The Real Estate Espresso Podcast

The Covid-19 outbreak has caused major upheaval in the lives of hundreds of millions of people. Things that seemed important only a few weeks ago have faded into the background. That massive dislocation has caused many to re-evaluate both the content and the context of their lives. Some people will re-evaluate their lives based on their own initiative. For many, that re-evaluation won’t happen until it’s forced upon them. Perhaps Covid-19 will be that forcing function, even if you don’t have the misfortune of contracting the disease, the disruption caused by it could be enough to cause a reset. The silver lining could be re-evaluating your life. This month’s book is “Designing Your Life: How to Build a Well Lived Joyful Life” by Bill Burnett and Dave Evans. Nothing could be more timely than re-evaluating and re-designing your life. Since life isn’t normal now, why would you want things to go back to normal. I actually don’t want things to go back to normal. I want my life to move forward so that what emerges from this dislocation in history is better than it was before. I fancy myself a designer. I used to design microchips. Then I designed systems that would process millions of phone calls per hour. I designed hardware systems. These days I’m designing subdivisions, and buildings, and apartments. Of course this is a team effort involving architects and engineers of many disciplines. Designers love problems. Every single item that you find in your house was the result of some designer somewhere encountering a problem and coming up with a solution. That’s why you have running water. That’s why you have a dishwasher and a toaster and a chair. These things would not exist if there were no problems. They were only created in response to a problem in each single case. So if you’re going to design your life, you absolutely need problems. Lord knows, there seems to be no shortage of problems at the moment. The book is based on a design methodology that has been taught at Stanford University for over 50 years. Design thinking starts with curiosity. Often times people are working on solving the wrong problems. So perhaps a re-frame of the question of the problem can get you unstuck. Connecting the dots to create a meaningful life involves getting connecting who you are, what you believe, and what you do. When these three are connected together, you will experience a more meaningful life. But if you’re never asking yourself the questions, you won’t get clarity. More importantly, life isn’t a destination, but a journey. If you spend your entire life chasing an elusive destination, then you will have missed it. You can’t solve a problem, you’re not willing to have. If you’re not willing to accept the problem, then it’s not really a problem and it’s merely a circumstance. It’s what you choose in life that makes you happy. Designing this requires evaluating several alternate futures. The obvious first choice is to take your current path that you’re on and simply making it better If your current reality was uprooted and you needed to do a plan B, what would that be? Finally, if you had no constraints and could design your wild-card plan, would that be? Things that come up on the other plans were items that were part of the past ideas that got lost along the way. By creating three alternative life paths you will generate enough ideas to figure out where you want to go next. Prototype your life. That is try it on for size so that you will know at an emotional level if the choice works for you. Choose well. That doesn’t mean making the best, choice, but it means making the choice in a way that you’re going to let go of the other alternatives and not second guess yourself. The book design your life might be the best thing you can immerse yourself in right now when your life has been disrupted.

