REI INK

3 Reliable Sources of Information in an Age of Media Bias

The truth about the markets is still out there if you know where to look. Sadly, one of the most significant trends of 2020 will likely fall by the wayside for most people. It will not be discussed on the evening news, and it will not be the subject of dinner-table conversations in the average home. However, this trend has the potential to be devastating for real estate investors and real estate professionals who remain unaware of it. This potentially devastating trend is the plethora of unreliable and biased data that’s overwhelming nearly every industry sector. For a real estate investor, unreliable data is an anathema. Sadly, one of the worst things that has resulted (in large part) from the COVID-19 pandemic is that everything in our lives today is highly politicized—including our health, our basic demographic data and our approach to business. In a world where the decision to wear or not wear a mask has become a partisan statement and medical data is wielded like a weapon instead of the valuable research tool that is should be, real estate investors are hard-pressed to find market data that hasn’t been twisted and distorted. Investing wisely relies on your ability to conduct effective and accurate due diligence. Fortunately for our industry, there are a still a few familiar standbys that are extremely hard to distort. Data that does not lie is still accessible if an investor knows where to look. Let’s take a look at three of my favorite market metrics. Key Market Metrics 1)  Inventory Levels. There are many ways to interpret housing inventory levels, but the actual number of houses available is pretty hard to distort. Most investors have historically steered clear of observations that markets with limited inventory (i.e., “unhealthy” inventories) are too hot and that markets with large volumes of inventory (i.e., “soft” inventories) are too cold. After all, the key to a hot or cold market relies entirely on your investing strategy and how you source your leads. The market that is hot for a fix-and-flip investor may not necessarily be the same market that is hot for an Airbnb investor, although they certainly can be. To analyze how a market’s inventory affects you, first find out what the inventory is. Find out what types of properties are in short supply, and then apply that information to your strategy or product. For example, in the areas of Indiana that are within about a 90-minute radius of Chicago, there is a serious shortage of single-family rental properties. In fact, these communities are experiencing huge demand for these types of properties because many people have realized that remote working is going to be an option and they no longer want to live in the close quarters of a metropolitan area. If you invest in single-family rentals or you fix-and-flip in the middle tier of affordability for housing in this type of area, then the Midwest inventory data indicates this could be a great location for you. 2)  Building Permits. In states and regions that are proving to be pandemic-insulated or somewhat pandemic-resistant, building permits are still on the rise. If you are wondering about the underlying health of a market, peek into the building permit records. In Georgia, for example, building permits are still up. It is no coincidence that this state also classified construction as an “essential service.” 3)  Days on Market. Days on market is a classic indicator that most real estate investors already use to evaluate the viability of fix-and-flip deals. After all, when you are estimating the timeline for a project, you need to know how long you should expect to hold that property once the work is complete. However, every residential real estate investor should be looking at this metric today because it provides an indication of how much demand there is for housing in general in the market. Do not just look at properties that are comparable to yours either. To get an idea of overall market health, look across the spectrum to see what other types of properties and the populations that reside in them are doing. Be a Leader Your ability to read the markets, pivot when necessary and make responsible decisions with your own capital and the capital entrusted to you is crucial to your success in 2020 and beyond. Successful real estate investors have always placed a premium on being able to do good due diligence with sound data. In this one way, at least, nothing has changed.  

