The Real Estate Espresso Podcast

Dan Rochon is a specialist in video marketing for real estate, based in Northern Virginia. He's the author of The Real Estate Evolution and the curator of the Consistent Predictable Income (CPI) Community. You can reach Dan on Facebook or connect with him through his website at www.therealestateevolution.com. 

On today’s show we’re talking about navigating the fine line between collecting commercial rent and pushing your tenants to close their doors. The financial stress is all over the world of commercial. Rent collection used to be automatic at this time last year. Revenues are down for most businesses. Most importantly, even if a recovery is underway in some businesses, the worry remains that the recovery won’t last. We could experience a second wave later this year. We could see a subsequent shutdown. We see government programs to assist businesses drying up. In many cases, small businesses failed to meet the eligibility criteria for government assistance. Commercial tenants are asking for rental concessions. They are clearly experiencing hardship. Vacancy in commercial space is also a reality of the current environment. Solving the cash flow problem involves a two printed approach. Getting existing tenants to pay the rent Finding new tenants to fill the vacancy. It’s often tempting to believe that you won’t find new tenants in today’s environment. While it’s true that so many businesses are having a hard time, there are still businesses looking for space in the current environment. That means getting aggressive on pricing and concessions in order to attract them. Today we’re looking for tenants that are doing a bang-up business. At a time when the economy is on life support and the unemployed number in the millions, it’s hard to imagine businesses that are booming. But they do exist. In one of our properties we had a single vacant retail space. We managed to find a tenant that was in desperate need of additional space. We had space that was ideally suited and they moved in a matter of weeks. At the other end of the spectrum we have tenants that have been forced to close during the pandemic. They’re being kept afloat by government emergency benefits. They’re paying a fraction of their rent and they seem to be teetering on the brink of closing. We asked them to pay the full rent this week, and they said that they simply don’t have the cash. They would have to close their door permanently. So we accepted partial payment and have applied for another round of government relief on our rents. It’s a lot of paperwork for another 30 days of rent relief. The cycle of negotiation with this tenant will repeat in another 30 days. At this time, the name of the game is survival. It’s not a time to optimize and maximize highest and best use revenue. It’s a time to be pragmatic. We entertained several potential tenants for the vacant space. One was a construction firm that would have used the space as an office and material depot. They were looking for a low rent situation and there was concern that the traffic of equipment and materials would be incompatible with the existing tenants in the building. We entertained the owner of a coffee shop who had a space rented a few blocks away at a much higher rental rate. She was losing money and could not afford her rent. She was looking to break her existing lease and get into a lower cost lease. When we evaluated her financials, it was clear that moving to a lower cost space would help her situation. But the deal breaker was the realization that she would have needed to sell an unrealistic amount of coffee in her old location, just to fund the monthly rent, without paying staff, buying food or generating a profit. So the additional rent from our new tenant is being used to cover the negative cashflow and is making it easier to negotiate rent concessions with the existing tenants. We’re not making money at the moment, but we’re not bleeding red ink either.