The world is about to embark upon the largest economic experiment in history. They have no choice really. In a Formula 1 race, the yellow flag comes out when there is a problem on the track and the race is temporarily suspended. The cars continue to circle around the track. The speed is reduced to a safe speed and its impossible to make forward progress. Yes, you’re still burning fuel, but the race is temporarily suspended. Never before have governments tried to put swaths of their economies in an induced coma and awaken them gradually. There is no yellow flag built into our economic system. One of the biggest impediments to the yellow flag is debt. Debt service appears as a fixed cost regardless of the level of business underway. But of course the debt was procured with an assumed underlying level of business. There was never an assumption that business would stop, or in fact that loan payments could stop on a large scale. On today’s show we’re talking about whether you should take advantage of the loan payment holiday that some lenders may offer. The fact is, we don’t know the scope of the Covid-19 problem. We don’t know if this period of social isolation is going to last weeks, months, or years. We already know that many countries have been shut down for If a lender offers you a payment holiday, or perhaps an interest holiday, you will sign a document called a forbearance agreement. A mortgage forbearance agreement is an agreement made between a mortgage lender and delinquent borrower in which the lender agrees not to exercise its legal right to foreclose on a mortgage and the borrower agrees to a plan that will bring the loan current. The thing to remember is that we are only a few weeks into a pandemic of unknown scope and duration. If you approach your lender now, the banks only have the tools that have been made available to them by the government and the central bank. Much of the economic stimulus was based on the assumption of a short term situation. Let’s put this in perspective. The US is spending $2T in stimulus, which is a huge amount of money. A report in the Wall Street Journal today suggests that we are expecting to see a contraction of about 30% in GDP in the second quarter. The stimulus would cut that reduction in half, or about a 17% reduction in GDP. It’s highly likely that additional stimulus programs will be forthcoming as the breadth of the damage becomes visible. While I haven’t seen the language of the forbearance agreements directly, what I’m hearing from investors I’ve spoken with is that the terms of the forbearance agreements are pretty draconian. As more stimulus becomes available in the coming weeks, I expect that the terms of the forbearance agreements will become more generous. If you have the financial strength to survive a few more weeks, you may get a more generous relief package and a more lenient forbearance agreement, either in terms of terms or duration. This is a fast moving situation. There are other programs that may apply to your business that you might consider first. For example, there are forgivable loans that are available in the US through the Small Business Administration to assist with payroll. In Canada, there are programs available through the Business Development Bank of Canada. In the UK, Employers can claim for 80% of furloughed employees’ (employees on a leave of absence) usual monthly wage costs, up to £2,500 a month. My recommendation is to look at some of those other programs first. A lender is likely to sign a single forbearance agreement, but not two or three forbearance agreements if this economic downturn gets extended beyond the initial number of weeks that governments around the world have been projecting.

On today’s show we’re talking about a French term that is often appearing in contracts, and insurance agreements. That term is "Force Majeure".  As of today’s show, the World Health Organization has declared the novel coronavirus (COVID-19) a pandemic; states of emergency have been declared in multiple states and provinces all over the world. There is no doubt that COVID-19 has and will continue to have, an adverse impact on the global economy. With disruption to supply chains, international travel, and business operations, many individuals and businesses may be unable to fulfil their existing contractual obligations. On today’s show we’re going to take a deeper look at Force Majeure and whether it could, or perhaps already has impacted you. Force Majeure clauses are generally included in contracts to account for circumstances where a party cannot perform the contract due to circumstances beyond its control. A Force Majeure clause typically operates to absolve the non-performing party of liability for its failure to meet contractual obligations as a result of an extenuating circumstance, but its precise effect will depend on the language of the provision in the contract. Some contracts treat Force Majeure as an “Act of God”. These events would then trigger their operation of that contract’s clause. Common cases include hurricanes and earthquakes. So the question is whether Covid-19 would meet the definition. Some contracts spell out a laundry list of events that fall within the scope a circumstance beyond the control of the parties, such as acts of terrorism, war, labour disputes, strikes, or adverse weather conditions. However, given the current state of affairs, it is likely that a court will find that COVID-19 is an unforeseeable event outside the control of either party. Whether COVID-19 makes it impossible for a party to fulfill their contractual obligations is a different matter. The obligations cannot simply be more difficult to fulfill; they must be impossible. The determination of these questions will be both fact- and contract-specific. One of the most common contracts that developers and investors encounter is the AIA-101 contract. The AIA contracts are industry standard contracts that are widely accepted across the industry and are used by many general contractors. The AIA-101 has a second document called the AIA-201. This document contains the general conditions that apply to the AIA-101 contract. The AIA-201 has section 8.3 which deals with the topic of delays. This section deals with a lengthy list of the usual causes of delay like labor disputes, fire, adverse weather and so on. If none of those possible causes of delay have triggered an allowable delay, then there is a fifth item “by other reasonable causes that the Contractor asserts, and the Architect determines, justify delay, then the Contract Time shall be extended for such reasonable time as the Architect may determine.” This is an example of a contract that has a force majeure clause. The one place I expected to find a force majeure clause was the standard agreement of purchase and sale. A review of several states and provinces, could not able to find a force majeure clause in any of the standard agreements. This has given rise to what many realtors are not calling a Covid clause. For new contracts being written in the current environment, many buyers are including a provision which would allow them not to close if the Covid-19 conditions make it impossible to close. The wording I’ve seen for one such clause was extremely broad. It basically said that if the buyer didn’t want to close, they could blame the virus and be off the hook. If you have a contract that you’re negotiating, or perhaps a contract that you’ve already signed, I recommend that you go read the Force Majeure language in it.

