On Friday, September 27, the Norris Group proudly presented its 12th annual award-winning black tie event I Survived Real Estate. An incredible lineup of industry experts joined Bruce and Aaron Norris to discuss perplexing industry trends, head-scratching legislation, massive tech disruption, and opportunities emerging for real estate professionals. All proceeds from the event benefit Make A Wish and St. Jude Children’s Research Hospital. This event is not possible without the generous help of the following platinum partners: the San Diego Creative Real Estate Investors Association, InvestClub, ThinkRealty, Coach Fullerton, Keller Williams Corona, PropertyRadar, the Apartment Owners Association, MVT Productions, and Realty411. Visit isurvivedrealestate.com for event information.
This week’s radio show is Part 4 of our 6-part series that will cover our recent event I Survived Real Estate. Today’s show will cover real estate technology and what they see as a disruption in the years ahead, what the panelists are most looking forward to for the industry in the years ahead, black swan events they fear and keeps them up at night, the rental and buying markets, and the mall industry.
Simon Chen started off by talking about how back in the day on the real estate agency side, a big part of the value proposition for agents was showing properties. You had The Secret Book of Listings or the secret book of another set. This has gone the way of the dodo, and you’re seeing that more and more. Companies like Zillow, for example, have effectively made leasing agents obsolete because you can actually generate more leads just throwing it up on Zillow than you could by putting it up on your MLS. Likely within the next few years, it will be an obsolete lifecycle. It’s kind of like a toll booth operator going up and down the orange corridor. Why do that anymore? You no longer need that. Those folks are likely going to disappear within the next couple to a few years, and they’re going to have to focus on higher value functions. If your claim to existence basically is that you happen to have the brochure that nobody else has where you can claim that those are your listings, you’re going away, which is ok.
Aaron said it was really interesting to watch Purple Bricks, the Irvine-based company, pull out of the U.S. market this year. Apparently a lot of people in the audience agreed with him. Aaron thought it was really early, and he was very surprised. At an Inman Conference, somebody said they were like plumbers that couldn’t represent anybody, but they got really hammered. From a listing agent site for people who don’t think it brings a lot of value, it’s weird that at this time in the cycle they got pushed out. He didn’t know if it was because they burned all their cash and didn’t have a good business model or something else.
Simon Chen said regarding the U.S. market versus the U.K. market and the Australian markets, they function very differently. To be able to compete in more of an open market economy like they do in the U.S. and run the same model is not going to be successful. He sat on a panel at the DOJ with the CEO of Purple Bricks in Washington; and the problem that they have is even though they claim to provide full service, the difference between full service and actually providing full service from the perspective of a brokerage is very different. Their average real estate agent does about 250 deals a year, whereas your average real estate agent without a team cannot do anywhere near that and provide any sort of service. That was something that became quickly evident. On the panel, he asked the DOJ attorney what happens if a client calls and asks you to help them trim their yard or paint their wall to get a house ready for sale to maximize their profit. In front of the government, he said he didn’t have time to answer their calls. Simon found this appalling, and it’s in the public records, so you can look it up. You cannot effectively scale to that level with those kinds of costs, and that’s why they left.
Aaron Norris ended by asking everyone on the panel what their most exciting technology is that they think will be disruptive in the next five years. Sean O’Toole said the one he thinks will have the biggest disruption that people don’t really is the move to real 5G. We have already gone from 3G to 4G. The 5G we have right now is a joke, but if we deliver on the true promise of 5G, the latency will be tighter. Latency is described as when you have been on an international phone call and you have to wait for a second to hear for the other person. This should be tighter, and it really changes quite a bit. When trying to come up with a good example, you think about augmented reality, like the Google glasses. Now, you can start having that where you can have a full overlay of a lot of information and real time talking to servers rather than having to try to have all that computing power on you. He thinks this is going to be a bigger transformation than the Internet. Aaron mentioned the Ring that Amazon had just released. We’re going to wearables, and he thinks that we’re going to be getting away from phone screens in the next five years with all the push for wearables for this. 5G will likely lead the way. Sean said 5G allows you to put all the computing power somewhere else so you can have less battery power, smaller devices, and a lot richer local functionality. It really is going to be disruptive, and maybe that will be the end of the phone. Parts of the world are actually investing a lot in technology, and we’re laggards now when it comes to a large infrastructure basis.
Mark Lesswing thinks in five years the autonomous vehicles, as it applies to trucking, will be interesting to follow because he can’t imagine what will become of the shipping bays. A lot of design will change as far as warehousing and commercial property. Aaron said it’s interesting because the Inland Empire has a lot of warehouses, and if 5G comes on, all of a sudden all the jobs that people are touting can be happening via the 5G connection and Minneapolis targets where they’re based. They could be controlling entire warehouses with robotics and the Internet. Sean even said the trucks themselves might be the warehouses. This didn’t exactly make Aaron feel comfortable.
