Markets are becoming increasingly hyper-local. That’s more true today than ever. Global transportation has been the great equalizer and has made so many things appear to be commodities. That’s why real estate is hyper-local. You can’t just pick up an office building that has high vacancy and move it to a place where there is a shortage. In the absence of a differentiated value, the discussion always degenerates to price. That’s why a pound of sugar tends to cost the same in Portland, Maine as in San Diego, California. A pound of sugar is a pound of sugar. There is no real dominant brand in sugar that distinguishes one supplier from another. It’s a true commodity. But when we describe real estate we describe the property in terms of its characteristics, its amenities, and most importantly, its location. Yesterday, the futures contracts for oil went into uncharted territory. Some prices went negative. Let me take you through a sampling of prices. Saudi Arabia light and heavy oil are both trading in the futures market at $19.07. Oil in Mexico from the Mayan region varies in price depending on the destination. If the oil is destined for the US Gulf Coast, the price is negative $1.18. If that same oil is heading for Asia, then the price is $21.79. That difference in price is a reflection of differences in both transportation and storage costs. The US has so much oil at the Gulf coast right now, that they have no place to store it. North Texas Sweet Crude is selling at a negative $41 per barrel. Arkansas Sweet Crude is selling for $11.50 per barrel. Central Alberta Crude is at $10.93 These prices are all over the place. The only distinguishing factor is location and the local supply / demand balance in that market. The price difference is a reflection of the cost of storage and the cost of transportation to get the oil to where it is needed. We’ve experienced an unprecedented collapse in global oil consumption in a matter of weeks. When you take transportation systems out of the market, you create inefficiencies all over the place. Those who aren’t paying attention will be surprised. Those who understand the relationship between transportation and price will make sense of the inefficiencies in the market. Now is the time to figure out where the supply chain disruptions are happening. They’re all over the place. Expect a significant portion of the 6,000 independent oil companies to go bankrupt or be acquired in a distressed sale. The oil won’t disappear. The change will be in the ownership. Don’t expect to see prices recover to the $50-$60 range for at least another 18 months. Even the price of commodities vary by location when you take transportation out of the equation.

On today’s show we’re talking about the mental aspects of navigating these uncertain times. I find myself going through all kinds of emotional swings in these days. Those who know me would describe me as someone who is very tempered, pretty unflappable. Over the past several months, I’ve been asking myself a lot of questions. I’m asking questions like: Will there be a shortfall in rental income, and if so, how much? When will we see revenue return to our short term rentals? Will our current construction projects be impacted by the mandated shutdowns? Will any of my friends or family get sick? Will we experience food shortages? Will we exhaust our financial reserves? What will the market look like when we emerge from this period of social isolation? What will happen to the capital markets? Will people stop investing out of fear? What I discovered in these questions is that all of these questions have one thing in common. They are rooted in a basic human need to bring certainty to the most fundamental aspects of living. We all crave certainty to some degree. If everything is certain in life, then there is no variety and life gets boring. So we need a little uncertainty, but we want that uncertainty to add a little spice to life. My wife loves to be surprised by a gift of beautiful freshly cut flowers. That should be uncertain. But in areas that are core to living like: “Where is my next meal going to come from?” We want that to be certain. In fact we need certainty so badly that some people will do just about anything to create certainty in their life. They will lie to themselves, they will create a narrative in their own minds that synthesizes a suitable level of certainty. If the certainty isn’t there, they will invent the story that brings an acceptable level of certainty. I’ve observed the full spectrum of reactions. There are those who go to sleep at night in a hazmat suit at one end of the spectrum, and then there are others who are in complete denial and believe that this is all a hoax. Both ends of this spectrum are trying to accomplish the same thing, to bring certainty to an uncertain situation. I reality, nothing has changed. Life is uncertain and always has been. Even those who embrace the thrill of the hunt, the adrenaline junkies out there. They too at a deeper level require certainty at the very core. My own response to the current Covid-19 pandemic has been to get as much information as possible. Armed with knowledge of what is really happening is my best path to certainty. I believe that I can’t change reality on a large scale. I can control my own expectations. The closer my own thoughts are aligned with reality, the less stress I will experience. There is a natural human reaction to any bit of new information. The first step might be denial. At the other end of the process is acceptance, and finally action taking. In between there are a number of steps which include shock, anger, rationalization, confusion, rationalizing. Some people get through that process to acceptance quicker than others. I’ve discovered for myself, that the best path to certainty is to remain grounded in reality, to constantly question my own beliefs to make sure I’m not engaging in confirmation bias. It’s a difficult process. Sometimes I catch myself looking at wrong data, simply to make myself feel better. Check in with yourself and how you are managing the uncertainty, that has been present in your life all along whether you recognized it or not.

On today’s show we’re talking about investing versus speculating, and we’re answering a listener question about where to invest in today’s environment. This question comes from David in Great Falls Montana. David asks, I want to thank you for all the hard work you put in on putting out great content that is filled with such helpful information. I had a question on the podcast you put out on April 14th about stagflation. I was wondering what are good assets to buy to hedge against stagflation in the economy. David this is a great question. One of the best short term hedges against inflation is precious metals. I definitely recommend parking cash in precious metals during a time like this. But I have to tell you that it’s extremely difficult to buy gold or silver at the retail level today. The supply has completely dried up and almost all the dealer’s I’ve researched have zero inventory. I like the way you phrased the question. Instead of asking where to invest, you asked what asset you should buy. In this context, I’m going to use Robert Kiyosaki’s definition of the word asset, where he defines an asset as something that produces positive net income. We are of course at a moment in time where problems are everywhere. I’m continually shocked by the fundamental lack of understanding of what investing is really all about. Some people just focus on buy low, sell high. The true investor mindset understands the value of an asset, but not just because it sold at a certain price. My thought is to focus on tactical problem solving. We are going through a global problem with supply chains right now. These are not going to resolve quickly. The recovery which is months away will be incredibly messy and inefficient. The path to earning is to solve problems that people are willing to pay money to have solved. The most trivial example is the guy walking through the crowd at a summer music festival selling cold bottled water for $2 per bottle. They paid $0.30 per bottle and are making a healthy margin. But they’re solving a problem. The problems abound right now. 90% of the doorknobs in the world are manufactured in China. There is a global disruption and everyone in construction is experiencing shortages of hardware for doors. That’s a problem that needs to be solved. Supply chains are going to be re-evaluated in the coming months with a greater emphasis on security of supply. It used to be that everything was being commoditized and lowest price always wins. That may change in the future. There will be a shortage of spare parts, globally. Anyone with a machine shop who can manufacture spare parts from a CAD file will do very well. Any machine shop that can create the CAD file by copying an existing part that might be broken by digitizing the dimensions will do very well. There are shortages in the food supply that have opened up and will become increasingly acute in the coming weeks and months. Someone with a few hundred thousand tomato plant seedlings would probably get a good price for them. It would only take a couple of acres to produce a few hundred thousand seedlings. It likely that many men in North America are going to be reluctant to go to the barber shop to get their hair cut anytime soon. Sales of hair clippers have gone through the roof. Inventories are sold out and many orders are experiencing long lead times. Here’s another problem to be solved. They’re literally everywhere. You get the idea. It’s about discovering the real problems and finding a way to add real value, not just being a middle-man in the transaction. I want to thank you David for a great question. This is a question that we’re going to be looking at repeatedly over the coming days and weeks.

Reed Goossens moved from Australia only 8 years ago. In that short time he has assembled a portfolio of 2,000 apartments in San Antonio and Austin, Texas. On today's show we're talking about the current market conditions and how he sees the market unfolding, rent collection, and managing the lender relationships.  Very valuable conversation for anyone who invests in multi-family apartments. You can reach Reed at reedgoossens.com

Russell Gray is a financial strategist and co-host of The Real Estate Guys Radio Show, now in its 24th year on the air. In this first part of a multi-part conversation, Russ and I discuss whether the pin is to blame for popping a bubble, or whether the construction of the bubble is in fact the problem. You can hear more from Russ at realestateguysradio.com 

Last week Colliers International had a private webinar for its clients focused on the state of the hotel industry. The numbers of are absolutely devastating. There is no comparable period in history. During SARS in 2003, the occupancy fell to 42%. We saw a 10.9% reduction in Revenue Per Available Room (REVPAR)  during the financial crisis. In the aftermath of the 2001 terrorist attacks REVPAR fell 2% Most hotel groups started to prepare in the first week of March, a full 5 weeks after the China lockdown. Many hotel groups had already started planning for a business slowdown when occupancies had started to fall in Q4. But all of the planning had focused on a reduction along the lines of what had been observed in previous economic downturns. Many of the hotel groups had started to communicate with lenders in the past two weeks to keep them up to date on the state of their business. Majority of institutions have been providing 3-6 months of interest only concessions. Many of the lenders are offering interest only relief and allowing principal payments to be deferred. One perspective when it comes to hotel valuation is that many hotels will lose a year of net income. At current cap rates, a complete loss of a year of income could translate into a 5% reduction in valuation. There is a lot of pent up demand for events. Weddings scheduled for the Spring are being rescheduled for the fall. Hotel rates are not falling in today’s environment. The reason for that is that dropping rate won’t stimulate demand, so there’s no reason to drop rate. The combination of the property tax deferrals, loan principal deferral, government wage subsidies, some amount of workforce reduction, capital project deferrals, the hotel owners who were on the panel seemed to feel that they can weather this storm for a period of time. However, they will need additional government help. Hotels are reaching out to health care workers who need alternate accommodations to protect their families from possible infection. Some hotels are also reaching out to hospitals to provide accommodations to patients as overflow for hospitals Some scattered demand exists for airline crews and for repatriation quarantines. The short term is focused on cost containment, preservation of capital and maintaining liquidity. The hotel owners on the panel see a lot of pent up demand as witnessed by the number of events that were scheduled and are being rescheduled for the fall. That means the chance for a V-shaped recovery in travel is there. Most of the hotel owners had run several scenarios ranging from a fast recovery after a couple of months. Most of the worst case scenarios don’t see a recovery any later than the fall. All the major operators on the panel were ensuring they had the liquidity to survive until the fall. The new financial model for 2020 assumes 50% occupancy for the year and a daily rate 15-20% lower than historical. That assumes a 0% occupancy for the next 60-90 days.