Fabio Lopez comes to us live from Milan Italy, the epicenter of the Covid-19 outbreak in Europe. Italy's hospital system has been overwhelmed. Fabio's description of life under quarantine is much more restrictive than here in North America.

Alan Schnur went through a life changing event that most of us can't imagine. He was working on the 101'st floor of the World Trade Center on September 10, 2001. This is a powerful story of transformation and of intentional growth. Many lessons in today's conversation. You can reach out to Alan at alanschnur.com.

On today’s show we’re talking about a topic that’s on every landlord’s mind. Which tenants will pay their rent on April 1? Part of anticipating the answer to that question is understanding who is still at work, and who has been laid off. There no question that this economic downturn will not affect everyone equally. If there’s a physical component to your work, chances are good that you’re going to be impacted. This means almost anyone in the consumer retail world, unless you’ve been deemed an essential service. Well a new report issued today by the folks at apartmentlist.com attempts to model and quantify the demographics. In this new “quarantine economy,” working from home is the most impactful thing workers can do to ensure job stability. But while remote work is becoming more popular over time, access is not universal. A much larger share of high-income earners have this luxury; many lower-wage employees do not. The quarantine economy creates four categories of workers, each facing varying levels of economic risk. The greatest risk is felt by those whose jobs a) are considered “non-essential” by local shelter-in-place laws and b) cannot be fulfilled at home. This includes many service sector employees, retail workers, and early educators. They tend to be lower-income, face higher housing cost burden, and have lower access to health insurance if they get sick. Regionally, high-risk workers comprise a larger share of the workforce in cities rooted in the tourism and service industries, particularly Las Vegas, Miami, and Orlando. Places with a high concentration of knowledge economy jobs and/or essential blue-collar industries will fare better, including metros like San Jose, Detroit, and Boston. Federal and state governments are rushing to pass legislation that will protect public health while reinvigorating the economy. In the meantime, job and housing insecurity will disproportionately affect millions of American workers in lower socioeconomic strata. There are four categories. Secure jobs are the least threatened. They are not only essential to the economy but also flexible in their working arrangements. These workers are likely to retain their usual income while also practicing social distancing that will keep themselves and their families at low risk of coronavirus exposure. These are folks like financial analysts, accountants, and those who operate the community infrastructure like power plants and water treatment plants. Low-Risk jobs provide shelter from the coronavirus, but carry some risk of economic uncertainty. These workers can easily transition to a remote environment but their paychecks may be in jeopardy if demand for their skills weakens in an economic downturn. These are folks like software developers, Exposed jobs are those that are deemed essential, but must be done in person. These jobs generally offer economic stability during the crisis, but may increase individual exposure to health risks. These workers cannot shelter-in-place while working because the nature of their job requires leaving home and engaging in some level of personal contact. The list of essential services varies from one state or province to the next. Where I live, the list of essential services is about 70 items long. High-Risk jobs are the most economically at-risk in the quarantine economy. These workers are deemed “non-essential” by federal guidelines and furthermore do not have the option to work from home. Heavily concentrated in the service sector, the incomes of many high-risk workers are already in jeopardy today. This includes restaurant wait staff, hair stylists, tour guides, flight attendants and hotel staff.