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Adding Value on a Budget

Don’t overlook the smaller, lower-cost items that can add interest and value to your renovation. The purpose of all home renovations is to add value to a property—while adhering to some form of a budget. That’s even more true with investment related to renovations. Adding value within a budget plays a large role in the success of the venture. When planning a renovation of an investment property, many investors focus solely on the big-ticket items as they try to add value or cut costs. Although it’s true that cabinetry, windows, doors and so on all have an immense impact on the budget and marketability of a home, the ability to add value and savings does not have to stop with those items. Smaller details can add up and generate significant buyer attention as well as reduce costs in some instances. When planning your project, some basic considerations that can help you achieve both value and savings are knowing your materials, being open to change and thinking outside of the (BIG) box. Know Your Materials Most individuals in this industry already have a good understanding of construction materials and basic costs. Still, it is good practice to occasionally wander the aisles at the home improvement stores or scroll through some websites to see if there are any opportunities to increase quality while reducing costs. For example, in one instance, a trip to a home improvement store led to the rediscovery of faux-decora outlet wall plates. Now, for someone in new construction, they wouldn’t serve much of a purpose. For low-budget rehabs, however, they are perfect! They are essentially a full cover that completely hide the existing outlet, and they have holes for the plug prongs to pass through the plate into the existing outlet. The cover is designed to look identical to a standard decora outlet/plate. These plates cost about $2.25 each, which is 20% less than a basic decora outlet and wall plate combo. But the real savings comes with not having to pay for labor to replace the outlets. Most rehabs will be repainted, so simply having your painter reinstall these wall plates instead of the old ones reduces your labor cost on the outlets to zero. Being Open to Change Being open to change refers to the idea that every rehab does not have to have gray walls with white cabinets and white subway tile. If the demographic allows, adding a few low-budget, but interesting, design points can make your house stand out from the rest. You’ll have minimal added investment, and in some cases, actually reduce costs. A good example that supports this idea is an alternative to traditional door and window casing. Instead of using a standard 2 ¼” colonial casing, consider using 3 ½” radius edge MDF. It has a simple craftsman design but makes the trim stand out more than the colonial (especially in listing photos). It is wider than a standard casing, which hides any caulk lines from old trim that has been removed. And, it’s cheaper! The MDF can be had for about $0.63 a linear foot; the colonial casing runs $0.80 a linear foot (as priced using nondiscounted pricing from a big box website). In this case, that’s a 21% material cost reduction. Thinking Outside the Big Box Big box stores are great for convenience. You can get most of your material under one roof, and there is at least one in virtually every town. Sometimes, though, just because you can get it at a big box store does not mean you have to. Take vanity mirrors for example. An in-stock framed mirror at the big box store will cost $50 or more and is as basic as basic can get. It may take a few extra minutes out of your day, but your local home goods store will provide an entire aisle of trendy mirrors in various sizes that will single-handedly upgrade the bathroom from generic to fashionable. These mirrors start at $29, or about 40% less than the big box mirror. Again, small savings add up, and you are getting a superior finished product. Ultimately, making one minor change will not have much impact on the overall results of your project. Collectively, though, several minor changes add interest and reduce costs. And they may add just enough value to persuade buyers to choose your house over another or keep the project from going over budget.

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Navigating the Commercial Real Estate Market in the Post-Pandemic Period