Simon Chen agreed with Mark. He is a big fan of the potential for automated vehicles, but less so for the commercial shipping and more for just all the cars on the road. If all of them actually knew how to drive, imagine the efficiencies that you could gain from that. He said the lady responsible for cutting his hair bought a Tesla and spent around $70 grand for it. He thought this was strange considering he does not pay her a whole lot. She said she got an automated driving thing for her Tesla, although he did not know what it was called. Elon Musk says that in the next couple of years, that car can go out and make money as an Uber driver by itself while she’s cutting hair, which is fascinating. Mark Lesswing joked when you dump your lease, the car will drive itself away as the new ones show up. Aaron said there’s a lot of people that cry because they realize how many more cars are going to be on the road. In California, there are people who say the traffic is going to be way better while others say it will be really cheap. Families won’t be taking their kids to soccer anymore. They’re going to be just sending the car. You’re going to go from a two car household to maybe more. Mark said you would think with the way it’s oriented as an autonomous vehicle, you can actually buy a 17th-century coach and go around with your queen of France because of the way the doors open and everything.
Next up was Bruce with the entire panel. He said he was going to end the way he always ends the event by asking one of these two questions. First, he asked them what black swan event is keeping them up at night. Second, he asked what’s the one thing they are most excited for in 2020? At the end, he told them to respond to either one or both of those questions. However, before this he began by asking them what their favorite source for information is, whether it is a newsletter or podcast, for learning and understanding better. Jim Park said there’s so many out there. He uses a little app called Flip. With it, he is building an ecosystem of things he only wants to hear about, so it pulls data, information, or news on things that he preselects. Instead of someone telling him what to look at, he preselects it himself. He literally flips through it every morning for about 15 minutes. He can get all the highlights at the start of his day, and he really likes where the app is going. Bruce next asked Jim who he relies on to tell him what’s coming, which he said that’s a hard question nowadays because we are able to grab information from so many different places. He doesn’t feel like we can just go to one place anymore. For him, if it’s an issue of whether it’s politics or the economy, this particular app allows him to look at all the articles that have been written about certain topics. So then you can just read about it from different perspectives. He said aside from Doug Duncan, he doesn’t really listen to any other economists.
Simon Chen went on to say he has Facebook up on one of his monitors all day long. He has a good-sized sphere considering he ran ERA for quite a long time. Your sphere on Facebook is your peers or people that you respect and acknowledge what have you. Things that bubble up that seem to be resonating with them tend to create more awareness on Facebook. That’s where he gets an awful lot of at least what the headlines are, and then he clicks down into them more to figure out some of the details.
Jim Park mentioned the Flip on his watch, which he loves. You’re able to just instantaneously get all the information you want from lots of different sources. Bruce felt he was out of the loop since he had never used flip.
Mark Lesswing said he has been an open-source software developer for so many years and goes to the crowdsourcing type model. He read slashdot.org, and they have articles that are really wide-ranging. He gets to hear from people that he has worked with all his career weigh in on different things. It’s a way to get an opinion.
To be different, Sean O’Toole said he reads a lot of science fiction. He has a lot of thoughts on cryptocurrencies and digital currencies, in which Aaron has shown a lot of interest. There’s a great book called Crypto Nomicon. Most of these things that still seem out there or that we’ve seen recently, including the internet and cyberspace, were in science fiction first. He is always thinking about what is the next scientific thing that is close that was once looked at as science fiction. He doesn’t use it for daily news, of course, but it’s a source of inspiration. Bruce and Sean had been riding in the limo to the event for ten years, and he had never even heard of most of the things Sean would mention. Eight or nine years ago, he was talking about 3-D printing and self-driving cars, and Bruce thought this would never happen. Now, here we are and they are a reality. He really likes their rides because you never know what he’s going to say, and Bruce is a big believer that he’s probably right. He just has to figure out if he can even comprehend what he just said.
John Burns said if Doug had a podcast, he would be listening to that. Since he doesn’t, John goes with Nick Timrose from the Wall Street Journal because he knows him very well and trusts him. He used to be the Housing Beat reporter, now he’s the Fed reporter, and he calls them like he sees them. He follows him on Twitter, and he tends to like articles and comment on them with some good intel and disagrees with people with facts, not opinion, and John likes that. Sean talked to him a lot during the foreclosure crisis and to a lot of reporters, and he was definitely one of the brightest. Doug Duncan added that he is the journalist Fed reporter now too.
