Friday, June 26, 2020

Real Estate in the Time of Pandemic

Photo by CDC

With our country beginning to find its way to a new normal at the end of months of quarantine, we in the real estate market are all left with one nagging question—What should we expect from here? 

Like most people, I do not have definitive answer. If you are over the age of thirteen, however, this pandemic is certainly not the first market disruption that you have experienced and with each such occurrence, we all learn some valuable lessons about the real estate industry. With that said, here are a couple of lessons that we can learn from this particular time of change: 

1. COVID-19 WASN'T THE END OF THE WORLD
Photo by Anna Shvets

The Corona virus pandemic is clearly a historical event and one of the most pervasive pandemics ever. Pandemics are an unfortunate part of human history and have happened a number of times in the last century. The world-wide nature of this particular pandemic, coupled with the inter-connectivity of today’s world, may make our current situation historically novel, however, despite the idyiosyncracies of this pandemic, humans have a history of overcoming pandemics and moving forward. The loss that COVID-19 has caused, in lives, wealth and production cannot be replaced. It is important to remember, however, that while the results of this destruction must be mourned, the real estate market will come back and has rebounded from worse. 


2. WITH EVERY DISRUPTION COME OPPORTUNITY

Large market disruptions and crises are much like forest fires--they are extremely destructive to everything effected. Also like forest fires, these events clear a path for growth that may not have been possible prior. The real estate market, like most other markets, will rebound and it is the duty of every real estate professional to be diligent in looking for ways to contribute toward the structuring of a new normal in our changing world. 

3. THINGS WILL NOT BE THE SAME 

There are a number of lessons that the past couple of months have taught us, not the least of which are the capabilities of our remote learning and working infrastructures and the importance of residential real estate in times of crisis. Unfortunately, the pandemic has also made many of us leery of in-person interaction and created a hypersensitivity around perceived health. Some of the changes that have resulted from the pandemic may dissipate over time, but no one who has lived through the quarantine will ever forget the experience. That said, it is important that real estate professionals stay alert to changing trends as we all quickly try to determine which of the adjustments made will become a regular part of our lives. 



4. HOME WILL TAKE ON A NEW ROLE
One thing that has been apparent throughout the quarantine is that there is no place like home. Residential real estate will certainly be viewed differently going forward. Consumers are bound to be much more beholden to their preferences and the sanitary status of a property may be its selling point. Newer construction may be able to demand more of a premium initially, given its modern features and shorter owner history. Additionally, working-from-home will become a continued reality for many. Homes that are best able to accommodate remote workers, may also be able to demand premiums.

Photo by August de Richelieu

5. WORKPLACES WILL HAVE TO ADAPT

Photo by Ivan SamkovThe concept of work has definitely been redefined during this time of pandemic, as we have learned that the nation will not fall apart if most of us work remotely. This realization, coupled with the shriveling of the economy during the past few months has caused some serious adverse effects in the commercial real estate market. Although warehouse space and industrial properties may be less effected by the move to remote working, as these property types are driven by the physical needs of companies, all property classes have been effected by the slowing of the economy. Social distancing has not been kind to office and retail properties. These property types may need to undergo some significant reimagining, as they are tailored to inter-personal interaction. Further, the required increase in online-purchasing has only served to further accelerate what has been an apparent reality in retail real estate for sometime—a new normal is on the horizon. Flexibility will be key in the office and retail markets, where the spoils will go to the nimble. 

6. SANITARY AND STERILE MAYBE TRENDY

Photo by cottonbro In the wake of this national health crisis, sterile is in. As the nation continues its path toward reopening, we have already begun to see businesses retooled in order to work toward the eradication of COVID-19. The concern over this virus will inevitably lead to an increased concern for the sterility of dwellings and structures. Demonstrable sanitary feature, systems and practice can allay health concerns and are certainly welcomed, if not mandatory, additions to any property. 