We haven’t had a lot of good news lately. Or, more precisely, we haven’t seen a lot of good news lately, though it does exist. We don’t see it because both regular media and social media usually focus on the bad. That’s not entirely wrong. The survival imperative makes humans watch for threats, and sometimes threats are real. One of the powerful lessons of this past month has been that you really can’t count on anything to be certain in the world of business. Only a few short months ago, if you had any rational risk manager argue that we could see a simultaneous large scale situation where retail revenues went to zero, where hotel revenues went to zero, where airline revenues went to zero you would have been sent for a psychiatric evaluation. Well, here we are. So where is this good news that I spoke about? Who will win in this economic environment? I take the perspective that a successful business is all about solving real business problems. On yesterday’s show we talked about the massive supply chain disruptions that are poised to hit our global food supply. At lunch today, my wife went to our freezer and took out a package of frozen kale which she added to her home-made carrot soup. The package indicated that the frozen kale originated in Ecuador. I don’t know how in a world of reduced transportation, as companies re-think their global supply chains, how we will kale get from a field in Ecuador into a freezer bag and ultimately to my dinner table in Ottawa Canada. On today’s show we’re looking at a new report issued this week from industrial real estate firm CBRE predicts that demand for local domestic refrigerated warehouse space is going to increase in the short term and over the next 5 years. CBRE also cited a Brick Meets Click/Shopper Survey, which saw 46% of respondents indicating they will continue to purchase goods online after the COVID-19 pandemic subsides. What’s more, the report pointed to what CBRE called long-term impacts for the industrial cold storage sector, due to COVID-19, including: E-commerce groceries will become more widely adopted as consumer comfort grows with the practice. This will trigger heightened demand for cold storage capacity; Multi-tenant refrigerated warehouse companies will likely consolidate to gain more control of the cold storage footprint; Since e-commerce is typically fulfilled by local grocery stores, retail footprints will include more storage and fulfillment space, including a greater need for infill temperature-controlled facilities in proximity to consumers; Automation will increase, prompting higher-density, greater-height and smaller-footprint buildouts that will be required for around-the-clock operations The cost of building new cold storage is a huge barrier given that construction costs are two-to-three times higher than that of regular warehouses. It stands to reason that more and more people will shop using online grocery stores. They are going to use them first out of necessity during the Covid-19 outbreak. Once the initial objections are overcome, they will continue to use the online grocery for convenience. The result will be a significant and permanent shift in the retail landscape for food. We’re talking about the last 5 miles of the supply chain between the point of production and my dinner table. Those online grocers will need a big fridge, the size of a warehouse. The entrepreneur who invests in these facilities in high density and high population markets stands to be ahead of the game and potentially a big winner out of this disruption.

Today’s show not about real estate. We’re talking about taking action to protect your family’s food supply. I remember watching the news on television in the 1970’s as a teenager seeing the two hour long lines as people waited patiently to get a loaf of bread at the bakery in Moscow. The notion of food shortages in the US, Canada or Western Europe seemed unimaginable. Well last week, I waited in line for 40 minutes to get into the grocery store. Once inside, some shelves were fully stocked, and others were 90%-100% empty. We have been hearing about supply chain disruptions all over the world for components, for manufacturing, and now for finished products. It stands to reason that the food supply would be similarly impacted. Whether the cause is labor shortage, transportation disruptions, or problems with logistics, supply chain disruptions are happening now in the path to your dinner table. The United States relies upon 3 million migrant workers each year to work in agriculture. They come largely from Latin America. Western Europe relies upon migrant workers to work in their fields, largely from Eastern Europe. Border restrictions are already creating workforce shortages in a number of sectors of the agricultural industry. We have millions of unemployed, but the question is are these people going to choose working in the fields versus sitting at home collecting an unemployment benefits check? In a world of travel restrictions and closed borders, I’m not seeing those migrant workers materializing. China exports millions of bees each year all over the world to help re-supply the declining bee population which are key to pollenating many crops. In the absence of bees, the only solution is for humans to hand pollenate the flowers with a cotton swab. I’m not seeing those millions of people, Q-tips in hand making their way out into the fields. Vietnam is one of the top three producers of rice in the world. They put an export ban on rice. Germany normally invites about 300,000 migrant workers into their fields. Last week, they brought 40,000 workers from Rumania to help with the Asparagus harvest. They plan to bring a total of 80,000 migrant workers. But between 80,000 and 300,000 there’s a gap. Germany hopes to close the gap with local labor that have been displaced from other jobs. This week, amid reports of widespread outbreaks of Covid-19 at several of the largest meat processing plants in North America, we are starting to see disruptions in the supply of beef, chicken and pork to supermarket chains. The supply of animal protein in North America is highly concentrated in a small number of companies and a small number of massive processing plants. My recommendation for listeners of this show is that you make a concerted effort to ensure security of your family’s food supply. I’m increasing my household supply of critical items from 60 days to 90 days. Even that is likely not going to be enough. We are also planting a much more extensive garden this year than we have in the past. Every year we plant about 10 tomato plants, zucchini, cucumbers, peas, basil, oregano and so on. This year we will more than double the size of our garden. I don’t expect even that to be enough. I realize that there has been a bucketload of jarring news over the past several weeks. I’m not here to spread negativity. Far from it. I believe that armed with good information you can make good decisions. Better to have a few extra cans of tomatoes and beans and not need them, rather than need them and be unable to get them.

On January 29 I reported to you that we were in economic recession, weeks before any economists uttered the words. I didn’t have any magic crystal ball to predict the future. It was just obvious that we had negative growth. On today’s show we’re talking about the consequence of the government handouts. In the next 5 minutes I’m going to build the case to show you that we are now in a period of stagflation. Stagflation is a combination of stagnant economic growth, high unemployment, and high inflation. It's an unnatural situation because inflation is not supposed to occur in a weak economy. In a normal market economy, slow growth prevents inflation. As a result, consumer demand drops enough to keep prices from rising. Stagflation can only occur if government policies disrupt normal market functioning. Many people are treating these bailouts like they’re free. Nothing is ever free. But there has been zero discussion of who is actually going to pay for these handouts. If its coming from government, it ultimately means that we the population are going to pay. But nobody is saying how exactly. A lot of people tend to measure the cost of government in terms of the cost of taxation in their personal situation. If they’re paying 50% of their income in taxes, then the cost of government is 50% of their income. If someone else is in a 10% tax bracket, then their perceived cost of government is 10%. But that’s not the cost of government. The true cost of government is measured by government spending, not in the amount of tax collected. So for example if government brings in $100 in taxes, but actually spends $150 of those $100, the cost of government is actually $150, not $100. You pay for government in two ways. You pay in taxation and in inflation. When government prints money, you pay for that spending in terms of reduced buying power, in terms of reduction in your savings. So here we are, governments are spending cash in vast quantities to bail out various industries. They’re spending cash they don’t have, so it’s being printed out of thin air. If you’ve been listening to this podcast for a while, you’ll know my opinion on inflation. We have plenty of modern day examples of hyper-inflation. So we don’t have to dig too far in the history books to look and see what happens. We can look to modern day Venezuela, or Zimbabwe for current examples. You can look to Argentina in the mid-1980’s. In a world of hyperinflation, there is so much currency being printed that the purchasing power of the currency gets eroded. It has the impact of eroding the purchasing power of those on fixed incomes, it devalues savings, and it devalues debt. If you know that you’re entering an inflationary period, you would want to hold assets that will benefit from a devaluation of debt and a devaluation of savings. Let’s say for example that you hold a piece of real estate that is generating income. That income property is producing positive cash flow, and its not over-leveraged. Well guess what, we have the conditions for stagflation. We have governments the world over telling people that they should not go to work, that they should stay home, and that they should avoid social contact. Don’t get me wrong, it’s all being done for a good reason, to save human lives. The social lockdowns are absolutely the right thing to do. But we have to acknowledge that the vast printing of money will have an inflationary impact. Now some of you might be saying that the government has been printing money for decades and it hasn’t resulted in hyperinflation. Why is that? I believe that we have exported our inflation through globalization. The extra printed money went to pay for goods that were manufactured in the East and imported into Western economies. We exported the extra cash, so long as they were willing to accept it.

Adam in Riverside California asks, Hi Victor, I hope you and your family are safe and well.  I enjoy listening to your daily podcast.  Thank you for educating your listeners! The COVID-19 pandemic will certainly have a deep and lasting impact on our society. Covering nose and mouth in public is now the norm.  Fewer cars on the road due to shelter in place orders has led to a reduction in carbon emissions.  Having a reliable internet connection at home has become a necessity for mom and dad to work from home while the kids are attending classes.  If we fast forward a year from now, what behaviors do you see changing? Thanks, Adam Well Adam, this is a great question. As always it’s hard to forecast the future. But I see a few trends that seem obvious to me. This is a huge question and I won’t be able to cover too many aspects in just five minutes, so I’ll touch upon a couple of them. The period of social isolation is going to be required for more than just a few weeks. Government leaders are going to try and re-open the economy as quickly as they can. China has attempted to re-open their economy and has almost as quickly tightened the restrictions when they saw cases of Covid-19 rising again. The process of re-opening the economy will take many months and will probably only happen fully in about 18 months from now. When any behaviour happens with enough regularity and for long enough, new habits are formed. It’s been more than two months since I’ve been to the gym. Will I renew the gym membership when this is all over? I’m not entirely sure. I suspect that I will have formed new workout habits and once those new habits are firmly in place, the gym won’t seem as compelling, or maybe it will. It’s too soon to say. A year from now, we will not be through this period of disruption. We will still be managing the disruption and some industries will be attempting to emerge from the shutdown. The fact is, we will not see a return to what was. What emerges will be different. We will see a new normal. I suspect that we will see changes that are driven by supply chain disruptions. For example, the way people shop for food is already changing. It used to be the case that the peak hour at the grocery store was traditionally 5PM, just before dinner time. Now that peak time is in the morning when the store opens. A year from now we will not be out of the woods with Covid-19. There will still be shortages of certain items and the competition for those scarce items between consumers will continue to be a point of social friction. We will see a large percentage of the population still struggling financially from this disruption. That means austerity, spending less, and only spending on essential items. Businesses that rely upon luxuries will struggle as demand for those products will be among the last to materialize. I predict that the cocooning of households that has been trending for the past 30 years will continue to become even more acute. There are a number of people who are used to traveling extensively. I’ve traveled about twice a month for the past 15-20 years. Now that is zero of course. So much that has been done in person with travel will be increasingly done using technology. That’s both a problem and an opportunity. Those who choose to travel for business will have a distinct competitive edge compared with those who merely video conference. How many people will eagerly jump on a plane in a year even when the airlines are saying that it should be safe to travel? How many people will book a cruise or go to a conference? I predict that these sectors will be slow to re-emerge after this is all over. We will no doubt see an even greater reliance on internet communication than ever before.

Jason Pero owns and manages a portfolio of apartments in Erie Pennsylvania. He's a dominant player in the market and he favors secondary and tertiary markets. Today was a fascinating discussion on another perspective of multi-family investing. You can reach Jason at perorealestate.com.

