Real Estate Espresso Victor Menasce

On today’s show, we are taking a look at one of the largest economies in the world and wondering why it seems to be sputtering.

We are of course, talking about China. Earlier this year the Chinese economy was in strict lockdown due to the COVID-19 pandemic. After weeks of protest, the Chinese government change course and opened up the economy, seemingly overnight. At the same time, the economy inn, Europe, Japan, And even the United States were showing signs of weakness. China reopening was heralded as the saviour to pull the global economy out of what seems like an impending recession, but that recovery failed to materialize.

We witnessed other economies around the world emerge from the lockdown to the pandemic and experience a massive surge in spending. We saw a recovery in demand for products and services that have been suppressed during the lockdown periods. We saw international travel resume. We saw a surge in demand For new homes.

We saw businesses throughout the west, respond to the supply, chain shortages of the pandemic, whereby they were placed just in time inventory management with just in case inventory management. Retailers did not want to leave business on the table by failing to carry ample supply or products that customers wanted to buy. After all, interest rates were low, and the additional cost of carrying that extra inventory was much cheaper than the loss of revenue associated with supply chain shortages.

Surely, China reopening would see a surge in demand for everything from finished products to raw materials.

But it did not happen. Why did China’s economy sputter when the rest of the world emerged from the pandemic with their economy on fire?

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Host: Victor Menasce

email: podcast@victorjm.com

 Our book this month is called "Debt: the last 5000 years.” 



I expected this book to be thought-provoking, and it did not disappoint.



The author of the book is anthropologist David Graeber and the book was written in the week of the great financial crisis of 2008 and published in 2011. 



For those who went through 2008, and for those who remember it, the great financial crisis was the mother of all deleveraging events observed so far in our modern history.



The author of the book is also the organizer of the occupy Wall Street movement, that captured headlines and attention from around the world. The association with the occupy Wall Street movement immediately biased me against the book. However, as I went through the books pages, I found the authors arguments to be well constructed. 

On today’s show we are looking at an outlook for inflation of construction prices and how this is going to play out over the next three years. 

There is no question that construction prices have come down in the past 6 months and continue to fall. This has been driven by the fall in lumber prices. Labor prices have stabilized and many subcontractors who have been forecasting no capacity for the next 36 months are coming back on one knee asking for work. 

The pricing for construction sub trades varies widely. We have seen prices for HVAC increase during the pandemic. We’ve seen paint and steel and copper and fasteners all go up in price. For the time being, these prices have stabilized. 

The question then becomes what will happen in the coming years? Can we forecast what will happen next, and what can we do about it?

I believe that the answer is yes, we can predict what is going to happen.

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Host: Victor Menasce

email: podcast@victorjm.com

On today’s show we are going to put forward a hypothesis. A hypothesis is an untested idea. It’s hypothetical which is why it is called a hypothesis. 

Specifically we’re going to look at the balance of revenue and expenses that make for a profitable venture in hospitality. 

It’s no secret that hotels suffered greatly during the pandemic. They were forced to close as the stay at home mandates caused travel of all kinds to dry up. A few that agreed to become quarantine facilities enjoyed some revenue thanks to the very government that forced the closure. 

Short term rentals suffered greatly as well. Depending on the location, some managed to get revenue from traveling health care workers who were on pandemic duty to provide relief to overworked and overstressed ER facilities. 

If you’ve traveled lately, you will notice that hotels have become a lot more expensive. I used to find bargains for hotels in NYC for $150-200 per night prior to the pandemic. Sure you could spend $1,200 a night if you wanted to. But you could still find good hotels in good areas at a decent price. 

In Toronto, I could find bargains in the downtown core for under $200 a night. 

This week I was at a conference in Toronto and it was extremely difficult to find a hotel room in the downtown core at the last minute under $500 a night. Most were $700 a night. 

Several of the people I spoke with at the conference had booked a short term rental and were grateful to have paid a lower nightly rate than the equivalent hotel room. 

It’s no secret that interest rates have gone up. You had to be living under a rock to have missed that one. Hotels are sometimes owned by the brand, but often are independently owned and flagged under a franchise agreement. 