Today is another AMA episode. Today’s question was actually asked twice by two different people. The questions are virtually the same to I’ll answer it only once. Both Chad and Michelle asked I have a portfolio of smaller multi-family properties duplexes, triplexes and some singles. I’m thinking of putting a blanket mortgage across the entire portfolio. The question is how to value to the portfolio? Should I be valuing each individual property independently or using a cap rate calculation to value the portfolio? This is a great question. Let’s start with discussing how an appraiser would look at valuation for a property. They use three methods. Generally speaking, appraisers determine the value of a property using one of three methods. Replacement Cost Comparable Sales Multiples of net income The problem exists when the three methods don’t agree, which of the three do you select? Generally, the appraiser will choose the lowest of the three. But here too they need to apply judgement and discard the one that doesn’t apply. The biggest problem in particular for commercial real estate is that in many cases there are no truly comparable properties in the same area. In those cases, a like for like comparison is truly impossible. If your property is a 10 unit building, there may not be any other 10 unit buildings in the area. There might a 12 unit, a 16 unit, a 20 unit. So what do you compare? Do you compare price per unit? Do you compare price per square foot? Are the properties truly comparable meaning are they of a similar vintage with similar levels of finish and attracting a similar tenant base? If not, then they’re not true comps. The appraiser will then look at replacement cost. They will look at the finishes of the building, and make a cost per square foot estimate construct the a new version of the same building today. Often times, buildings are trading below construction cost because they might have been built some number of years ago and the increase in value has not kept pace with the rising cost of new construction. Finally, the third method is multiples of net income. This is where a property is valued on its ability to generate profit. That is, after all why we real estate investors are in this business altogether. The appraiser will look at what, say, B class apartment buildings are trading for in the area. It might be 6.5% cap rate. They will then analyze the financials for your building and determine the income and the expenses for the property based on a bank approved model for properties in the local area. Now your case is a little different. If all the properties are within a small radius, say, a few blocks of each other, then you can effectively treat the portfolios the same as you might a single building. If all the properties are of a similar vintage and the apartments are positioned similarly in the market, then you can compare them together as a group. The approach you’re suggesting is something we’ve done for nearly a decade. In our case, we rebuilt a portfolio of properties in a small geographic radius of a few blocks in Philadelphia. Almost all of the units were rented to students, and they were all pretty similar. The rent for each bedroom of student housing was very similar. The lender was comfortable with putting a blanket mortgage across the portfolio. You also need to be aware that the lender may want to look at the yield on cost instead of the cap rate. You might not be familiar with the term yield on cost. It’s a calculation which is similar to the cap rate calculation. Some lenders like to be conservative and don’t want to lend you so much money that you cash out of your initial investment. They may want you to keep some of your own cash in the deal.  It comes down to the specifics of your deal and what your lender will allow.

When we think of hotels we tend to think of a few large brands that dominate the market. Marriott is the largest after having gobbled up with Starwood Group which had all the Sheraton brands. Hilton is #2 with about 30 brands under its umbrella, and Intercontinental Hotel Group which owns Holiday Inn and a host of brands is number three. There are remarkably few independent chains left. Hyatt remains largely independent. The Accor Group in France owns brands like Mercure, Ibis, Novotel, and Sofitel to name just a few. Some would think that the hotel industry is highly consolidated with a small number of players. From an operations standpoint, there is a lot of consolidation of brand ownership. But that doesn’t mean a lot of consolidation of hotel ownership. Some hotels are owned by the brand, but in fact most are franchise arrangements. Hotel owners are investors, like us, who happen to specialize in owning hotels instead of apartment buildings. There are all kinds of different plays in hotel ownership. Some specialize in resort properties. Others specialize in local hotels, the ones that crop up all over the city. These serve a small radius and have anywhere from 80 to 150 rooms. Some are combo hotels where you might find two hotels side by side on the same property with different brand positioning. One might be a suite hotel for more extended stays, and the other might be a more budget hotel for shorter transient stays. There are business hotels in the central business district or in the shadow of business parks. There are hotels that cater to convention centre traffic. All these segments are distinct businesses with unique client needs and distinct business models. Today, in the pandemic environment, most are hurting quite badly. There are a few rare exceptions. Some hotels that are driving distance from major population centres and are in vacation areas like Myrtle Beach are doing comparatively well. The rest are all losing money. I’ve been in discussion with a number of hotel owners over the past several months. Most had built a 90-150 day cash buffer into their plan. That assumed that they would have low occupancy. They assumed that the return to normal would start in late Spring and that by the fall, occupancies would be back to normal levels. Hotels are small businesses. They tie up a lot of capital and they have a lot of debt, but they don’t employ that many people. The largest number of staff members are fairly low wage earners. The huge fixed operating cost and debt service that hotels face is the one thing that they can’t do much about. They can cut costs temporarily by cutting staff. They can reach some agreements with their lenders for a few months. But that will save maybe a third of the expense for a finite period of time. Most of the hotel operators I spoke with said that they had enough cash to last until the fall, maybe September or October. It’s now August and there are no signs of significant recovery in the travel industry, and recovery in hospitality is definitely levelling off. We also see a difference in demand based on property type. In the midscale and economy segments, occupancy is roughly double that of the luxury segment. That means that corporate travel and luxury have not really started to pick up yet. This is going to be a long and slow recovery. The only thing driving the market right now is the summer vacation demand. This will diminish as schools reopen in August and will shrink further after labor day. Corporate travel shows no signs of picking up. Therein lies the worry for many hotel owners. The resurgence we are seeing is going to be short lived with a drop in occupancy starting in September, followed by a more severe drop if we see a resurgence in the number of Covid-19 cases. We will start to see high quality assets at discounted prices in the near future. 