7. FUNDAMENTALS STILL REIN SUPREME

In the end, real estate is still real estate. It will continue to be a relatively illiquid asset and it will continue to have significant market lags. It will also continue to be a valuable resource and a viable way to build and shield wealth. All of these factors are why we love real estate so much. It’s indicators will remain the same: e.g. the employment rate, housing starts, mortgage rates, local economic factors, locations of major employers, etc., although, it is wholly possible that some new indicators may arise. I will avoid trying to speculate on which indicators may be significant, but one thing is clear, change is coming and it is important to be ready to navigate toward our new way of life. 

This has been my take on the impending changes to real estate coming in the wake of the pandemic. I’d love to hear your thoughts. Please comment below.

Friday, June 12, 2020

Social Justice Real Estate


I try my best on this blog to focus on the issues effecting the real estate market and offer a perspective uninfluenced by political factors. To the extent that social factors effect the real estate market, I am happy to address them, but I work diligently to ensure that this blog does not serve the dual purpose of promoting any particular political ideology. With that said, we are all contextual creatures and I, as an African-American male, cannot ignore the current outcry regarding police brutality against my fellow brothers and sisters.

Although the issue of police brutality against black and brown people is nothing new, it is refreshing to see all of the momentum that we are generating toward a solution. I am prayerful and hopeful that the demonstrations being made, the dialogues taking place and the changes that have begun are indicative of a new direction that our country is taking, toward working on resolving the clearly apparent and lingering racial biases found in our country. Police brutality is certainly an important issue that must be resolved, but is a symptom of an American history of racially stratified policies, both formal and informal, that have lasted for centuries and preserve advantages for those not of color. Given that the “complexity” of race relations in our country has developed over centuries, it is reasonable to expect that the solution to this issue, will not be a quick fix, but it absolutely necessary that every American commit to working toward a resolution of this issues. Until we heal our racial wound and deal with our checkered past, we cannot truly move forward as a nation.

What does this have to do with real estate?

Well, I’m glad that you asked that question. Real estate, in fact, has frequent been used to either preserve a status quo or to begin drastic change. From the mortgage redlining of the 50’s, 60’s and 70’s to racially restrictive land covenants, to blockbusting, to redistricting, to urban planning, to affordable housing programs, it is abundantly clear, real estate can influence the path of a society. The issues of the oft mentioned “inner city” are the result of urban planning, which has used zoning laws, covenants, variance hearings and other land use methods to ensure that some areas thrive and others flounder. These planning decisions had lasting effects, as communities were shaped by these decision, many of which have lasted for generations. 


Few issues are more political than land use and few are more hotly contested. Proposed major changes in zoning draw large numbers of reactions on both sides. Elections are won and lost over the location of new developments or the violation of the ubiquitous NIMBY. In fact, in most cities, big and small, there is no group more powerful and wealthy than the real estate lobby, which works to ensure that either status quo is maintained or that their notification of any changes is advanced as possible.


So if real estate can garner so much focus and convey so much influence, then the importance of acquiring as much of it as possible is clear. As Master P recently said, you have own blocks to create influence. In actuality, few things speak louder than the concerns of a collective of the largest landowners. If you are skeptical, look at how many of the largest campaign contributors of most local, mayoral and gubernatorial elections are directly tied to the real estate market. Also look at the amount of tax benefits, such as PILOTs and tax credits are given to large developers or businesses that intend to open headquarters in an area. Governments have in some instances taken land from smaller private landowners through eminent domain to ensure that such developments or headquaters are able to be built.

When it comes to real estate not much has changed from the days of feudalism—land equals influence, so if people of color want to be heard in a lasting way and establish generational change, one way to do so is to own land and/or to influence land policy. Real estate has always been a powerful tool for social change. If we do not mobilize and acquire, then we will continue to be at the mercy of the planning decisions of a group that does not share our interest. Diversity has many benefits, but it is important that we do everything that we can to secure our seat at the table, so our inclusion is a necessity and not a mere act of benevolence. 

Well that’s my take on social justice real estate. I’d love to hear your thoughts. Please comment below.

