The Real Estate Espresso Podcast

The pandemic has challenged a lot of assumptions about both markets and demographics. We used to assume that school enrollment would remain stable according to demographics, and would continue to grow if population was growing. But even as the pandemic is clearly winding down, we are seeing school enrollments fall in many parts of the country. Remote online learning has been very hard on children. It has damaged their academic development, and it has damaged their social development. The reliance of electronic learning has kept kids glued to electronics for more hours of each day, and more than ever before. It used to be the case that real estate values were often influenced by school districts. The better the rating of the schools in the area, the more desirable that district would be from a real estate perspective. We have seen falling enrollment in schools over the past two years. Part has been due to the pandemic. Parents have seen how their children have struggled. It’s been difficult monitoring online classrooms. In the end, for many it’s been simply easier and more effective to home school rather than try to oversee engagement in online learning. Of the roughly 3.5 million full- and part-time public school teachers, more than one-third, or 38%, said that working during the pandemic has made them consider changing jobs. At the college level, even more — about 55% — of faculty have seriously considered changing careers or retiring early, according to a separate report from Fidelity Investments and The Chronicle of Higher Education. We are about to experience major churn in education.

On today’s show we’re talking market distortions, inflation, and the coming recession. The headwaters of a recession can be found in a cycle of inventory hoarding. So on today’s show we’re going to look and see if the conditions exist for inventory hoarding or not. On March 7 we talked about derivative markets and the impact that they can have on the real value of the underlying assets. We talked about futures markets and how these paper derivatives can be very helpful for those who have a vested interest in commodities prices to hedge against changes in commodities prices. After all, business leaders, just like investors, want to bring predictability and certainty to their business. In a world where currency is being devalued, it makes sense to put money into hard assets. If you’re in business, then buying inventory with today’s dollars makes sense before prices rise. The commodity will be a better store of value than the cash. If you are in construction, and you have seen a nearly 25% increase in the price of paint in the past year, then stocking up on paint that you will use anyway seems like a good move. You doubt the price of paint will fall, so why not buy an entire year worth of supply? How about two years of supply? If you can borrow funds for your inventory at less than the expected price increase, buying now makes sense. If you are relying on nickel, then it makes sense to hedge futures and build inventory in nickel at prices you can handle. If you need lumber, then buy lumber as much lumber at prices you can tolerate as possible. But when the market demand peaks, and consumers no longer see the need to build inventory, they will start consuming inventory rather buying from the supply chain. At that moment, demand drops like a stone, and prices fall dramatically. This dramatic swing in demand will trigger the next recession, which will be wider, deeper and longer than anyone expects. We need to be careful during this next period to know the difference between true market demand and shadow inventory in the hands of end customers. --------------- Host: Victor Menasce email: podcast@victorjm.com

On today's show, we're in front of a live audience at The Real Estate Guys Secrets of Successful Syndication Conference in Dallas. Today's talk is a case study on the value multiplier that can be possible with the combination of annexation and entitlement.  -------------- Host: Victor Menasce email: podcast@victorjm.com

Josh McCallen is the CEO of Accountable Equity, the owner of the Renault Winery and a new property located on Kent Island, a few minutes from Annapolis Maryland. Josh and his team specialize in renovating resort properties and transforming them. His track record includes beach front resorts, hotels, and most recently, properties that cater to weddings and special events. To learn more visit accountableequity.com. 

Today’s question comes from Vishal in Canada. Can we touch on the  flight of capital to US from Canada of wealthy families? If not, would you mind letting us know of what you think is happening and is it real or too far-fetched a possibility? Are you worried that we may come to a point where investments and wealthy family offices shy away from Canada? Your thoughts are always enlightening and call for some thinking on our part, so let us know in your views in a podcast episode. Vishal, this is a great question. The article in the Financial Post speaks about Having assets in safe jurisdictions outside your country of residence is part of the solution for long-lasting wealth. If you are a student of history, governments have a history of confiscating wealth. I don’t see this as a Canada US issue at all. From that perspective, I disagree with the article. I see the problem as more general. ---------------- Host: Victor Menasce email: podcast@victorjm.com

