth hiring a project management company? It is a flat fee and they would help with design, compare costs, negotiate with contractors, and management. The project budget is $50k-$100k and the cost is $7k for the PM. Is it worth it? ------------- Host: Victor Menasce email: podcast@victorjm.com

On today’s show we are going through a thought experiment about the risk of large global divisions and how that might affect your real estate development project. To walk through the process, we are going to use an example of a small construction project for a single family home. The home is already under construction and the foundation has been poured and the wood framing is 80% complete. The project has been started and like all construction projects, once it is started it must complete. Any discussion of risk requires a more detailed analysis of the elements of risk. Let’s start with a definition of risk. A risk is anything that is not in your plan. In this context it is fair to say that most businesses have not taken into account the risk of China becoming fully isolated from the western world. Europe and the US would certainly face severe product shortages if that were to happen. When we talk about risk we need to break it down further. Risk gets broken down into likelihood and impact. We know from history that people are notorious poor at assessing whether a risk is likely to come true or not. So we are not going to even try to assess the likelihood. What we can quantify is the impact. ------------ Host: Victor Menasce email: podcast@victorjm.com

The Wall Street Journal finally reported on something that investors and lenders have known for more than nine months.  The rapid rise in interest rates has created a structural problem for commercial real estate.  The issue goes far beyond the headline that nearly $1.5T in commercial real estate debt is vulnerable to default in the next three years.  The punch line of the article is that lenders are prone to foreclosing on these loans because the issues with office occupancy are not likely to be resolved anytime soon.  Unfortunately the simplified reporting completely neglects the fact that the lender is not some rich dude who can withstand the loss with no consequences to everyday citizens.  The counter party risk that was present in 2008 is still present today.  Why is that?

How do you know if a project bid is good? On today’s show we are talking about how to value engineer a project. We’re going to look at a project that has a firm bid on it. Overall, the construction bid seemed to be fairly reasonable in terms of total price per square foot. Having said that, there could still be problems in the bid. Some line items might be too high and others might be too low. One of the most common mistakes is to accept a total price merely because the overall price seems to be in the ballpark. When we conduct a budget review we look at every single line item. When problems occur in a budget, it is often because the scope of the work has an error in it. We double check the contractors numbers of every single component of the project. We use material estimating software that measure the dimensions for each material using the architectural drawings. We measure the roof area, the wall area, the number of electrical fixtures, all the doors, you get the idea. There are literally hundreds of line items to be estimated. It is in this process that we find errors. -------------- Host: Victor Menasce email: podcast@victorjm.com

On today’s show we are looking at the design of industrial warehouse buildings. Building designs are changing from a functional perspective and this is important when you consider investment in industrial buildings. When we hear about warehouses, people tend to talk in terms of square feet and rent per SF. But these facilities are not universally interchangeable. Operators think in terms of volume, not just area.  So when you take design into account it is clear that not all warehouses are considered equal. Older buildings that do not meet the logistics demands of a modern facility will not even be considered. They are treated like a functionally obsolete building, even if they are only a few years old. It all comes down to the racking system that is used to plan the warehouse operations. --------------- Host: Victor Menasce email: podcast@victorjm.com

Deborah Smith is based in the NY area where she plays a key role in institutional investing at the Center Cap Group in industrial real estate. In particular, she is a big fan of industrial outdoor storage. We share that in common. On today's show we are talking about the market dynamics. To learn more or to connect with Deborah, visit centercapgroup.com. ------------- Host: Victor Menasce email: podcast@victorjm.com