Is the COVID-19 pandemic beginning to have an impact on commercial real estate? First quarter sales data from First American DataTree suggests we might already be seeing a glimpse into what’s likely to be a difficult year for commercial real estate (CRE) sales in 2020. At first glance, sales volume appears relatively stable, if uninspiring. Three sectors—apartments, industrial and hotels—actually showed modest year-over-year increases in the total dollar volume of sales, while the office and retail sectors showed fairlysignificant declines. But a closer look at the number of units sold probably offers more insights into what’s likely to be a trend for the rest of the year. Only the apartment sector was able to eke out a small increase in unit sales. The industrial, hotel and senior living sectors showed modest declines. Both the Office and Retail sectors showed a significant drop-off in the number of properties sold. How the CRE Market Has Already Changed The COVID-19 pandemic has had devastating consequences for the U.S. economy. Entire industries, mostly in the service sector, were shuttered. The implications for the CRE market were ominous, particularly for commercial properties that hosted sports and entertainment events, housed restaurants and retail stores, and supported travel and lodging. These were the types of businesses that most often closed in an attempt to “flatten the curve” and minimize the spread of the virus. For an economy where consumer spending accounts for 70% of its gross domestic product, shutting down these businesses effectively put an end to the longest period of sustained economic growth in U.S. history and sent the country into a recession. GDP dropped by 5% in the first quarter. Analysts are forecasting a drop of 25% to 42% drop in the second quarter GDP. Unemployment jumped from 50-year lows to over 15%, andnew jobless claims continue to exceed 1 million a week in July. It’s no surprise that an economic shock of this size has had an effect on every sector of the CRE market—some more than others—and each with a different outlook for the post-pandemic future. The good news is that transactions and development haven’t completely stopped, although they have slowed dramatically. The unanswered questions the industry faces are making financing new deals more difficult: When will consumers feel confident enough to spend again? How many businesses won’t survive the downturn and how many jobs will be permanently lost? And what sort of behavioral and structural changes will have an impact on the utility of commercial space in the years ahead? Until we have answers to those questions, it’s hard to predict whether the CRE market will experience the kind of crash it did in 2008. It’s not hard, however, to see some of the short-term implications from the pandemic. For example, the office sector may see the most long-term changes due to COVID-19. The segment is likely to see two countervailing forces at work. On one hand, there will be a need for more space-per-employee and modifications to entrances and points of egress to facilitate social distancing. Apparently jamming employees into crowded cubicle farms or setting up coworking facilities where workers sit shoulder-to-shoulder aren’t great ideas during a pandemic. On the other hand, it’s likely that many companies will need less office space in general, since work-from-home productivity was better than expected. Will companies move toward a more distributed workforce, with employees working from home some or all of the time, and/or offices set up in less expensive markets across the country rather than in the more expensive major metro areas? Anecdotally, these conversations are already happening in Silicon Valley. Twitter has announced a permanent work-from-home policy, and Facebook executives have discussed the benefits of having employees in other, less expensive states. The pandemic may well have already changed the size, location and the very structure of tomorrow’s offices. In the short term, the hotel sector will probably suffer most. The outlook for travel is bleak. Consumers seem unlikely to travel in large numbers until the pandemic is under control or there’s an effective vaccine available. The major brands like Marriott and Hyatt will certainly weather the storm (albeit not without some pain). But many of the limited service hotels are owned by smaller investors, and they may not have the financial wherewithal to survive the downturn. In the long run, the retail sector is likely to be the biggest casualty as we exit the pandemic. This sector was already struggling before COVID-19, with vacant suburban shopping malls and big box retailers like Macy’s, Sears and J.C. Penney Co. shuttering stores across the country. Since the pandemic hit, many other well-known brands (e.g., Brooks Brothers, Neiman Marcus, GNC, Pier 1 Imports and JCrew) have all filed for bankruptcy. The weakness of the retailers themselves, the accelerated growth of e-commerce and questions about how quickly shoppers will head back to the stores all weigh against a strong recovery. It’s very likely that the most successful resolution for the retail sector might be the repurposing of existing shopping centers into multiuse facilities. On a more positive note, the industrial sector seems poised for post-pandemic growth. As mentioned, the pandemic has fast-tracked the country’s already growing shop online habits. To accommodate this growth, we may see Amazon and other major online retailers invest heavily in warehouse and distribution hubs across the country. A distributed workforce will likely create the need for more cloud computing facilities. And it seems likely that we’ll see investment in more flex manufacturing facilities, since the inability to produce the kind of personal protective equipment needed by health care providers and first responders shined a light on that weakness in our manufacturing ecosystem. All three of these trends should drive industrial growth. The apartment sector may experience some short-term pain. Most unemployment claims were likely filed by renters, and there appears to be an accelerating trend among millennials to abandon urban apartments for suburban homes, in search of a healthier environment to raise their families. But the sector is well-positioned

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What to Do While You’re Waiting for the Turnaround