On today’s show we’re talking about using data to drive business decisions. Perhaps the best company in the world for using data driven decision making is Amazon. But what do you do when the data exists? You’re hoping to try something new in the market that hasn’t been done before, or if it has been done, you don’t have access to the data because it’s proprietary? Well, it would make sense to run an experiment on a small scale to collect the data and then use that data to plot their next move. Amazon announced the closure of numerous recently opened stores. Does this mean that their recent foray into physical retail was a failure? Or were they simply running a data gathering experiment? --------------------- Host: Victor Menasce email: info@victorjm.com

On todays show we’re answering a listener question that is a very common question. On today’s show rather than answering the question directly, this is the synopsis of a conversation that I had with this developer. I’m often approached by people who own land they would like to develop, or by those who want to operate a highly specialized event space for hosting wellness retreats. This listener is looking at developing a large acreage North of Palm Desert California. This is the place that has become famous for the massive Coachella music festival that in recent years has attracted close to 250,000 people for those few days a year. The developer I spoke with this past weekend desires to develop a wellness retreat on the acreage. The proposed project would consist of high quality amenities and the short term rentals would be made from factory built structures and assembled onsite.  Part of the concept is to have short term rentals on the property. Short term rentals are typically not branded properties. This means that you are going to likely rely upon a platform like VRBO or AirBnB to market your property on a nightly basis. As the name implies, this area is a desert. The average rainfall in Palm Desert is about 6” of rainfall per year. This can range from a low of 3” per year to 10” of rainfall per year in a record year. All of the moisture from the pacific gets deposited in the mountains before reaching the far side of the mountains, which is why we have a desert on the inland side of the mountains . When I am presented with any concept for a new project, I always ask the same questions. It doesn’t matter whether the project is located in the core of a high demand high density city, or in a rural location. All real estate has to follow the laws of supply and demand. There are examples of properties that have been developed in remote locations that have been successful. But there are even more examples of those that have failed. I’m simply not a believer in taking those types of speculative risks. I want to see demonstrable demand. That means examples of comparable properties. The problem with property in this location is the lack of municipal services. Specifically we’re talking about water and sewer. The lack of services is probably enough to kill any opportunity of developing anything of substance in this location. The area doesn’t get enough annual rainfall to develop a sustainable reliance on an underground aquifer. In recent years, the sustainability calculations for using groundwater have become much more conservative. Calculations that were commonplace 30-40 years ago have been shows to deplete the water table and many locations have run dry.

Today’s question comes from Adam. I’m looking to reposition a four unit apartment building. The construction budget is $60,000 and we have a quote from a contractor. Construction material and labor prices seem to be changing regularly. The building is currently vacant and the longer I wait, the larger the negative cashflow will eat into the viability of the project. The property is a C-Class property and I’m trying to figure out how to finance the construction with a bridge loan of some kind. The property has an existing mortgage on it, and the after repair value should be high enough to support the increased loan amount. The building is 110 years old and we will be replacing kitchens, bathrooms, and a total of 60 windows. We will be redoing the electrical panels, but re-using the existing aluminum wiring. I’m concerned about a hard money lender wanting to charge too much for being in second lien position, and the bank financing has several years left on the loan with a pre-payment penalty which I don’t want to pay. The pre-payment penalty would increase the cost of the project and impact its viability. How would you suggest that I finance this project? ---------------- Host: Victor Menasce email: podcast@victorjm.com

On today’s show we’re taking a look at markets that operate purely like their functioning primary markets, and comparing them with the secondary markets. Primary markets are essentially what it sounds like. If you want to buy tomatoes, you go to the farmer’s market and you buy tomatoes for dinner, and the price for tomatoes is the price you pay. This is a simple primary market. Many markets operate this way, including real estate. There is a primary market, and that’s all. But when we are dealing with commodities that are used in the supply and manufacture of other derivative products, there are often secondary paper markets that can often be larger in dollar volume than the primary market. --------------- Host: Victor Menasce email: podcast@victorjm.com

Addam Hooper is the CEO and founder of RealCrowd.com. On today's show we're talking about multiple product offers being managed before you have a failure of complexity.  To connect with Adam, reach out at info@realcrowd.com or visit realcrowd.com -------------------- Host: Victor Menasce email: podcast@victorjm.com