The Real Estate Espresso Podcast

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

On today’s show we are taking another look energy markets and how energy costs affect the price of virtually everything. I’m completely in favour of the idea of transitioning from burning oil, gas, biomass and coal to cleaner forms of energy. In the US there are still over 1,000 active coal mines. This is approximately half of the number of coal mines that were in operation in the year 2000. If you go back 15 years, western Europe produced more natural gas on the continent than was imported from Russia in 2021. They outlawed fracking, in order to help the environment and now find themselves having to buy natural gas from the US at a much higher price where fracking is the primary source of the natural gas. The energy security situation in Europe is a function of a series of policy decisions made over the past two decades, more than it’s the fault of Russia or any one nation. Last week the OPEC+ cartel announced a 2M barrel per day reduction in production quotas. The reaction in the US was swift. Prices at the gas pump jumped almost immediately. Many in the media have misinterpreted the announcement to mean that there will be a reduction of 2M barrels per day of oil production. The OPEC members have done little to correct the public perception. The truth is, that the announcement was a reduction in production quotas, not production volumes. Even before the announcement, the OPEC+ member countries were producing 3.5M barrels per day less than the production quota. So in theory, a reduction in a quota would have no impact at all on the actual amount of oil being exported into world markets by OPEC+. You have to remember that OPEC+ includes Russia. --------------- Host: Victor Menasce email: podcast@victorjm.com

Real Estate values are often driven by influx of job and influx of population. On today’s show we’re talking about the semiconductor industry and the $52B injection of funds that are wrapped up in the CHIPS act. This 1054 page document is filled with goodies for the tech industry. The recent export ban on advanced semiconductor manufacturing equipment and technology is aimed at slowing China’s ascent as a global technology player. The geopolitical instability and growing confrontation with China leaves the US vulnerable. The CHIPS act has triggered several new announcements including facilities to be built by TSMC, Samsung, Micron, and Intel. Samsung plans to build nine factories in Taylor Texas, and two in Austin. Micron has announced a new memory chip facility in the outskirts of Syracuse NY. TSMC has plans for up to six factories at a location in Arizona. Each of these facilities represent a lot of new jobs. These factories operate round the clock. But at the same time, I look at the capacity of each fab and ask the simple question, “Who will consume that many chips?” ------------- Host: Victor Menasce email: podcast@victorjm.com

Amy Johnson is a partner with Y Street Capital and is based in Salt Lake City, Utah where she specializes in development in multiple cities across the US. On today's show we are talking about the relationship between the developer and city officials and how the reality differs from the utopian view of simply following the planning and zoning rules.  --------------- Host: Victor Menasce email: podcast@victorjm.com

Today's show is a live talk given earlier this week at the Ottawa Real Estate Investors Organization. We are talking about what you need to do as an investor to prepare for what's coming.  -------------- Host: Victor Menasce email: podcast@victorjm.com

Buckle up folks. I know this is starting to sound repetitive. But interest rates are heading higher, whether we like it or not. Our industry is incredibly interest rate sensitive, and the cost of capital is going higher. There are several inflation metrics published by various government departments. There is the consumer price index, the producer price index, the core CPI metric which is basically CPI without the more volatile food and energy components. The Federal Reserve looks at the Core CPI metric. Many had hoped, myself included, for a reduction in core CPI this month. Well according to the latest data from the bureau of labor and statistics, core CPI was up in September to an annual rate of 6.6% in September, up from a rate of 6.3% in August. This is the largest increase in Core CPI since August 1982. When economists speak about inflation they make a distinction between cyclical inflation versus secular inflation. You will hear these terms cyclical inflation and secular inflation. So what do these terms mean? If you’re not an economist, or haven’t studies it, you probably have  no idea what they’re talking about. Cyclical inflation is temporary, it’s something that will sort itself out without a lot of government intervention. There are many examples throughout history of inflationary periods that resolved themselves with no central bank intervention. That’s because there was no central bank in existence in the 1800’s. Secular inflation on the other hand is is basically creeping inflation that continues to persist over a long period of time. It becomes deeply entrenched in the system, the culture and the norms of the economy. I personally would make the argument that because our CPI metrics have been manipulated to such a degree that even though the BLS has been claiming that inflation has been at or near their 2% target for much of the past decade, no amount of inflation is good. We have indeed been experiencing secular inflation for the past 100 years. To suggest otherwise is not being honest.

On today’s show we are talking about the market for sovereign debt and what it means for investors. We have a severe interest rate inversion where short term interest rates are higher than long term rates. The obvious question is “Why is that a problem?” If you think about what a market interest rate says to investors, it communicates a perception of risk. In a natural environment it stands to reason that you could predict the next three months or the next year with greater certainty than you could predict the next 10 years or the next 30 years. If that is the case, why are short term interest rates higher than long term rates? Why is the market rate for the one year Tbill 4.28% whereas the yield on the 10 treasury is at 3.9% and the 30 year treasury is at 3.8%? What does that tell us about market sentiment? It says that there is much higher perceived risk in the short term than in the long term. On today’s show we are going to look at signs of contagion that are not making headlines, but I believe you need to be paying attention to. ------------- Host: Victor Menasce email: podcast@victorjm.com

On today's show we are looking at what is happening in the office market in San Francisco as a proxy for what might be happening elsewhere in the asset class. Spoiler alert: It's not pretty.  ---------------- Host: Victor Menasce email: podcast@victorjm.com

The velocity of money tends to decline in highly indebted economies. The UK is currently one of those places that tried to use debt financing to restimulate economic growth. Instead, all they got was burnt toast, and you can’t unburn toast once it’s burnt. Let’s step through a chronology of what has happened in the past two weeks in the UK and break down why this could have a cascade effect into global financial markets. The UK has suffered a number of significant economic shocks. It started with Brexit and the flight of European headquarters to other parts of continental Europe. Then came the pandemic, then the supply chain disruptions, followed by a worker shortage, a food shortage, and now an energy shortage. It’s clear that despite very high price inflation, the UK is in economic contraction. Normally in a recession, the government wants to stimulate economic growth. But wait, stimulative policies can be inflationary and we already have too much inflation. The government of Liz Truss proposed a series of stimulative tax cuts on the 23rd of September. After the financial markets reacted negatively to the announcement resulting in a drop in the value of the British pound, and an increase in the yield on the sovereign debt called the gilt. The finance minister doubled down on the announcement and the prime minister went on national TV on over the weekend to say that the government would not change course on the tax cuts. The 180 degree about face came the very next day. The volatility in the bond market is truly unprecedented in the UK and is on par with the volatility we saw in the US in 2008. ------------ Host: Victor Menasce email: podcast@victorjm.com

When you design a building, the goal is often to ensure you are meeting the building code. After all, the building code was developed with health and safety has primary goals. In the world of senior housing, the building code is not nearly enough. On today’s show we’re talking about how each second of every day in the United States, an older adult has a fall. So, for each step we take, someone aged 65 or older is falling. Currently, falls cost our health system $50 billion a year. ---------------- Host: Victor Menasce email: podcast@victorjm.com