Jeff Love is a real estate lawyer with Gibbs Giden in Southern California. This is one of the most difficult environments for real estate investors in recent years. Our conversation centered around how to form strong partnerships. You can reach Jeff at [email protected]

We are in an unprecedented situation economically. Because of that, we might conclude that there is no playbook for dealing with a crisis of this type. The question is, can we learn anything from the handling of past economic downturns and is there anything that we can apply from that past experience? I sat in on a conference call with the senior leadership from real estate firm Marcus and Millichap late last week that attempts to address this question. Of course we are all in uncharted territory, so it’s impossible for anyone to say they have all the answers. Clearly if any did make such a claim, they’d be delusional. 2008-2010 saw a contraction of the economy of 4% over an 18 month period. This time around we’re seeing a 29% contraction in the economy in a matter of a few weeks. This number could degrade further as the impact of the health crisis deepens. Now we have a relatively healthy financial system compared with 2007. Companies are highly leveraged, but corporate balance sheets have been pretty strong compared with history. If we compare this current situation to 2007, the banks only had $44B in reserves in 2007. Today the banks are sitting on $1.7 T in reserves. They were vastly undercapitalized in 2007. Back in 2007, household debt was at 100% of GDP. Today, household debt is at 74% of GDP. Back in 2007, the economic damage was caused by major cracks in the financial system, whereas today it’s being caused by a health crisis. The concern of course is primarily for the health and wellbeing of the population. The secondary concern is on the economic damage potentially spilling over, causing massive loss of jobs, large scale corporate bankruptcies, and that in turn could destabilize the global financial system. The news media today are portraying the economic numbers with a combination of surprise, shock and horror. That’s partly their job to sensationalize the outcomes. But really there’s not a lot of surprise to me that the lockdown is damaging to the economy. The folks at Marcus and Millichap created an economic model that uses a number of baseline expectations. They based their model on the folks at Moody’s Analytics. Frankly, what the folks at Marcus and Millichap have presented seems to me to be a nearly best case scenario. Yes, the US banks are much better capitalized. The US banks reserves have never been stronger. Simon Black and Peter Schiff had a conversation about the state of our global debt situation. That discussion centered on the massive amount of debt that is being created, and the lack of equity to support that debt. On a global basis, we have about $250T of debt. The banks don’t own all of that debt, but the banks are an integral part of the system and if their customers feel the pain as a result of bond defaults, the banks are not immune. The banks are only sitting on somewhere between 7.5T - 10T of Bank capital. That puts bank equity at about 3% of the global debt. If we saw a destruction of only 3% of bank’s debt, the banks would be technically 100% insolvent. The question is, would a 30% decline in GDP as the folks at Moody’s have surmised be enough to wipe out 3% of bank debt on a global basis? We are about to enter a period of economic stagnation combined with one of the most inflationary periods in the past century. We’ve seen pockets of hyper-inflation throughout history in South America in the 1980’s, most recently in Zimbabwe and Venezuela, in Weimar Germany after the Great depression, and of course in the good ol US of A during the American Revolution. The result has been the same each and every time. Every time has seen an economic collapse and a large scale destruction of savings, and a corresponding destruction of debt.

We’re one week into the month of April. Landlords across the globe have been bracing themselves for a fall in rent collections in April. After talking with a number of investors over the past several days, some preliminary numbers are coming in. I spoke with a landlord in Texas who owns about 3,000 units. Their portfolio contains a mix of both B-class and C-class properties. Overall, collections are running between 75%-78% of potential after the first week of April. The numbers are definitely down compared with a month ago. In a normal month, collections would be well into the 80’s and in many cases approaching 90% after the end of the first week of each month. There is a small difference in collection between B-class and C-class. The numbers are slightly better in the B-class properties. Management has spoken with every family. They’re seeing a large number of new leases being signed, even in this environment. Some markets like Houston and San Antonio have a high annual turnover rate. The landlords I spoke with are seeing higher than expected tenant retention. That means, tenants that had previously given 60 days notice to vacate have changed their mind and signed a new lease. The National Multifamily Housing Council (NMHC) found a 12-percentage point decrease in the share of apartment households that paid rent through April 5, in the first review of the effect of the COVID-19 outbreak on rent payments. The Tracker found 69 percent of households had paid their rent by April 5; this compares to 81 percent that had paid by March 5, 2020, and 82 percent that had paid by the same time last year. The NMHC data takes data from several property management sources including realpage, Yardi, Entrata, Resman and MRI. There is a belief, propagated by many in the tenant advocacy groups that tenants are no longer required to pay their rent. They point to the moratorium on evictions that have been publicized. The fact is, there are several levels of government involved which results in a patchwork of regulations. There can be rules imposed at the federal level, the state or provincial level, or at the local level. In some cases, there may be more than one regulation providing conflicting rules. Understanding which rule takes precedence will require that you get local legal advice in your home market. For example in the US, the federal disaster relief CARES Act, included a 120-day moratorium on evictions, late fees and other penalties, starting on March 27, the date the legislation was signed.  This moratorium  applies to all properties with a federally insured mortgage (Fannie Mae, Freddie Mac, FHA, HUD, VA) and properties participating in a covered housing program, such as the Section 8 voucher program, rural housing voucher program, the Low-Income Housing Tax Credit. Covered property owners also may evict or charge late fees to any resident. This moratorium applies to ANY resident who fails to pay their rent, not just those whose incomes have been disrupted by COVID-19.  Unfortunately, the way it is written, that currently means the moratorium also applies to residents who simply choose not to pay their rent On the commercial side, we’re seeing a very real problem with collections. It depends highly on whether the business has been forced to close its doors. We have some businesses that are unable to perform their business online. Their revenue has gone to zero. Our commercial rent collections are currently running at 50% of leased space. We expect that number might drop even lower in the coming months.  Overall, the impact to residential rents seems to be less than many had feared. It’s also reasonable to expect that the rent collections will be lower in May than in April. As you think about that, keep your lines of communication open with your tenants.

On today’s show, we’re talking about what you can do if you have a short term rental? Short term rentals, like hotels, and most of the hospitality industry are suffering deeply in this era of social isolation. You might be used to a high nightly rate, similar to what hotels are accustomed to getting. On average, this revenue stream is higher than the traditional monthly unfurnished lease. Today, very few people are traveling to take vacations. Only essential travel is being permitted. That means that unless you have a medical reason for travel, or perhaps repatriation to your home country, there is no reason to travel. Upon return from outside the country, all citizens must undergo a mandatory 14 day quarantine. A quarantine in the same home together with others who have not traveled defeats the purpose. Here’s the problem. The hotels are closed. Many communities have instituted rules that restrict short term rentals to only happening in owner occupied properties. For example, you might have a spare bedroom, or maybe an inlaw suite. Where would someone who must quarantine stay? Where would someone who has potentially been exposed to Covid-19 stay? Locally, health care workers who are on the front line of the Covid-19 pandemic need a place to call home temporarily, without putting their families at risk. To that end, the folks at AirBnB are looking to help provide accommodations for health care workers who need a temporary place to stay. They have agreed to waive their fees for the first 100,000 bookings that match health care workers with a place to stay. Hosts can put their homes into the program, either a full price, at a reduced price, and in many cases for free. The thinking is that any revenue is better than the alternative. The people at AirBnb have put together a comprehensive cleaning checklist for your cleaning staff. They’ve also assembled a recommended list of amenities that might be difficult for guests to source during this time of social lockdown. This includes all the basics that someone might need for daily living. There needs to be enough towels, linens, pillows, for each guest. The kitchen needs to be properly equipped with plates and glasses, cookware; everything you might need for cooking should be on hand. Make sure there is ample supply of paper products. When it comes to cleaning, make sure your guests know about your enhanced cleaning routine. Guests will want to know about all of the additional steps you’re taking to reduce the spread of infection. So it’s a good idea to mention your enhanced cleaning routine in your listing description. Now is not the time to be trying to squeeze every last dollar out of every booking. It’s the time to get anyone to stay at your property, even at a reduced rent to try and cover your expenses. Another use of vacation homes is to protect more vulnerable family members. Let’s say that you have a family member working at a grocery store. They’re interacting with the public on a daily basis. They’re definitely at higher risk of coming into contact with the disease by virtue of being exposed to more people during the pandemic. Let’s say you have someone else in the home who is elderly, or perhaps immune compromised, you want to make sure that the vulnerable family member and the at-risk family member don’t cross paths during this pandemic. Isolating vulnerable family members in a second location can be a very practical way of protecting them. All of these uses for Short Term Rentals can fulfill very real needs during this time of social need.

Folks, I’m an optimist. Those who know me would classify me as a solid optimist. But in the past few days, there has been a deluge of news that, quite frankly is heavily biased toward the negative. Let me be clear, I’m not here to propagate fear. But I think you ought to know what is possibly in our immediate future. Armed with that information, you can take steps to protect yourself and your family. So here we go. Over the past several days, the folks at Moody’s Analytics who provide the bond ratings for much of the debt that is issued in the world have been performing a lot of modelling and analysis on the current market situation. The latest projection from Moody’s is that if the shutdown of the economy persists another two months, the fall in gross domestic product is estimated at 75%. That would be the largest drop in economic output in global history. All of it having occurred in less than three months. The impact of the shutdown is coming into focus with each passing day. So far, supply chains for food remain largely intact, but this is unlikely to last. We know for example that Vietnam had banned the export of rice. That country is one of the top three producers of rice in the world. The US no longer maintains a grain reserve. You can expect that there will be rice shortages in the west later this year. Much of our food harvesting in Canada and the US is performed by migrant labor, much of it coming from Latin America. Some estimates put the number of agricultural migrant workers in the US at about 3 million people. In an era of social isolation and international travel restrictions, what will happen to food production? This isn’t just an issue in one country. Covid-19 is a global pandemic. On Sunday evening, the folks at Wells Fargo announced that the loan window had closed for its customers wanting to apply for the SBA Paycheck Protection Program, only a day after it opened. The bank said that it had exhausted the $10B it had capacity to lend for the SBA PPP. Now I have no doubt that the government will realize that it needs to do much more than it has so far. In fact the Federal Reserve announced on Monday that they were going to facilitate more lending to small businesses through the SBA program. A massive decline in economic output on the scale of 30-75% will require the government to step in and replace that money in some fashion. If cash runs out in households across globe, and commerce becomes inefficient or impossible, we can only expect that a bartering system will eventually take over and a brand new underground economy will flourish. But even before that happens I expect that we will start to see social unrest as people become desperate. Governments have been slow to react to this pandemic. Here too, they are way behind the curve. Two months of payroll help for small businesses is not going to be enough. It’s not even close. This evening, my own city extended its official state of emergency until the end of June. That’s a full 3.5 months. Those of you who know me, know that I’m someone who has a high degree of personal initiative. I don’t wait for permission to do the right thing. This year is going to be a test of emotional fortitude for billions of people around the world. I’m going to be taking additional steps to prepare for a deeper economic stress. I can say with all honesty that I don’t know exactly what that’s going to be. But it will be something. I told my wife tonight that we were going to be alright. We both acknowledged that this period is stressful. We are going to be alright for three reasons. We’re in better financial shape than the bulk of the population. We’re generous and will help others during this time of difficulty. We have each other.