Standard Management Company founder Samuel K. Freshman on the post-pandemic economy Samuel K. Freshman, owner and chairman of private real estate investment and management firm Standard Management Company (SMC) and chairman emeritus of Stanford Professionals in Real Estate (SPIRE), has been in real estate since 1958.  Under Freshman’s leadership, SMC has acquired and managed more than 6,000 apartment units and 5 million square feet of office, retail, mixed-use and industrial space across 12 states and 25 U.S. cities during the past five decades. Freshman looks at it all with a mixture of pragmatism and patience. After spending this past spring working from home, he’d really like to get back to his Los Angeles office. He’s not holding his breath that he’ll get his wish anytime soon,however. “I think this turnaround is going to take longer than people expect,” Freshman said in a recent interview with REI-INK. “It’s going to take some time, and we could see some sectors experience significant crises before it’s over.” REI-INK sat down with Freshman to talk about how the current economic environment is affecting his company’s investments and whether the effects of the COVID-19 pandemic are as unprecedented as many would argue. Q: What kind of timeline do you expect for the economic recovery, or will there be one? A: First thing I would say to you is, “Your guess is as good as mine!” Then I would say, it is going to take longer than people expect right now. Until they actually solve the COVID-19 virus problem, things will remain tough. Unfortunately, efforts to alleviate financial strain on tenants by delaying or prohibiting evictions could stretch the recession farther because landlords will be in crisis as well. For example, there is currently a proposal to reduce rents by 25% in some jurisdictions. While this sounds nice, the reality is that nearly no operators make 25% returns to begin with, so there is nowhere to cut that much. It would immediately put operators under, and every single landlord out there would be asking for relief from that initiative. It would destroy the rental industry. The disaster and the disaster response both must be measured and proportionate or we will stretch the crisis out. Q: In March, many analysts predicted staggering delinquencies on rents. Did those delinquencies manifest this past spring? A: They have not yet [as of June 27, 2020]. We are collecting about 94%, down from 96%. The problem that many policymakers do not understand is that this means we are 6% down each month, which is about half of our net operating income (NOI). The “top dollars” in real estate go to NOI after you maintain the building, pay your taxes and loans, utilities, water treatment, etc. So, if you write down rents by 25% across the board, that eliminates all the NOI and puts the building into duress because no operator is making 25% NOI. Q: What types of assets do you find attractive right now? A: I would not be particularly enthusiastic about Class A assets, and I’m not sure what is going to happen to communities with Class C buildings, either. We are focused in the range between B- and B+, which seems to have held up pretty well so far; we have not yet had any great loss of rentals or ability to pay. There is a lot of risk across the board right now. Some people are starting to move back home; others are doubling up so they can afford rent on an apartment if they lose their job or lose hours at their job. We have not acquired much this year so far becausewe are sort of waiting to see what the trends are going to be. We have talked to people who say they are quite optimistic buying at a 4% CAP rate because they expect to increase rent, but I think rents may decline in the multifamily arena. Q: Is SMC still lending in today’s environment? A: Yes, although maybe not as much as we were. There are always exceptions. We are making loans on properties in Malibu, which is coming back pretty strong because of the beach. After all, they are not making any more of it! I would not necessarily want to do much lending on construction, but if there is an existing property, we will make the loan. We have to become more conservative because we do not really know in what direction we are going. Q: What regions of the country particularly interest you? A: As a practical matter, I prefer to stay invested in places that are no more than 90 minutes from L.A. However, if I lived in the Midwest or Eastern U.S., I would definitely be looking at Florida and Texas. Atlanta, Georgia, seems to be doing well also. We look primarily to invest in Nevada, Arizona, secondary California markets and the states on the West Coast. Q: Does state reopening policy affect your interest in an asset? A: It depends on how the economy in the state is doing. We just look at which states are doing well and which aren’t in order to decide. We don’t necessarily review their policies. Q: Is the current economy and national environment as unprecedented as most people seem to think? A: Unfortunately, the biggest problem is that the two main political parties in the country are at loggerheads. That is making the entire situation harder to resolve on top of the issue that the coronavirus is historically unique. Probably the closest comparison would be the Black Plague in Europe during the 1500s. The most important thing we can do is to get control of this thing or it will become even more serious. It’s very frustrating for me because they have opened my office building back up, but because I am over 65, they don’t want me to come in! As a nation, we need to watch the education system carefully going into the fall to make sure grade

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Regional Spotlight: Las Vegas, Nevada

