The Real Estate Espresso Podcast

On today’s show we’re talking about migration. Migration happens within the country for a variety of reasons. People have been slowly leaving the rust belt in favor of the sun belt. The trend has been alive and well for a couple of decades now. Today we’re going to take a deep look at Florida and what migration can tell us about real estate demand. There are a lot of NY accents in the state of Florida and former New Yorkers make up 7.5% of Florida residents, more than any other state. Florida has a very low proportion of native born residents, making up only 35% of the population. About 22.3% of Florida’s residents were born outside the US.  This makes sense. Florida has long been a favored destination for people coming from Latin America. Spanish is widely spoken and I’ve had more than one Uber driver who only spoke Spanish and no English. Over the past decade, Florida has averaged a net influx of population totaling 297,000 people a year. 2016 was a banner year for migration with nearly 2% population growth in a single year. That year 408,000 people moved into the state. It’s projected that migration is going to average 305,000 a year over the next five years, a little above the average for the past decade. That amounts to 835 people a day moving into the state. That translates into significant demand for new housing. We’re talking about adding a city the equivalent size of Orlando each year. That’s a big number. In contrast, NY State lost 123,000 people in the past year. Illinois experienced a loss of 79,000 residents in the past year. The fastest losing state is California which lost nearly 200,000 to migration last year. Michigan lost 18,000 in the same time period. So where are people moving in Florida? Where are they going? The top growth market in Florida over the past decade has been the southwest cities of Fort Myers and Cape Coral. Jacksonville, Miami, and Port St. Lucie round out the top 5 cities in terms of growth. The two largest home builders in Florida are Lennar and DR Horton. They consistently lead with the largest number of new building permits across all 5 of the major regions in the state. In the realm of multi-family, South Florida lead the way with 12,000 units of new supply added to the market. The largest growth markets were Fort Lauderdale with 2,634 units of new capacity added to the market, and Downtown Miami and South Beach with 2,000 units and South Miami / Coral Gables with 1,700 units. The greater Miami area picked up the lion’s share of the new growth. But as always, real estate is hyper local. Northeast Miami has earned a reputation of being a bit of a rough area. NE Miami experienced a net absorption loss of 683 units at the same time that south Miami absorbed 762 units. Some investors, particularly out of state investors tend to get into trouble by simply looking at the macro migration numbers. I’ve noticed that the number one factor influencing local population growth is the quality of air service. The further you get from a major airport in Florida, the lower the property values, and the lower the percentage of population growth. You have two major airports along the Gulf Coast. You have Tampa, and Fort Myers. Property values are at their lowest in Englewood which is about the midway point between the two airports. There are still waterfront properties In Englewood and Venice that can be purchased a surprisingly affordable prices. But with 800 people a day moving into the state, low cost of borrowing, low cost of living compared with the major NE cities, there’s continual upward pressure on prices.