On today’s show we are talking about why our governments policies in the aftermath of 2008 is making this economic downturn so much more painful than it needs to be. This all falls into the category of a self inflicted wound. I’m going to share some data with you from the federal reserve bank of St. Louis. But before I do let’s talk about the different types of expenses that a business or individuals can incur. Broadly speaking, there are two types of expenses: fixed costs and variable costs. If my business is a bakery, then an ingredient like flour is a variable cost. A fixed cost would be something like rent or a loan payment. Irrespective of the number of loafs of bread, those costs don’t change. The cost of labour is also a fixed expense in the short term. Yes, you can reduce the size of your workforce, but that comes at a price that goes beyond just the cost of paying severance. There is a human, social and emotional price to be paid for both employers and employees. The problem with debt is that it keeps accumulating with the passage of time. Some debt that is government backed can be deferred through government intervention. But most commercial debt is not government backed. Large commercial projects are funded by insurance companies, but commercial lenders who have issued commercial mortgage backed securities that are sold in the bond market. A bank that is regulated by the federal government can implement temporary rules based on changes in legislation. But a bond that is held by private investors has no provision to implement a forbearance agreement. There is no mechanism to provide a 90 day payment holiday. Debt involves bringing future money into the present. That only makes sense if you’re going to have more money in the future, measured in the same dollars so that inflation doesn’t skew the picture and accidentally make the picture look different than it really is. What you find is that our nominal gross domestic product before inflation adjustment has been growing at about 4.5% over the past number of years. The real GDP number, adjusted for inflation is about 2%. But the growth of debt across the United States has been growing at about 9% s year over the same time period. When the growth of those two numbers diverge, you can never catch up. This will eventually blow up. We had the opportunity for debt to implode in 2008. Governments elected not to allow that to happen by issuing even more debt. It seems that since debt is the problem, then more debt is going to be the solution. Unless the financial system totally collapses this time around, we’re going to be issuing more debt. The only question is who is going to carry that debt on their balance sheet. Will it be individuals, businesses, or the government? We have a global medical condition and the goal is not to harm the economy, but to put the economy into a medically induced coma. The question is, how do we come out of the economic coma? Does the economy bounce back? Does it take years to limp back to health? The path to economic recovery depends on how governments choose to respond to the economic damage. You could give the money to the company that employs the people on the condition that they keep people employed. That way, the employees are never separated from the company they work for. The other approach is to pay people unemployment benefits. But as soon as employees are separated from their employers, the path to economic recovery requires people to be re-hired. That’s a higher barrier than simply reopening the doors. This is the time for you to get in touch with your elected officials and educate them on how to structure the bailout so as to enable the fastest restart of the economy. We already have tens of millions of people out of work in the past two weeks. It may be too late already.

Chris Prefontaine is a repeat guest on the show. His no bank strategy is zero risk and very appropriate for a down market. You can learn more from SmartRealEstateCoach.com Fascinating conversation. You won't want to miss this one.

Billy Keels is a US Real Estate Investor, living in Barcelona Spain. On today's show he gives a first hand, boots on the ground perspective of what's happening with the Covid-19 outbreak in one of Europe's hot spots of the outbreak. 

Today is another AMA episode that is Ask Me Anything. I’m not going to attribute this question to any one listener because I've had several people reach out to me and ask the same question. The question is, “Do I think the stock market has hit bottom, or is there more downside risk?”

As real estate investors we all have projects at various phases in the pipeline. Projects that are completed, those that are in construction, and those that are still under contract. The impact of the current global circumstance on each of these will be different. It’s clear that the scope of the economic impact is going to extend beyond a few months. Governments are only now starting to come to terms with this stark reality and setting more realistic expectations with the general public. For example, the City of Toronto told its residents to expect another 12 weeks of lockdown. At this stage we are focusing on only two things. Protecting our investors and ensuring that our existing projects remain healthy Ensuring that our family remains safe and our household well supplied for the long haul. For many of us, the focus has shifted to the basics of human living. That means making sure you are maintaining focus on keeping your family safe. Trips to the grocery store that in December were taken for granted, now are a process involving risk and immediate detox as soon as you leave the store. Nearly nothing is as it was. We have responsibilities to our investors, to our stakeholders, to our partners and to our families. You response to the current market conditions will very widely depending on your circumstance. If you are a landlord, you’re concerned with whether tenants will pay rent on the first of the month. Many jurisdictions have put a moratorium on evictions which creates the incentive in many people’s minds that they no longer need to pay rent. Even some tenants who are receiving unemployment benefits may choose to capitalize on the moratorium on evictions and not pay their rent. Our vacation rental business in the Rockie Mountains is currently 100% vacant. Our lender has offered a 3 month mortgage payment holiday. We have also brought additional capital into the business to further protect the business from possible collapse. At this stage we have about 7 months of cash reserves. That may not be enough and we may have to do even more to ultimately protect the business and our investors capital. So far today we had are down about $6,000 in retail rent collections compared with last month, but we don’t have a full report. We’re completely sympathetic to the plight of businesses that have been forced to close due to the pandemic. The fact is, very few retail clients will pay rent. This will become a huge issue for commercial landlords in the coming months. Eventually this will cascade and become a huge issue for commercial lenders. Banks are getting a bailout package, but many commercial buildings have non-bank lenders including private lenders, insurance companies, and commercial mortgage backed security lenders. Deal sponsors who have tried to close deals in the past two weeks have reported that lenders have pulled out in some cases. In other cases, they’ve changed the terms of the deal and asked for substantial additional cash reserves. One investor I spoke with yesterday had a deal fall apart when the lender required and additional $750,000 in capital at the closing table. These stories are becoming routine. If you have a closing coming up, now is the time to seek extensions from the other side. You can expect that there will be delays and that the delays will be extensive. These negotiations require a recognition by the parties that a third party that is not part of the transaction is the cause of the delay. Then there is the entire question of what valuations will look like when the market emerges from this pandemic. I expect that many more deals will get canceled or renegotiated. For the time being, in our business we’re focusing on execution of projects, protecting our projects and by extension our investors, and taking care of our families.

The Covid-19 outbreak has caused major upheaval in the lives of hundreds of millions of people. Things that seemed important only a few weeks ago have faded into the background. That massive dislocation has caused many to re-evaluate both the content and the context of their lives. Some people will re-evaluate their lives based on their own initiative. For many, that re-evaluation won’t happen until it’s forced upon them. Perhaps Covid-19 will be that forcing function, even if you don’t have the misfortune of contracting the disease, the disruption caused by it could be enough to cause a reset. The silver lining could be re-evaluating your life. This month’s book is “Designing Your Life: How to Build a Well Lived Joyful Life” by Bill Burnett and Dave Evans. Nothing could be more timely than re-evaluating and re-designing your life. Since life isn’t normal now, why would you want things to go back to normal. I actually don’t want things to go back to normal. I want my life to move forward so that what emerges from this dislocation in history is better than it was before. I fancy myself a designer. I used to design microchips. Then I designed systems that would process millions of phone calls per hour. I designed hardware systems. These days I’m designing subdivisions, and buildings, and apartments. Of course this is a team effort involving architects and engineers of many disciplines. Designers love problems. Every single item that you find in your house was the result of some designer somewhere encountering a problem and coming up with a solution. That’s why you have running water. That’s why you have a dishwasher and a toaster and a chair. These things would not exist if there were no problems. They were only created in response to a problem in each single case. So if you’re going to design your life, you absolutely need problems. Lord knows, there seems to be no shortage of problems at the moment. The book is based on a design methodology that has been taught at Stanford University for over 50 years. Design thinking starts with curiosity. Often times people are working on solving the wrong problems. So perhaps a re-frame of the question of the problem can get you unstuck. Connecting the dots to create a meaningful life involves getting connecting who you are, what you believe, and what you do. When these three are connected together, you will experience a more meaningful life. But if you’re never asking yourself the questions, you won’t get clarity. More importantly, life isn’t a destination, but a journey. If you spend your entire life chasing an elusive destination, then you will have missed it. You can’t solve a problem, you’re not willing to have. If you’re not willing to accept the problem, then it’s not really a problem and it’s merely a circumstance. It’s what you choose in life that makes you happy. Designing this requires evaluating several alternate futures. The obvious first choice is to take your current path that you’re on and simply making it better If your current reality was uprooted and you needed to do a plan B, what would that be? Finally, if you had no constraints and could design your wild-card plan, would that be? Things that come up on the other plans were items that were part of the past ideas that got lost along the way. By creating three alternative life paths you will generate enough ideas to figure out where you want to go next. Prototype your life. That is try it on for size so that you will know at an emotional level if the choice works for you. Choose well. That doesn’t mean making the best, choice, but it means making the choice in a way that you’re going to let go of the other alternatives and not second guess yourself. The book design your life might be the best thing you can immerse yourself in right now when your life has been disrupted.

The world is about to embark upon the largest economic experiment in history. They have no choice really. In a Formula 1 race, the yellow flag comes out when there is a problem on the track and the race is temporarily suspended. The cars continue to circle around the track. The speed is reduced to a safe speed and its impossible to make forward progress. Yes, you’re still burning fuel, but the race is temporarily suspended. Never before have governments tried to put swaths of their economies in an induced coma and awaken them gradually. There is no yellow flag built into our economic system. One of the biggest impediments to the yellow flag is debt. Debt service appears as a fixed cost regardless of the level of business underway. But of course the debt was procured with an assumed underlying level of business. There was never an assumption that business would stop, or in fact that loan payments could stop on a large scale. On today’s show we’re talking about whether you should take advantage of the loan payment holiday that some lenders may offer. The fact is, we don’t know the scope of the Covid-19 problem. We don’t know if this period of social isolation is going to last weeks, months, or years. We already know that many countries have been shut down for If a lender offers you a payment holiday, or perhaps an interest holiday, you will sign a document called a forbearance agreement. A mortgage forbearance agreement is an agreement made between a mortgage lender and delinquent borrower in which the lender agrees not to exercise its legal right to foreclose on a mortgage and the borrower agrees to a plan that will bring the loan current. The thing to remember is that we are only a few weeks into a pandemic of unknown scope and duration. If you approach your lender now, the banks only have the tools that have been made available to them by the government and the central bank. Much of the economic stimulus was based on the assumption of a short term situation. Let’s put this in perspective. The US is spending $2T in stimulus, which is a huge amount of money. A report in the Wall Street Journal today suggests that we are expecting to see a contraction of about 30% in GDP in the second quarter. The stimulus would cut that reduction in half, or about a 17% reduction in GDP. It’s highly likely that additional stimulus programs will be forthcoming as the breadth of the damage becomes visible. While I haven’t seen the language of the forbearance agreements directly, what I’m hearing from investors I’ve spoken with is that the terms of the forbearance agreements are pretty draconian. As more stimulus becomes available in the coming weeks, I expect that the terms of the forbearance agreements will become more generous. If you have the financial strength to survive a few more weeks, you may get a more generous relief package and a more lenient forbearance agreement, either in terms of terms or duration. This is a fast moving situation. There are other programs that may apply to your business that you might consider first. For example, there are forgivable loans that are available in the US through the Small Business Administration to assist with payroll. In Canada, there are programs available through the Business Development Bank of Canada. In the UK, Employers can claim for 80% of furloughed employees’ (employees on a leave of absence) usual monthly wage costs, up to £2,500 a month. My recommendation is to look at some of those other programs first. A lender is likely to sign a single forbearance agreement, but not two or three forbearance agreements if this economic downturn gets extended beyond the initial number of weeks that governments around the world have been projecting.

