The Real Estate Espresso Podcast

On today’s show we’re looking at some of the recently announced or completed hotel conversion projects. These projects are happening all over the country. Hotel News Now maintains an online database of all the hotel conversions that are announced across the United States. You can download the entire excel spreadsheet and look at the details of each project. In 2019, there were a total of 47 hotel conversion projects across the US. So far in 2020, seven hotel conversion projects have been announced across the country. On today’s show we’re going to showcase a few of those conversions to give a flavour for the types of projects that are getting funded in today’s environment. Some of the hotel conversions are merely a refresh of an old and tired hotel, along with rebranding the property with a stronger brand. There are a few examples where a property switched from a Quality Inn to a Ramada. The Vegas Hard Rock Hotel is now going to be a Hilton Curio Collection property. Some went from a private label like Turnberry in Miami to the JW Marriott brand. In one case, an Intercontinental hotel in Milwaukee Wisconsin removed the brand affiliation and chose to go the independent route. The improvements in a hotel conversion go beyond a fresh coat of paint, rectangular floor tiles and quartz counters in the bathroom. Today’s traveler wants the best of both worlds. They appreciate the unique experience that comes from staying in a boutique hotel. It’s far more memorable for a visitor to stay in a hotel with art deco interior, Venetian chandeliers and brass handrails on the stairs, than telling friends and family that they stayed at a nondescript Holiday Inn. But travellers also want the security of knowing that the property will adhere to international hotel standards for comfort and amenities. This is where the major hotel companies have been launching so many new brands. In particular, they’ve been launching brands that allow for boutique hotels to maintain the brand strength of the parent brand whether it’s Hilton or Hyatt, while embracing the unique aspects of the property. For example, Baywood Hotels purchased the downtown 14 story Oil and Gas office building with a plan to convert the property into a 175 key Canopy by Hilton hotel. This building was built in the 1950’s and was given heritage status in recent years. The hotel plans to open in 2021 after an extensive refit which was started this month. It’s hard to start with an old bank, or a post office and make that hotel conversion meet the specifications of a Hampton Inn. In fact, it would be silly to try. It would create confusion in the marketplace. The Hampton Inn brand would add very little value to a unique boutique property. When you are starting with an existing building and you would like to incorporate the history or the unique characteristics of the area into the building, it needs a distinguishing name that is in keeping with the character of the neighborhood. At the same time, travellers want to know that they can expect a fridge and coffee machine in the room, that there will be a safe for their valuables, a place to charge their electronic devices, the bed will be comfortable and that they will have high speed internet service for free with their hotel loyalty program membership. All of these things come with being associated with a major brand in one of the new boutique collection hotels. While these boutique hotels make up a small percentage of the overall portfolio of hotels in the market, they are a growing trend. The boutique hotels don’t demand all of the same architectural specifications that a brand like Sheraton might require. So the construction cost can be lower in a lot of cases. Those savings make for a more profitable hotel while maintaining the brand strength.

On today’s show we’re talking about how more New York City hotel owners are defaulting on their mortgages, succumbing to a crush of new supply and rising expenses. New York’s average daily room rate fell to $255.16 last year, according to hospitality research firm STR Global. That is down from $271.15 in 2014 and the lowest figure since at least 2013. A continued construction boom could push these numbers down further: 22,117 new hotel rooms were under construction or in planning as of January, according to STR. Here are a few examples. A $98 million financing package for two Manhattan hotels has sunken into default. As it turns out, I’ve stayed at one of these hotels. The debt, which dates to late 2014, is secured by two midtown lodgings: the 148-key Hampton Inn on 43rd Street and the 135-key Holiday Inn Express Herald Square, on the West side on 36th Street. When Cantor Commercial Real Estate originated the five-year, interest-only debt five years ago, income for the Hampton Inn covered debt-service requirements more than two times over, with a debt-service coverage ratio of 2.04. But by June that number had declined to 1.28. Revenue at the pair of hotels has held more or less steady over the course of the loan, rising to $21.9 million this year from $21.7 million at origination. But expenses have grown more rapidly: They’re up 15 percent over the same period, rising to $14.5 million this summer from $12.6 at origination. Otherwise, performance has been strong: As of 2019’s halfway point, the Hampton Inn’s 12-month occupancy rate stood at 92.3 percent, with the hotel earning an average daily rate of $224.65 Earlier in 2019, the owners of the NoMad Hotel, a luxury independent property located near Madison Square Park in New York, defaulted on about $140M of debt. The property was in jeopardy of going to foreclosure last June amid conflicts between the partners who own the property. At the 11th hour, the partners came together to save the property. Most recently, the old Milford Plaza Hotel in Times Square has run into trouble. This 1,331-room property was renamed Row Hotel. The property is in default on a loan package had a principal balance of $260.2 million. According to a report in the Wall Street Journal, the loan could now sell for as little as $50 million, say people familiar with the matter. The debt, which is secured by a long-term lease on the hotel rooms, has been in default since 2018 because income from the rooms isn’t enough to cover debt payments and rising expenses, according to the WSJ report. Several other hotel owners have had similar trouble. In June, a lender filed to foreclose on a hotel in Williamsburg, Brooklyn, over a defaulted $68 million loan. In December, a group of international lenders filed to foreclose on a Times Square hotel and retail tower once valued at $2.4 billion. Last month, the owner of the Blakely hotel in Midtown Manhattan said he would shut it down, citing stiff competition. And this month, a lender filed to foreclose on the former Hotel Americano, which in December was rebranded as Selina Chelsea.

