The Real Estate Espresso Podcast

On today’s show we are going to talk about one of my favourite real estate development strategies. I call that strategy Buy on The Line, Move The Line. So what is that line? On one side of the line is a hot gentrified neighborhood. On the other side of the line is an economically depressed area. Often, these lines get developed and moved. Over the course of time, a few properties get left behind. The net result is a form of Swiss Cheese. The question is whether the holes in the Swiss Cheese represent an opportunity or not? In my experience, filling the holes in Swiss Cheese is more difficult than moving the line. The reasoning is simple. When you are surrounded by more expensive properties, those derelict properties take on the aura of being in a more expensive area. The land value goes up because the properties have been improved all around them. The reason the buy on the line strategy works so well is because when you are on the wrong side of the line, you are considered to be in a bad area. Bad areas are worth less. But you know that you’re going to improve the entire area and in so doing, you’re going to change the market perception of that location. If you only do one or two properties, it won’t be enough to convince the market that the line has moved. But when you improve maybe 5-6 properties, or an entire block, the marketplace takes notice and says “Oh, the line has moved”. ------------ Host: Victor Menasce email: podcast@victorjm.com

We are starting to look back on the pandemic as one giant bubble. There was the stock market bubble, the lending bubble, the real estate bubble. The pandemic saw demand for certain products multiply. There was a shortage of hand sanitizer. These days, there are pallets on sale at the drug store and Walmart, a sign of unrealistic inventory building by retailers. Clearing out those excesses will be painful. It will result in losses as those mistakes become visible. Companies bulked up during the pandemic. They saw business booming and they saw the opportunity to take advantage of the disruption in the market created by the pandemic. The traditional bricks and mortar businesses suffered, and those who adopted new technologies and implemented new business systems would thrive. Where department stores suffered, Amazon benefitted. Where restaurants suffered, Skip The Dishes and Uber Eats benefitted. Home improvement stores did a booming business during the pandemic, and the supply chain disruptions were legendary. Lowes had 12.5B in inventory in 2019 prior to the pandemic. Fast forward to today, and Lowes has 19.817B in inventory as of October 31. That’s nearly $20B in inventory. Considering the annual revenue is $95B and 33% gross margin, that inventory represents about 120 days of inventory. That’s means three inventory turns per year. That’s low for a retail business. For example, Target usually has about 60 days of inventory. Yes, it’s a different business. Back in 2019, Lowes had no more than 90 days of inventory. ----------------- Host: Victor Menasce email: podcast@victorjm.com

Today’s show is another AMA episode. Today’s question comes from Paul who asks: “I have always considered development projects to be high risk. How do you mitigate the numerous risks in a development project?" -------------- Host: Victor Menasce email: podcast@victorjm.com

Today’s show is a deep dive into the world of artificial intelligence. There are a lot of marketing agencies out there that are offering to write content for you for your website, or your blog. The problem with hiring someone to do this work for you is that they are being asked to represent you. But it’s rare to have a ghost writer capture your voice. A ghost writer is not going to be anywhere near the quality that you would get if you undertook the writing yourself. That’s why it’s not a good idea to have a ghost writer write a book for you. Sure you can do it. Lots of busy people have successfully launched a book written with the help of a ghost writer. But these days there is a new ghost writer on the block. This is the artificial intelligence bot. These learning software systems are getting better and better all the time. You can expect that an increasing number of people to start hurling marketing messages at you using an AI tool. On today’s show we’re going to look at what an AI tool can generate. I went into a tool that uses the OpenAI framework as the underlying technology. This is one of the most widely used. ------------- Host: Victor Menasce email: podcast@victorjm.com

Signs of recession are everywhere. These metrics have not been seen in a long time. We are generally conditioned to think of a recession as a negative thing. But frankly, it’s a necessary part of the cycle and as real estate investors we should actually embrace the recession. Imports to the US are down 7.6% in November from the month of October. That’s a huge decline on the basis of a single month. We have been hearing for months now that retailers ordered too much inventory during the pandemic. The rise in interest rates means that the cost of carrying that inventory is much higher than forecast at the start of the year. There is a silver lining in a recession, the market for bonds will have correctly predicted a so-called Fed pivot. ------------ Host: Victor Menasce email: podcast@victorjm.com