The discussion of housing affordability is at the forefront of many community meetings. Three things stand in the way of affordable housing. 1) High cost of land 2) High cost of construction 3) Cost of servicing the land with the infrastructure Unless you can dramatically reduce the cost of these three items, the cost of housing will continue to be high for those who are on fixed incomes and those who are lower on the income ladder. It doesn’t matter who builds the house. It’s not the fault of the builder. If materials and labor dictate that new construction costs $130 per SF in many areas of the US, and if land contributes another $50 per SF of finished floor area, someone buying a 1500 SF house is going to need an income of $36,000 minimum in order to afford such a really small house. If a household is close to that income level, housing affordability is going to be a challenge. Two people in a household earning minimum wage will roughly afford to live in a mobile home and not much else. At $10 an hour, you’re looking at $18,000 a year in income per person. Very hard to make ends meet at such a low income level. We’re not talking about a teenager living at home, working at McDonalds part-time for a bit of pocket change. When you have independent adults in minimum wage jobs, they will quickly become the working poor. On today’s show we’re taking a look a mobile home parks. Today about 10% of US households live in mobile home parks. They represent about 20 million home sites. Most of these parks started out as mom and pop owned projects. Today, they’re a corporate affair with big business and family offices investing in them. Mobile homes provide the largest inventory of unsubsidized, affordable housing in the nation, but many began as RV parks in the 1960s and 1970s and are now old, with rundown water and electric systems and trailers that have been long past “mobile” for decades. As a park owner, the profit is in the lot rent, not the structures. Their prevalence varies widely by state. Some states like Colorado have a lot of them. More than 100,000 people live in more than 900 parks across Colorado. Many started as RV parks and then were converted to mobile home parks. But the infrastructure requirements for RV’s and mobile homes are different. Rv’s require 30A and 50A electrical service. But the building code treats a mobile home the same as a detached home and requires 200A service. The reality is that a mobile home will draw almost the same amount of electricity as an RV. The biggest demand for electricity comes from heating or air conditioning. Lights and kitchen appliances are insignificant consumers of energy by comparison. Nevertheless you will need to completely redesign the electrical system for a park in order to handle mobile homes if the park was not designed for it. The next major areas that can be costly to upgrade for the long term are the water and sewer infrastructure. Most of these parks are outside the dense urban environment and rely on well water and septic systems rather than municipal services. So why are these types of assets attractive to institutional investors? The largest cost of operating a park like this is the staff. If the park is small at say 50 units, there is not enough income from the park to pay for the staff required to operate it. These only work as owner operated parks. The cap rates for a well run, large sized park can be easily 14-15%, provided they are purchased at a good price. The specialists in operating these parks have developed strong systems for owning and operating them.

On today’s show we’re going to be talking about a proverb that you’ve probably heard you parents, or maybe your grandparents say. There are several different versions of it. But it goes something like this. They will only help you if you don’t need it. Strangely, banks have more cash on hand than ever. Consumers have been using stimulus checks to pay down credit card balances. The new loans from the SBA disappear from bank balance sheets once they’re forgiven. The residential mortgages that have been written in the past year, a record year for originations and refinance activity are usually securitized and sold into the secondary bond market. Businesses are not borrowing to expand. They’re accessing lines of credit to hang on, but they’re not really investing. As many as 8% of homeowners in the United States have accessed some form of forbearance agreement with their lender on their residential property. A forbearance agreement is when the lender says, OK. I can see you’re having temporary financial trouble. Let’s postpone a portion of your loan payments. Maybe let’s have you pay only the interest payment, you can defer the principal portion of the loan payment for six months and we’ll extend the loan by six months. That would be an example of a forbearance agreement. Today, less than 5% of the homes in the country are still in a forbearance agreement. Many have managed to exit the forbearance. The banks were encouraged to extend these types of terms to borrowers and at the same time, the Federal government issued a moratorium on foreclosures, in addition to the moratorium on evictions that protect tenants from eviction during the pandemic. Those forbearance agreements have a term of 12 months. Over the coming 90 days, many of those forbearance agreements are going to be coming to a an end. So the question is, what happens at the end of the 12 month term? There is still a moratorium on foreclosures. The foreclosure process is not fast at all. But still it’s not clear what will happen to these millions of homes? Will the lender extend the forbearance agreement? Will the lender modify the loan and extend the term of the loan, or lower the interest rate? Or will the lender move to put these loans in default? It turns out that in order for the lender to approve the modification, they will need to re-underwrite the loan. If you don’t have a steady income stream you won’t qualify. If you are receiving an unemployment check and you’re going to have trouble making payments on your home loan, you won’t qualify for a loan modification. You have to not need the help in order to qualify for the help. Now the contradiction in terms should not be lost on you. About a quarter of the forbearance agreements in existence will expire in the next 6 weeks. I can tell you know from first hand experience that the permanent economic damage is starting to appear in a big way. I’m seeing first hand businesses closing down, and I’m seeing these business assets being sold. I’m now seeing asset sales from businesses that are closing cross my desk about once a week. My team is conducting due diligence on multiple businesses right now as we speak. I speak regularly with a specialist in asset disposal. These are the folks that will come into a business or a restaurant that is closing and remove all the equipment and cart it away to a warehouse to be sold at auction. They’re running out of warehouse space. They’re busier than they’ve ever been. So the impending housing crisis of foreclosures on the scale of 2008 seems to be a distance away. Governments are trying hard to prevent the carnage in the housing market that was experienced following the 2008 financial crisis. All we can say right now is that government will continue to shovel cash into the system. Where this cash will ultimately end up nobody knows.