On today’s show we’re talking about a French term that is often appearing in contracts, and insurance agreements. That term is "Force Majeure".  As of today’s show, the World Health Organization has declared the novel coronavirus (COVID-19) a pandemic; states of emergency have been declared in multiple states and provinces all over the world. There is no doubt that COVID-19 has and will continue to have, an adverse impact on the global economy. With disruption to supply chains, international travel, and business operations, many individuals and businesses may be unable to fulfil their existing contractual obligations. On today’s show we’re going to take a deeper look at Force Majeure and whether it could, or perhaps already has impacted you. Force Majeure clauses are generally included in contracts to account for circumstances where a party cannot perform the contract due to circumstances beyond its control. A Force Majeure clause typically operates to absolve the non-performing party of liability for its failure to meet contractual obligations as a result of an extenuating circumstance, but its precise effect will depend on the language of the provision in the contract. Some contracts treat Force Majeure as an “Act of God”. These events would then trigger their operation of that contract’s clause. Common cases include hurricanes and earthquakes. So the question is whether Covid-19 would meet the definition. Some contracts spell out a laundry list of events that fall within the scope a circumstance beyond the control of the parties, such as acts of terrorism, war, labour disputes, strikes, or adverse weather conditions. However, given the current state of affairs, it is likely that a court will find that COVID-19 is an unforeseeable event outside the control of either party. Whether COVID-19 makes it impossible for a party to fulfill their contractual obligations is a different matter. The obligations cannot simply be more difficult to fulfill; they must be impossible. The determination of these questions will be both fact- and contract-specific. One of the most common contracts that developers and investors encounter is the AIA-101 contract. The AIA contracts are industry standard contracts that are widely accepted across the industry and are used by many general contractors. The AIA-101 has a second document called the AIA-201. This document contains the general conditions that apply to the AIA-101 contract. The AIA-201 has section 8.3 which deals with the topic of delays. This section deals with a lengthy list of the usual causes of delay like labor disputes, fire, adverse weather and so on. If none of those possible causes of delay have triggered an allowable delay, then there is a fifth item “by other reasonable causes that the Contractor asserts, and the Architect determines, justify delay, then the Contract Time shall be extended for such reasonable time as the Architect may determine.” This is an example of a contract that has a force majeure clause. The one place I expected to find a force majeure clause was the standard agreement of purchase and sale. A review of several states and provinces, could not able to find a force majeure clause in any of the standard agreements. This has given rise to what many realtors are not calling a Covid clause. For new contracts being written in the current environment, many buyers are including a provision which would allow them not to close if the Covid-19 conditions make it impossible to close. The wording I’ve seen for one such clause was extremely broad. It basically said that if the buyer didn’t want to close, they could blame the virus and be off the hook. If you have a contract that you’re negotiating, or perhaps a contract that you’ve already signed, I recommend that you go read the Force Majeure language in it.

Fabio Lopez comes to us live from Milan Italy, the epicenter of the Covid-19 outbreak in Europe. Italy's hospital system has been overwhelmed. Fabio's description of life under quarantine is much more restrictive than here in North America. 

Alan Schnur went through a life changing event that most of us can't imagine. He was working on the 101'st floor of the World Trade Center on September 10, 2001. This is a powerful story of transformation and of intentional growth. Many lessons in today's conversation. You can reach out to Alan at alanschnur.com.

On today’s show we’re talking about a topic that’s on every landlord’s mind. Which tenants will pay their rent on April 1? Part of anticipating the answer to that question is understanding who is still at work, and who has been laid off. There no question that this economic downturn will not affect everyone equally. If there’s a physical component to your work, chances are good that you’re going to be impacted. This means almost anyone in the consumer retail world, unless you’ve been deemed an essential service. Well a new report issued today by the folks at apartmentlist.com attempts to model and quantify the demographics. In this new “quarantine economy,” working from home is the most impactful thing workers can do to ensure job stability. But while remote work is becoming more popular over time, access is not universal. A much larger share of high-income earners have this luxury; many lower-wage employees do not. The quarantine economy creates four categories of workers, each facing varying levels of economic risk. The greatest risk is felt by those whose jobs a) are considered “non-essential” by local shelter-in-place laws and b) cannot be fulfilled at home. This includes many service sector employees, retail workers, and early educators. They tend to be lower-income, face higher housing cost burden, and have lower access to health insurance if they get sick. Regionally, high-risk workers comprise a larger share of the workforce in cities rooted in the tourism and service industries, particularly Las Vegas, Miami, and Orlando. Places with a high concentration of knowledge economy jobs and/or essential blue-collar industries will fare better, including metros like San Jose, Detroit, and Boston. Federal and state governments are rushing to pass legislation that will protect public health while reinvigorating the economy. In the meantime, job and housing insecurity will disproportionately affect millions of American workers in lower socioeconomic strata. There are four categories. Secure jobs are the least threatened. They are not only essential to the economy but also flexible in their working arrangements. These workers are likely to retain their usual income while also practicing social distancing that will keep themselves and their families at low risk of coronavirus exposure. These are folks like financial analysts, accountants, and those who operate the community infrastructure like power plants and water treatment plants. Low-Risk jobs provide shelter from the coronavirus, but carry some risk of economic uncertainty. These workers can easily transition to a remote environment but their paychecks may be in jeopardy if demand for their skills weakens in an economic downturn. These are folks like software developers, Exposed jobs are those that are deemed essential, but must be done in person. These jobs generally offer economic stability during the crisis, but may increase individual exposure to health risks. These workers cannot shelter-in-place while working because the nature of their job requires leaving home and engaging in some level of personal contact. The list of essential services varies from one state or province to the next. Where I live, the list of essential services is about 70 items long. High-Risk jobs are the most economically at-risk in the quarantine economy. These workers are deemed “non-essential” by federal guidelines and furthermore do not have the option to work from home. Heavily concentrated in the service sector, the incomes of many high-risk workers are already in jeopardy today. This includes restaurant wait staff, hair stylists, tour guides, flight attendants and hotel staff.

History doesn’t exactly repeat itself. But it does rhyme. The year was 1775. The government in the British colony in North America was out of money to pay its soldiers. The American Revolution was well underway and they needed cash to to help fund the Revolutionary War. Continentals quickly lost value, partly because they were not backed by a physical asset like gold or silver, but also due to the fact that too many bills were printed. Here we are in 2020. Ignorance of history and economic ignorance is spreading through the country faster than the Covid-19 virus. So much of what you’re hearing in the mainstream media is just plain wrong. The problem is that much of the economic ignorance sits in our houses of Parliament, and in our legislative bodies. We have Senator Mike Gianaris, deputy leader of the Senate in NY State, advocating a 90 day suspension of residential and commercial rent for tenants and small businesses impacted by the coronavirus pandemic. How will the building owners survive for 90 days? How will this modern day Robin Hood shower cash upon the tenants, and ultimately protect the banking system from collapsing? Not to worry, the Evictions in the state have been frozen by a moratorium issued by the Unified Court System and Governor Cuomo has already ordered a 90-day mortgage moratorium. But wait a minute. Rents pay for much more than just the mortgage on a property. Where will the money to pay the property managers come from? Where will the funds for maintenance of the properties come from? I guess the Federal Government will helicopter more money into those businesses. Tuesday the Dow went up nearly 11% in the largest single day gain since 1933. What was the driver for that? The news that the Federal Reserve would buy an unlimited number of US Treasuries. That’s right, there is no limit. Republicans and Democrats reached a deal on a 2 trillion dollar funding package. This fiscal stimulus will be used to help businesses and individuals affected by the outbreak. The mechanism for getting money into people’s hands is not clear yet. What will constitute a loan? What will be an outright grant? It’s tempting to blame the bursting of a balloon on the pin. But if the balloon wasn’t over-inflated, the pin would have no effect. Now we’re trying to pump more air into the balloon after the balloon has burst. The last time the balloon burst was in 2008. But the Fed doubled down on printing money. The pin in this case is Covid-19. The worst thing that can happen to someone’s money isn’t the loss of a bit on their investments. The worst thing is hyper-inflation. We’ve seen it through-out history. One of the founding principles of the United States of America, enshrined in the constitution was the notion of We saw it in the Weimar Republic in Germany from 1919 until 1933. Germany was licking its wounds after the defeat in the first world war. The country was focused on reconstruction and it lacked the resources to fund the reconstruction. When the printing of money happens with complete abandon, the problems multiply. It caused the collapse of the Roman Empire. The problem with printing money is that it is inflationary. The deficits are rationalized as temporary. They will be made up during the boom times. Little by little the government becomes addicted to the temptation to perform a politically expedient move and kick the can down the road. Each hit of cash feels great. It’s like a hit of cocaine to the cocaine addict. The effect of inflation is to wipe out purchasing power for those on fixed income. It has the effect of wiping our savings, and it has the effect of wiping out debt. It’s a wholesale devaluation of the currency. While it’s happening, the short term impact is positive. Asset prices increase. Remember, the best performing stock market in the past decade was Venezuela, that is, up until their economy collapsed.