Bruce Norris jokingly asked Doug if he listens to himself, to which he responded he does because nobody else in his house does. Maybe the dog once in a while. He reads thinks called books, like hardcovers, pages, and they’re printed on paper. He is a liberal arts guy, so most of the reading that he does when he is not in the office has nothing to do with economics. He reads history, biographies, and world events. He thinks the world of ideas has a lot to offer economics from people who are not economists, and so he does that. In terms of daily news, he reads both The Wall Street Journal and New York Times every day. He likes things in print, and he hasn’t watched a television news program in 20 years. In terms of the business he reads, there’s probably six or eight other analysts or economists that he reads because he certainly doesn’t know everything. He likes to see the people that differ with him because they will tell him something he might not have considered.
Bruce was surprised there were no YouTube fans since this is the source he likes. He wondered if he was like a college kid. I actually like that source. He used YouTube to see if he could listen to Jim Rohn teach the same talk he did in 1981; and lo and behold, it was there. It was unreal. It then connected the dots to other similar people that he didn’t expect. All of a sudden, he was introduced to other people that are big influencers. Doug Duncan also discovered at least one incident of very useful YouTube. His 16-year-old Ashley came walking into his office one day looking at her phone, and she looked at Doug. She looked back at her phone and said, “You know, you’re actually funny,” This came from 16-year-old watching a video of him.
Bruce said we’re back to the business of business here. Doug invited a number of investors to go to Washington and speak to Fannie Mae, and it was interesting, at least from his perspective. The first meeting seemed like they were a little perfunctory and not really being taken seriously. But, by the third one, it was a very different meeting where they had separate groups. After discussing it, they came back with really good questions. Bruce asked Doug what his sense was of Fannie Mae’s attitude toward growing that side of the business to investors. The other thing is what the journey of going to a private company will entail? Doug said the regulator has said that they can’t do any business outside of their current footprint, which is the 10 maximum loans to investors. That is a rule that has been imposed on them by the past regulator. The current regular hasn’t said anything about that yet because he’s been focused very much on what it would take to release them back into the private sector in a more competitive market. The most important thing to watch for is the issuance of the capital rule, which has been a matter of proposed rule and taken commentary from the public on that proposed rule. Then they will have to issue a final rule. When they do, it suggests to private investors what level of capitalization and the potential returns that they could offer to a private investor. That’s the first thing that has to happen. It may happen this fall. If the rule is reissued, that will delay the whole process. There there is a move to allow us to start to retain some earnings, which would build capital because the two agencies, Fannie Mae and Freddie Mac together, given the current level of capital, which is, you know, three or four billion dollars, would need to have many many times that. In fact, a single capital rule would be the biggest – a single capital raise if they were attempting to recapitalize both agencies in one raise would be the largest IPO in the history of the United States. So that’s simply not going to happen. So they’re making progress in that direction, but there will be some time.
Bruce asked John if he wanted to go from a household to the rental market what the makeup is of a typical household. When he was a kid, it was two kids, or two-point three kids, and two adult parents. He wondered what the makeup is now and if that lends itself to more rental households. John thinks we are going to see more rental households. Some of the data is just like one line, like the number of people per household, so it’s very misleading. However, you have to drill into it. Seniors are going down, thus the number of people per household, but they are tending to rent out rooms in their house. The fastest-growing landlord at Airbnb is seniors with a mortgage, which immediately caught the attention of one of the audience members. On a serious note, he thinks this is going to grow. Conservatively, they calculate that there are 44 million empty bedrooms in homeowners’ homes right now, and people are retiring and need another $10 grand a year. John thinks we are going to see a lot more of that. And then the baby boomers are really the only generation around the world or ever in America who left home as soon as they possibly could. Everybody else stayed with their family as long as they possibly can. If you look around at the rest of the world and you look at the people that are moving here, they live multigenerationally because it’s smart. We make fun of some of the millennials who are living with mom and dad, but mom and dad are okay with it. The millennials are okay with it. It’s saving money. It’s smart and thinks we are going to see bigger households when you strip out that retirement who’s become single because one person passed away.
Bruce next asked regarding the businesses that got involved in buying rental inventory with the first round of homes that were bought below replacement cost. He asked if these were bought to keep or to flip. John said this should be one of his poll questions for the audience. But, for sure home prices were falling this year. When John asked the people in the room the previous year if they would be a seller, most said they would not. The big institutions are not either. They cannot because they have bonds secured by all that real estate. If you’re a REIT, there’s a huge tax penalty if you start doing it. There is no threat of Invitation Homes or American homes for rent playing that game. However, what everyone is alluding to is a part of the business that is just ridiculously exploding, which is this new trend to build homes with the intent to rent them out. It’s not happening here in California. It’s happening around the rest of the country, so the whole thesis of buying below replacement cost is shot when you’re building it. But, there’s a lot of capital on Wall Street in this environment that says, “Hey, if I can get a brand new home with low maintenance and a yield of maybe 5 or 6 percent, I’m feeling OK about that versus some of the other investment opportunities out there.” There’s a lot of money chasing that deal right now. He bet they had done 60 studies for people in the last 18 months exploring build-to-rent.