Tuesday, April 28, 2020

Back in the Saddle Again

Hello Readers/Subscribers of the Real Estate Think Tank,

I once read that it's not how many times that you fall off the horse, but how many times you get back on. With that said, I want to announce that I am back on "the horse" and will once again begin to deliver to you once again real estate content from an industry-insider's perspective. 
I have been blessed to have had the opportunity to try my hand at a few occupations and have had success in a couple of careers, but one thing remains consistent--no matter how far I try to stray, real estate is my calling. That said, I am going to begin to deliver content on a regular basis. In doing so, I will try my best to both be more technical, as well as more topical and will look to strike a balance between the two. 

It's great to be back at the Real Estate Think Tank and like a pair of well-worn jeans, it just feels right!

Yours Truly,

Stephon Martin

Wednesday, August 8, 2018

The Real Estate Sales Game (Part 2)

In Part 1 of this post, three aspects of real estate sales were addressed--lead generation, asset valuation, asset management. These real estate sales characteristics require a specific approach when applied to real estate sales. In this post, the remaining two aspects of real estate sales will be discussed--marketing and customer relations. These aspects of sales are more uniform across all sales profession, both in and out of the real estate industry.

As a reminder, the term real estate salesperson includes all real estate professionals that spend a significant portion of their time selling real estate assets, including property salespeople, real estate capital markets sales professionals and commercial and residential loan officers. 

Marketing

Sales professionals across industries must concern themselves with marketing. If lead generation is the bloodline of sales, then marketing is the sales lifeline. Few owners of real estate assets are well known enough to sustain consistent sales without advertising their assets or needs on the market. Even further, marketing is not merely advertising, but also the market research necessary for the sales force to conduct a successful sale. This includes market, customer and competitor research. 

Admittedly, marketing takes on a different appearance in the different types of professions that engage in real estate sales. Direct customer advertising and research are very common among property sellers, whereas marketing in the real estate secondary and capital markets may consist of networking, listing on exchanges and purchasing market data from data providers. Despite the idiosyncrasies of the industry-established method, effective marketing is absolutely necessary to the success of any sales professional and any business, as no one will seek to purchase an unknown asset. Real estate salespeople are not exempt from this essential business function.

Customer Relations

Much like marketing, proper management of customer relations is key to success in business. Sales professionals should seek to ensure that the needs of their customers are met, as satisfied customers are great for business. Research has shown that the overwhelming majority of business referrals come from customers who have had a positive experience with a company. The bottom line is that satisfied customers are one of foundations on which a successful business is built and real estate companies are not exempt to this business tenet. The profile of a customer may vary among the different types of real estate professions, but be they consumer, corporate, governmental or institutional customers or clients, their satisfaction is integral to the success of the real estate sales professional.

Bringing It All Together

Although the various sales roles present in the real estate market each have their own characteristics, they all share a concern with the five aforementioned sales concepts. The most successful real estate salespeople have implemented systems to manage these five aspects of sales in an effective manner. Real estate sales professionals that lack in any of these areas would do well to assess where they lack and address any such shortcomings. That is my take on real estate sales, please feel free to provide your prospective on the matter below.

Monday, August 6, 2018

The Real Estate Sales Game (Part 1)

Interestingly, I have over 10 years of experience as a real estate salesperson and attorney and have yet to write a post on the mechanisms of real estate sales. An understanding of real estate sales can be useful in informing the perspective of a real estate investor. Real estate salespeople have an intimate understanding of market activity, market trends and asset valuation that can prove valuable to all real estate investors.

Real Estate Salespeople

Before continuing, it may be necessary for me to provide a working definition for the term “real estate salesperson.” For the purposes of this post, the term real estate salesperson will include all real estate professionals who spend a significant amount of time disposing of real estate assets in the market. This definition includes property salespeople, such as Realtors, but also includes sellers and agents in the real estate capital markets, as well. Such secondary market participants include whole loan sellers, traders of mortgage-backed securities and loan officers of the various types of residential and commercial real estate loans that exist.

It may be tempting to think that such a broad definition of real estate salesperson includes a number of disparate professions that do not have much in common, however, each of the aforementioned professionals engage in real estate sales. Remarkably, real estate asset disposition has certain immutable aspects that transcend asset class distinctions. These aspects are lead generation, asset valuation, asset management, marketing and customer relations. This post will address the first three aspects, which have very specific concerns in the real estate market. A subsequent post will address the final two, which are more uniform across all sales.

