The Real Estate Espresso Podcast

I live in Ottawa Canada, and I invest primarily in the US. This fact has given me a unique perspective on markets. I started my investing career by investing in my home market. I made my first investment in 2006. After that, you might remember there was this little event that started about a year later. The Great Financial Crisis had a global impact in many ways. I saw the opportunity to deploy capital into markets that had seen a dramatic fall in price. I was still new at investing in real estate and I made a lot of mistakes in those days. Fortunately, prices were so depressed, that the market would eventually wallpaper over those mistakes. There were some powerful lessons from the GFC. What were they? Were the lessons global in nature or local? Not everywhere was impacted equally. Some markets suffered more than others. In fact, when real estate prices went down in Miami Dade County by 45.5% from 2008 to 2012, prices in Ottawa Canada went up 32.7% over that exact same five year period. In 2008 when prices in Miami fell by 28% in a single year, prices in Ottawa Canada went up 6.3%. So the question is why was Ottawa Canada so stable throughout the great financial crisis? If the GFC was all about subprime mortgages in the US, then why was the first bank to signal a problem on August 9, 2007, BNP Paribas, the second largest bank in Europe the one to come forward with a press release stating that they were having trouble valuing three funds that were on its balance sheet. The first financial institution to collapse was Northern Rock, a bank based in the UK. But wait, this was a US problem wasn’t it? What does Europe have to do with it? On tomorrow’s show we’re going to talk about what the GFC was truly about.

On today’s show we are talking about inflation and whether higher interest rates will even help. When you listen to Fed chairman Powell speak, he spends a lot of time talking about inflation expectations. In fact, he mentions inflation expectations as being anchored in virtually every speech. So what is this anchoring of expectations and does it even matter? There was a paper published in May of this year by two economists who work for the Fed. Jae Sim and David Ratner wrote a paper entitled, “Who Killed the Phillips Curve? A Murder Mystery”. In order to understand the paper we first need to describe the Phillips curve. The Phillips curve has longstanding model of inflation and employment, and perhaps the central model underpinning the Fed’s monetary policy. The experience in the last decade puts in doubt the stability and usefulness of the Phillips curve in predicting inflation and conducting monetary policy. First, the Phillips curve failed to predict the stable inflation seen in the aftermath of the Global Financial Crisis. In my opinion, there could be several explanations for this. There is real inflation happening underneath the covers which is not being captured in the CPI metrics. That’s one possibility. The model for predicting the way inflation and the economy works is fundamentally flawed and doesn’t track the real behaviour of the economy. A growing number of economists and commentators of different backgrounds have gone so far as to declare the death of the Phillips curve.

On today’s show we are asking the question “Are we in an orderly market?” Market volatility can be a function of exaggerated trading activity. In extreme cases, it can be the result of market manipulation. In the world of real estate, there are those market experts who are saying that we need to look at the long term averages. If you look far enough back you can construct a rolling average. This thinking says that over the long term, home prices cannot exceed an average price to income ratio. Things will return to normal. If a household spends more than 30% of their household income on the cost of housing, then the cost is not sustainable. It’s not normal. But if that were true, house prices in cities like San Francisco, San Diego, Toronto, Vancouver, New York should not be anywhere near the levels that have been present in those markets for decades. There must be something else in play. These experts will tell you that eventually, over time, the prices will revert to the mean. Prices might fall below the mean for a period of time, then exceed the mean for a period of time. But eventually, prices always revert to the mean. I personally take issue with mean reversion theory. The problem with averages is that very few properties actually represent the average. ------------ Host: Victor Menasce email: podcast@victorjm.com

On today’s show we are talking about the importance of hiring the best engineers for your real estate development projects. Engineering is not just about technical knowhow. Engineering designs are multi-dimensional. When you fix one variable, you can often break another. When problems arise in engineering it’s almost always a result of an incorrect scope, or an incorrect assumption or understanding of the design requirements. When we hire engineers, the results are often mixed. There have been some painful lessons along the way. In all cases, we hired competent engineers. They understood the specifications and requirements of the city. At least we think they did. So how do you evaluate an engineer? It’s a little like evaluating a pilot. If the pilot still has their license, there is almost nothing to distinguish one pilot from another. Virtually any pilot who is active hasn’t crashed. One pilot won’t get you there faster than another. The aircrafts pretty much fly at the same speed. So too is the world of civil engineering. At least that’s how it appears from a distance. ------------- Host: Victor Menasce email: podcast@victorjm.com

