The Real Estate Espresso Podcast

These days at our development company Y Street Capital, it seems like we spend every day in underwriting. We are analyzing potential new projects, re-analyzing existing projects, and then analyzing them again. Bond yields are changing, which means interest rates are changing again. Some lenders who had paused their lending programs in Q3 and Q4 have re-entered the market and are being more aggressive about getting deals done. Construction costs continue to fall, and we are constantly value engineering the designs to pull cost out of the projects without compromising the finished product. We are performing sensitivity analysis on half a dozen variables. On today’s show we’re answering a simple question, “Does the real estate industry have a short attention span?” So much of the market is guided by playing the comparison game. What did the exact same model of home sell for down the street? What are rents in the same building, or in similar properties in the same neighborhood? What cap rate are Class A apartment buildings selling for in the local market? There are so many comparisons to make. When it comes to market conditions, we are programmed to think of comparison data as guiding fair market value. But that raises the obvious question of “What is a fair comparison?” Can you compare a three bedroom home and a five bedroom home? Not really. Can you compare a 12 unit building and a 100 unit building? Not really. Can you compare a 12 unit building and a 30 unit building? Well maybe. How far apart are they from one another. Are they of similar vintages? Assuming they’re relatively nearby, now you’re starting to get to a closer point of comparison, but not in absolute terms. Maybe you’ll compare them on a cap rate basis, or perhaps on a per unit basis, or maybe a per square foot basis. But even if you get all of that data and convince yourself that you have a valid point of comparison, you have another problem. The market has gone through so much change in the past year that it’s hard to look at market data that is more than six months old. Data from early in 2022, while not that long ago, was in a different set of market circumstances. Interest rates were still low. We were in the tail end of the pandemic, or so it seemed. We were in a different world. It seems a lifetime ago. ---------- Host: Victor Menasce email: podcast@victorjm.com

How is the US dollar still the world reserve currency? Every year or two it seems like the US is running out of money again. Legislative gridlock, combined with spending money like drunken sailors leaves the population wondering whether those in Washington entrusted to govern the United States are really worthy of the honour and the responsibility. The debt ceiling is coded into the legislation by design. The debt ceiling is designed to force a public legislative dialog about spending responsibly. Some would argue that it’s hardly been an example of responsible spending. But somehow, The US has raised the debt limit 89 times since 1959. Wait a minute, do you mean to tell me that the US has raised the debt limit 89 times in the past 64 years? Yes, that’s right. You’ve no doubt heard the expression “fool me one shame on you, fool me twice shame on me.” I’m wondering if there is an expression for when the government fools you 89 times? Will we through a party when the debt ceiling is raised 100 times? Somehow, US treasuries are considered the most safe and secure investments in the world. There is no collateral considered as good as US treasuries. ------------- Host: Victor Menasce email: podcast@victorjm.com

You know me as the host of the Real Estate Espresso Podcast. By day, I’m also one of the partners at Y Street Capital where we specialize in new construction and development projects across the US and Canada. We are observing that Investors these days are cautious. We agree that it make sense to be cautious. You want to ask tough questions whenever you are performing due diligence. You really want to understand what it means to invest in a particular project from a market standpoint. On today’s show we are talking about what strategies work in each economy. When the market is hot and the tide is rising, it’s natural to focus on growth. Growth is going to give the best results. That’s true in real estate investing, and it’s even true in the stock market. But when the market is contracting and the economy is hunkering down, the best results will come from focusing on value. Value outperforms growth over the span of economic cycles. Why is that? If you focus on value, then you will also benefit from the growth when it happens. You will get the double kicker of both value and growth. But if you’re focusing growth alone, then you’re going to get stuck when the market is contracting. So what do we mean when we’re talking about growth and value? -------------- Host: Victor Menasce email: podcast@victorjm.com

We have heard of a debt trap. This is where the cost of servicing a debt exceeds the cash flow needed to service the debt. In those instances, some borrowers take on additional debt hoping for better days and hoping to outrun the bankruptcy. States, cities and provinces don’t have the luxury of printing money. They need to live within their means, or at least within their ability to get revenue from taxation. It’s no secret that companies and wealthy individuals have been leaving high tax states in search of low tax states. There is a well worn groove in the freeway from California to Texas and from New York to Florida. Rather than try to create the incentives for businesses to move to California, the state of California is doing the opposite. They’re doubling down on the incentive for people to leave. California lawmakers are once again considering a wealth tax. This is on top of the state surtax implemented recently which raises the state income tax level to 13.3%. ----------- Host: Victor Menasce email: podcast@victorjm.com

On today's show we're talking about the negotiating techniques for sellers who are looking to sell when few people are buying. George taught negotiation at the law school at New York University for over 20 years. His writings on negotiation are based on his course notes from those days. George has established himself as a world class authority in negotiation through his many decades in the practice. ----------------- Host: Victor Menasce email: podcast@victorjm.com