Today’s show is the story of a conversation that happened in our household and probably mirrors conversations that are happening all over the world and maybe in your household. The messages of social isolation have been clear for weeks. We are in the middle of an exponential growth in the number of cases of the disease, the number of critical cases, and the number of deaths. When you know the equation, it’s simple math to predict the future. We made the decision to keep isolated within our household and to minimize trips outside the house. My wife has transitioned all her client appointments to video conference calls. I’ve cancelled all my travel and we have made minimal trips outside the house for critical supplies. After dinner on Sunday night my son announced that he was going out for a walk. That seemed  perfectly OK. But after about 45 minutes he wasn’t home and we saw that he had gone for a walk in his car. A quick phone call discovered that he was out for a walk with a girl. He had all kinds of justifications. The girl had been in isolation for weeks, and he had been in isolation and they were walking outdoors in nature, and he was tired of being cooped up in the house and needed to get out. At this stage we have examples of community transmission in our city. The public health lines are getting jammed with thousands of calls. The testing centres remained open until they ran out of tests. It’s clear that we don’t know, and probably will never know who does and doesn’t get the disease. The public health officials are saying at this stage not to call. If you have symptoms, stay home. If you are really sick and are having trouble breathing, then call your doctor to get an over the phone assessment. Most clinics have closed their doors and are only admitting patients after a phone screening. The result was a difficult conversation with my son. The isolation practice in our house can’t be a leaky bucket. Either we’re in isolation or we’re not. Right now, and for the foreseeable future we’re choosing isolation. My son shared that he takes the current situation seriously and that he’s being ridiculed by many of his peers as a result. I’m seeing many examples on social media of people who are not taking this seriously. A friend of mine in Las Vegas posted a large group photo. One last group shot before we go into isolation was the caption. I was dismayed to see the photo. They’re not bad people. They are just a little further behind in their adjustment to the current reality. As with any change, there will be a spectrum of adjustment reactions. There will be those who accept the new reality almost instantly. They probably represent the usually early adopter percentage of the population. Then you have those who are easily convinced. After that you have the mass of the population who will follow when ordered by government to act a certain way. Finally there are those who will be dragged kicking and screaming every step of the way. We now know of people in the community who we believe have contracted the disease. The numbers are still small compared with the global situation. In every case, they didn’t think they were taking a risk. But here’s the problem, most of those who are carriers are not exhibiting any symptoms. They are completely asymptomatic and they are infectious, silently spreading the disease to everyone they come in contact with. I believe that people are basically good with good intentions. They also believe that the risks are low when less than 0.1% of the population have been diagnosed. But many of these same people will go out and buy lottery tickets where the chances of winning are less than one in a million. My son pledged to uphold the rules of our house. I truly believe that he meant no harm, but in spite of this he did put our home at risk.

This question is from Dan in Alberta Canada I just put an apartment under contract and working through the DD. It’s a 32 unit 4 storey for $50,000/door in a town with heavy reliance on the oil industry. At present the gross monthly revenues are 17k. The property was mismanaged and vacancy is 45%. The rest of the market has about 20% vacancy. Rents are now 20% less than the present market rents. In it’s peak days, gross rents were 60k. I’m having mixed thoughts In these uncertain times... What are you suggesting? 1. Wait and see 2. Buy during these fearful times, as deals are best. Dan this is a great question. On the surface, when you look retrospectively, it looks like the property might be a deal. The purchase price is well below construction cost, and the market has delivered stronger performance at this property in the past. That’s all in the rear view mirror. We would both agree that driving a car using the rear view mirror alone for guidance is a recipe for disaster. We are about to embark upon one of the largest economic slowdowns in our lifetime. The impact of this is unknown in many respects. We don’t know what the credit markets will look like in 15 days or 30 days, let alone six months. You mentioned that the local economy is driven by the oil industry. The oil industry is in the middle of a price war and the community that depends on oil production for its lifeblood will very quickly experience even greater reduction in workforce if prices remain anywhere near current levels. We’ve experienced a massive drop in global oil demand over the past two weeks which has caused prices to drop as stronger players aim to protect their income streams at the expense of weaker players. At a certain point with prices near levels we haven’t seen in over 20 years, these companies are losing money. The price of oil varies widely based on the cost of transportation. In places like Alberta where the transportation costs are high due to the lack of pipeline infrastructure, oil prices hit a low $7.23. Let’s let that number sink in for a moment. Even the OPEC price of $27.31 is at extremely low levels we haven’t seen in decades. So much of the global oil industry has been financed with debt. Many companies will end up defaulting on their debt and the stronger players hope that will result in a drop in supply. If you don’t have an influx of population into the market, it’s hard to see how you’re going to implement a turnaround on this property in the current environment. Making investment decisions requires a measure of certainty in the market conditions. There’s always a degree of risk in any market. But today we have so many risks that it’s virtually impossible to quantify the impact of each of the individually, and then in combination, it’s well above my analytic ability. The key to answering this question. How long will this economic disruption last? The true answer is that nobody knows. There have been a few promising announcements that chloroquine, a 70 year old anti-malaria medication has been shown to be effective in treating patients with Covid-19. If that’s the case, and the clinical trials prove positive, we might be looking at a shorter period of economic disruption. That depends on whether this drug, or perhaps another, or a combination of drugs proves effective. The chances are high that this situation will precipitate a credit crisis. Government backed loans only represent a small proportion of all lending activity. If there is a crisis in the private lending market, then we can expect a fall in asset prices just like we saw in 2008. This particular building may be a deal, but I personally would advise you to be patient and continue to monitor the situation. You might find an even better deal in the weeks and months to come.

On today’s show we’re talking about preparation for the next several weeks. It’s stunning to me that I still talk to people on a daily basis who have made zero steps to prepare for a possible period of complete social isolation. Many who I spoke with in the past week had less than a week of supply in their pantry. We’ve starting preparing for the possibility of a social lockdown over a month ago. As of now, we have about 8 weeks of supplies such that we can remain isolated for 60 days without going shopping if we need to. We are still going out to the grocery every few days and making sure we keep the pantry topped up. We’re also mindful that as the disease spreads through the community, so too does the risk of going out even for a trip to the grocery store. Sooner is lower risk than later. Our latest visit to the grocery shows that the shops are empty of many essentials at this point. There is no flour, very little in the way of paper products like toilet paper, no rice, no coconut milk, no tofu.  We made sure to have a large supply of canned items and dried goods that have a long shelf life. Canned goods have the benefit of being easy to trade if there’s something you need that someone else has. In our family, we have a Vegan diet which means no meat and no dairy. At some point if we face a lockdown situation we may have to rely upon what food we have in our house completely for an extended period of time. We will be relying on beans as a primary source of protein. So we have a lot of chick peas, lentils and beans that we can use in preparing meals. We also purchased a fair bit of frozen vegetables. This is not something that we would normally consume, but if we are not going out, they will come in handy in meal preparation. We have a healthy supply of spices. When we speak about food tasting good, that has more to do with the seasoning of the food than the taste of the underlying ingredients. We recognize that part of our own emotional well-being will center around how we care for ourselves and how well we eat. We have a few meals of prepared foods that are frozen and can be quickly heated and served. We don’t have a lot of these because they take up a disproportionate amount of space in the freezer. We have dried foods like Rice, and Pasta. Some wonder how to calculate how many days of food are in their cupboard. For example, a one pound package of pasta will feed about 4 people, or about 100 grams per person if you do the math using the metric system. There are some things we have not purchased. For example, we have not bought freeze dried foods, what some people call astronaut food. It’s partly because these portions are about 4 times the cost of regular food. They have a long shelf life, but it’s far from something we would normally eat. We felt that sticking as close to real food was the best choice for our family. We have made certain assumptions about what will remain operational. For example, we expect that running water will continue to function, and that electricity will be reliable. So far we haven’t seen any cases of mass outages in the West. There is some risk. If you’re relying on your own well water for drinking water, then you should definitely stock up on drinking water. If you faced an equipment failure, it could be a long time before you got service to come and fix your pump.  We made sure we have about a two month supply of soap for the dishwasher and for the laundry. We do laundry on a regular basis, and this will be even more important if we go out for any errands. When we come back in the house from the grocery, the clothes go straight into the laundry and we go straight into the shower. If you do the math on the social isolation required to protect our healthcare system, you quickly conclude that the period of social isolation we’re talking about is not measured in weeks. It’s measured in months.

Mr. George Ross, now 92 years old was Executive Vice President in the Trump Organization and Donald's right hand man for close to 47 years. On today's show George shares his perspective on the Covid-19 outbreak after having spoken with The President earlier in the week. 

Dr. Chris Martenson has a PhD in Pathology from Duke University and is one of the founders of Peak Prosperity along with Adam Taggart. Chris was one of the first people in the West to flag Covid-19 as a major global health issue on Jan 23. Today's conversation with Chris covers the outbreak from a scientific perspective. To find out more, connect with Chris at peakprosperity.com and check out his YouTube videos on Covid-19.   

There are so many aspects to cover these days. The entire world is truly in uncharted territory. It seems almost trivial to wonder whether tenants will pay rent on April 1, and May 1 and June 1? Landlords truly don’t know how many tenants will have been laid off, and how many will simply not pay rent in anticipation of the need to conserve cash. These things may happen. We are in a moment of crisis, globally. It’s far more important to focus on staying healthy and keeping people who have existing health risks well isolated from any possible path of infection. The heartbreaking stories circulating the news services are incredible. There’s the story of a A Japanese man from Gamagori in central Japan with liver cancer and the new coronavirus wanted to enjoy a last night out before going to the hospital. He held hands with a hostess who so far hasn’t tested positive but he ended up infecting another employee at a karaoke bar and causing a national uproar. On Wednesday, he died, just two weeks after what turned out to be his last song. There’s the story of an Italian nursing home with the small town of Cremona. I’ve visited that town many times. This nursing home has 460 beds. In the past week there had been 18 deaths at this facility of patients with respiratory difficulties - symptoms associated with the coronavirus on just a single day. None of these residents had been tested and therefore none of them fall into the official Covid-19 death-toll. So far in Italy, about 8% of healthcare workers have been infected. In the United States, the Center for Disease control has advised health care workers that if they exhibit symptoms of the virus, to put on a mask and gloves and get back to work.  It’s amazing to me that there are still people out there thinking this Covid-19 thing is totally overblown. I’m seeing people lose friendships over a difference of opinion about this outbreak. It’s amazing how this is challenging some closely held beliefs for some to the point of rupturing life long friendships. I think this is because the most basic of human survival is at stake. On today’s show we’re talking about how you as landlords can open a dialog with tenants and how the government is making overtures that they plan to make direct cash payments to the population within the next month. You have an early warning that you need to take action to strengthen your balance sheet. If you have access to lines of credit, I recommend that you draw on those funds before the lines get pulled back. The White House has proposed nearly a trillion dollars in emergency funding, and up to $250 billion of that trillion dollars going directly to citizens. This spending will require an act of Congress, and details are still being worked out. The Canadian government has recalled Parliament and is expecting a bailout package for ordinary citizens that will be available in the next two to three weeks. While many programs discussed publicly have focused on employees, we have to remember that the economy has an increasing number of self employed workers. These include the entire spectrum from lawyers, doctors and dentists, to folks who drive for Uber and Lyft. None of them would qualify for traditional unemployment insurance benefits. Oh yes, that also includes real estate investors. It reminds me of a simple example where if you, as a single landlord run out of cash, you might be forced to declare bankruptcy. In that situation, you have a problem. But when tens of millions of people run out of cash, then the banks have a problem, and the government has a problem. There will be an increasing number of programs coming available. Banks will be asked to do their part to help their customers. The banks will only do so if they believe the government will backstop any financial commitments made.