On today’s show we’re talking about hotels and some of what’s happening in the hotel industry. The first major trend is that the hotel landscape is changing dramatically. Major hotels chains are launching more and more brands as they try to gain market advantage. Here’s what I believe. The value of a brand is called its brand equity. There is a ladder of brand equity that starts at the very basics Brand Awareness Brand Preference Brand Insistence Brand Advocacy I’m a pretty astute world traveler. I’ve visited over 55 countries in the world. That’s not going to break any records. But it’s fair to say that I’ve traveled. I’ve stayed in roadside hotels on the freeway at under 40 Euros a night, and I’ve stayed in luxury 5 star properties from Shangri La in Asia. I’ve stayed in Taj hotels in India, and Accor Group Hotels all over Europe. When it comes to hotels, I find that I struggle to keep pace with the proliferation of hotel brands. It’s like there is a hotel brand arms race underway. All the major hotel groups including Hilton, Marriott, IHG, Best Western and Hyatt have multiplied their brands. ntercontinental Hotels purchased Kimpton Hotels back in 2015. The company breaks down their business into Mainstream hotels and luxury and lifestyle. Their best known brands is Holiday Inn. Atwell, Avid are new brands that complement Holiday Inn and Holiday Inn Express as part of their mainstream portfolio. Some of the growth has taken place through acquisition, but much has happened as a result of launching new brands with positioning. Luxury and lifestyles (Intercontinental has 65 hotels under development). There are new brands like Regent, 6 senses resorts, and Indigo. Almost all of the 6,000 hotels in the IHG portfolio are owned by independent 3rd parties. At Hilton, they’ve added new brands like Tempo, Motto, Signia, Canopy, Tru, Home2, Homewood Suites, the Curio Collection and the Tapestry Collection. Marriott is now the largest hotel group in the world after having acquired the Starwood Group that owns Sheraton, and Westin. Hyatt has expanded with new brands including Andaz, Alila, and Thompson Hotels. The hotel groups are eyeing the growth of the middle class on a global basis as the main driver for demand. There has been considerable focus in the industry on bringing additional value to guests through loyalty programs. Someone who earns their Hilton Honors points at the airport Hilton when traveling for business will use their points at a vacation destination using one of the other brands when traveling for leisure. Today’s traveler is looking for specific amenities. When I travel, whether it’s for business or pleasure, the number one amenity that I look for is a refrigerator in the room. If it doesn’t have a fridge, I’m not staying there. It’s common in the downtown core of a major city to see many competing hotel brands, when in fact many are The seven largest hotel companies boast a mind numbing 134 brands. There has been so much consolidation in the hotel industry that even iconic family run hotel names like Waldorf Astoria, Fairmont and Ritz Carleton, are all part of a global conglomerate. So why are the hotel companies proliferating the number of brands? Strong brands like those under the Marriott and Hilton families attract the most visitors. They also attract the highest valuations from the REITs that aim to purchase performing hotels.