We have a great listener question today.  What are your Key Performance Indicators for underwriting a rental building (100m+) on Park Avenue NY in the current market conditions (decrease in occupancy and increase in concessions). There is also few sales comps in the last decade. Thanks in advance This is a great question. This is an area of NYC that I know well. My father had his dental practice on the corner of Park Avenue and 73rd Street. My mother was an architect on the Pan Am building, now called the Met Life building on Park Avenue and 43rd Street. Park Avenue luxury rentals are complex buildings to own. Most of the land underneath those buildings, North of Grande Central Station is owned by the Pennsylvania Railway and leased to the buildings.  Those ground leases are expensive which is part of what contributes to the high rent needed to merely break even on those assets. Eventually those buildings could be turned into condo buildings, or rebuilt to even higher density. You are correct that these buildings don’t change hands very often. Most of the luxury apartment buildings that are rentals along Park Avenue have not experienced a large increase in vacancy. Many of these older buildings date back to the early 1900’s. These buildings along Park Avenue are not a commodity. Those who are renting in those buildings are paying $5,000-$7,000 per month. They’re paying that because they want to be in that location. At the purchase price of several million dollars, even a rent of $7,000 a month is a relative bargain. So these tenants are not moving out in search of something cheaper. The turnover in these buildings is extremely low. Some have been updated and converted into condominiums in the process. Those that have been converted to condo are pricing around $6,000 per square foot. However, given the excess of supply that has opened up in Manhattan in the past two years, it’s going to take several years for this market to recover. I don’t believe we’re anywhere near the bottom of the market in NYC. Even before the pandemic hit, there was a lot of new supply having entered the market. There was an estimated inventory of about 9,000 vacant brand new construction condos in the market. That represents about 7 years of inventory at 2019 absorption rates. So who would be buying buildings like this at such inflated prices? Buildings like this are considered to be trophy assets. The buyer of such a building is someone with a lot of cash to put to work. They’re looking for an asset where it’s more important to tie up a large amount of cash to protect it for the long term, rather than simply maximizing the rate of return. Some international wealthy families have their money in places like Brazil or Argentina where they face considerable ongoing currency risk. More important than earning a high rate of return, is protection from 10-15% annual foreign exchange loss. These families sometimes like to park cash in a stable asset that is safe by virtue of being in a high demand location in a global gateway city like NY. Some of these buildings are being valued at cap rates in the mid 3’s. That means the cash on cash return would be approximately 3.5%, with zero leverage. At that price the property won’t generate enough free cash flow to service any debt. It all comes down to being clear on your investment criteria. We would not buy a building at a 3.5% cap rate. That’s not for us. We prefer to build new construction at a 6.5-7% cap rate and then refinance the property at a lower cap rate that is consistent with the market valuations around 5%. Remember, the difference in price between 3.5% cap rate and 7% cap rate is double the price. One of the key metrics is price and the ability to use debt to finance these buildings. But we’re comfortable building new construction. That’s not for everyone.