“Sin City” Real Estate Posts a Summer Surprise When COVID-19 locked down the U.S. in mid-March, analysts understandably warned that economies heavily reliant on tourism and hospitality would suffer the most. With national unemployment spiraling into the double digits and remaining above 13% in June, it seemed likely that Las Vegas, Nevada, would once again secure a spot on the hardest-hit lists for the latest downturn, thanks to its dominant tourist industry. Instead, the city known for wild abandon and encouragement of behaviors that run counter to today’s “physical distancing” seems to be muddling through the pandemic and possibly even poised to bounce back sooner than many other areas of the country. In fact, many local real estate professionals and national economists are calling the current real estate situation in Las Vegas a “late-spring bloom,” thanks to May numbers that indicate higher numbers of properties under contract and at higher prices than for the same period in 2019. “What surprised us [in May] was it was not just entry-level homes we were seeing the demand for, but luxury homes,” said Lesley Deutsch, author of a John Burns Consulting report on the topic. Deutsch speculated Silicon Valley giants’ decisions to permit employees to work from home indefinitely could be playing a role in the market’s momentum. “You can afford more space in markets like Vegas,” Deutsch said. He described an emerging trend of homeowners “trading up on their luxury homes to have more space” and noted that the trend accelerated in May. In early May, Twitter and Square CEO Jack Dorsey and Facebook CEO Mark Zuckerberg announced they would allow employees to continue to work from home “forever.” Further, Facebook began accepting applications for new remote positions. While the social media platforms may opt to adjust salaries to fit the employees’ new locations, the appeal of owning a much larger, more luxurious home in Nevada is likely to outweigh the appeal of renting a small, exponentially more expensive unit in the Silicon Valley area if the commute is no longer a factor. When these high earners started home-hunting after Nevada “reopened,” they created demand for housing in higher price tiers, more so than most other markets are experiencing. Local real estate brokerage owner Ken Lowman said his firm, which focuses on luxury housing in the Las Vegas area, is seeing the strongest interest among buyers looking at properties priced between $800,000 and $1.2 million and homes priced $3 million and higher. He also reported that before the national shutdown, about one-third of his buyers were already coming from California. Today, that number has climbed to more than half. According to Realtor.com’s Housing Market Recovery Index (HMRI), in mid-June, Las Vegas has surpassed the index’s January 2020 baseline of 100 and is in official “recovery mode.” It is one of eight markets, including Seattle and Los Angeles, to have achieved that status. Las Vegas’s presence on the list has many investors feeling surprised and optimistic. “Markets with stronger job creation pre-COVID are proving to have the crucial edge for real estate activity, particularly those with a strong technology sector,” said Javier Vivas, Realtor.com’s director of economic research. He said stable jobs and incomes would “power demand for homes” and ultimately speed recovery in markets on the list. Since Las Vegas exceeded its January baseline in mid-May and has posted index measures between 100 and 105 since that time, the area’s recovery appears to be growingin stability. Multifamily Housing Unpredictable Although single-family real estate in the Las Vegas area may be gaining momentum, multifamily developments are experiencing some expected turbulence. Multi-Housing News (MHN) associate editor Adriana Marinescu observed that the Vegas “multifamily market continued to move at a slow pace through May following a sluggish April. Both landlords and renters waited for normal activity to resume in a city severely hit by furloughs and layoffs since the early days of the coronavirus pandemic” (“Las Vegas Multifamily Wrap-Up,” May 2020). Casinos and hotels have been cautiously reopening their doors up and down the Strip and in outlying areas of town since the beginning of June, but the hospitality sector remains uncertain. Local real estate investor Larry Loik, president of The Real Estate Investor Network, observed that suburban areas around Las Vegas are largely reopened and in full recovery mode despite ongoing unemployment issues in the tourism sector. “Here in Las Vegas, our economy was the hardest-hit in the nation due to tourism being a major factor. Nevada had the largest unemployment of any other state. A lot of this was due to the governor’s rulings,” Loik said. He added that in suburban areas where local economies are supported mainly by Nevada residents, “restaurants, shops, malls, parks, golf courses and more are all packed … and visitor count is going back up.” The contrast between the pace of regional recovery and the Las Vegas tourism recovery is creating some unique opportunities for real estate investors interested in holding assets long-term. The state is currently adding jobs much faster than the national average, which could translate to firmer ground for the local market and rising demand for single-family rental (SFR) housing even if the rental population’s current employment status is less than ideal. “Nearly half of the population in Las Vegas rents, and it is a beautiful city surrounded by nearly 70 parks. It is a highly attractive destination for outdoor activities as well as its more notorious entertainments,” said Marco Santarelli, founder and CEO of Norada Real Estate Investments. Santarelli said the most prevalent building type in Las Vegas is the single-family detached home, making it an attractive market for residents hoping to leave multifamily living situations. As a result of the unusual nature of the Las Vegas recovery, single-family homes in the lower and middle tiers of the market could be good investment options either to rent-and-hold long term or rent in the short term and then sell when the economy more fully recovers. Although multifamily developments are nearly always a safe long-term

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Helping Investors, Connecting Contractors, Building Communities