Today’s show is called 52 offers. You might be thinking that the number 52 relates to a deck of cards. Not in this case. On today’s show we’re talking about a property that this past weekend had 96 showings and today had 52 offers. Mine was one of them. I was certain there would be multiple offers and we knew the property would sell above asking price. We did our due diligence, a thorough job of estimating the work. The house was a total mess but salvageable. There was a gaping hole in the roof. The house had been left to fall apart. The mess on the inside had the makings of a horror film. Amidst all the clutter, garbage and debris, there were items in near perfect condition. The had to be at least $10,000 worth of tools and equipment that could be sold on the open market. It’s a sad story. The owners are sick. One is in hospital and there is a power of attorney to oversee the sale. So the question is how to read the market? Our offer price would be influenced heavily by what the finished product would sell for in that location. The asking price was about 45% of the after repair value. Clearly there was a fair bit of room to do a quality job of the renovations. The structure of the house had been damaged in a few places due to the intrusion of water. But these problem areas were localized. The entire house would be gutted and refinished. The hot market conditions means that there were only 4 houses on the market in the same area of the city. Interest rates are at historic lows and the cost of renovating this house compared with the cost of building a new house in the city made this a compelling project. We normally don’t go after flip opportunities. They’re labour intensive for the return on investment. But this one seemed compelling if we could get it at a fair price. With 52 offers, there was a good chance we would not be the winning bidder. Someone is almost always willing to pay too much. That’s the auction environment. As it turns out we did not submit the winning bid. On one level, I’m happy that we didn’t win. If we did, it meant that we were probably paying too much. We offered $63,000 above the asking price. We knew offers would be above asking and that by itself would not be a huge differentiator unless we offered a crazy high number. We offered to buy the property on an as-is, where-is basis. There were no conditions to the offer. That too would not be a differentiator. We expected the other offers to be unconditional. Our bid contained two items that were designed to differentiate from the other bids that might have made a difference amongst bids. The experience of this bidding war says a number of things about the market. It says that despite the depressed economic conditions, there is an intense level of competition in the local market. It will be hard for something appearing on the public MLS to ever be a bargain with that level of competition. There are simply too many people searching for too few opportunities. Generally speaking, we don’t bid on single family homes. Our projects are overwhelmingly multi-family. But every now and then we will look at single family opportunities when the market conditions seem to point toward the conditions being favorable. This is one of those times when property values have increased more than 20% in some local segments in under a year. The only meaningful way to redevelop a property in today’s environment is to find opportunities that are off-market, or to build new construction. But new construction homes won’t complete for close to a year once the permitting process and the design process is complete. The market conditions could change dramatically in that time. We could see a further reduction in inventory, or perhaps we could see many properties come on the market. We’re prepared to wait and stick to the discipline of our numbers