The issue is that a significant percentage of the hotels in the world were funded through bond offerings at extremely low interest rates over the past decade. 

Some of these hotels have bonds coming due this year and next year and the year after that. They will be forced to refinance at higher interest rates. 

This means that those hotels will need to increase their nightly rates in order to survive. If the market won’t tolerate higher nightly hotel rates, then the owner will have to hand the keys back to the lender. A hotel in foreclosure is likely to close which will remove supply from the market, which in turn will push up nightly rates. 

I don’t see a scenario in which hotel rates don’t go up from here. Even in a recession, falling travel won’t mean lower nightly rates. The hotels will fail. So the only choice for owners is to raise nightly rates. They have no choice. 

They have to find a way to increase revenue or die. I’m convinced that the hotels will act in tandem to protect the industry. 

If hotel nightly rates go up, then STR rates go up. 

There you have it. That’s the hypothesis. The only thing that could hurt STR owners is if government steps in and forces STR to close, or imposes regulation that is so onerous, that is makes an STR business impractical.  Local governments might do this to protect the hotels from going under. 

Of course everything I’ve said on today’s show neglects the hyper local nature of real estate, hospitality and STR. Your local situation could vary widely. But maybe an analysis of the hotel business in your area could yield some valuable data that might validate, or maybe invalidate this thesis. 

On today’s show we’re coming to you live from Multi Family Conference in Toronto. 



There were a number of great speakers at the conference, but I want to focus on one speaker in particular. Our North American culture can be celebrity obsessed and I don’t buy into that. However, I believe that success leaves clues and that success is rarely accidental. 



That speaker was Alex Rodriguez. He is known as a baseball player, first for the Seattle Mariners, then the Texas Rangers and finally the NY Yankees. He played a total of 22 seasons in MLB, an industry in which the average tenure is 5.5 years. 



Most recently he is known as one of the Sharks on the TV Show Shark Tank. Naturally, most people believe that he made his money in baseball. There is no doubt that baseball helped. But baseball did not come close to affording the growth that Alex has experienced. 



I’m here today to talk about none of the celebrity stuff that most people focus on. Alex Rodriguez is a real estate investor. He started like all of us, with a small single family rental, duplexes, triplexes and eventually moved up to small multi-family buildings 10 units, 12 units and so on. He started investing early during his baseball career. In the early days, his baseball salary was used to cover the negative cash flow in his real estate portfolio and there were many times when he was at risk of running out of cash. 



Today, ARC has a portfolio of over 20,000 units. He is not known as a real estate investor. But he is a real estate investor at a very high level. 



A portfolio of that size is operating at an institutional level. Here are some of ARod’s key take-away’s.




He has been investing in real estate for over 22 years. This looks to me like one of those 20 year overnight success stories. 
He continues to grow the ARC companies by having hired A players. He has had the good fortune of developing a friendship with Warren Buffet who counselled him to only hire A players. A players tend to hire other A players. B players tend to hire C players which can poison an organization. He’s better off maintaining a smaller organization of higher quality people than having an organization of mediocre players. 
While ARod had an impressive 696 HR in his 22 year major league career, ARod also holds the title of having the fifth most number of strike outs in the history of major league baseball. It was this fact that trained Alex to approach the plate to a clear head each time he went at bat. It didn’t matter if he had just struck out. It was this quality that meant he could simply never quit. He was unaffected by setbacks and failures along the way. In his experience, most people can’t handle the emotional pain of failure and quit far too early. He has tried to bring some other professional athletes into real estate investing only to see them quit after a short period when they discover that it’s difficult. 
When A rod is hiring people into the organization, he always looks for people who have that emotional stability in the face of adversity. It’s the one thing he looks for that he considers to be a super-power in business. 


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Host: Victor Menasce

email: podcast@victorjm.com

Mark Kenney is a principal at Think MultiFamily in Dallas Texas. He and his partners have amassed a portfolio of more than 14,000 apartments. On today's show we are talking about lessons learned from the current market conditions. This is a fairly sobering episode and Mark is extremely transparent about the stresses he is experiencing. To connect with Mark and to learn more, visit ThinkMultiFamily.com

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Host: Victor Menasce

email: podcast@victorjm.com