All the way from Nashville, Tennessee, Leslie Anne Morris specializes in short term rentals in the Smokey Mountains. Today's show is a deeper examination of the laws of supply and demand and how choosing the best location is vitally important when it comes to short term rentals. Her website is JoshsCabins.com or InvestInthesmokeymountains.com where you can book a short term rental or learn more about investing in the area. ---------------- Host: Victor Menasce email: podcast@victorjm.com

Matt Picheny is based in NYC where he started his career as a starving actor in live theatre. His journey into real estate investing is unique and inspiring. You can learn more and connect with Matt at picheny.com. Matt is also the author of the newly released book "Backstage Guide to Real Estate Investing". ------------- Host: Victor Menasce email: podcast@victorjm.com

Today is another AMA episode (Ask Me Anything). Today's question comes from Collins I’m the owner of a nice property on one of the main highways in an area of south Alabama that has sustained steady growth over the last 30 years. In fact, the city recently placed a year long moratorium on development. I saw this time as an opportunity to achieve favorable zoning and have my land packaged for any would be purchasers or developers. I am a “land dealer” in the IRS’s eyes so I’m taxed at ordinary business income levels on land sales… furthermore, a 1031 exchange is also not applicable to the circumstances on this property, and I’d rather not take the tax hit on an outright sale. The restaurant chain, Five Guys, purchased a failed Pizza Hut not far from this location and they have signed a longterm ground lease with favorable payments and escalation clauses for the landowner. Which leads me to my question…rather than going through the top 10 google results… how can I identify companies who may be inclined to enter a ground lease with me as the owner so I can create a stream of longterm recurring revenue? (LRR) Big fan of the podcast! ------------------ Host: Victor Menasce email: podcast@victorjm.com

On today’s show we are talking about what’s happening in the world of construction. The supply chain shortages of the pandemic are continuing as China pursues it’s zero Covid policy. New lockdowns have been ordered in Guangzhou, one of China’s largest manufacturing hubs. So much of what we buy is sourced from manufacturing in China. Shortages are not only about materials. It’s also about labor. There is no doubt that some trades people are busy with a backlog that stretches 18 months or more. These projects were committed in 2020. But increasingly, I’m finding that lead times for both material and labour have shrunk to pre-pandemic levels. --------------- Host: Victor Menasce email: podcast@victorjm.com

On today’s show we are talking about the impact of construction cost saving on rental affordability. The narrative among tenant’s rights groups is that landlords are out there just getting rich and exploiting tenants. Developers need to be building more affordable housing. In Canada, the government in the province of Ontario has finally been recognizing that the cost of housing is linked to a few inexorable facts. The cost of rental housing is partly a function of supply and demand. If there are too many impediments to increasing supply, then the price of rental housing will go up. The cost of new construction that meets the building code is determined by the cost of materials, the price of labor, the cost of land, and the fees that governments charge developers for the infrastructure to support those projects. Cities have been progressively implementing more and more bureaucracy when it comes to new development applications. My home city of Ottawa requires a long list of deliverables. They require almost the entire project to be detailed. The city requires the envelope of the building. But not only that, they require shadow studies, wind studies, noise studies, traffic studies, utilities reports, school loading, public transit impact, bicycle storage ratios, parking ratios, amenities, meeting affordability criteria. The list goes on and on. But it’s not just my home city. Many other cities with affordability issues have implemented similar hurdles. Municipal impact fees can vary widely and they directly affect affordability. These fees are designed to pay for infrastructure like roads, schools, utilities, that are forced to expand as a result of growth. Our development company recently went through a detailed analysis of the relationship between development cost and rent. The results were surprising and so I thought they would be worth sharing with you, the listening audience. ------------- Host: Victor Menasce email: podcast@victorjm.com

On today’s show we are talking about a shadow market that appears in the grey zone of the real estate market. When a condo developer launches a new building, you often get speculators who make purchase commitments on newly released units. They believe these first units released into the market are the lowest price point and that all future sales for those units will be at higher prices. It is true, that many condo developers do indeed have a price escalation built into their pricing model. Buying at the very start of a project on the first of sales guarantees you the lowest price. In a world where prices only increase and never decrease, this is a great strategy. Fast forward to 2022. There are a number of properties that are newly under construction, where the buyers purchased in 2018, 2019, and 2020. The market conditions have clearly changed and interest rates are much higher than at any time in the past decade. These speculative buyers had no intention of ever having to close on the purchase of these new units. This is uncharted territory for buyers who never expected to qualify for a mortgage on these properties. ------------ Host: Victor Menasce email: podcast@victorjm.com