History doesn’t exactly repeat itself. But it does rhyme. The year was 1775. The government in the British colony in North America was out of money to pay its soldiers. The American Revolution was well underway and they needed cash to to help fund the Revolutionary War. Continentals quickly lost value, partly because they were not backed by a physical asset like gold or silver, but also due to the fact that too many bills were printed. Here we are in 2020. Ignorance of history and economic ignorance is spreading through the country faster than the Covid-19 virus. So much of what you’re hearing in the mainstream media is just plain wrong. The problem is that much of the economic ignorance sits in our houses of Parliament, and in our legislative bodies. We have Senator Mike Gianaris, deputy leader of the Senate in NY State, advocating a 90 day suspension of residential and commercial rent for tenants and small businesses impacted by the coronavirus pandemic. How will the building owners survive for 90 days? How will this modern day Robin Hood shower cash upon the tenants, and ultimately protect the banking system from collapsing? Not to worry, the Evictions in the state have been frozen by a moratorium issued by the Unified Court System and Governor Cuomo has already ordered a 90-day mortgage moratorium. But wait a minute. Rents pay for much more than just the mortgage on a property. Where will the money to pay the property managers come from? Where will the funds for maintenance of the properties come from? I guess the Federal Government will helicopter more money into those businesses. Tuesday the Dow went up nearly 11% in the largest single day gain since 1933. What was the driver for that? The news that the Federal Reserve would buy an unlimited number of US Treasuries. That’s right, there is no limit. Republicans and Democrats reached a deal on a 2 trillion dollar funding package. This fiscal stimulus will be used to help businesses and individuals affected by the outbreak. The mechanism for getting money into people’s hands is not clear yet. What will constitute a loan? What will be an outright grant? It’s tempting to blame the bursting of a balloon on the pin. But if the balloon wasn’t over-inflated, the pin would have no effect. Now we’re trying to pump more air into the balloon after the balloon has burst. The last time the balloon burst was in 2008. But the Fed doubled down on printing money. The pin in this case is Covid-19. The worst thing that can happen to someone’s money isn’t the loss of a bit on their investments. The worst thing is hyper-inflation. We’ve seen it through-out history. One of the founding principles of the United States of America, enshrined in the constitution was the notion of We saw it in the Weimar Republic in Germany from 1919 until 1933. Germany was licking its wounds after the defeat in the first world war. The country was focused on reconstruction and it lacked the resources to fund the reconstruction. When the printing of money happens with complete abandon, the problems multiply. It caused the collapse of the Roman Empire. The problem with printing money is that it is inflationary. The deficits are rationalized as temporary. They will be made up during the boom times. Little by little the government becomes addicted to the temptation to perform a politically expedient move and kick the can down the road. Each hit of cash feels great. It’s like a hit of cocaine to the cocaine addict. The effect of inflation is to wipe out purchasing power for those on fixed income. It has the effect of wiping our savings, and it has the effect of wiping out debt. It’s a wholesale devaluation of the currency. While it’s happening, the short term impact is positive. Asset prices increase. Remember, the best performing stock market in the past decade was Venezuela, that is, up until their economy collapsed.

