The Real Estate Espresso Podcast

On today’s show we’re talking about how to reduce our energy footprint and one of the obstacles to doing so. Energy consumption per capita in the US and Canada is among the highest in the world. While our homes have become much more energy efficient, we still have a long way to go. One ideal is the so-called zero energy footprint home. These homes not only lead the way in terms of energy efficiency, they also produce enough electricity to cover their consumption needs. All of this comes at a price. The cost of building such a home is definitely higher than vanilla stick built construction. Since housing affordability is one of the most important issues in our communities, the idea of spending even more is outrageous to most people. One of the leaders in green technology and clean technology is a gentleman named Vinod Khosla. Vinod was the founder of Sun Microsystems in Silicon Valley. His company created some of the greatest breakthroughs in computing technology dating back to the 1980’s. His company has since been acquired by Oracle and he runs a venture capital firm called Khosla Ventures. He has a very pragmatic view of green technology. If the technology requires a government subsidy to be viable, it’s not interesting. If it requires massive investments in infrastructure, it’s not interesting. Your Toyota Prius, or your Tesla reduces greenhouse gas emissions by a tiny micro-fraction of a percentage. Until you come up with a technology that will convince the low income family in China or the single mother in New Delhi to stop cooking dinner on an open air fire using two bricks of coal, we will struggle to make headway on our global environmental challenge. The obstacles that make pollution the path of least resistance need to be removed. On today’s show we’re talking about one of those challenges. This is the story of Brad McLaughlin. He’s a home builder in New Brunswick who built a zero footprint home in 2017. But the three-bedroom, two-bath home stubbornly refuses to sell. It has been on and off the real estate market since 2017. Starting out, McLaughlin's asking price was $695,000. By May, 2019 he lowered it to $570,000. This week he put the two-storey house back on the market at $495,000. The problem appears to be financing. Appraisers don’t know how to model a high efficiency home compared with a regular home. They see comparable sales and comparable construction costs in the area, and they don’t recognize the lower cost of ownership associated with a zero footprint home. Their financial model assumes that the energy consumption will be the same as a conventional home, and that the purchase and sale price should be identical to any other home in the area. The technology for zero footprint is here. It’s a little expensive, but not out of line. Here’s the problem. Home prices in my area have gone up 19% in less than a year. Appraisers and lenders are happy to recognize a 19% increase as perfectly normal in a market. Lenders are willing to lend against it. But a 15% increase in cost in order to create a zero footprint home is way off-side. There’s a certain silliness that allows price increases of 8%, 15%, 19% in a single year to be OK, but the construction of infrastructure that will make a home consume zero energy for the life of the home is not considered to be a legitimate part of the home value.

Today’s story is about Mr. Steven Long. He’s a construction worked who lives in Seattle, Washington. Long had been homeless since March 2014, when he was evicted from his apartment after the rent got too high and he missed payments. He said he had previously lived out of a camper in the 1980s, traveling through five different states, so he thought he’d try sleeping in his truck.' In fall 2016, when Long was doing cleanups for the Sounders, he had parked his truck in the 900 block of Poplar Place, near the Interstate 90 and Interstate 5 interchange. “It was out of the way,” according to Mr. Long’s testimony. Steven Long returned from his job cleaning up CenturyLink Field after a Seattle Sounders’ game when he discovered that his truck was gone. He had been living in his 2000 GMC pickup, parked on a side street, but the city of Seattle towed it because Long had violated a city rule that requires vehicles be moved every 72 hours. Mr. Long claimed he told the officers he was living in the truck; Nonetheless, Mr. Long tore off the impound sticker, and left the truck in place. The parking officer waited at least four days before having the vehicle towed, giving Long extra time to buy a part needed to get it running. When the enforcement officer returned Oct. 12, the truck was still there but Long was not, and the vehicle was towed. At the impound hearing, Long said the truck was his residence. The city waived the $44 ticket and reduced the towing and impound fees from more than $900 to $557. Long sued the city but lost in Seattle Municipal Court in May 2017. He filed an appeal, which Judge Shaffer heard in the Spring of 2019, and she ordered the city to refund Long the money he has so far paid. King County Superior Court Judge Catherine Shaffer ruled that the city’s impoundment of Long’s truck violated the state’s homestead act — a frontier-era law that protects properties from forced sale — because he was using it as a home. Long’s vehicle was slated to be sold had he not entered into a monthly payment plan with the city. The City has since appealed the case to the State level appeals court. ] The appeals court judges have been asked to decide the case on two main questions: Does fining someone living in their vehicle violate the U.S. Constitution’s Eighth Amendment barring “excessive fines” and “cruel and unusual punishments;” and does attaching an impound fee to the vehicle, refusing to release the truck until Long entered into a payment plan to address the fees, violate Washington state’s Homestead Act, a frontier-era law that protects homes from being easily seized and forcibly sold? Long’s lawyers argue that not only was Long forced by the seizure of his vehicle to sleep outside, but the fines amount to the city punishing him for being homeless. They argued that it is punitive to take away a man’s home because of a parking violation. Long still lives in a truck, now with a trailer attached, but outside Seattle now. He’s working a full-time carpentry job in construction. A ruling from the State Appeals Court is expected within six months. There’s no question that the despite being among the richest nations in the world, we in the west haven’t figured out how to care for the homeless in our midst and help them get a roof over their heads.