Lead Generation

Leads are the bloodline of all sales, but real estate salespeople differ from other sales professionals in that they almost always seek out their customers and clients from the market. This is especially true of properties sales, where product placement is predetermined. In fact, since a real estate purchase is most frequently not seen as an emergency, real estate salespeople are not only required to find their customers and clients, but are also often tasked with having to impart a sense of urgency into their target audience in a way that is not as necessary in other sales professions. Admittedly, the methods of lead generation vary wildly among the different real estate sales professions. Direct marketing and customer engagement is frequent among property salespeople and residential mortgage professionals, whereas more indirect approaches, such as networking and informal referrals, are prevalent among capital market professionals. Despite these differences, leads are essential to all real estate salespeople and must be actively managed.

Asset Valuation

Asset valuation is an integral part of the role of all real estate sales professionals. Real estate assets are price idiosyncratic, in that their prices are determined at arms-length and not by the market. Except in the case of some government mortgage backed securities, which have fixed bid-ask prices, the price of a real estate asset is determined after some bargaining between the buyer and seller. As such, the seller’s asking price is merely an initial offer and not a firm price. It is the responsibility of the real estate salesperson to ensure that the seller’s initial asking price is attractive enough that buyers will bid, while retaining sufficient value that the seller is able to reap an acceptable profit upon the close of the sale. These competing concerns can only be mitigated through an intimate knowledge of the market and a strong sense of the value of the asset sold. The best real estate sales professionals have an uncanny ability to determine an asset’s value and its demand in the market place. They use this ability to price assets accordingly and sell them efficiently.

Asset Management

Asset Management is a key component of real estate sales, because real estate cashflow is neither automatic nor derived solely from market factors. Income property rents and mortgage payments must be collected in order for investors realize cashflow from their real estate holdings. Furthermore, properties require maintenance and mortgages require regular compliance with various lending laws. Real estate securities are also subject to regular reporting requirements, as well. As such, there is no way for a real estate salesperson to escape asset management. Proper management of real estate assets by the salesperson will lead to seamless dispositions, whereas mismanagement of these types of assets can lead to a canceled or substantially delayed sale. Unlike other types of sales, asset management is as much a consideration to sale as timing and value. The competent real estate salesperson understands this requirement and ensures that assets are properly managed.

Lead generation, asset valuation and asset management are aspects of real estate sales that have unique concerns. Real estate sales professionals must master these aspects of sales in order to successfully bring about consistent dispositions. In our next post will deal with the remaining two aspects of real estate sales--marketing and customer relations.

Tuesday, July 31, 2018

Change Is A Coming: How Current Economic Conditions Should Affect Real Estate Investment


Many economist and market pundits are predicting a market downturn, beginning some time in 2019 or 2020. All of the indicators of an overheated boom seem to be present--increasing margin debt, decreasing dividends, stock market price inflation and increased levels of corporate debt. Essentially, low interest rates have made credit more accessible. As a result, businesses are using credit to buy back some of their outstanding stock. In response to the relative decrease in availability of stock, stock market prices are rising, increasing household wealth across the nation. Spurred on in part by technological development, the economy seems to be booming at present, but it is important to note that mechanism that is fueling this increase in wealth is debt.

The Dangers of Debt

Although the use of debt in an economy is not an inherent cause for alarm, the financing of an economic boom through debt can lead to some undesirable outcomes. An increase in corporate debt without an accompanying increase in productivity simply means that companies are borrowing to appear more profitable, merely because money is available at low rates. Cheap money, however, has to be paid back at some point and without an increase in productivity to support the increased leverage, companies that borrow cheaply will have repay their obligations at their current rate of production with future dollars, which have less purchasing power.

Compounding this issue further is that the resulting increase in stock prices leads to an increase in the values of the portfolios of consumers throughout the nation. This increase in household wealth leads to an increase in consumer spending and borrowing. In turn, prices increase in response to the uptick in consumption. In the presence of increased productivity, such economic functionality is normally a mechanism of economic growth. Without increased production, leading to an increase in value created by this cycle of price increasing, inflation results.