Today’s show is the story of a conversation that happened in our household and probably mirrors conversations that are happening all over the world and maybe in your household. The messages of social isolation have been clear for weeks. We are in the middle of an exponential growth in the number of cases of the disease, the number of critical cases, and the number of deaths. When you know the equation, it’s simple math to predict the future. We made the decision to keep isolated within our household and to minimize trips outside the house. My wife has transitioned all her client appointments to video conference calls. I’ve cancelled all my travel and we have made minimal trips outside the house for critical supplies. After dinner on Sunday night my son announced that he was going out for a walk. That seemed  perfectly OK. But after about 45 minutes he wasn’t home and we saw that he had gone for a walk in his car. A quick phone call discovered that he was out for a walk with a girl. He had all kinds of justifications. The girl had been in isolation for weeks, and he had been in isolation and they were walking outdoors in nature, and he was tired of being cooped up in the house and needed to get out. At this stage we have examples of community transmission in our city. The public health lines are getting jammed with thousands of calls. The testing centres remained open until they ran out of tests. It’s clear that we don’t know, and probably will never know who does and doesn’t get the disease. The public health officials are saying at this stage not to call. If you have symptoms, stay home. If you are really sick and are having trouble breathing, then call your doctor to get an over the phone assessment. Most clinics have closed their doors and are only admitting patients after a phone screening. The result was a difficult conversation with my son. The isolation practice in our house can’t be a leaky bucket. Either we’re in isolation or we’re not. Right now, and for the foreseeable future we’re choosing isolation. My son shared that he takes the current situation seriously and that he’s being ridiculed by many of his peers as a result. I’m seeing many examples on social media of people who are not taking this seriously. A friend of mine in Las Vegas posted a large group photo. One last group shot before we go into isolation was the caption. I was dismayed to see the photo. They’re not bad people. They are just a little further behind in their adjustment to the current reality. As with any change, there will be a spectrum of adjustment reactions. There will be those who accept the new reality almost instantly. They probably represent the usually early adopter percentage of the population. Then you have those who are easily convinced. After that you have the mass of the population who will follow when ordered by government to act a certain way. Finally there are those who will be dragged kicking and screaming every step of the way. We now know of people in the community who we believe have contracted the disease. The numbers are still small compared with the global situation. In every case, they didn’t think they were taking a risk. But here’s the problem, most of those who are carriers are not exhibiting any symptoms. They are completely asymptomatic and they are infectious, silently spreading the disease to everyone they come in contact with. I believe that people are basically good with good intentions. They also believe that the risks are low when less than 0.1% of the population have been diagnosed. But many of these same people will go out and buy lottery tickets where the chances of winning are less than one in a million. My son pledged to uphold the rules of our house. I truly believe that he meant no harm, but in spite of this he did put our home at risk.

This question is from Dan in Alberta Canada I just put an apartment under contract and working through the DD. It’s a 32 unit 4 storey for $50,000/door in a town with heavy reliance on the oil industry. At present the gross monthly revenues are 17k. The property was mismanaged and vacancy is 45%. The rest of the market has about 20% vacancy. Rents are now 20% less than the present market rents. In it’s peak days, gross rents were 60k. I’m having mixed thoughts In these uncertain times... What are you suggesting? 1. Wait and see 2. Buy during these fearful times, as deals are best. Dan this is a great question. On the surface, when you look retrospectively, it looks like the property might be a deal. The purchase price is well below construction cost, and the market has delivered stronger performance at this property in the past. That’s all in the rear view mirror. We would both agree that driving a car using the rear view mirror alone for guidance is a recipe for disaster. We are about to embark upon one of the largest economic slowdowns in our lifetime. The impact of this is unknown in many respects. We don’t know what the credit markets will look like in 15 days or 30 days, let alone six months. You mentioned that the local economy is driven by the oil industry. The oil industry is in the middle of a price war and the community that depends on oil production for its lifeblood will very quickly experience even greater reduction in workforce if prices remain anywhere near current levels. We’ve experienced a massive drop in global oil demand over the past two weeks which has caused prices to drop as stronger players aim to protect their income streams at the expense of weaker players. At a certain point with prices near levels we haven’t seen in over 20 years, these companies are losing money. The price of oil varies widely based on the cost of transportation. In places like Alberta where the transportation costs are high due to the lack of pipeline infrastructure, oil prices hit a low $7.23. Let’s let that number sink in for a moment. Even the OPEC price of $27.31 is at extremely low levels we haven’t seen in decades. So much of the global oil industry has been financed with debt. Many companies will end up defaulting on their debt and the stronger players hope that will result in a drop in supply. If you don’t have an influx of population into the market, it’s hard to see how you’re going to implement a turnaround on this property in the current environment. Making investment decisions requires a measure of certainty in the market conditions. There’s always a degree of risk in any market. But today we have so many risks that it’s virtually impossible to quantify the impact of each of the individually, and then in combination, it’s well above my analytic ability. The key to answering this question. How long will this economic disruption last? The true answer is that nobody knows. There have been a few promising announcements that chloroquine, a 70 year old anti-malaria medication has been shown to be effective in treating patients with Covid-19. If that’s the case, and the clinical trials prove positive, we might be looking at a shorter period of economic disruption. That depends on whether this drug, or perhaps another, or a combination of drugs proves effective. The chances are high that this situation will precipitate a credit crisis. Government backed loans only represent a small proportion of all lending activity. If there is a crisis in the private lending market, then we can expect a fall in asset prices just like we saw in 2008. This particular building may be a deal, but I personally would advise you to be patient and continue to monitor the situation. You might find an even better deal in the weeks and months to come.