Despite all the public warnings from governments and health experts all over the world, there are still people out there thinking that the SARS Cove-2, also known as Covid 19, the entire situation is being over-blown, that this is no more dangerous than the flu. The UK government was taking a very passive role up until a couple of days ago when they made a dramatic shift in strategy. The clearly saw some new information, some studies that scared the heck out of them and decided a change was appropriate. Think about it, Italy had 4,200 new cases and 475 deaths yesterday, and has been averaging about 350 deaths a day for several days before that. These are huge numbers. If we scaled that up to the size of the United States, we’re talking deaths of over 2,000 people a day, and many times that in intensive care. These are huge numbers. Their health care system is crumbling under the weight of the new cases coming in requiring intensive care. Clearly some action is needed to slow down the progression of the disease to protect the health care system. Governments have been telling people that they need to eliminate social interaction for the next two to three weeks. The general population can handle a few weeks. They’ve been told that they don’t need to stock up for more than just a few days. On today’s show we’re talking about the scope of the economic shutdown that we’re currently in the middle of. Many people are asking the question “How long?”. I’m wondering, is this an economic blizzard, or an economic winter? In an economic blizzard, everything grinds to a halt, the community bands together, cleans up the situation and not long after, life is back to normal. An economic winter is an entire season. It could be a deep freeze, and hopefully not an ice age. In a world of social distancing, businesses all over North America and Europe are either closed or operating with telecommuting. Some areas have allowed restaurants to remain open at 50% capacity. The mortality rate is incredibly high compared with the flu. Since we don’t have a cure, nor a treatment, social isolation is key to prevent the spread of the disease. The big question is how long. If the goal of the isolation is to completely suppress the virus and eradicate it much like we have managed to do with Polio, then it will take an extensive period of social isolation, aggressive testing and aggressive contact tracing. Only when we have a vaccine that has been proven and manufactured in quantities will we be able to resume normal social interaction. But that’s at least nine months away, even if we had a vaccine today which we don’t. The process of introducing a vaccine requires a pre-clinical trial for 90 days, followed by a limited clinical trial, followed by volume manufacturing, and then the time it takes to immunize millions of people. In mitigation, the virus is present in the population. As soon as you allow people to interact again, the rate of infection picks up where it left off and we will overwhelm the healthcare system in a matter of weeks. So here too, the period of isolation ends up being extended for quite a while. While governments have not been sharing this perspective with the general population, the mathematical model to simulate the spread of the virus through the population is no great secret. The simulation is quite straightforward. If unchecked, the virus would envelope the population in 120 days, and governments aren’t trying to prevent it from happening. They are only trying to slow it down. So let’s say they’re trying to slow it down to no more than one percent of the population gets infected in a single week. That would take 100 weeks, or nearly two years. Italy’s health care system has been crushed in a very short time period. And penetration of the population is estimated to be no more than 1%.

The airlines are critical to virtually everyone in society, including real estate investors. So today we’re talking about the airline industry. I’ve traveled extensively over the years for business and pleasure. Despite the recommendations from government to reduce travel, There are currently 90,000 passengers on cruise ships around the world whose fate is uncertain when their cruises end. Even once they’re back on land, the reality of flights home may be far different than when they boarded the ship. Most airlines have already announced massive reductions in capacity in recent days. Many international routes have been cut by 85%, in some cases 100%. Domestic routes have been cut by anywhere from 10% to 50%. Westjet flight attendants union announced that they expect layoffs of 50% of the airline’s staff in the coming weeks. So far a consortium of airlines Industry trade group Airlines for America, or A4A, have asked the US Federal government for an aid package of $50 billion. This is a combination of loans, loan guarantees, and grants. The trade group argued that roughly half of the proposed assistance—$25 billion—should come in the form of direct grants to airlines. The proposal also outlines a $25 billion program in which the Federal Reserve would purchase financial instruments from, or provide interest-free loans or loan guarantees to, the carriers. United Airlines alone estimating its revenue would be down $1.5 billion in March from a year ago. United Airlines cancelled their new pilot training program, but Air Canada is looking past the current business interruption and continuing to hire and train pilots. A4A, also proposed $8 billion in grants and guarantees for cargo carriers. U.S. airports are separately seeking $10 billion in assistance to counter forecast full-year losses already approaching $9 billion. The airports collect their revenue through landing fees that are charged to each passenger as a supplement to their airfare. This pays for the operation of the airport and the debt due on any airport improvements. In a matter of days, American Airlines managed to reach an agreement with its pilots union. These negotiations typically take months of dialog and the can gets kicked down the road many times. When this downturn ends, the airlines will need to spin up to capacity very quickly. But in order to do that, pilots need to remain current. They need to complete at least 3 landings as pilot in command in the past 90 days. They also need to remain current on their medical and any flight tests. When a pilot is qualified to fly, they are certified on a single aircraft and only that single aircraft. You’re not going to have a Airbus A320 pilot all of a sudden switch to a Boeing 787. That’s a completely different equipment rating. You can do all of this work in the simulator. The big question is how long is this disruption going to last? Like we said on yesterday’s show, is this an economic blizzard or an economic winter? Some estimates I’ve seen have suggested that if the lockdowns we are seeing in the economy are successful in slowing the spread of Covid-19, the time that will be required to limit the spread through the population will be extended. That means possibly an extended period of reduced social contact, and therefore an extended period of economic slowdown. Will the airlines undergo a substantial long term shrinkage in the industry as a result? The White House has been clear that maintaining the airline industry is a priority as a matter of national security. Some lawmakers have opposed the bailout saying that protecting workers is a priority above protecting corporations. Perhaps those elected officials don’t realize that the path to paying workers is through the companies, without which there is no employment.

On today’s show we’re talking about the challenges that many property owners will be facing during this unprecedented time in modern history. We don’t know if the Covid-19 crisis is merely a blizzard or an entire winter. Depending on the answer to that question, the extent of the economic damage can vary widely. Most people can survive an economic blizzard. Things slow down for a few days. Everyone gets their shovels out and digs out. A few days later life is back to normal. In an economic winter, a different approach is required. Today’s discussion is a microcosm of the hundreds of similar situations that are happening in industries all over the world. If you’re in the restaurant business, if you’re a taxi driver, if you’re an airline pilot or flight attendant. Hundreds of millions of people are being directly affected economically by the current outbreak. The real estate example we’re focusing on today is short term rental properties. I’m an owner of a portfolio of properties in the Rocky Mountains. A current search shows over 300 listings available for next week. Normally at this time of year, we’re running about 80%-90% occupancy. This past weekend, AirBnB changed its extenuating circumstances cancellation policy. This policy over-rides the policy that each AirBnB host lists for their properties. We have seen a flurry of cancellations over the past three days. In many of those cancellations, guests have been making false claims in order to qualify for a full refund. The AirBnB policy says: “We may be able to give you a refund or waive the cancellation penalties if you have to cancel because of an unexpected circumstance that’s out of your control. Below is a list of circumstances covered by our Extenuating Circumstances Policy. Before you cancel, check that your circumstance is included in the list below and that you can provide the required documentation.” Unexpected serious illness or injury Government-mandated obligations Transportation disruptions Travel restrictions Epidemic disease or illness In my case, my properties are not in a location that has identified any Covid-19 cases. As such, unless the guest is unable to get to the location due to, say, a flight cancellation, they would only be entitled to a 50% refund and not be entitled to a 100% refund. As an AirBnB host, we want to be sympathetic to guests who are genuinely afraid of traveling in today’s environment. I cancelled two trips to Europe and paid a 50% cancellation fee to the AirBnB host in Rome. There are three main questions that need to be answered. 1) Are we going to be unsympathetic to guests who want to cancel? 2) Has the guests false claim that the property is infected going to stigmatize the property and lead AirBnB to improperly flag the property as having a problem? 3) How will the property pay its bills in the coming weeks and months? Some people may experience travel disruptions due to flight cancellations. Clearly we are sympathetic. I would not choose to be traveling right now. At the same time, we have bills to pay, condo fees that are due and mortgage payments that are due. In our case, we have a cash reserve that will carry us for a period of time. But that cash reserve never contemplated 0% occupancy for an extended period of time. We are probably not alone in that regard. We will have to tap additional resources in order to cover the negative cash flow. A 2019 report by the JPMorgan Chase looked at 1.4 million small businesses with a business account at the bank and found 29% were unprofitable, and 47% had less than two weeks of cash liquidity. That means that nearly 76% of US small businesses could be insolvent in less than a month. You should take immediate steps right now to reduce expenses and conserve cash.

The markets woke up this morning to a new era of zero interest rates in the US, and a coordinated effort with 5 other central banks to ensure liquidity in international markets. The Federal Reserve slashed its benchmark interest rate to near zero on Sunday and said it would buy $700 billion in Treasury and mortgage-backed securities in an aggressive bid to prevent market disruptions from aggravating what is likely to be a severe slowdown from the coronavirus pandemic. The Fed’s rate-setting committee said in a statement Sunday “The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States. The Federal Reserve is prepared to use its full range of tools to support the flow of credit to households and businesses.” As we’ve talked about before, it’s not entirely clear what these moves are intended to accomplish in the broader economy. The slowdown wasn’t caused by a lack of liquidity in the market. We have an unprecedented simultaneous drop in both demand and supply due to the corona virus outbreak. It’s not like the drop in interest rates is going to stimulate me to hop on a cruise ship next week. The Federal reserve is basically allowing the banks to buy treasury bills, up to $500 billion worth. In addition, they’re going to take $200 billion in mortgage backed securities onto the Federal Reserve’s balance sheet. In his remarks, the Federal Reserve Chairman Jerome Powell said that he was seeing stresses in the market for Agency Mortgage backed securities, specifically Fannie Mae and Freddie Mac. He said this was necessary to enable refinance activity and enable buyers to continue to buy new homes. So the Fed is clearly seeing a credit crisis emerging from the economy screeching to a halt in a matter of days. The Fed also said firms could use their capital and liquidity buffers to lend, and reduced reserve requirement ratios to zero percent effective on March 26. That’s an astounding statement. Think about it, the banks are no longer required to maintain a deposit reserve. The Fed is going to print an infinite amount of money, and it’s going to allow the banks to print an infinite amount of money, backed fully by the authority of the US Federal Government. Fed said the financial institutions should feel comfortable tapping into the discount window as a tool for addressing “potential funding pressures.” In the past, banks have been hesitant to tap into the direct lines of funding because of the stigma associated with relying on the Fed for emergency funds. The Fed also reduced the interest rate for the discount window to 0.25% and these lines can be accessed for up to 90 days. We’ve seen the Federal Reserve pump over $400B into the Repo market earlier this week. Despite the aggressive move, the market’s initial response was negative. Dow futures on Sunday pointed to a decline of some 1,000 points at the Wall Street opening on Monday morning. The stock futures hit a limit which automatically stopped trading activity whenever there is a decline of 5% or more. Treasury Secretary Steven Mnuchin said his agency would advance funds to businesses so they can meet paid sick-leave requirements under a new House bill to combat the Covid 19 outbreak. He said employers will be able to use cash deposited with the IRS to pay sick-leave wages. In essence, the funds on deposit with the IRS for payroll could be used as a line of credit for paying sick leave. For businesses that wouldn’t have sufficient taxes to draw from, the Treasury would make advances to cover the costs, he said. It’s important to remember that this sounds like a loan, and the terms for repaying the loan are not at all clear. Now is the time when businesses need to be taking the necessary steps to conserve cash and reduce expenses.

