The Real Estate Espresso Podcast

Today’s question comes from Carlos in Los Angeles We are planning a 57-unit development student housing project at USC. We are now considering a relatively new product called C-PACE financing. The C-PACE financing + senior construction financing would achieve 85% Loan To Cost ratio at a blended rate somewhere in the 6% range. Are you familiar with the C-PACE product and in your opinion what are the pros and cons of using it? --------------- Host: Victor Menasce email: podcast@victorjm.com

The Federal Reserve has signaled that they’re going to be increasing the rates in 0.5% increments at the upcoming rate setting meetings. The market accordingly has priced in 0.5%, 0.5%, 0.5% for the next three meetings instead of ¼ ¼ ¼ as had been the previous guidance.  Over the past two years, the biggest buyer of US Treasuries has been the federal reserve itself. In addition to the rate increase, the Fed is also pledging to reduce its balance sheet by $95B a month each month. Of that, $60B will be in US Treasuries and $35B will be in mortgage backed securities. The reduction in mortgage backed securities will mean that banks will have fewer places to sell their loans to get them off their balance sheets. That might result in a lower liquidity mortgage market in addition to higher interest rates. The US Federal debt is over 28.4 T in debt.  The vast majority of that printed in the past decade. That comes to $86,000 in debt for every man woman and child in the US. That comes to 137% of GDP. US Treasuries are issued by the Department of the Treasury, under treasury secretary Janet Yellen, who used to be Fed Chair in the Obama administration. So far at interest rates near zero, servicing that debt has not been a problem. But let’s imagine if interest rates were to increase to 6%. That’s not so far fetched when you consider that inflation has been running above 8%. If that were to happen, in a matter of a couple of years, nearly 50% of the US debt would reprice at a much higher interest rate. In fact 72% of US debt would reprice within 5 years. Let’s imagine that in a few years time, the cost of servicing the debt rises to 6% of the roughly 30T in debt. That means spending nearly 2T in just interest payments. Well the entire revenue for the US government was only just over 4T last year. They spent 6.82T. All of this was funded by the issuance of treasuries. The biggest customer for those treasuries was the Fed itself. Now if the Fed is going to shrink its balance sheet as publicly stated, they are going to be retiring debt from the Fed’s balance sheet. Not only is the Fed not going to be buying more of the US debt. But they are now net seller’s of debt into the market in direct competition with the Treasury to place those bonds. The Treasury is having to sell bonds their bonds at lower prices, which means higher yield in order to compete with this new competitor selling into the market. If the stock market crashes, then it may change the dynamic. In the event of a stock market crash, we will get some amount of flight into the supposed safety of the bond market. If the stock market crashes, then the Fed will worry about a recession. That would precipitate a reversal of policy at the Fed. If the bond market crashes, causing rising rates across the board, then a stock market crash is inevitable. The Fed and other central banks will continue to raise rates, and we will see rising yields until we see a bond market crash, or a stock market crash. Fed policy has played a major role in market liquidity over the past ten years and the past two years in particular. The financial markets are behaving like a drug addict, completely addicted to the next hit of crack cocaine. But like any addict, the hits need to be more and more potent to have an impact. If you remove the injections of cash, then the markets go through withdrawal. We still have inflation. We still have high interest rates, and we still have economic contraction. I defy anyone to make a case with confidence that 2022 will be a year of economic growth. We have continuing supply chain disruptions due to the pandemic. We have rising interest rates. We have runaway inflation. We have war induced global supply chain disruptions.  For this reason I predict a stock market crash, recession, and a reversal of monetary policy. 

Today's question comes from Mike in Pennsylvania. He writes: Hi Victor, Thank you for your daily podcast! I find your show format insightful and your perspective extremely helpful. Our family has decided to sell a vacation rental we own on the coast of North Carolina that we purchased almost ten years ago. The market there is extremely hot right now and we are ready to exit at this time for several reasons. We expect to sell for almost triple what we paid in 2013, which will leave us with a sizable capital gain tax bill unless we find a tax-favorable alternative way to invest the proceeds. I am concerned we may not be to able find and close on a new property for a 1031 tax exchange fast enough. Any thoughts on 1031 or opportunity zone funds? How would you consider handling this? As always...I look forward to hearing you on the Real Estate Expresso podcast! Mike Mike. First of all, thank you for the kind words, and this is a great question.

This past week, the Federal government in Canada took the step of temporarily banning foreign purchase of residential real estate for two years. It’s no secret that real estate markets in Canada have been hot, much like in many markets in the US. On Today’s show we’re looking at housing with non-resident ownership, and whether the temporary ban will in fact have the desired impact of lowering home ownership costs for ordinary citizens and residents. The foreign ownership ban is one of several measures introduced in the budget last week aimed at making housing more affordable. In my view, this new regulation is a decoy. Inflation is the result of printing money. Rising prices are the symptom of inflation. Just like a fever is a symptom of the flu. You can try to treat the symptoms, or you can attempt to address the root cause. The root cause of rising prices is lack of supply and strong demand. But the lack of supply is overwhelmingly governed by very slow and bureaucratic approval processes that can in many cases take years to see a project fully approved. Artificially eliminating demand may have a small temporary impact. But then we will experience a surge in demand once the ban is over. Government simply will not admit its role in inflation. It’s too convenient to blame others. They’ll blame the grocery store for high food prices, and the gas station for high gasoline prices. They won’t say I’m Sorry Mr and Misses electorate, we screwed up. We printed too much money. It’s easier to blame all those foreign buyers who have no vote for Canada’s domestic problems. This move is taken straight out of the playbook from George Orwell’s classic novel 1984. When there is a problem domestically, the playbook says you need to take aim at a foreign enemy and that will unit the country against the foreign enemy and deflect attention from the real issue. ----------------- Host: Victor Menasce email: podcast@victorjm.com

