The Real Estate Espresso Podcast

Colliers recently completed a market report on the state of office space. It contains some startling revelations.  Yes flexible office co-working space segment of the market accounted for 1/3 of all new leases signed last year. While still a small percentage of the overall market, its the fastest growing segment.

Last week, NY State Senate Deputy Leader Michael Gianaris announced he will introduce legislation to eliminate tax breaks for capital gains when investing in federal Qualified Opportunity Zones.    “The Opportunity Zone program was intended to help economically distressed areas but is being abused to grant tax breaks to already overdeveloped neighborhoods,” said Senator Michael Gianaris. “The state should not be made to suffer due to the misuse of this program.”

This live Q&A session was part of a keynote address in Lancaster, Pennsylvania. Some great questions that were very specific to the local geography, but universally applicable to almost any geography.

Chuck has developed all types of properties in his extensive career in real estate investing. But he's a self storage specialist. This will be obvious from our conversation.  Chuck can be reached at creativerealestatenetwork.com/podcast  He has written a book on creative financing and it's a free download for our listeners.

This episode was recorded live at a conference in Lancaster, Pennsylvania. The question came from a member of the audience. In my estimation, the one thing that distinguishes success is "resilience". I give an example of our neighbors who tried every trick under the sun to block the existence of our project. 

The economic indicators of recession are starting to trickle in. We are seeing ballooning inventories in multiple sectors of the economy. When times are good, suppliers increase production to meet the rising demand. But as always, they get a little ahead of themselves.  The auto industry sold 17.3 million vehicles last year. Frankly, some of that consumption was the result of major storm damage from settling insurance claims from late 2017 and from 2018, as opposed to true economic demand for new cars. Demand peaked 3 years ago at 17.55 million cars and trucks. Today, inventories on dealers’ lots total 3.95M vehicles. That’s nearly 11 weeks of inventory. The industry considers 30 days of inventory to be healthy. However, if you consider that the current forecast for 2019 is for less than 17M cars to be sold in the US. If we see a drop in demand, then we’re really sitting on close to three months of inventory. General Motors already announced the closure of 5 plants across North America and Ford is also reporting a 27% drop in operating income for 2018. Part of the driver for new vehicles last year was a change in tax rules that permit businesses to expense the entire vehicle in the fiscal year compared with the previous requirement to depreciate the capital expense over several years. The stimulus resulting from the rule change is unlikely to repeat in 2019 to the same degree.  Other sectors of the economy are also showing signs of slowdown. As we’ve previously reported, the residential housing sector is seeing inventories increase in several markets. Inventories are up 116% in Seattle Washington, up 131% in San Jose California. Britain is in a full blown contraction, but that’s driven by the Brexit uncertainty. The cloud of what will happen looks like it will take considerably more time to resolve. Prime Minister May has survived a non-confidence vote and has indicated that she will renegotiate the terms of Brexit with the European union after the original deal was resoundingly defeated in the British parliament. The EU has said they’re not willing to renegotiate. The calls for a second referendum is getting increasingly louder. Italy reported economic numbers for the 4th quarter. They reported the second full quarter of economic contraction putting them technically into recession territory.  France showed contraction in Q4, and December retail sales in Europe overall had their largest one month drop since 2011.  

For many people it was a boring game. Well into the third quarter the game was tied at one field goal each. No team had managed an offensive run of more than five possessions of the ball. It was a game dominated by defence.  Games that involve lots of scoring, passes and receptions that defy physics make for an exciting game. Watching a game that is dominated by offence is so much fun. As real estate investors, those are the days of acquiring new properties, and of growing the portfolio. They’re exciting times. Everything is appreciating in value. The game of offence in real estate is fun too. Tom Brady was in his 9th Superbowl. He’s by no means a rookie to the championship game. Anyone who watched the game would acknowledge that Tom Brady didn’t play his best game. He had some weak passes. He looked slow and tired in the first quarter. Offensively, the New England Patriots didn’t look like the tight disciplined dominant machine we’re accustomed to seeing.  He won his 6th Super Bowl on Sunday night, tying the record for most number of championships in Super Bowl history. Playing defence is boring. But playing defence won the Super Bowl. There’s no doubt that we are in a phase of the market cycle that shows lots of signs of weakness. This is not the time to play offence. It’s a time to play defence. Prices are high. That means that we will likely see lower prices in our future. The days of playing offence will return. But you need to survive this next down cycle and be positioned to take advantage of the next wave of market growth when it returns.  As real estate investors, the time to buy is when the market is falling, when investor sentiment is negative. We may not want a repeat of 2008, but we do want to see good buying opportunities in our future.

On today’s show we’re talking about the main areas that owners run into trouble with contractors. There are 5 areas that I see over and over again. In some cases, these learning have been the result of first hand experience. There’s nothing more humbling than making a mistake when you really know better.  I believe it's really important to get references when selecting a contractor. My favourite source of references come from architects. They get to experience a wide range of contractors over an extended period of time. Over time, they figure out who is good and who isn’t. So here we go the top 5 problem areas when developing contracts. 1) Scope 2) Payment  3) Purchasing 4) Termination 5) Liens

Today's episode shatters the law of reciprocity. It's a myth, it doesn't exist. There' another mechanism at play that we actually have more control over. When we understand that, the results are more powerful.

Abhi Golhar is the host of the nationally syndicated Think Realty radio show. He's a multi-family investor, a syndicator, and he specializes in tax liens. Join me for a fun conversation with Abhi. You can learn more about him at https://www.abhigolhar.com/