The Real Estate Espresso Podcast

Our world is very confusing at the moment. Whatever thesis you create, you can find the evidence to support your point of view. Even a review of the headlines in the Wall Street Journal on a single day can be contradictory. Apple reports record revenue. Amazon forecasts falling sales and the shares dropped 12% in after hours trading US Gross Domestic product up 2.6% in the third quarter. Boeing reports a loss. Google reports falling advertising revenue. Facebook reports falling advertising revenue, Fedex reports falling revenue and suspends guidance. -------------------- Host: Victor Menasce email: podcast@victorjm.com

Today is another AMA episode (Ask Me Anything). Mike asks, Hi Victor,  I listen to your great podcast a lot and I notice that you and your company do a lot of development, which obviously effects and impacts the worlds environment that we all share.  You seem like a very practical and good person, so I’m wondering what do you and your company do to make sure that your projects are sustainable and are not just hurting the environment? --------------- Host: Victor Menasce email: podcast@victorjm.com

As real estate investors we are very sensitive to interest rates. Rates for permanent loans are indexed to the yield on the 10 year treasury and in some cases on the yield for the 30 year treasury. But for short term financing like bridge financing or construction loans, these loans are indexed historically to LIBOR. It’s common to see a construction loan with a rate of LIBOR + 5.75% with a floor of, say, 8.5%. So what is this thing called LIBOR and why is it used to set rates for commercial bridge loans? For more than 40 years, the London Interbank Offered Rate—commonly known as Libor—was a key benchmark for setting the interest rates charged on adjustable-rate loans, mortgages and corporate debt. The important aspect of SOFR is that theoretically, it will be more difficult to manipulate because unlike the LIBOR, there’s extensive trading in the Treasury repo market. SOFR is based on data from observable transactions rather than on estimated borrowing rates, as is sometimes the case with LIBOR. That makes SOFR much more difficult to manipulate. -------------- Host: Victor Menasce email: podcast@victorjm.com

On today’s show we’re talking about a major development project that we have underway. We closed yesterday on a parcel of land consisting of 1783 acres on the edge of Colorado Springs. This property was part of a much larger property called the Norris Ranch that originally was close to 20,000 acres. There is a story behind Mr. Norris and the Norris Ranch. We purchased the property from Mr. Steve Norris, son of Bob Norris who died in 2019 at the age of 90. Bob Norris was a cattle rancher. Through an unlikely turn of events, Mr. Norris had an elephant on his ranch. Bob Norris was famous as the Marlboro Man, the public face of Marlboro cigarettes.  This project would not have been possible without forging a partnership with some very prominent families in the local Colorado Springs market. We have a strong vision for this project as an extension and growth of the Colorado Springs community.  ---------------- Host: Victor Menasce email: podcast@victorjm.com

Today is another AMA episode (Ask Me Anything). Davindra asks I am a long time listener of your RE espresso podcast and have thoroughly enjoyed your well thought out  and efficiently delivered content.  Time permitting, I had a question on the most recent podcast about potential scenarios for the economy.  In the second scenario, you said, bonds would have a significant "run up" as interest rates stabilize.  Can you explain what this means? I've been trying to wrap my head around the bond market but there are so many moving parts that affect it, and affect different maturation levels differently as well. If you can suggest a good primer on the bond market, that would be greatly appreciated. ------------ Host: Victor Menasce email: podcast@victorjm.com

Allison Williams is a lender with walkerdunlop.com. On today's show we are talking about financing for multi-family apartment assets. Today's points are timely and top of mind for many investors.  --------------- host: Victor Menasce email: podcast@victorjm.com

Mikkel Thorup is based in Panama City, Panama where he helps people find a plan B residency in favorable locations. Many countries have programs that enable accelerated residency with investment in the country. You can learn more and connect with Mikkel at expatmoney.com. He is going to be hosting a five day conference in early November which you can attend for free. To learn more about the summit, visit expatmoneysummit.com -------------- Host: Victor Menasce email: podcast@victorjm.com