On January 31, a motion was put in front of Los Angeles City Council to expropriate an apartment building because the affordable rent covenant was due to expire after being in place on the property for 30 years. The motion asks city staff to draft plans for using eminent domain to seize Hillside Villa Apartments, a 124-unit, privately-owned development in the city's Chinatown neighborhood to avoid rent increases at the property. The property is currently under an affordability covenant that requires 59 units to be affordable for the first 30 years. The owner of the building sent notices to tenants over a year ago warning them of the increase, which will increase to market rates. That translates to an increase of up to $1,000 per unit. The owner of the building is Tom Botz. He said, ”I think it's a brilliant idea but I need to know: Are we in Cuba or Venezuela?" A condition of that loan was that the developer rent out units in the building at below-market rates for 30 years. Other government grants and loans that helped finance the building came with their own specific affordability requirements. The affordability requirements from the redevelopment loan were due to expire in June 2019. In May 2018, tenants started to receive notices that their below-market rents would be increasing in a year. In March 2019, tenants were given the option of signing new leases at the new rate or face eviction. In June 2019, several tenants, with the assistance of the Legal Aid Foundation of Los Angeles, sued Botz, claiming the tenants received did not receive proper notice. That lawsuit was dropped in July after a compromise was reached in which Botz agreed to extend the affordability covenant for another 10 years in exchange for the city wiping away the debt owed on the redevelopment loan. But after a period of time, Mr. Botz decided to not go through with that deal. He says that he had no hope that once the extended affordability requirement expired, activists and the city wouldn't just try to pressure him again into maintaining below-market rents at the building. The past six months have seen bitter feuding between Botz, tenant organizers, and Cedillo's office. Activists even picketed his home. Traditionally, eminent domain is used for projects that are considered in the public interest. These are situations where you need to build a freeway or an airport. The act of condemnation is not usually used for a city to simply buy a property. It’s not clear whether eminent domain would survive a court challenge. If the city  succeeds in condemning the building, it will erode property rights, possibly on a national scale. If this is a legitimate use of eminent domain, then it could be used again to seize other properties where affordability covenants are set to expire. The affordability covenants are usually set by HUD in Washington which is the primary source of funding and loan guarantees for these types of projects. Cedillo's motion asks the city's Bureau of Engineering to consult with the city attorney and then prepare a report on seizing Hillside Villa within 30 days. Botz says he will fight any effort to seize his property in court. It should come as no surprise that the increasing cost of housing follows the laws of supply and demand. Many within Los Angeles have opposed development and intensification. Intensification allows for more units within the city. Even though 70% of the land mass in Los Angeles is made up of roads, congestion is a major issue. For example, in 2019, LA Council voted unanimously against SB 50, a state bill that would legalized four-unit homes on most residential land and mid-rise apartment buildings near major transit stops. Should the city go down the path of seizing private developments to preserve units, it will discourage investment in developing new housing.

On today’s show we are talking about how to use other people’s money. As real estate investors we are trained to use other people’s money. We use the bank’s money. We might joint venture and leverage a partner’s money. We might syndicate a project and bring investors along for the journey. Robert Kiyosaki is famous for his assertion that your home is not an asset. An asset is something that puts money in your pocket. A liability is something that takes money out of your pocket. But what do you do in markets that are over priced? Everyone needs a place to live. I hear that mantra over and over again. What if you want to live in an expensive city like NY, San Francisco, Toronto or Vancouver? Let’s look at Vancouver where the median sales price for a 4BR detached home was $2.5M last month. Even a 1,000 SF 2 BR condo in Vancouver averaged $985,000 last month. That represents a price decline compared with a year ago. But you can often rent that same condo for $2,500 a month. Unless you believe that the 2BR condo is going to further inflate to $1.2M in the market, why would you ever take the financial risk of buying something that generates zero income at that price. Some people justify the purchase price of their personal home by saying that they deserve a nice place to live. I get that. So let’s look at the cost of owning that 1,000 SF condo in Vancouver. If you finance 80% at a 3.6% interest rate over 25 years, you would be looking at a monthly loan payment of almost $4,000 a month. When you add property tax and insurance you’re now at $5,000 a month and you have to tie up about $200,000 in equity just for the privilege of paying that $5,000 a month in holding cost. But wait, there’s more. The owner of the condo has $600 a month in condo fee. The monthly cost of ownership is a whopping $5,600 a month, for a 2 BR condo. That comes to $67,200 a year. Now on the other hand, let’s imagine that you could rent that same condo for $2,500 a month. All other things being equal, you would save $3,100 a month by renting instead of owning. That 2BR rental would cost you $30,000 a year. You would have zero maintenance responsibility. If the condo Corp isn’t properly capitalized and the owner faces a special assessment to replace windows or make repairs to the underground parking, you pay none of that. Imagine now that you took the $200,000 you would have tied up in equity and invested it in real estate, at a modest 10% annual rate of return. You would have $20,000 a year in income and could use the after tax portion of that income to further offset your monthly living expenses. You could probably reduce your monthly housing expense by another 50%. What I’m describing is heresy to many of my listeners. “Live where you want to live and invest where the numbers make sense.” I know that for some of you, what I’m saying is going to challenge some deeply held beliefs. Some of you will rationalize your belief by saying, you can’t rent a place that will be a nice as one that you would buy. Today’s show is based on real world apples to apples comparisons. The truth is, there are foreign investors who are looking for places to park cash in real estate. They are buying brand new construction condos, off of the builder’s plans and then putting those brand new properties into the rental market. It is happening every day. The concept of other people’s money doesn’t just apply to investing. It can also apply to your own home if you want to live in an expensive market where the numbers don’t make sense.

