The Real Estate Espresso Podcast

RJ Burr is with Panther Exploration, an oil and gas exploration company based in Bowling Green Kentucky. The entire Burr family are deeply entrenched in the oil industry. Today's conversation centers around the prediction that oil prices are likely to remain elevated for a long time. To learn more about the oil industry and to connect with RJ at Panther Exploration, visit panex.us --------------------- Host: Victor Menasce email: podcast@victorjm.com 

On today’s show we’re talking about market valuation and the narrative that investors attach to prices. The daily headlines are about the latest stock market bloodbath. We hear terms like bullish and bearish. Some people I know have earned the nickname perma-bear to somehow denote that they are biased towards pessimism. The first part of this year has resulted in a tremendous amount of paper wealth destruction in the stock market and in the crypto currency market. I simply don’t buy into the notion of bullish or bearish as a label that I would attach to myself. Think about it this way. Imagine if you had a one ounce gold coin. If you wanted to trade that gold coin for two half ounce gold coins, that would be a fair trade. If you traded that one ounce gold coin for five 0.25 ounce gold coins you would be turning a profit of a 0.25 ounce of gold. In that trading scenario the frame of reference is ounces of gold and you either trade for a profitable amount of gold, a neutral amount of gold, or a losing amount of gold. It’s simple math. 1+1=2. 5-4=1. These are all within the grasp of any second grade student who understands addition and subtraction. In today’s market, I’m seeing many cases where a single family home is selling for a substantial premium over what it costs to construct a replacement of that home. That valuation doesn’t make sense to me. I want to see valuations grounded in tangible hard math that is grounded in a rationale. That rationale should be based exclusively on what the last trade price was. Too many markets are relying on the last trade price as the benchmark and for that reason we see words like bubbles being thrown around. Does that make me a bull or a bear? I think neither narrative applies. I’m just pushing for a simpler time when value could be tied back to something tangible, rather than an arbitrary story.

On today’s show we talking about the impact of energy policy on housing. The fact remains, the US has underinvested in oil and gas since 2015. Despite the high prices currently in the market, the number of new wells being drilled is not quite enough to keep production levels constant on a year over year basis. The US currently produces about 20% of the world’s LNG, and over the next 6-7 years that will increase to producing about 30% of the world’s LNG. That will make the US the dominant player. Even with that, the US will still keep the majority of it’s natural gas for domestic consumption. The constraint on liquefaction capacity will ensure that domestic prices for natural gas will still be lower than global prices for natural gas. We still have 40% of the world’s energy being consumed by 15% of the world’s population. As emerging market economies grow, so too will their demand for energy. There are a lot of movements across the political spectrum to invest in green energy technologies. I’m here to tell you that these will only truly win when the economics of energy efficiency. When you can convince the guy on the streets of New Delhi with two bricks of coal that there is a cheaper alternative than cooking on two bricks of coal, then you have a realistic shot at true improvement of greenhouse gas emissions. We don’t have viable sources to make up for the structural shortage we are experiencing globally at the moment, let alone displace oil and gas with green alternatives at a rate that will replace expansion of emerging market economies like China and India. Energy prices have the makings of protests in Europe and these are spreading all over the world. North Americans are the largest consumers of energy per capita in the world. While the pain of $7 a gallon of gas is real in many parts of the US, we have not seen riots over this yet. But it’s possible. I believe that higher energy prices are here to stay for the foreseeable future. Much like in the 1970’s when the US lost its dominance of the auto industry by resisting energy efficiency, we are at another inflection point where energy efficiency and energy transitions become important. In the world of real estate, this is best addressed through design in new construction, but is difficult to retrofit to existing buildings. ------------------ Host: Victor Menasce email: podcast@victorjm.com

Today’s show is another AMA episode (Ask Me Anything). Today's question comes from John who asks: I have an acquaintance who has a land assembly under contract that has development potential. The assembly consists of two properties on a main street with close proximity to a river. The property will need to be rezoned and I’m being told that the property will sell to a backup offer with someone else unless the current contract is completed. The timeline for waiving the conditions on the existing contract is too short to complete my due diligence. The property is in an amazing location and I’m scared to let this one go. At the current price, I think the property is a good deal. What are your thoughts on buying from the wholesaler? ----------------- Host: Victor Menasce email: podcast@victorjm.com

On today’s show we’re talking about changing the use of real estate in the downtown core in many cities. It’s no secret that the world is swimming in excess office space since the start of the pandemic. I’ve been involved in direct discussions on several major office buildings that are candidates for conversion to apartments. A recent report from CBRE puts the amount of sublease space available for rent at 159 million square feet across the US. That's in addition to the 144M square feet of new construction in the pipeline and the 15.9% official office vacancy rate. On today's show we're looking at some of the variables in office to residential conversions.  ------------------ Host: Victor Menasce email: podcast@victorjm.com