For the past several weeks we have been focusing on macro economic conditions. It seems that all markets, the stock market, the bond market, and real estate are being dominated by the macro environment. Traditionally, we think of real estate as hyper local, and it is. A piece of waterfront property is going to be valued differently than the same acreage two blocks inland. But still the macro environment is dominating. There are facilities available for banks that are in trouble to ask the Federal Reserve for help. These short term facilities are accessed through the discount window at the Fed and the what is called the REPO market. But REPO transactions are publicly visible. Banks are reluctant to use the facility because they’re effectively signalling to the world that they’re in difficulty. ------------- Host: Victor Menasce email: podcast@victorjm.com

On today’s show we are talking about three different scenarios of central bank monetary policy and how that could impact the world of stocks, bonds, and real estate. I believe it’s important for investors to be able to have intelligent conversations with each other. We are all investors. I know very few investors that invest exclusively in a single asset class. The question then becomes what is the most attractive investment to make in the coming market conditions. Everyone is in search of safety in an environment where there is seemingly no safety to be found. There is no safety to be found in the stock market. We are heading into a recession and the PE ratios are not showing enough of a difference in yield compared with interest bearing notes like treasuries. That says to me that the stock market still has a long way to go down now that yield in the bond market is rising. The bond market has more downside in front of it as interest rates increase. Real Estate has more downside in front of it as interest rates increase. We will see cap rates expand and we will start to see distressed assets appear on the market. Keeping cash in the bank is a losing proposition with inflation running above 8.5%. So what do you do? Where do you put your money? Putting money in hard assets is usually a a good hedge against inflation. That includes real estate and certain commodities. But if we are heading into an economic downturn, commodity prices are likely to fall as demand falls. We probably won’t see the bottom in prices for gold, copper, silver for a while. As interest rates rise, commodities like gold have not moved up much because they don’t pay a rate of interest. It’s a real dilemma of where to place your money. In the absence of a safe alternative, more and more people are just dumping cash into treasuries. They yield is still negative compared with inflation, but it’s less negative than cash in the bank. So let’s talk about three different scenarios. In case #1: Inflation stays elevated and the Federal Reserve continues its unrelenting upward pressure on interest rates for the next 24 months. In case #2: Inflation starts to show signs of moderating and the Fed decides to hold the line on rate increases to bring a sense of stability to money markets. In case #3, We enter a steep economic contraction and the Fed pivots from QT to QE. They’re back to printing money and the treasury starts again with fiscal stimulus. All three of these scenarios are highly plausible. If you wanted to argue for any one of these futures, you could find the evidence in the world to support your thesis. What actually happens will be the result of the complex web of headwinds and tailwinds. -------------- Host: Victor Menasce email: podcast@victorjm.com

On today’s show we are taking a look at the the impact of the falling Euro on US real estate. A recent report by brokerage house Marcus and Millichap looks specifically at this question. The Euro has fallen by more than 15% this year reaching a more than 20 year low in September. Governments make decisions to be stimulative to the economy, or constrictive. In the US, the Federal Reserve is supposed to operate independently from the elected government and its mandate is to bring maximum employment to the nation and to maintain price stability. Since the start of the year, the Fed has increased interest rates five times so far this year and is on track to increase rates two more times before the end of the year. The Federal Funds overnight rate is currently between 3.25%-3.5%. But we expect that those rates will increase to more than 4.25% before the end of the year. In fact, with the latest inflation numbers, I would not be surprised to see interest rates hit 5% by the end of the year. In contrast, Europe is in an economic crisis and an energy crisis. Having a war in your neighborhood casts a huge shadow over the entire continent, to say nothing of the human tragedy that the war is bringing to millions of people. Governments in Europe have been trying to compensate for the higher energy costs by bringing fiscal stimulus to the population. There are widespread protests in France over high energy costs. The French government has pledged 100B Euros to help ordinary citizens combat high energy prices. This means deficit spending and increased debt levels in Europe. But when you look at monetary policy, the European central bank has only raised rates to 0.75%. So if you assume that within the term of the monetary instrument, say, the next 90 days, or even the next 365 days, you assume that neither the US, nor the European central bank will default on its notes, The US T-Bills are more attractive than their European counterparts. All other things being equal, there will be a flight of capital out of European bonds into US T-Bills. It’s that interest rate differential that is causing global investment dollars to flow out of Europe and into the US. The exchange rate between the currencies is merely a reflection of the supply demand situation. ---------------- Host: Victor Menasce email: podcast@victorjm.com