This week’s radio show features Aaron Norris of The Norris Group. For the last couple of months, they’ve really beat up accessory dwelling units. He doesn’t expect to touch on that again until SB 13 has some movement. It did move forward as of July 1st, so we’ll see what’s next. It’s still in the house, and we’ll wait to see what happens. However, it was covered from so many different angles, and last week they covered AirDNA. If you’re doing vacation rentals or thinking about doing vacation rentals, it’s going to be a really important tool for you.
- What are the top 10 issues facing residential and commercial real estate?
- How is the hotel sector of the market fairing?
- What big changes are coming to the retail sector?
- Where does investor buying activity stand?
- How are home builders feeling about the market?
- What are the numbers for the iBuyers in terms of their number of home transactions?
- What are some upcoming events The Norris Group has planned?
At the very end of June, Aaron was part of a conference by the National Association of Real Estate Editors. As a creator in the real estate space, he was recommended to join. Every year they put on the spring conference that’s really interesting. It’s basically three days, and it’s built for journalists, international journalists, that cover real estate. So there’s a panel on iBuyers, commercial real estate, industrial, you name it. There’s about an hour session on any real estate topic that you can imagine crammed into three completely packed days. This is his second one and.
In today’s radio show, Aaron will share some of the highlights because it was so content rich and really fascinating. It started out with the panel, and it was moderated by Beth Decarbo, who does real estate for the Wall Street Journal. She was interviewing Julie Millander, and they were covering the top 10 issues facing residential and commercial real estate. The first was infrastructure. In a survey that they did to their members, more than 50 percent of the responding survey takers of the counselors ranked infrastructure as one of the top three issues affecting the real estate industry. This includes everything from roads to bridges, tunnels, railways, flooding, and the natural disasters. They’re just really worried about crumbling infrastructure thwarting economic growth and daily lifestyle and quality of life issues overall. So it’s really interesting to watch markets like Austin, Colorado, and markets that have really boomed since the downturn. Things like transportation have take a lot of thought and leadership, and a lot of those markets have not been investing in mass transit. The last time Aaron was in Denver and Austin talking to people about traffic, it’s just exploded. Their answer to it hasn’t been anything, so no light rail or subways. We’re getting behind.
Number two was housing in America. The range of population facing difficulties in securing an appropriate place to live extends from those who are homeless in big cities, small towns, and rural areas to Millennials and Generation Z members entering the workforce and thriving cities where apartment rents have soared. There’s just no way that they’re going to be able to afford a property. Income is definitely not keeping up. So access to housing in America has definitely shifted.
Number three on their list was weather and climate related risks. The National Center for Environmental Information says that there was something like the average insured loss between 1980 to 2018 is 19.3 for major major weather events. We’ve had lots of big hurricanes. In 2018, the losses from California topped $12 billion because of all the wildfires. More than 13,000 insured homes and businesses were destroyed. Aaron’s still expecting to see some pretty ugly insurance bills come out of that, but they’re worried about weather and climate risk.
Fourth on the list was technology effect. Technology is going to drive the capital markets use of space, leasing, brokerage, valuation, and building operations and technology, maybe making the actual location of a business less important. So everything from Internet of Things, or IOT, Big Data, analytics, artificial intelligence, robotics, Blockchain. He thinks it’s going to catch a lot of people off guard. 5G has been really interesting to follow. At the Consumer Electronics Show he got to go to in January, he was really excited to learn about 5G and when it was going to be rolled out just to realize that what’s rolling out right now is not true 5G. It’s just an elevated 4E plus. But when it does roll out, when you’re talking about Internet connection that’s ten to a hundred times faster than what we’re experiencing now, it’s going to be game changing for a lot of things. We won’t just be cutting the cord on cable TV as we know it. It just changes a lot of things.
You may have seen some of the articles Aaron’s written for ThinkRealty Magazine on education, technology, and where that’s going. He thinks education is ripe for disruption. If you haven’t played around with LinkedIn Learning yet, for basically three hundred dollars a year you have access to thought leaders on almost any topic you can imagine. You take a course, and after you’re done, you get a certificate that’s attached to your profile on LinkedIn, and recruiters can search against it. So why not be able to take some of the best training from the thought leaders in any category? If they produce it once at a very high professional level and it’s evergreen, meaning it will last and it’s not so timely it would go out of date quickly, that could be a game changer, especially when it comes to the university market.
Number five on their list of concerns is the end of cycle economics. We’re now in our longest boom market; so everyone at the event was talking about a recession, but it was interesting to hear nobody was really saying when. He has seen charts from a few different events this year where the majority of economists think that by the first quarter of 2020, we will have one. But it’s sort of a wait and see thing right now.