Marc Koran specializes in commercial strip malls. These assets are income properties with strong anchor tenants. Marc's take on this segment of retail space has a unique twist that aims to protect against the changing landscape of retail. He can be reached at marckoran.com.

Scott Choppin is based in Long Beach California where he specialized in  new construction work-force housing. You will learn a ton from this conversation on development in a difficult market. Check it out.  

Today we’re going to be sharing a collection of short stories that have one thing in common. They should never have happened. We’re starting with the mundane custom furniture company that took an order for a custom made sofa. The lead time for the sofa is a full ten weeks and let me tell you, those ten weeks are going to pose a commercial problem for the business that is waiting for the furniture to arrive. The process of fabric selection took a week of back and forth negotiation between the sales team and the placement of the order. Now that we’re away from the country for two weeks, we get a message a week after placing the order that the fabric is not available, and what would we like to do with the order? Number 2. This is the story of the government department of health that is really two departments in one. Submitting an application to said department of health, as it turns out does not mean that the building application will get routed to both places within the department. Of course, there is no publicly available documentation saying that you must submit the application twice to the same department in order to get it routed through both subsections of the department. After getting the approval from said department of health, the city’s building examiner noted that the food safety division of the department of health had not signed off on the application. This was despite the fact that the department had the application for nearly 6 weeks. The food safety division promised to give speedy review of the application. But his ultimately meant a month of delay. When that was complete, it went to the city’s food safety review who then required the addition of a 500 gallon grease trap for each 3 gallon kitchen sink. Clearly that made no logical sense. Number 3. Then there’s the story of the internet service provider who would not provision fiber to a property because the property address wasn’t listed in the 911 database for the city’s public safety records. It turns out that the city is willing to collect taxes for that address. The road to the address is paved, and the mailman is delivering mail to that address. But the internet service provider could not recognize that the address existed. The location shows up in Google maps. The solution in this case was to bring the internet service to a friendly neighbor whose address did actually appear in the 911 database, and then we introduced a private extension of the internet service to go the last few yards to the subject property. The problem with this approach of course is that we experienced months of delay in the provisioning of the service, and we will won’t get the emergency services coming to the proper location if someone were to call 911 from a fixed device on that network. Number 4. There is the story of the client who chose the paint color for an office. The painter ordered the paint and proceeded to get to work. Total elapsed time for the job was forecast to be three days, one primer coat and two finishing coats of paint. At first, the client was happy with the paint color. They chose it after all. By the time the time the second coat of paint was expertly rolled and dried on the walls, the client admitted that perhaps it wasn’t the best choice. They would go back and order new paint. But now the painters would not be available for another week. It took three days to choose another paint color and then another week to repaint the entire office. So what do all these stories mean? They’re real life stories from our own business. Does it mean that we’re bad managers? The fact is, it means none of these things. These are real life risks that happen in any business. You can’t plan for the unknown, apart from allocating a time buffer at the end of each project. That buffer isn’t for anything specific. It’s there to deal with the unknowns that will arise with alarming regularity in real life.