What is old is new again. On today’s show, we’re taking a deeper look at digital marketing. Why? Because every successful business needs to be known by its customers and real estate businesses are no different. Some of you may be wondering why there is not a lot of advertising on the real estate espresso podcast. We have had advertisements in the past on the show. At most they were 30 seconds long. These days, the show is free of advertising. Back in the good old days, marketers would spend money on advertising. They would run an ad on Television. We just finished watching the latest crop of advertisements during the Super Bowl broadcast. The ads that make their debut at the Super Bowl are aimed at a broad audience. The advertisement for Doritos corn chips can’t directly be measured. We don’t know who will go out and buy corn chips as a result of the commercial. Google had a very simple business model when it got into the paid search business. It charged $0.05 for the opportunity to be placed above the organic search results. Then some businesses realized that their competitors were buying that ad space. Every time someone searched for Home Depot, an ad for Lowes would appear. So Home Depot would offer to pay a higher price for that same ad. Eventually it became an auction environment. The advertising auction price would rise to the point where the equilibrium would be reached. Google rose to becoming one of the most valuable companies on the planet with zero sales force. Think about it. They had zero sales force to achieve that market position. Yet, they managed to siphon almost all of the marketing value out of the system with zero sales force. Business is changing. It used to be that commerce was sold through platforms. If you wanted your product to get to the consumer, you needed a platform. In some cases, you needed a company like Walmart to choose you. Or maybe a national supermarket chain needed to choose you. The business model was rarely direct to consumer. Google enabled companies to cut out the middle man and made it possible for smaller companies to go direct to consumer. But there was still a large percentage of commerce that was not using search in order to reach the end customer. Nobody uses google to search for Coca Cola, or Pepsi. With pay per click, the ROI is easily measured. The advertising is direct to consumer. There is no middle layer obscuring your view of the transaction. But some businesses are starting to experience a loss of return on these platforms. Competitors are hiring services to covertly click on your ads to waste your ad budget. Some behind the scenes I’m hearing that Google plans to change the emphasis on new forms of advertising that are tailor made for the kinds of businesses that today are advertising on television, or on billboards. The world of television has not changed its format in 50 years. They still subject the viewer to 5 minutes of advertising every hour. Google on the other hand has figured out that viewer attention span is much shorter than 5 minutes. Most viewers will not tolerate 5 minutes of advertising without changing channel. Google ads on the other hand are no longer than 15 seconds. Many are under 10 seconds. What does this mean for you, as a business owner? It means that the already saturated online world is about to get even noisier. In my view, the world of interruption marketing is becoming less and less effective. Those who master the art of building a relationship with their customers and with their audience are those who ultimately win.

Wes Hill hails from Chico, California (about 100 miles North of Sacramento). Wes and his partners own about 1,400 apartment units across several states. On today's show we're trying to gain insight on rent collection statistics across multiple geographic areas. Today's discussion highlights the plight of landlords across the country.  You can connect with Wes at MultiFamilyAssetAdvisors.com.

Today's show is not a real estate show. Our guest is Joseph Fung, founder of a technology startup company. We're talking about an innovative technology company that is training people how to become expert sales people involved in the sale of complex products. All companies require sales. As legendary investor and RichDad advisor Ken McElroy says, "Sales solves all problems".  To learn more, reach out to Joseph at uvaro.com.

Today’s question comes from Chris in Long Island. He asks, You’ve talked about many different asset classes on the show, but I haven’t heard you talk about crypto currency? Why haven’t you talked about it, and what are your thoughts on crypto-currency. Chris this is a great question. In order to answer the question, we need to go back to the very definition of what is money. I don’t know if this is strictly a dictionary definition, but in my mind in order for something to be money it has to have three characteristics. It has to be a means of exchange It has to be a store of value It has to be easily divisible into different sizes so that you can use it to exchange for a wide spectrum of goods, services and commerce. Let’s look at a crypto currency like Bitcoin, or Etherium, or any of a host of others and measure them against those three criteria. As a means of exchange, it’s not great. There are more methods coming into play. But you can’t just go out and buy groceries with a crypto-currency As a store of value, it definitely fails. The value of crypto currencies have been extremely volatile, both up and down. The value seems to be linked to the number of coins in existence and demand for coins. The notion of value is based on the promise that supply of coins won’t be inflated and debased the way the dollars are being printed. Most of the coin exchanges like coinbase allow for fractional purchase of coins. So maybe the third is satisfied. But against the measures of the definition of what money needs to look like, I can’t see how anyone thinks that crypto-currency is money. A bank  has a centralized database where they keep track of how much is owed to you. That centralized database is not 100% perfect, but is pretty trustworthy. I assert that it’s trustworthy because I can virtually guarantee that all the listeners of this show have a certain amount of their liquid cash on deposit at the bank where it is being tracked in a central database. The argument for crypto currency is that there is no bank that is keeping track of your funds. The database technology that sits underneath the crypto-currency is based on a technology called block-chain. The blockchain is a database that is distributed across thousands if not millions of computers and so there are literally thousands or millions of copies of your transaction being recorded across all those computers. The argument is that if someone attempted to tamper with the records in the database, it would be virtually impossible for them to tamper with all of those copies of your records. The inconsistency would show up instantly and the fraud would be exposed. A single computer updating a single entry in a database can complete that operation in a few microseconds. But if you have to make the same change and recalculate the signature 1,000 times across 1,000 computers, or 10,000 computers, it’s clearly going to take a lot longer. So blockchain technology is essentially a slow distributed database. So crypto has some security features that are interesting and compelling. On the flip side, the inherent security doesn’t come for free. There is a technical problem associated with a distributed database and that is scalability.  Have people experienced huge capital gains in crypto-currency? Clearly the answer is yes. Have people lost money? Absolutely. In my world investing has the notion of value at the foundation. Speculation on the future price is not investing in my world. That’s gambling. I believe there is risk in everything we do. But when it comes to investing I want to take calculated risks, not play in a game of chance.