Home Depot’s Culture of Honesty and Problem-solving Is On Your Side. A little over a decade ago, Home Depot entered a new facet of the real estate industry when it quietly debuted its business-to-business (B2B) service offerings. Called Renovation Services, they target real estate investors, asset managers, banks, mortgage servicers and others involved in larger-scale rehab and renovation efforts. Of course, being Home Depot, the company was not really “new” to the notion of foreclosure and REO renovations, but the concept of putting the full force and resources of the corporate brand behind the practice was unprecedented at the time. Now, nearly 12 years later, the company is still working behind the scenes to help real estate investors and any large-scale property owner scale their operations, scope projects, and, ultimately, build up the communities around those properties. “Being part of the community is a big deal to Home Depot, so supporting the community by being part of renovating and rehabbing homes is also a big deal to us,” said Chris Albano, director of Renovation Services. “That’s why we stay in the business and are dedicated to helping investors contribute to a vibrant economy by updating their investment properties. We are part of a recession-resistant industry. That makes it important to us to be active in every way possible in this space at every point in time.” A Crucial Link the Chain When the company first started the B2B side of its operations, the move was largely to help contractors, real estate agents and major lenders like Wells Fargo find a way to work together successfully and restore the nation’s battered housing inventory. This had proven difficult, despite high levels of interest and investor activity in the foreclosure space, because both banks and investors were cynical and suspicious of each other after spending the better part of the year being demonized in public forums. There was a desperate need for transparency so the “healing process” of restoring vacant and foreclosed homes to basic marketability could begin. “There were not a lot of tools out there in 2008 that would enable people to know where they were in the construction process,” Albano said. “The kind of trust and transparency that apps and other software permit today did not exist then. Renovation Services found itself in a position where we could provide some visibility from all sides to help lenders get the repairs they needed and keep contractors and other real estate professionals in business.” It was a natural extension of what became a series of wildly successful partnerships for Home Depot to begin offering B2B services to real estate investors as well. “Investors and contractors make up the bulk of what we call our ‘Home Depot Pro’ customers. It only made sense to support them and help them build their businesses up as strong as they can,” Albano said. “Put frankly, a vacant house does not buy anything from Home Depot, does not contribute anything to a real estate investor’s portfolio, does not build up a contractor’s business and does not support the community in which it is located. By bringing all of those individual facets of housing and real estate together, Home Depot served and serves as the crucial link in the chain that gets all those factors working together.” Everyone’s in the Loop For Daniel Linenger, national sales manager for Renovation Services, one of the biggest advantages for real estate professionals working with this division of the company is that the brand provides a proven trustworthy track record with a wide range of services across a large geographical area that makes it easier for investors to scale and grow their business. “Where we are particularly able to add value for real estate investors is when a successful investor decides to replicate their investment strategy in another market,” Linenger said. “So many large-scale investors are very hands-on in their core markets but may lack connections in new regions where they would like to explore opportunities to acquire new properties. We partner with these investors to help them expand into new markets without having to hire a new team or figure out who is a good fit for their business when they are not local to the area. They can trust us to tell them the truth about the market and the things they are attempting to do there.” Albano agreed. “At the end of the day, we’re Home Depot and that matters to us. People know we are not going to ‘take the money and run,’ so to speak, because we finish projects. We are in it for the parties involved who support our business and buy our products, not to get paid on labor. We are the total package and we never, ever forget that.” Because Home Depot is a national company, Linenger said sometimes investors feel intimidated by the scale of the company at first and assume they are going to pay a premium for its B2B services. But, Linenger pointed out, Renovation Services is both competitive and affordable, prioritizing the customer relationship over any short-term margin gains. “Culturally, it is not who we are to lose a long-term relationship to make a bigger margin on a short-term project,” Linenger said. “We are focused on maintaining and growing our partnerships through transparency and adding value wherever we can. We are going to finish the project and finish it right.” To that end, Home Depot’s Renovation Services now come with a variety of tools and even field teams to help investors and contractors get their jobs done. For example, the company offers a free tool called RenoWalk, which helps investors create a specific product selection that can be duplicated across markets and sourced at Home Depot stores. “When you use RenoWalk, you can create a budget inclusive of labor that will guide every party working with you to walk around the property in a specific fashion and consider only certain types of products when defining the project,” Albano said.

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