Paul Kazanofski is based in Nashville Tennessee where he runs Revision Homes, a high volume house flipping and one of the premier custom builders in Nashville. On today's show we are talking about the state of the market and how the downturn is affecting people in the business.  To connect with Paul you can find him on LinkedIn. ---------------- Host: Victor Menasce email: podcast@victorjm.com

What is the no-sale auto auction, and why do we care as real estate investors? The world of real estate is highly dependent on borrowing and the liquidity and affordability that banks and other major lenders can offer. But banks lend in multiple areas. They have consumer credit. They have subprime credit. They have real estate credit, automotive credit, commercial credit, and on and on. The auto industry, like real estate is highly driven by credit markets. During the pandemic, dealers were getting credit authorizations for all kinds of insane financing. A buyer with no credit would get approved for a loan to cover 100% of the value of the car, plus the sales tax, plus an extended warranty, plus rust proofing and pre-paid oil changes. By the time the buyer walked off the lot they had signed paperwork for a loan at 130% of the car’s value with a $1000 a month car payment. During the pandemic when they were collecting their stimi checks from the government and all staying home, not paying their landlord, all was fine. Some realized quickly that they could not afford the car payment and asked the lender for forbearance under the emergency covid legislation to protect consumers. So the auto industry is sitting on a ton of bad loans that were originated during the pandemic. Much of this is not being reported to the public. It’s like a game of hot potato with bad paper. One out of every four is 30 days late. One out of six is 90 days late. These numbers are worse than 2008. The default rate in 2008 was 14% for cars. Today, the default rate across all credit ratings is 13.56%. --------------- Host: Victor Menasce email: podcast@victorjm.com

On today’s show we are going to take a closer look at AI tools that are making headlines. A couple of weeks ago I put out an episode on the OpenAI framework and the software ChatGPT which uses that framework as the underlying AI engine. In that episode I gave some live examples of questions and answers that I put to the software. In that episode, I concluded that the results were underwhelming and no threat to us humans. It turns out that my conclusions missed the mark in that episode. Nothing I said was misleading. But where I missed the mark was by asking the software some very simple questions. If you ask an unsophisticated question, then you are going to get an unsophisticated answer. I suppose humans would respond in the same way. Ask a stupid question and you will get a stupid answer. Ask a better question and you’re likely to get a better answer. -------------- Host: Victor Menasce email: podcast@victorjm.com

According to an article published in the Bloomberg Law Journal last week, we are in store for a massive meltdown in the world of hospitality. Just as it appears that travel is returning to normal, hotels are about to get slammed in the side of the head again. But this time its from their lenders. As of December, close to $4.1 billion out of roughly $93 billion in outstanding lodging loans are delinquent, according to data from CMBS analytics firm Trepp Inc. It currently projects about $35 billion worth of those loans to mature this year. According to the report, there are currently 155 loans secured by hotels that are in financial distress in the US. This number is expected to balloon as loans become due. Those who are franchisees of major flags also have covenants for capital expenditures to keep the hotels looking fresh and meeting brand standards. These are hard requirements from Hilton, Marriott, and IHG. Many of the hotel operators were allowed to defer those capital projects during the pandemic because clearly they were in financial distress with the large scale lockdowns that were crippling the industry. Now those improvements are required to happen at a time when the cost of financing those capital improvements has more than doubled. The hotel data company STR Global maintains industry statistics on hundreds of local markets. Recovery is underway when you compare 2022 and 2023 data with 2019. But averages are still below 2019 numbers in most cases. Parts of Europe experienced above 2019 occupancy for certain specific weeks, indicating strong leisure travel. The real story is that despite the recovery, the Bloomberg law article is onto something. There will be a significant number distressed deals appearing in the market this year. If this is an area of interest, be prepared to jump in and perform your due diligence for the right assets.

The World Economic Forum opened its annual meeting on Monday evening in Davos Switzerland. This five day in person event is one of the global networking events of the year where you can rub shoulders with some of the most influential people in the world. These folks hold sessions on everything from the economy to energy, to health care to climate change. The output of the conference seems more like a highly choreographed Hollywood production than a conference designed to influence change. The documents are highly polished and extremely superficial in their treatment of the issues. The footnotes are filled with academic style references. But I found all of the papers I read so far lacking in substance. On opening day the WEF published the Chief economists outlook for 2023. This 31 page document is based on a survey conducted of the chief economists in the months of November and December. So the outlook is pretty current in terms of the sentiment of these economists. Remember, the WEF takes a global perspective, not just Europe or USA or Africa. 100% of the chief economists surveyed said that Europe is expected to be weak or very weak this year, and 91% said that the US is expected to be weak or very weak this year. --------------- Host: Victor Menasce email: podcast@victorjm.com