Number six is political division. This includes political gridlock and infighting. This isn’t helping anything get done. From climate change to population, migration, infrastructure, and housing, it’s just really hard to get people focused, especially with the way politics work. This is especially true on issues that really have to have a long-term leadership in place to really make it happen. We’re seeing that in California with the bullet train. It’s frustrating to watch other countries install this needed infrastructure, and we just can’t get it done. The cost overruns are absolutely insane, and we might end up pulling the plug on something we’ve already spent billions on. It’s really frustrating to watch.
Number seven is capital market risk. As risk tolerance, perception of the market’s position in the cycle and tastes and preferences for space change, so does pricing and demand. There’s a tremendous amount of liquidity in the market. There’s almost too much money, and banks are competing with unregulated debt funds. Private equity transactions are down, an indication we’re nearing the end of a cycle.
Number eight is population migration. People move because of business conditions, tax policies, technologies, disasters including floods and extreme weather events. In the very big picture the census record shows that since the first population tally is 1790, the population centroid, or the imaginary spot on the map that represents the spot at which the American population is perfectly centered, has shifted to the west and to the south. A look at demographics change since 2010 suggests this long range trend will continue uninterrupted when the 2020 census is tallied. Another good book on that ,as we’ve said a lot of different times, is Big Shifts Ahead, and it’s one of the reasons that The Norris Group is in Florida. They are doing a second Florida trip, and chances are they have already sent an email out about it. If you were interested in tagging along, it’s going to be August 15th and 16th, and information will be on the calendar.
Big cities are prospering like California. The Pacific Northwest, Florida, and major Texas metros are part of this equation. Secondary cities are also adding populations, so areas like Denver, Salt Lake City, Atlanta, Nashville, Minneapoli,s Charlotte, Raleigh, Kansas City, and Greenville and many of the latter areas renewal of suburbanization is complementing the downtown revivals. Downtown is being a core asset in the way boomers and millennials are wanting to live, and in the book Big Shifts Ahead, he talks about the surban environment. It’s access to those downtown cores but with a suburban fill around the edges such as access to jobs and shopping and all that good stuff. Up until a decade ago, the consensus projections had the U.S. population as growing to about 440 million by 2050. That has been pushed back by as much as 30 million, a very significant deceleration. Partly the reason for slowing anticipated growth is constraint on immigration. That’s always an interesting thing. We’re just not having kids as often and as many these days. So that’s gonna be something very interesting to watch over the next decade. Capital is gravitating disproportionately to major market, so the top 10 metro MSAs tallied $266 billion of real estate invested in 2018 though they had just 33% of the U.S. population. Interesting things to watch on population shifts, money, and where it goes.
Number nine in CRE issues are volatility and confidence. The levels of commercial property investment appear to be reflecting some uncertainty concerns on the market. Overall investment volume has been down year over year, and there is an underlying trend of decelerating rent gains in income-producing property. This is gonna be really interesting to follow in the commercial space, especially in retail, because there is a lot of conversation about malls. We have too many of them, we’ve overbuilt, and the role of the mall is shifting. Year-over-year, single-family housing construction is down 9.4% As of April 2019 and down 5% for all residential construction in the U.S. The U.S. Census Bureau also reported that non-residential construction volume is down 8.5% for commercial properties in April. The National Association of Realtors’ survey of members confidence has also mirrored the Conference Board’s poll. So most states, 39 of the 50, expect price appreciation of less than 3% with 14 of those anticipating value growth of less than 2%. Apparently, we’re just really spoiled, and we just really expect high rates of appreciation, which is partly the reason why we’re having affordability issues.
Finally on the list of CRT issues is public and private indebtedness at number 10. So long story short, just the ease of access to credit and lots of money chasing yield has some people concerned because people have pulled too much at high risk. Aaron has definitely seen that in the hard money lending world with people creating programs that just don’t make a lot of sense. He’s watching iBuyers make a lot of very interesting decisions after raising billions of dollars. The things that they’re buying in California is interesting to say the least. The CRE actually has a report where they spell it out, and it’s on their Web site if you’re interested in reading more on that.