On today’s show we’re talking about how our economy depends on the printing of money. Let’s put this in perspective. The fortunes of entire industries rest on whether governments around the world are going to print a virtually unlimited amount of money in order to get the economy back on track. The political impasse in Washington over how much to spend and for how long is a case in point. The bureau of labor and statistics published data that more than 2/3 of those who are receiving unemployment benefits are making more money in unemployment benefits than when they were employed. Why would they want to go back to work? The unemployment benefit is breeding dependence. Many politicians see the need to cut the benefits to incent people to go back to work. Canada has traditionally been among the most liberal countries when it comes to social programs. Here too, the government has announced that they will be terminating the emergency relief benefit for employees and transitioning to the predecessor employment insurance program which has a finite period of 14 weeks for recipients to get a check. We know that the unlimited money printing can’t last forever, and at the same time, the printing of money has created such a dependence that it will be difficult for governments to stop. In the US, there are about 32 million people out of work as a result of the pandemic. The economic damage falls into two categories: Temporary damage Permanent damage Temporary damage happens when a business is forced to close temporarily. A dental practice might be a good example. The reception staff and the dental hygienists would be on a temporary layoff but would be still considered “employed but not at work”. They would be collecting employment benefits during the furlough, but it’s reasonable to expect that a dental practice will continue when allowed to re-open. Permanent damage happens when a business that has been operating for decades, closes its doors permanently. Those jobs are gone and are not coming back. Lord and Taylor just filed for bankruptcy. This iconic department store that started in NYC may not re-emerge from bankruptcy. It’s too soon to tell. You can’t just assume that the salesman selling mens suits at Lord and Taylor can now go get a job in an Amazon fulfillment center because that’s where the retail jobs have moved. Right now the Federal Reserve is doing what it can to maintain the reserve currency status. There is a list of 15 countries that the US lends money to through the Swap Lines that are managed by the Fed.  The big issue is whether the US dollar will lose its reserve currency status. Right now the Federal Reserve is doing what it can to maintain the reserve currency status. There is a list of 15 countries that the US lends money to through the Swap Lines that are managed by the Fed. These lines of credit are typically 30 days in duration and friendly countries to the US have the privilege of rolling over the loan for another 30 days. The Fed has permanent swap arrangements with Canada, England, Japan, Europe, and Switzerland. When interest rates hit rock bottom in March, that list of countries was expanded by 9 countries on a temporary basis to include Australia, Brazil, South Korea, Mexico, Singapore, Sweden, Denmark, Norway and New Zealand to tap up to a combined total of $450 billion dollars. Note which countries are not on the list. Cash strapped Argentina is not on the list. Nor is Russia or China. None of the Pacific rim countries like Vietnam, Thailand, Cambodia, none of the African nations.  At what point will those countries who didn’t get a free loan from the Fed turn to China or Russia for financial or military assistance? There is a game of geopolitical chess underway and it involves buying loyalty from friendly allies, to the tune of $450 billion dollars in the past few months.

Barry Wolfe is with Marcus and Millichap in Ft. Lauderdale. He specializes in retail assets and spent his entire career, including his early career as a lawyer working on retail assets. On today's show we're talking about the current state of retail.

On today’s show we are reviewing “Yes to Life, in spite of everything “ by Viktor Frankl. Viktor Frankl is best known for hist book “man’s search for meaning “ which chronicles his discovery of the meaning of life during his 3 years in 5 different concentration camps during WW2. During that time he saw his parents killed and his pregnant wife. Somehow he managed to survive. The book Yes to Life was curated by Daniel Goleman who assembled a series of lectures given by Viktor Frankl in 1946, only a year after the end of the war, and before the publication of Frankl’s groundbreaking book. Daniel Goleman is a best selling author known for his own body of work including the books “Emotional Intelligence “, “Primal Leadership “ , “Focus”, and “Altered Traits” to name just a few. After the War, most people who survived the atrocities emigrated to start a new life rather than reintegrate in the community that allowed such horror to take place. Frankl on the other hand returned to his native Vienna where he became professor neurology and psychiatry at the University of Vienna. He would look into the eyes of colleagues who claimed ignorance of the Nazi machine, even when they were part of it. He developed a new body of work in understanding psychotherapy called logo therapy. He held visiting professorships at Harvard, Stanford, Southern Methodist and Duquesne universities. For four decades he made countless lecture tours all over the world. He received in total 29 honorary doctorates. He authored thirty-nine books which have been translated into 50 languages to date. The book “Yes to Life” brings forward some of Frankl’s clearest thinking in the immediate aftermath of the holocaust. In our social media infused, consumption driven, Netflix intoxicated world, we rarely slow down enough to ask existential questions. Frankl is clearly focused on answering the very fundamental question about the meaning of life. Since death is certain, does not life itself become meaningless? Does death not make all our beginnings seem pointless from the start, since nothing endures? Let’s ask the question the other way around. What if we were immortal? But if we were immortal we could postpone everything. It would never truly matter whether we did a particular thing right now or the next day or the day after or in a decade. There would be no reason to do something right now or experience something right now. There would be an infinite amount of time. The fact that we are mortal and our time is restricted and our possibilities are limited is what makes it meaningful to do something. Therefore our mortality form the background against which our act of being becomes a responsibility. We do not judge the life history of a particular by the number of pages in their life story, but by the richness of the content it contains. Every hour, every minute loads our existence with the weight of a terrible and yet beautiful responsibility. Any hour whose demands we do not fulfill, or fulfill halfheartedly, this hour is forfeited ,for all eternity. Life can only become more meaningful the more difficult it becomes. The athlete, the mountain climber who actively seeks more difficult tasks, creates difficulties for themselves. If life has meaning, then suffering must also have meaning. Our modern culture seems obsessed with having a happy life, a life free from stress with all the creature comforts. Compared with our great grandparents, most of us live like royalty, and yet how many are happy? Frankl makes the case with example after example that people created their own sense of meaning from within. They didn’t rely upon external circumstances to establish that sense of meaning. Their own agency created the meaning even under the most adverse conditions. Though written in 1946, these lectures stand as a timeless piece of work.