Real estate investors are famous for saying that you can buy a property based on both price and terms. I will let you set the price as long as I set the terms. The trivial example is, I’ll pay you $10M for that old 1950’s single family home. But I’ll make daily instalments of $0.10 per day until the $10M is fully paid off. As long as you set the payment terms, you can agree to virtually any price. I learned a powerful lesson in the past month. It’s a lesson that I already knew, or at least I thought I did. Sometimes, I find myself learning the same lesson more than once. So here’s the story. I’ve always known that a confused mind doesn’t make a decision. The author and marketing expert Donald Miller is famous for his saying “When you confuse you lose, noise is the enemy, and a clear message is the best way to grow your business.” I’ve known this for a long time. A confused mind will not make a decision. My partners and I have a property under contract and we are looking to assemble several of the neighboring parcels in order to build a high rise project. This requires negotiating the purchase of these properties with each of the land owners. As with any negotiation, the seller wants to maximize the price, and as a buyer I don’t want to pay too much. The value of the land to me is largely dependent on what the city will ultimately allow to be built on that site. The value will be influenced by the height restriction, and by the setbacks from the property line. It will be influenced by any restrictions imposed by the zoning code.  Will the city allow 6 stories, 9 stories, maybe 14? The higher the density, the greater the value of the land. Can I build right to the property line, or will there be a required setback from the property line? So here I was, thinking that I had come up with a clever solution to negotiating the purchase price for three properties. In each and every case, the idea didn’t really connect with the seller. Out of the three, only one of them truly got it. Even then, they didn’t really value it. In almost every case, we were negotiating with one representative from each property. But there were multiple stake-holders behind the scenes that we didn’t have a chance to talk with directly. So what was the lesson. 1) Keep it simple and easy to understand. 2) Don’t assume that all the stakeholders will connect with your clever idea if they’re not part of the conversation directly.

Some people believe what they see. But in truth, I think the opposite is true. Most people see what they believe. Nowhere is that more true than in the political landscape. If you believe that the President of the United States should be removed from office, you’ll see evidence that supports your point of view. If you believe he’s innocent and was duly elected and is doing a good job, then that’s what you’ll see. If you believe that eating beef is healthy for you, then you’ll see the evidence that supports that point of view. If you’re Vegan and you believe that beef is bad for you, then you’ll see the evidence to support that point of view. I’m not telling you anything new. But there’s a link between this and economic survival. Consumers increasingly want to work with businesses who deliver all the values of price and convenience, but also those contribute outside the transaction in a societal way. Toms Shoes is a company that exemplifies this kind of impact. They invented the buy a pair, give a pair model. To date, they’ve given away almost 100 million pairs of shoes to people in need. Last week at the World Economic Forum in Davos, the CEO of Walmart spoke very eloquently about how these social factors are influencing consumer choices. Walmart is starting to look at Vegan products and are catering to consumers who match the values alignment with those products. The big question is what kinds of businesses are going to be successful in the next decade. Those that are local and only compete on a local basis will continue to do well, provided of course that they deliver a quality product and good value for their customers. Increasingly, they need to cater to their values, not just deliver the product. Some people will order a cup of coffee because it tastes good. Others will only order from a coffee shop that advertises “Fair trade” coffee. Commodity businesses are those that compete on a global basis where scale, convenience and lowest cost are the over-riding factors. This is the world of commodity. When the value is unclear, the discussion always degenerates to price. Price always wins in commodity. You can’t get your hair cut online and your dentist had better be local. But if you have a high ticket item, you can bet that an online purchase will be the way to go. Carrying that inventory in a bricks and mortar store will always lose. I just purchased a dishwasher for a commercial property online. There’s no need for the bricks and mortar store. But if loyalty to a store is going to exist, it requires three things: Repeat business. Transactions that occur infrequently such as once in a lifetime, or once a decade don’t generate loyalty. Wedding dress shops don’t have any customer loyalty. That’s why Competitive price and service. A connection between the buyer and seller. Increasingly these days, values alignment is being tested as a Could it be that businesses that identify as Tea Party values will be attractive to that target audience. Perhaps businesses that identify as LGBT friendly will connect with a large segment of the population? Businesses that are explicitly immigrant friendly. If you or your parents are new to the country, then you are part of the immigrant experience. Businesses that speak to you and the immigrant mindset might be more attractive. There’s no question that the landscape of business is changing. But the question is how is it changing? As a real estate investor, you need to know how business is changing because that’s the economic engine that ultimately pays for the rent in the buildings you own, whether you’re in the world of multi-family apartments, office, retail, or storage. All of these segments don’t survive without a vibrant local economy underpinning the community.