Mark McGuire is based in Westchester Pennsylvania where he specializes in acquiring and improving self storage assets across multiple states. To connect with Mark, visit investingwithmark.com.  --------------------- Host: Victor Menasce email: podcast@victorjm.com

Alexandria Ali hails from the Pacific NW where she is a real estate investor and a practicing nurse. Not only is she a practicing nurse, she is a traveling nurse who provides relief to hospitals that are searching for staff to manage staffing shortfalls. Today's show is a follow-on to last week's show where we were talking about the crisis in healthcare staffing.  To connect with Alex and to learn more you can reach her directly at alexandriaroseali AT gmail.com. 

To infinity and beyond. That’s the line from the famous Pixar movie “Toy Story”. Here in the West we are concerned with climate change and the impact that our relentless consumption is having on the planet. We’re talking about some finite resources on our planet. But we have a moral dilemma. Those countries who are living with first world luxuries are consuming more than their fair share of energy. In fact, we have 40% of the world’s energy being consumed by 15% of the world’s population. So why are we talking about energy? After all, this is a real estate podcast. Well it turns out that energy and a few other critical resources are the underpinning of the entire economy. For every unit of GDP, there is a corresponding unit of energy consumed somewhere in the world to product that economic output. It’s everywhere. Energy affects the production of food. Without burning of fossil fuels, you can’t manufacture synthetic fertilizer. Without fertilizer, agriculture yields would be 50% or less than they are today. We can expect to see the linkage between energy security, cascading to food prices, and eventually food insecurity in many parts of the world. One of the principal inputs to fertilizer is ammonia. Back in 2020, the European spot price for ammonia was around 200 Euros per tonne. Today, that same metric ton of ammonia is pricing at 1450 Euros. Ammonia and lots of energy is critical to the nitrogen component of synthetic fertilizer. Brazil is getting its last wave of much-needed fertilizer from Russia before supplies plunge due to the Ukraine war, potentially hurting harvests in the biggest grower of crops from coffee to sugar to soybeans. A fertilizer shortage in Brazil could result in smaller harvests and higher food costs globally, given the importance of the South American nation to world crop supplies. When you look throughout history, every time there has been a spike in energy prices, it leads to price increases in food, which leads to food insecurity, which ultimately leads to social unrest. The armed conflict is making headlines. Interest rates are making headlines. What’s not making headlines is the impact to global food security from the conflict. The reality of globalization is that the world is far more interdependent than it has been at any time in history. The impact of these disruptions will be far greater than ever before. -------------- Host: Victor Menasce email: podcast@victorjm.com

A Bay Area startup just received a $300M funding round at a $3B valuation, triple its value from eight months ago.  San Francisco-based Remote Technologies Inc. helps businesses manage onboarding, payroll, benefits and other services for foreign workers that they hire, whether they are contractors or full-time employees. Remote solves those problems by becoming the employer of record for its customers' employees in every country where it operates. This is a real estate podcast. You might be wondering what a tech startup in Silicon Valley has to do with real estate. Real estate is hyper local. Employment is generally hyper local, at least for certain types of work. But as the pandemic has shown, there is a large percentage of the economy that can be conducted remotely. The company has customers in serving customers in 70 countries today and has a goal to be operating in 100 countries by the end of the year. ---------------- Host: Victor Menasce email: podcast@victorjm.com

On today’s show we’re taking a closer look at what’s happening in the world of senior housing. The folks at Fannie Mae recently published a market update on the sector which we look closely at. We also follow the daily updates at Senior Housing News which report both trends and news in the sector. We saw a rapid deterioration in senior housing occupancy since the start of the COVID-19 pandemic. Senior housing fundamentals began to improve in the middle of 2021, with the industry experiencing a strong occupancy rebound, according to multiple sources that we track. Back in 2015 senior housing occupancy averaged about 90% nationwide. Developers started building more supply in anticipating of growing demand from the aging baby boomer population. At the start of the pandemic, occupancy had fallen to 87% on average with a 90% occupancy in independent living and 85% in assisted living. Along came the pandemic and occupancies fell to 75% in assisted living and 82% in independent living. But that’s just an average. --------------------- Host: Victor Menasce email: podcast@victorjm.com

On today’s show we’re talking about market psychology. There are two principal emotions that drive investment decisions, fear and greed. Fear and greed usually sit at opposite ends of the spectrum when it comes to decision making. Greed propels people forward. Fear usually holds people back when making investment decisions. If you’ve been listening to this show for a while, you’ll know that I’m a proponent of buying hard assets. Top of the list of hard assets is real estate. We’re talking income producing real estate. But there are other hard assets that are also worth investing in. That can include commodity metals like copper, and precious metals like platinum, silver and gold. Gold has typically been considered a safe haven in times of uncertainty, and a hedge against inflation. Examination of commodities as hard asset investments should not be limited to gold. If we look at other commodities that have industrial applications like copper, we see rising global demand for the product and finite supply. -------------------- Host: Victor Menasce email: podcast@victorjm.com