On today's show we’re taking a look at the extent to which our housing market is completely addicted and driven by the availability of debt. There are some powerful lessons to be learned from the financial crisis of 2008. It was the near insolvency of thousands of banks and insurance companies that precipitated a massive lack of liquidity in the lending market. The unprecedented bailout of banks and insurance companies by the federal government and by extension the federal reserve came with some very stringent underwriting criteria. On today's show we look at the market statistics from two markets and try to make sense out of the data. --------------------- Host: Victor Menasce email: podcast@victorjm.com

Brian Scudamore is a living legend in the world of entrepreneurship. He's the founder of 1-800-GOT-JUNK, and WOW 1 Day Painting, and Shack Shine. His brands are world renowned in their segments. He has taken the ordinary and figured out how to create exceptional.  Brian recently wrote a new book called "BYOB, Build Your Own Business, Be Your Own Boss". It's a book designed to inspire those with an entrepreneurial bug how to build and scale a business. You can connect with Brian at BrianScudamore.com and you can buy a copy of his book anywhere books are sold.  ------------------ Host: Victor Menasce email: podcast@victorjm.com 

Kim Radaker Bays is based in Dallas Ft Worth where she runs the Exponential Property Group having invested in approximately 10,000 apartments since inception a little over a decade ago. On today's show we're talking about managing risk in today's rapidly changing environment. To connect with Kim visit https://exponentialpropertygroup.com/ or email invest@exppg.com.  -------------------- Host: Victor Menasce email: podcast@victorjm.com

On today’s show we are talking about how to design a product for the market when the spreadsheet is telling you otherwise. We’re developing a storage facility in a tertiary market up in the Rocky Mountains. Most of the existing storage facilities in town are older and date back to the 1980’s and 1990’s. The newest facility was built in 2019. The market has very high occupancy and we see demand in excess of the existing supply. The interesting thing is that none of the facilities are climate controlled. When we rely on a spreadsheet analysis alone we would come to the same conclusion that climate controlled storage would not make financial sense. There is considerable additional cost associated with insulating the space and then outfitting the HVAC infrastructure. The electrical requirements for the entire site would increase considerably and the additional revenue when balanced with the additional costs would not return additional profit to the bottom line. We would be reaching the same conclusion that all the other storage facilities have. Climate controlled makes no sense. But this is where market positioning becomes important. If you don’t want to be differentiated in the market, then it’s easy to treat your product as a commodity and play the same game as everyone else. In a commodity market, all of the products are the same. They all offer the same value and the only differentiator is price. One facility might be more conveniently located and will win the business. But apart from location, these facilities are completely interchangeable. Will someone drive an extra mile to save $20 a month? Some will, and maybe some will not. It’s the race to the bottom. But if someone has prized possessions that they want stored in a climate controlled environment, they will pick you and only you if you are the only one offering that in the market. There is a real benefit of being in a category of one, rather than just one of many. They will call you first. They may ultimately not choose the climate controlled storage unit. But they still will call you first. That is a tangible marketing advantage that is otherwise intangible in a spreadsheet. Customers may choose a small climate controlled storage locker for those few prized possessions and keep the remainder of their items in a non-climate controlled locker. There are opportunities to bundle two lockers in a packaged offering that other facilities don’t have. When you build a building, you are not just undertaking a bricks and mortar exercise. You are designing a product for a specific customer. Product design involves thinking through the product usage from the customer’s perspective.

On today’s show we are talking a deeper look at the rising interest rate environment and making sense of the current market conditions. Yields on the 5 and 10 year treasury have advanced faster than the actual rate increase. Bond investors are clearly looking into the future and trying to telegraph the destination of the rate increases the Fed has planned over the next two years. The rise in rates has already decreased demand for debt in the residential market. As we reported yesterday, the demand for residential mortgage loans has already fallen by 33% as reported by Wells Fargo. But we need to distinguish between the residential homeowner mindset and the investor mindset. The residential homeowner is focused on ensuring expenses are minimized and cash flow is strong enough to afford the daily necessities and perhaps a few luxuries. This is analyzed simply, crudely as a snapshot is time. Is the cost of home ownership below 30% of households income? Yes or no. But as investors we take a step back and look over a longer time horizon. If borrowing costs are at 5% and inflation is currently running at 8.5%, then we are actually experiencing a period of negative real interest rates. The value of that loan is falling with each passing month. If these inflation rates remain elevated for any sustained period, borrowing makes a lot of sense as an investor. The interest is deductible on an investment property and the lender is actually putting cash in your pocket each month. I realize that there is no actual cash transaction happening. But if you are repaying the loan with future dollars that are worth less than today’s dollars, and the interest rate is less than the rate of inflation, the bank is virtually giving you free money for the entire time that inflation remains elevated above your interest rate. -------------- Host: Victor Menasce email: podcast@victorjm.com