On today’s show we’re talking about a comprehensive look at short term rentals in a recent report from commercial brokerage house CBRE. This 52 page report outlines some major findings on the impact of short term rentals on the hospitality industry. The STR segment is also undergoing significant change as it matures. The supply penetration rate of short-term rental      (STR) units to traditional hotel units reached 10.4% in 2019 and is      expected to hit 12.2% this year with the addition of more than 100,000 net      new units. STR supply grew by 26% in 2019, down from      39% in 2018 and after seven years of exponential growth (100% to 500%)      since 2009. Growth rates are expected to slow further to 19% in 2020. Recent growth for STRs has been primarily      in suburban and rural areas. Units in urban areas make up only 21% of      total supply, down from more than 45% in 2014. Los Angeles remained the largest STR      supply market in 2019 after overtaking New York in 2018. Los Angeles, New      York and Orlando together accounted for about 12% of total STR supply in      the U.S. last year. Guests consistently cite price and      location as their top reasons for choosing alternative accommodations. Branded apartment/hotel models such as Sonder, Stay Alfred, Lyric and Domio depend on the pricing arbitrage between monthly apartment rent and nightly STR rates. Many companies have entered the market, primarily in U.S. urban areas. If we examine where these units are located and their market penetration, we find that nearly 20% of the resort market is made of STR with 80% being made up of more traditional hotel product. 13% are urban, 10.5% are small metro and 6.5% are suburban or airport.

Consumption accounts for 60% of GDP. Back in the 1970’s many of the western economies experienced the so-called stag-flation. The simultaneous occurrence of both economic stagnation and inflation. Traditional Keynesian economists postulated that monetary stimulus by governments would create economic growth. Until the 1970s, many economists believed that there was a stable inverse relationship between inflation and unemployment. According to this theory, the growth in money supply would increase employment and promote economic growth. The 1970’s proved that this theory was not true. Fast forward to today. We have central governments printing money like never before. However, it’s not having much of a stimulative effect on the economy. It’s inflating asset prices, but not creating a substantial jump in economic growth. The other major factor that can’t be over-looked is demographics. If I observe my own behaviour, there was a time when I was willing to spend money on a large scale. I remember ordering matching custom made leather sofas for our home. They were stunning. Today, my values have changed. I would never do that today. Perhaps it’s because I’m over 50. Maybe it’s the result of spending considerable time on board a boat and realizing that I don’t need all that stuff. There’s no question. I’m actively opposed to spending money these days. I want to invest, not consume. I’m putting increasing amount of money into assets and not into consumption. Am I also responsible for the economic slowdown? I see other people my age spending less on consumption, even if they’re not investors. In our family, we took the decision to reduce our household from two cars to one. The number of times when both my wife and I need the car at the same time is hardly worth justifying the extra expense. We have an economic system that requires never-ending growth in order to survive. Unless you have growth, there is no way to practically retire debt. Debt is borrowing from the future to spend money today. The only way that debt makes any sense is if you can have more money in the future. If the growth isn’t there, then the only solution is the inflation of the money supply. In the world of inflation the currency get devalued. This has the effect of increasing prices. When prices rise, three things are affected. People on fixed income have their purchasing power eroded. They can’t spend as much on consumption. The only way to feed the consumption side of the economy in those cases is to make more consumer credit available. Savings get devalued. Debt gets devalued just the same way that savings do. So the question is, are there new barriers to employment which are not influenced by monetary policy or fiscal policy? If you live in California, the state government continues to make it less attractive to do business there.. New laws are making it less attractive to hire in the state of California. If the fed prints more money or lowers interest rates further, you’re not going to see a lot of new hiring happening in California. Access to credit isn’t what’s preventing more people from getting hired. If you look at Japan, as soon as their population peaked in 2005 and started to shrink, you saw economic stagnation. In fact, today there are over 11M vacant, that’s right 11M empty homes in Japan. The birth rate and immigration are not sufficient to sustain the population. Japan’s population has continued to shrink and their fertility rate is currently 1.4, far below the 2.1 needed to maintain population constant. The US population is growing through immigration, but only barely. If you want see our economic future look to Japan for a clue on how it might unfold. Increases in government spending and higher debt to GDP ratios have not help stimulate economic growth.

David Barnett is a business sale consultant. He can be reached at davidcbarnett.com. Such a great conversation.