Frustrating when your Podcast hosting company has a problem preventing new shows from being published to the feed. Listeners must be wondering what's going on.... The hosting company acknowledged the problem and are working on it.

Now that parts of the economy are opening up, we’re starting to see the opening up of the courts as well. We’re continuing to see rising cases of Covid-19 which has claimed 155,000 lives in the US since March and 9,000 lives in Canada. With that we’re starting to see litigation associated with the Covid-19 pandemic. A report in the Wall Street Journal on Thursday reported that hundreds of lawsuits have been filed for damages caused by the pandemic. Employers across the country are being sued by the families of workers who contend their loved ones contracted lethal cases of Covid-19 on the job, a new legal front that shows the risks of reopening workplaces.  Walmart, Safeway, Tyson Foods, and some health-care facilities have been sued for gross negligence or wrongful death since the coronavirus pandemic began unfolding in March. Employees’ loved ones contend the companies failed to protect workers and should compensate their family members as a result. Workers who survived the virus also are suing to have medical bills, future earnings and other damages paid out. Fortunately, we haven't had any outbreaks in our facilities.  There are stories in the WSJ article that frankly are heartbreaking. There are stories of people who were told to report to work or be fired. Some employees were told that protective masks would not help and not to wear a mask. Clearly we have millions of people who have been exposed to a high risk pathogen without the appropriate precautions. But this is not just an issue of workplace safety. The virus doesn’t care if you’re at home, at work, at a social event, lounging by the swimming pool. If you’re a tenant in a multi-family apartment complex, you need to feel safe in your own home. You need to be safe in the common areas. If it can be shown that a landlord acted negligently and a tenant slips and falls on an icy walkway, you can expect a lawsuit. It stands to reason that if you follow the same chain of logic that if a tenant uses the gym amenities and contracts Covid-19, then there might be a case against the landlord. The risk of lawsuit is very real. If you own a multi-tenant building, whether it’s an office building, or a residential building, you have risk of litigation if someone gets sick. You need to make sure that common areas and public bathrooms have a much higher standard of cleaning than normal. There is a real cost to these additional protocols. In the office building that I manage, we have instructed members of the public who might enter the building to call in advance. They are to wait in their car until their appointment. They will be escorted into the building and directly into their appointment. The waiting rooms are closed, the chairs are off limits with yellow caution tape. Senior homes are another area of risk. There have been numerous outbreaks in nursing homes in Europe, Canada and the US. Tragically, these outbreaks have ripped through the populations in these long term care facilities and the loss of life has been staggering. Here too, this is an area of risk. What about hotels? The common areas, the food and beverage establishments all represent an area of risk. The legal system is all about what you can prove. It’s not about what you know, it’s what can be independently verified. You definitely want to strengthen your cleaning and sanitizing protocols. That alone may not be enough to prevent you from being sued. It’s important to post placards and communicate your policies. If you’re communicating what you’re doing, and documenting it, there’s no guarantee that it will be enough to prevent someone from becoming sick. But it becomes harder for someone to argue that you were negligent.