The hotel sector featured Jon Keeling of the Valencia Hotel Group, and the moderator was from the Las Vegas Journal. Overall, the hotel sector is doing well. They said despite AirBNB, they just can’t get as much as they want during peak periods because of Airbnb. At CES, Aaron scored a huge deal on an Airbnb because the hotel rooms at the time were going for $800 a night. These were the Circus Circus rooms, like two star hotels. It’s so crowded, and they have an influx of around 150 to 200,000 people. Airbnb’s definitely put a suppression on those, so it’s really scary to think where those hotel prices could have been. Lots of our hotel construction has really gone up, so it’s it’s getting harder to build. Consumers are gravitating towards new construction hotels. Land materials and labor are increasing, so it’s getting harder for hotels to pencil overall. It was really interesting to hear that more hotels are building in condos into the mix on the top floors. This is building in some income there to make these projects pencil, and the condos in those cases are really on the luxury side of the market.
The next thing that they covered was a retail Armageddon, and it had Herb Weitzman with the Weitzman Group, and it was moderated by The Dallas Morning News. This just fascinated me. 35 percent of malls will be retrofitted or torn down because of e-commerce. Back when he was in the construction industry in the lighting design field, they were talking about a lot of lifestyle centers right before the downturn. So he thought it was interesting that they were calling the trend open air centers. They’re not just not indoor malls. We’re putting the service stores out in the front. Herb says we put the bigger boxes in the back. It’s repositioned how these centers really work. Retail companies are slowing down and trying to retrofit their operations to merge digital into brick and mortar. We saw that with Amazon buying Whole Foods and figuring out that mix. It’s been really interesting to watch Walmart and Amazon. Wal-Mart obviously had all the brick and mortar, but they spent several billion dollars buying Jet.com, which is a really cool Amazon competitor. If you’ve never tried it, you have to check it out. They have a very cool app.
Online stores and Amazon are integrating their online businesses with brick and mortar to various degrees of success. He hasn’t seen Amazon roll out a lot of their specialized brick and mortar with those top things that you can buy. It’ll be interesting to see how that precedes. Empty spaces from department stores that closed pose a challenge to retrofit because they’re multi-story. Aaron wants them to create senior housing. Last year at this event, they talked about building more housing into the mix on these retail centers. He thought senior housing would be a shoo-in simply because you have all the entertainment there. He’s been seeing gyms at malls more often. This really creates an experience where you show up, and almost everything you need is there. That would be good.
New landlords and cutting-edge investors was moderated by Palm Beach Post, and it featured David Hicks of HomeVestors, Colin Wilde with Mynd, which is a property management company, and Ralph McLaughlin of CoreLogic. He’s been on our radio show before when he was a economist at Trulia. It was a really interesting panel. When Aaron was coming in from New York City, he lost his luggage. After the event, he went up and introduced himself. David Hicks of Home Busters, and he told him he was a hard money lender. Aaron was in shorts because they lost his luggage, so he was told he didn’t look like a hard money lender. It was so awkward.
Investor buying activity in the U.S. is at record highs, and the smaller guys are leading the increase. They’re mostly buying starter homes. IBuyers came up in this conversation, and Aaron thinks it’s being downplayed a little bit because they have only raised the billions of dollars as of the last 12 months, and now you have new entrants like Zillow and Keller Williams that are getting into the mix. Aaron just finished doing the research for California alone for an upcoming newsletter that will probably be released by the time this is out or next week for our subscribers. He looked at every single transaction from the four that are very active in California, including OpenDoor, Redfin, Zillow, and OfferPad. They looke at what they’re buying, where they’re buying, and the buy box came up quite a bit at this event. This is exactly what these iBuyers are after. It’s not the big investors and institutions that’s driving the market right now, but this can definately change considering the kind of money that’s pouring into this market. Most investors are going east of the Mississippi and avoiding states like California because the numbers just simply don’t work.
David Hicks was really interesting to hear. He says that there’s only about a 10 to 15 percent crossover with the iBuyers at the moment, and on average his franchise is now at 1100, having gone from around 165 in 2009 to over 1100 different franchisees across the country. They’re spending about $7 million per month in marketing, and 50% of those that are flipped actually go to other investors. So they’re really just a marketing arm, and they’re wholesaling those to other real estate investors that are either going to fix and flip them or hold them as rentals.
Next up was Colin with Mynd. They are a property management company. The Norris Group has worked with a similar company out in southwest Florida called the Great Jones. They have their roots in the big institutional buyers, the buy to rent landlords. They’re really just introducing a lot of technology into the property management space. Right now Aaron hasn’t seen a lot of discounts, but the technology is pretty cool. We’ll have to see if the customer service remains there. Some of the other things talked about in this panel was flipper data and to watch out for this. Aaron spoken to ATTOM Data and CoreLogic in hopes that they will consider bifurcating the data on Wall Street purchases versus Main Street. The reason why is that Wa