Out book this month is called "Who Not How" by Dr. Benjamin Hardy. I’m a huge fan of his work. Benjamin Hardy has listed Dan Sullivan as the primary author even though Dan Sullivan didn’t write a single word of the book. Rather, Dan Sullivan is the curator and designer of many of the ideas that underpin the book. Not only is Ben an excellent writer, but his work is well researched and methodically organized. He has written other titles which we have reviewed on this podcast including “Willpower doesn’t work” and “The gap and the gain.” ------------- Hoost: Victor Menasce email: podcast@victorjm.com

This year was a year of managing the unexpected. Jan 1, 2022 was a day of optimism and a fresh start in a new year. The world was on its umpteenth wave of Covid. 0micron was the new word added to the vocabulary. The word endemic was being used and many countries around the world were loosening travel restrictions. I personally have not fully returned to the pre-pandemic average of traveling twice a month. But I did travel 10 times this year. It was well below my average. But it’s starting to feel more normal again. The travel industry struggled to cope with the return to normal travel demand. Business travel is still down. The airlines that only months earlier had furloughed thousands, went on a hiring spree and struggled throughout the year to attract enough staff to cope with the resurgence in travel. Hotels lacked the cleaning staff and stopped changing linens daily. 2022 was a year of adapting to change. Little did we know that we would witness a war that would rival the atrocities of WW-II. Little did we know that the vastly outgunned Ukraine would fight back and hold its ground. Little did we know that a new cold war would be the new world order. Little did we know that the conditions for a potential world war could be be brewing. Little did we know that the red hot housing market would turn in a matter of weeks. Little did we know that the inflation that was readily apparent would catch the ire of central bankers who would kick the economy in the teeth because when your only tool is a hammer, everything looks like a nail. -------------- Host: Victor Menasce email: podcast@victorjm.com

The problems at Southwest Airlines demonstrate what can happen when your systems break down. All businesses, including real estate investment business have systems. These systems are designed to have limits. When you go outside those limits, you can’t expect those systems to keep working. For example, our investment management software is currently handling hundreds to low thousands of investors. We have no idea what would happen if the system was faced with millions of investors. I can’t tell you for sure, but I’m pretty certain our system would break down. ------------ Host: Victor Menasce email: podcast@victorjm.com

On today’s show we are talking about what is coming in the world of energy. So why am I telling you this? This is, after all a real estate show. Well, wherever there is low cost energy, there is economic growth. Wherever there is economic growth, there will be population migration. All of this affects real estate. It’s going to get a lot worse before it gets better. But the good news is that it will get better. We have a global energy shortage. We think that energy is expensive at $1.50 per litre in Canada, or 1.70Euro per litre. That comes to about $7 per gallon in USD, and compares with $90 cents per litre in the US or about $3.60 per gallon. Naturally that price varies across the country. Energy is what enables us to live our modern lifestyle. The amount of energy contained in a single litre of gasoline is equivalent to about 110 person hours of work if done by human labour. At a minimum wage of $7.25 per hour, that same output would cost about 1,000 times if performed by human labor. The industrial revolution and the shift from bio-mass to coal, and from coal to oil is what has enabled our modern lifestyle. The fact that you can spend your evening watching a movie on Netflix is testament to the fact that energy has enabled our lifestyle. We will see a drop in demand for energy during this current recession. It happens in every recession. There is a direct correlation between a unit of economic output and the consumption of an equivalent unit of energy somewhere in the world. These two are inextricably linked. But once this recession shifts into recovery, we can expect to feel the full force of the energy shortage. We are past peak oil in the US. Can the US continue to produce oil for years to come? Yes, but the cost of extracting that oil will continue to rise. There will be increasing amounts of energy consumed in order to get at the oil which thereby reduces the efficiency with which we can produce energy. Even with the most aggressive forecasts for penetration of solar, wind and hydroelectric, we will not produce enough energy to displace the decline in oil and coal output. -------------- Host: Victor Menasce email: podcast@victorjm.com

On today’s show we are talking about one of the unwritten rules that influences the success of medical facilities. In an ideal world, patients should be free to seek the medical care that is best suited to their condition. If they have insurance coverage, the insurer would pay the bill up to the limits of the insurance plan, and patients would get the best care possible. On today’s show I’m going to introduce you to a term you might not have heard before. The term is adverse selection. ------------ Host: Victor Menasce email: podcast@victorjm.com