Increased productivity is important to sustainable economic growth, unfortunately, it has been outpaced in the present economy by corporate and consumer consumption. The dislocation between interest rate activity and production growth is a clear indication that the monetary policy of the Federal Reserve is the true underlying cause of the economic boom. Unfortunately federal monetary policies alone cannot be the support an economic boom, as these policies will have to change once the economy show signs of overheating. Naturally, a change in the underlying support of an economic boom will cause a market crash.

What Does All of This Have to Do with Real Estate Finance?

As discussed, in a previous post, an economic downturn is the time to acquire real estate exposure, however, it is also a time during which credit is scarce. Accordingly, given the prevailing prediction of a market crash, capital acquisition should be the focus of savvy real estate investors. Therefore, now is the time to forgo acquisition in favor of increased occupancy and monetization. Given the low cost of money, now is also the perfect time to finance repairs that will facilitate higher rates and increased capitalization.

Although the argument could be made that once indicators point to a market downturn, it is already too late to begin preparation, it is better to adjust to eminent market conditions to the extent possible than not at all. The upcoming downturn, although unfortunate, can serve as an opportunity for the liquid, well-prepared real estate investor. A change is certainly on the horizon, be prepared and please feel free to provide your prospective on the matter below.

Friday, July 27, 2018

How To Approach A Defaulting Second Mortgage


Default happens, hopefully not often, but it is a fact of lending. Upon default, however, a holder of a second mortgage must find an objective, value-driven manner in which to evaluate its options. Unfortunately, in many instances second position lienholders opt for one of two extreme approaches—accepting a nominal amount in exchange for the release of the lien or demanding an unreasonably high sum for satisfaction of the lien. Both approaches are harmful for different reasons. Despite such prevalent behavior, with proper management, a defaulting second mortgage can provide a lienholder with a number of options.


So, You Agreed To Be Second

Financing a second mortgage is making a conscious decision to maintain an interest in a property that is subject to the interests of the first lienholder. The most cogent concern of a second lender is that upon default of the first mortgage, all of the second lienholder's interest can be extinguished. Such subordination is not only a concern at default, but an ongoing concern, as any changes to the property or its rights that the second position lender would like to make may possibly trigger a default in the first mortgage. 

Upon default, the relationship between the first and second lienholders undergoes a slight alteration. To understand this shift, it is probably most beneficial to think of a second position lien as converting into an option or right of first refusal upon default. When either mortgage is in default, the second lien holder has to assess whether it wishes to incur the cost of litigation, in the case of the second lien’s default, or satisfaction, in the case of a default on the first mortgage. In the same manner, the money lent for the second lien can similarly be seen as the cost of the option, which bears interest for the lender. Viewing its lien from this property rights perspective will enable the second lien holder to conduct an objective risk-weighted cost-benefit analysis of the second mortgage.

Which Approach Should Be Taken Upon Default?

When it comes to defaulting second mortgages, objectivity is essential. Accepting a nominal payoff leads to lost profits. Alternatively, overly aggressive demands for a payoff will lead to either foreclosure of the first lien position and extinguishment or a longer period of nonpayment, followed by ownership of the property subject to the first mortgage. An active approach is necessary to avoid entering either situation unwillingly. Second lien holders should assess the value of the property and determine if the remaining equity after satisfaction of the first lien and additional litigation/acquisition costs makes the exercising of the lien holder’s rights worth the cost of doing so. In addition to this course of action, it is important for the second lienholder to understand the secondary market pricing for performing second mortgages, defaulting mortgages and the typical payoff discount for defaulting second mortgage in the property’s local area. The state of title of property is also an important determining factor. Armed, with this information, a second position lienholder can make an informed decision on how it will proceed upon default.

Unfortunately, second lienholders and their authorized agents are not always optimally informed at the time of default, leading to frequent instances of idiosyncratic behavior. That said, I thought it prudent to provide my take on how to approach the default of a second position mortgage. Please feel free to provide your prospective on the matter below.