Bruce asked about when he goes to build-to-rent and builds a new house. First of all, when they were buying REOs, they were all scattered. Now they’re building them and they have a choice, so Bruce asked if they have a preference of the choice? John said he thinks of it as a luxury apartment complex. It’s not idiotic to be building luxury apartment complexes. Every neighborhood could probably use a brand new rental neighborhood where all the homes are next to each other with some amenities, and he has learned some pretty interesting things on the consumer side too. When a consumer moves into your neighborhood and is the renter, you almost look at them like that’s the renter, they’re transient, and they don’t feel as welcome. When they move into some of these neighborhoods in Texas where everybody else is a renter, they’ve never felt as at home. They have block parties, there’s none of that kind of taint. These are professional landlords who take care of them. So, there is a market for this. He thinks that 10 years from now we may be talking about it getting overbuilt though, just like luxury apartments get overbuilt from time to time.
Bruce asked if the builder is the end owner or if he is building for a fee to somebody else. John said that’s interesting because they’re all brand new companies that are formed that don’t know how to build houses, so they’ve contracted with big companies. Lennar is building for two of them. Toll Brothers is building for BB living. Taylor Morrison is building for Christopher Todd communities. They are hiring builders to build for them, and it looked really good on Wall Street because they’re booking it as a sale. There’s a new buyer for a new home now. It’s these companies that are taking one hundred homes as soon as you’re done with them, and they’re going to their trades and saying, “Guess what, I’m going to lock you up for the whole year. I can keep your entire best crew busy all year long.” They’re getting better pricing from the trades because of it too.
Bruce Norris has bought some lots and built some rentals, but those are just houses. Bruce asked if the houses in these areas have all the whistles and bells, almost like the villages? John said they don’t have 50,000 golf carts like the villages. They’ve actually done a report on this, so there’s segmentation developing. There’s the 600 square foot home with a small yard that’s pulling the person out of an apartment complex for the same rent who didn’t want to be in an apartment but wanted a place for the barbecue and a dog. There are seven unit long townhomes. Some of them almost look like horizontal apartment complexes. And then there are traditional homes, and each builder actually is specializing in one or the other. The ones that are actually doing luxury houses are very few and far between. There’s a company out of the Midwest who’s built 90 of these neighborhoods that are all built around homes and are all townhomes.
Bruce next asked John Burns about the mall industry. John said we all know what’s happened to the mall industry. General Growth filed bankruptcy, one hundred and sixty-five malls. Brookfield Residential, which has a longer than usual investment horizon, picked them up. It was a bidding process, so they probably paid more than the next guy, but they got one hundred and fifty million square feet of retail surrounded by 300 million square feet of vacant land. They coined this term “Surban,” where people are wanting to live closer in, and these malls are in awesome locations. They’re redeveloping 12 of them already. Interestingly, they picked twelve of the best, not twelve of the worst to get started because they wanted a good footprint here. You’re going to see apartment complexes and other things popping up on the outer edges of these parking lots now that the other bidders weren’t putting into their pro forma. He thinks it’s going to be super smart, and the CEO of Brookfield is speaking at their conference in November on this topic.
Bruce mentioned another thing he said that surprised him. He expressed concern about the potential of having huge competitors come into the marketplace. Bruce asked if he is a huge competitor and how big of one he is. John said they titled that one The Biggest Checkbook in Home Building, but there’s maybe about 15 companies that could compete with him. Bruce thought he was talking about Amazon, but that’s a different issue. So they’ve partnered their homebuilder too, and they’ve partnered with Amazon and others. Amazon could build a home for no profit and be totally happy if they set you up to be doing all the purchases you ever do for the rest of your life in that house. And you laugh, but that is what they’re trying to do with Alexa. That is part of their strategy. If someone wants to know if the air filter needs to replaced, you get an alert. We’ll just we’ll put you on a subscription for the air filter. There’s a lot of things Amazon can do here to disrupt the industry, and he was watching it carefully because he’s partnered with Lennar and Brookfield and others who Amazon has learning the business.
The Norris Group originates and services loans in California and Florida under California DRE License 01219911, Florida Mortgage Lender License 1577, and NMLS License 1623669. For more information on hard money lending, go www.thenorrisgroup.com and click the Hard Money tab.
The Norris Group would like to thank its gold sponsors for supporting I Survived Real Estate: Coldwell Banker Town and Country, In A Day Development, Inland Valley Association of Realtors, Keystone CPA, Las Brisas Escrow, LA South REIA, Michael Ryan and Associates, NorcalREIA, NSDREI, Orange County Investment Club, Pacific Premier Bank, Pasadena FIBI, Shenbaum Group, SJREI, Spinnaker Loans, South Orange County Real Estate Investment Club, uDirect IRA Services, White House Catering, Wilson Investment Properties. See isurvivedrealestate.com for event information.