Rich Danby is the founder of Masters of Real Estate and is a frequent guest speaker at live events and on podcasts. He can be reached at rich@mastersofrealestate.com

Today's show is a live Q&A from a thought leadership conference in Toronto. Many of the questions center around the design and production of the podcast.  Enjoy...

On today’s show we’re talking about conferences. Who needs them? Are they worth all the effort, expense and time? Nothing has impacted modern life more than mobile technology. In fact, if you’re listening to this podcast, 85% of you are listening on a mobile device, either iPhone or Android. The continued evolution of mobile technology is a global effort with companies from around the world involved in the invention, design, development, deployment, localization, monetization, and promotion of mobile platforms, devices and applications. Yesterday, the GSMA, sponsor of the Mobile World Congress, the largest mobile conference in the world cancelled the conference, scheduled to be held in two weeks in Barcelona. This conference is massive in its scale and impact. Its cancellation also raises questions about the utility of conferences in today’s environment. Let’s dig into the details. It’s the first time in MWC Barcelona’s 33-year history that organizers have called off the event, which draws more than 100,000 participants from across the world to check out the latest innovations, pitch to investors and do deals. That’s right, 100,000 attendees. Hotels are booked months in advance. Short term rentals are booked months in advance. Poor unsuspecting tourists come into a city that is over-run by the event. The direct economic impact of the conference in Barcelona is estimated at $490 million dollars. The show provides temporary employment for over 14,000 people. This year, the list of big-name attendees started to crumble on Feb. 7, when Swedish wireless equipment maker Ericsson pulled out, saying it couldn’t ensure the safety of staff and customers. The first Asian company to pull out was Korea’s LG. As others pulled the plug from Sony to Nokia, Vodafone and Deutsche Telecom, it became harder for those remaining to justify their presence. The booths from the world’s largest equipment manufacturers are extravagant multi-story structures. Many of them include built-in conference rooms in which exhibitors can hold client meetings. Some of the booths cost more than $2M to construct. Booths are limited to 6 meters in height or about 20 feet. These three story structures are extravagant and eye catching. Why even hold a conference? Why is it needed? Do customers, many of whom work for government, or quasi government agencies really need to see all that extravagance? From an exhibitor perspective, the question is always whether trade shows generate any additional business. Do people walking up to your booth become customers? Are the people in your booth existing customers who you would have retained anyway? There are over 1,200 exhibitors and the attendees include experts from all aspects of the wireless industry. When I was attending, I was representing my company that manufactured chips that are used in mobile devices. We were meeting with equipment manufacturers who would ultimately use our chips in their devices. It’s an opportunity to compress timeframes. When I go to conferences, I hold multiple face to face meetings in a single day. Sometimes I’ll hold seven or eight meetings starting from early in the morning until late in the evening. I’m able to accomplish in four days what would realistically take four months. When people are in conference mode, they put the office on hold and focus to maximize the efficiency of meeting people at the conference. When I attend a conference, I don’t pick up the glossy literature. I don’t load up on free pens or sunglasses. I focus on meeting people, from dawn till late. Later this month, none of that is going to happen. The big question is, who is going to absorb the cost of the cancellations?