On today’s show we’re talking about preparation for the next several weeks. It’s stunning to me that I still talk to people on a daily basis who have made zero steps to prepare for a possible period of complete social isolation. Many who I spoke with in the past week had less than a week of supply in their pantry. We’ve starting preparing for the possibility of a social lockdown over a month ago. As of now, we have about 8 weeks of supplies such that we can remain isolated for 60 days without going shopping if we need to. We are still going out to the grocery every few days and making sure we keep the pantry topped up. We’re also mindful that as the disease spreads through the community, so too does the risk of going out even for a trip to the grocery store. Sooner is lower risk than later. Our latest visit to the grocery shows that the shops are empty of many essentials at this point. There is no flour, very little in the way of paper products like toilet paper, no rice, no coconut milk, no tofu.  We made sure to have a large supply of canned items and dried goods that have a long shelf life. Canned goods have the benefit of being easy to trade if there’s something you need that someone else has. In our family, we have a Vegan diet which means no meat and no dairy. At some point if we face a lockdown situation we may have to rely upon what food we have in our house completely for an extended period of time. We will be relying on beans as a primary source of protein. So we have a lot of chick peas, lentils and beans that we can use in preparing meals. We also purchased a fair bit of frozen vegetables. This is not something that we would normally consume, but if we are not going out, they will come in handy in meal preparation. We have a healthy supply of spices. When we speak about food tasting good, that has more to do with the seasoning of the food than the taste of the underlying ingredients. We recognize that part of our own emotional well-being will center around how we care for ourselves and how well we eat. We have a few meals of prepared foods that are frozen and can be quickly heated and served. We don’t have a lot of these because they take up a disproportionate amount of space in the freezer. We have dried foods like Rice, and Pasta. Some wonder how to calculate how many days of food are in their cupboard. For example, a one pound package of pasta will feed about 4 people, or about 100 grams per person if you do the math using the metric system. There are some things we have not purchased. For example, we have not bought freeze dried foods, what some people call astronaut food. It’s partly because these portions are about 4 times the cost of regular food. They have a long shelf life, but it’s far from something we would normally eat. We felt that sticking as close to real food was the best choice for our family. We have made certain assumptions about what will remain operational. For example, we expect that running water will continue to function, and that electricity will be reliable. So far we haven’t seen any cases of mass outages in the West. There is some risk. If you’re relying on your own well water for drinking water, then you should definitely stock up on drinking water. If you faced an equipment failure, it could be a long time before you got service to come and fix your pump.  We made sure we have about a two month supply of soap for the dishwasher and for the laundry. We do laundry on a regular basis, and this will be even more important if we go out for any errands. When we come back in the house from the grocery, the clothes go straight into the laundry and we go straight into the shower. If you do the math on the social isolation required to protect our healthcare system, you quickly conclude that the period of social isolation we’re talking about is not measured in weeks. It’s measured in months.