In a mastermind, you will often meet new people who each take a few minutes to introduce themselves. On today's show you're hearing a recording of my introduction to a mastermind group. If you're not part of a mastermind, I strongly urge you to make that investment in time and relationship building. 

On today’s show we’re talking about the shift in housing supply during the pandemic and what it means for new builders. Housing starts were up 12% for the year according to data just published by the research team at Fannie Mae. Multi-family starts are down 13.6% compared with a year ago. Total housing starts of all types were up 5.8%. Now through the year we had supply chain disruptions which meant that some items were difficult to source. Those hard to find items naturally went up in price. Lumber is priced as a commodity and lumber futures trade on the commodities markets like many other commodities including copper, pork bellies, wheat, and energy. Softwood lumber is priced per 1,000 board feet. The math is pretty easy to work out. If lumber prices are at $1,000 per 1,000 board feet, you’re basically paying $1 per foot. The simple test is how much would an 8 foot long stud cost you to purchase? You might expect it to cost about $8-10, and that’s exactly what we see. We’ve seen lumber prices fluctuate wildly throughout the year. Prices dropped to $264 at the end of March, and were up to $367 by the end of May. Once summer hit and we had a succession of hurricanes make landfall all over the country. Lumber prices hit $970 in mid September before dropping into the $500’s for most of the fall. Through Q4, prices rose into the $800’s and have remained around $850-$880 for most of January. The impact of these high lumber prices, along with all the other supply chain shortages is that overall construction cost has increased about 10-12% in less than a year. The price increase by itself would have made it difficult to start any new construction. The saving grace has been that the falling inventory has pushed prices up to the point where higher sale prices have made new housing starts viable. If prices hadn’t jumped an average of 11% across the nation for existing home sales, the market conditions would not support new construction. Fortunately for builders, prices do support the higher cost of construction. But there is also an opportunity. It turns out that steel framing is less expensive than wood. Steel framing has commonly been used in commercial construction. It has the advantage that it doesn’t warp or shrink, or swell with humidity. It’s also very strong in compression when properly installed with drywall. Some might be tempted to switch materials from wood framing to steel in certain applications. Sadly it’s not that simple. The carpenters who frame out of wood are not necessarily experts on how to frame out of steel. In addition, your architect would need to design the building to have the proper lineup of materials and cross sections. What you might save in materials, you could easily lose in labor, complexity and rework if things are not done properly. But if you’re looking to build cost effective housing, this could be an area to explore with your architectural team. Unless you’ve been able to secure your materials or your subcontractors are willing to reconfirm and guarantee pricing, you might face a situation where a subcontractor walks off the job and refuses to honour their contract. You could sue them, but at the end of the day, you have a project to complete and a law suit won’t get the building finished on time and on budget. 2021 is turning out to be a year of value engineering, where the owner, the architect, and the general contractor will need to get creative about adapting to material shortages, price jumps, and optimizing your negotiations with subcontractors.