David from West Virginia asks: Nothing is selling here in the coal fields of WV. However, the rental market is really good. My question is, knowing I can buy cheap and rent with my long term goal being to eventually sell, Is this a reachable goal with our real estate market? David, this is a great question. My heart goes out to the communities where the main industry is shrinking. The fact is, real estate follows any other free market and must adhere to the laws of supply and demand. Communities connected to coal mining are shrinking because the employment is shrinking. For better or worse, coal has earned a reputation of being a dirty fuel and many jurisdictions have made the decision to eliminate coal burning for environmental reasons. Some of that reputation is well deserved, some not. There are some clean coal technologies under development and undergoing trials with the department of energy. If those trials are successful, it’s possible that we may see a resurgence of coal as a viable fuel for power generation. I doubt we will see power plants convert back from natural gas to coal any time soon, but it may enable some domestic power plants to extend their operating life. In particular, there are numerous plants in other parts of the world that may want to license clean American coal technology, or perhaps source clean American for their power plants. In my opinion, it would take something like a resurgence of coal in order for me to consider investing in an area where there is a dominant industry like coal mining. In order for me to invest, there has to be population growth, and jobs growth. If the jobs are disappearing, you’re trying to sell a product to somebody with no money. If they have no money, it’s not exactly clear why you would go out of your way to do business with someone who has no money. There might be a social benefit to doing so, or perhaps a humanitarian benefit to doing so, Those are all great things. But if your goal is an investment, then you want to evaluate the investment on investment metrics. The flow of money is straightforward. The tenants have the money. The way it works, is the tenants give you money at the start of each month. Over time, they help you pay for the property. In exchange, you take the financial risk of buying the property and borrowing the money from the future, along with personal guarantees and collateral to protect the lender’s position in the property. But if the tenants don’t have the money to start with, then the whole system breaks down. The problem with buying with the intent of selling in the distant future is that you don’t know if there will be buyers. If there are no buyers, then prices fall. It’s exactly the same situation as Detroit, albeit on a smaller scale. If there are no buyers, then prices fall. If there are no buyers, then you don’t have an investment. All you have is a prison for your money. Keep a close eye on whether clean coal gets adopted and whether it will drive a resurgence in coal mining.

On today’s show we are talking about how the arsenal at the Federal Reserve’s tool chest is getting empty. The Fed is taking the approach of monitoring the situation closely. Fed officials at their meeting last week left their benchmark federal-funds rate steady in a range between 1.5% and 1.75% and signaled little reason to change course for now. Fed officials had signaled before the coronavirus outbreak that they saw greater risks of surprises that could force them to lower rates than to lift them. Americans are driving the US economy along with borrowed money. The question is how much longer can it last? Consumer debt surged once again in December as Americans charged up their credit cards for the holidays. Total consumer credit grew by $22.1 billion in December, according to the latest data released by the Federal Reserve. That represents an annual growth rate of 6.3%. Total consumer debt now stands at a record $4.197 trillion. Just 5 years ago in 2015, consumer debt was a record $3.4 trillion dollars. Back then, we were all saying “How much higher can it go?” This is unsustainable. Here we are 5 years later with an additional $800 billion in consumer debt. The Fed consumer debt figures include credit card debt, student loans and auto loans, but do not factor in mortgage debt. A big jump in credit card balances drove the big rise in consumer debt in December. Revolving credit was up 14%. Americans have run up nearly $1.1 trillion on their plastic. The big jump in credit card debt reversed a trend of slowing consumer borrowing, but this was not unexpected during the December holiday shopping season. Non-revolving credit, including auto loans and student loans, grew by 3.7% in December. Total non-revolving debt outstanding stands at just under $3.1 trillion. Through 2019, consumer debt grew by $187 billion, a 5% increase. Americans are driving the US economy along with borrowed money. So if incomes have not grown by 5%, and inflation is low, some would say worryingly low, and consumer debt has grown by 5% and the economy grew by 2%, then there is only one possible conclusion. America is spending money it doesn’t have. The Traditional methods for stimulating the economy have relied upon the federal reserve lowering interest rates. The slow down in the economy is not the result of lack of investment by business. Lowering interest rates will have zero impact on economic growth. It won’t have much of an impact on consumer spending either. Even if consumer interest rates fall, the ability of the consumer to sustain higher levels of debt is highly questionable. The only economic stimulus weapon left is fiscal stimulus. That’s code for government spending more money and hoping that the increase in spending will circulate through the economy. Well folks, don’t get ahead of me. This is an election year and you can bet that the White House wants to stretch out this economic expansion as long as it can. Government spending is the only weapon left and you can expect them to use it. The White House released their budget for the upcoming fiscal year. The $4.8 trillion budget for fiscal 2021, released Monday, assumes that economic growth will be stronger than most forecasters project. The major elements of the budget plan are unlikely to become law, as Democrats control the House and spending bills in the Republican-led Senate need bipartisan support.