On today's show we take a live look at my own website from a digital marketing perspective. Adam has some powerful insights on how content can be repurposed to create additional searchable content that can expand the digital reach. Adam can be reached at gowercrowd.com.

Cynthia Cummins is a residential realtor in San Francisco who specializes in luxury properties. Her wildly successful blog called "Real Estate Therapy" www.realestatetherapy.org has set her apart and allowed her to dominate her segment in the market. 

We are living through a moment in history where circumstances seem to be changing almost daily. With that less certainty, there’s less that you can count on. When you’re negotiating a transaction between two parties, there are three sources of uncertainty. There’s the uncertainty that I bring to the transaction for items that are within my control. There’s the uncertainty that the other party brings to the transaction through items that are in their control, and then there are factors contributed by third parties to the transaction where it’s outside the control of both parties. We’ve seen first hand, and second hand cases where investors have decided to pull back from commitments and sit on cash, choosing to do nothing for the time being. If you’re raising money in today’s environment, you have to assume that you’re going to get some investor attrition. It might not be large numbers, but you might plan on losing 25% of your investors just because of the uncertainty in the current market conditions. In my conversations with other developers, I’m aware of cases where the drop in stock market values has directly made less capital available for investors to deploy into real estate transactions. This is real and I have to tell you that raising capital just got harder in the past few weeks. For the moment, this hasn’t impacted the lending environment. But that too could change. Lenders come in all shapes and sizes. If you’re relying upon financing for a project, you may want to consider taking a more conservative approach in your negotiations. In at least one case, we’ve added a financing condition to a transaction, even though we have no indication that there are any changes to the financing commitment. We’re living in a highly interconnected world where counter party risk exists all over the place. You might have a private bridge lender who is fully on board with your project. You might have a term sheet, a good appraisal, and green lights everywhere. Then at the closing table the lender might not come through. This happened to us with a reputable bank back in December. In that case, it was a situation where the bank was missing the paperwork for a partner bank that was co-funding the deal. It took a couple of weeks to resolve and everything was good. But we had no visibility of the fact that a second lending institution was involved in the loan. This is an example of the types of complexities that exist in the financial system. This stumble was nothing more than a benign administrative error. Fast forward to today where we have a highly fluid situation that is changing from one day to the next. I believe that you should not be signing any purchase agreements without a financing condition. You might have a lender failing to perform at the closing table at which point you need additional time to secure alternate financing without putting investors monies at risk in the form of non-refundable deposits. I also believe that you should be much more conservative and unless you have the cash in hand to close, your earnest money deposit should be in trust with a lawyer, a title company a real estate brokerage, or other appropriate trustee for those funds.

On today’s show we’re talk about the Everything Bubble. Bubbles have formed throughout history and all it takes it a pin prick to burst a bubble. On today’s show we’re talking about all kinds of bubbles and how they form. The year was 1554 and tulip bulbs were sent from the Ottoman Empire to Vienna. By 1593, a botanist in the Netherlands figured out how to create a varietal that would be hardy in colder climates. The tulip mania was on. By 1636, there was a derivatives market trading in Tulip bulb futures. Tulip mania reached its peak during the winter of 1636–37, when some bulbs were reportedly changing hands ten times in a day. No deliveries were ever made to fulfill any of these contracts, because in February 1637, tulip bulb contract prices collapsed abruptly and the trade of tulips ground to a halt. It sounds silly in retrospect. But at the time, those in the Tulip trade took it very seriously. Back in 1997, 98 and 1999 we had the dot com bubble. Any business that had an internet component was worth gazillions. Some of those businesses had no revenue, only a promise of bringing internet technology to some aspect of commerce. Buying pet food online made no sense. We can see that in hindsight. But at the time, investors flocked to buy up those shares. In 2004-2006 we had the housing bubble. In that scenario, it wasn’t really a housing bubble, but a debt bubble. Irresponsible lending practices in the subprime market caused stated income loans to be written against real estate using valuations that had been bid up beyond the level of affordability. The increase in asset prices was fueled by the lending practices. If you couldn’t get an appraisal at that higher value, then the bank shouldn’t lend you the money. Over the past two years we’ve had numerous bubbles forming. We’ve had businesses that have not generated a penny of positive cash flow like Tesla, Netflix, Uber, Lyft, and WeWork getting valuations in the tens of billions of dollars. Companies that haven’t demonstrated their ability to have a profitable business model were worth gazillions. We have another bubble in the shale oil business. Shale oil wells have a very steep decline in production volume after they start producing. After 12 months in production, they are typically producing about 15% of the oil that was gushing on the very first day of production. That well might continue to produce for another 20 or 25 years, but at very low volumes. The problem is that the break-even on the debt for that well is a function of the price of oil. At prices below $45 a barrel, these wells will never break even in their lifetime. The only way these oil companies stay afloat is to drill more wells at increasingly higher levels of debt. We’ve had oil prices fall nearly 40% in the past week. These companies will not be able to service the debt on those bonds for long if the price war between Russia and Saudi Arabia continues.  Well here we are in March of 2020. Central banks all over the world have been pumping liquidity into the system during supposed boom times. These are the actions to be taken during a crisis. But they were being taken during good times. We’ve known for a while that there would be a breaking point eventually. I thought the trigger event would be a sovereign debt crisis. I was wrong. It turns out that the trigger was the outbreak of a virus. The impact of that additional liquidity was to for cash to make its way into the debt markets which in turn was used by companies all over the world to buy back stocks through additional leverage and in turn increase the asset prices in the stock market. Even now, after the pin has burst the balloon, the central banks think they can re-inflate the balloon by pumping more cash into it. This bubble was not a single asset bubble like before. This is the Everything Bubble. 

What a difference a few weeks can make. A month ago we were in an economic boom. Unemployment was low. The stock market was at all-time highs. Sure there were a few cases of Covid-19 in China, but all was good in Europe and in North America. In a few short weeks we’ve seen the travel industry’s world turned upside down. The first airline casualty was FlyBe, a regional airline in the UK that represented about 38% of domestic air capacity in the UK. They flew to smaller centers like Manchester, Birmingham and Liverpool, serving 139 routes. They declared bankruptcy and likely won’t be returning to the air. Oil prices started to fall when it became clear that economic output was going to be disrupted from China. There’s a direct link between one unit of economic output and one unit of energy consumption. OPEC was trying last week to propose production cuts in order to prevent a glut on the market and to protect oil prices. Russia refused to comply and now we have an all out price war happening in the oil industry. In response, we’ve had oil prices fall nearly 40% in one week and 25% in just one day. If there is a protracted drop in oil, we can expect bankruptcies in the oil industry. Stocks have fallen 20% in value in a couple of weeks including a 2000 point drop in the Dow Jone Industrial Average, the largest single day drop in history. We know there are supply chain disruptions that are going to ripple through the economy over the coming months. So that’s all happening in the broader economy. So let’s say you have a market report in front of you that’s two months old, or six months old. Is it any good? How do you plan? Do you assume reductions in employment? How many of your tenants will be impacted? Do you assume that there will be disruptions in the bond market which will ripple through the banking industry? You see we’re used to thinking linearly. When there are massive dislocations and there is a delay between the warning signs and all the downstream consequences to the economy, it’s hard to connect the dots. I was reading the Marcus and Millichap Office market report for 2020. It’s only a few weeks old. But as I was reading the report, it was clear that the report was written in a completely different environment. That was then, this is now. Would the report be written the same way if it was published today, only a few weeks later? We think about cities like Dallas, Houston, Nashville, Toronto, that have been attracting tremendous growth in population. Will that growth be disrupted? If it is disrupted, will that disruption be temporary or longer lasting? There are too many questions for which there are no answers. The only answer is to wait and see how all of this shakes out. The web of interconnected dependencies in our global markets are incredibly complex and the relationship between them hasn’t even been modelled, let alone understood. I was watching a TED talk that Bill Gates gave back in 2015. In that talk, Bill Gates predicted that we are globally unprepared for the outbreak of a virus. We have spent trillions on military preparedness in order to protect against a catastrophic global conflict, but our health care systems have not adopted the same wartime footing to prepare for a surprise attack. The problem isn’t that our system for handling these outbreaks is breaking down. The problem is that we don’t have a system at all. Our system of testing in the US required medical samples that have a shelf life of less than 6-9 hours to be sent to a central lab in Atlanta. Even if you could get the sample to the airport by courier within minutes, the 5 hour flight to Atlanta, through the backlog in testing, the chances that the test sample is still viable diminishes rapidly. Nobody can tell you the impact of what happens when you mass quarantine 60 million people, or 700 million people.

The Corona Virus is making headlines all over the world. Many people are out there thinking that it’s an over-reaction. On today’s show we’re going to take a departure from real estate and talk about the major factors that you need to consider during this unprecedented moment in history. There’s no question that the disease and the threat of the disease are having a major economic impact. Events have been cancelled all over the world, quarantines and large scale lockdowns are underway in a number of areas, employers have asked people to work from home, and health care workers are sharing some harrowing tales. On today’s show we’re going to break down the three major conflicting factors that individuals, governments and communities alike need to balance. The need to confine the spread of the disease Keep the economy and society running as smoothly as possible Protect the health care system from being overwhelmed Let’s go into these three areas one by one. I’ve seen many statements on television, on the internet, including from doctors that this isn’t any different than the influenza. All these quarantines are an over-reaction. Let’s look at the numbers for the corona virus and see if we agree. The influenza does kill a number of people each year. It’s usually in the range of about 0.1% of cases result in death, and these are heavily skewed towards older people with other health issues and compromised immune systems. If we look at the data from the current outbreak in Italy, there are a total of 7375 people known to have been infected as of March 8, and increase of almost 1,500 compared with the day before. So far the disease has claimed the lives of 366 people. There are 622 who have recovered and 650 who are in serious or critical condition. So if you were to measure the case fatality rate you would divide the number of deaths by the number of cases where you know the outcome. They either got better, or they didn’t. You can’t include the number of new cases where people just tested positive because you don’t know the outcome. You only know the case fatality rate retrospectively. The WHO is estimating the case fatality rate at 3.4%. I frankly don’t see how they get that number. If you accept the WHO number, then the case fatality rate is about 34 times higher than the annual influenza. But if you look at the actual numbers from China you get a different picture. Their case fatality rate is running at about 5%. If you look at the numbers from Italy, you get a very different picture. If you do the math you get a case fatality rate of 37%. That’s a huge number. It’s possible that the number will come down in the future, but we don’t know the outcome of the newly reported cases so its too soon to include those new infections in the statistics.  Let’s move on to number 2, the need to keep the economy moving. If the entire economy came to a standstill and you couldn’t get food to the grocery stores, you would start to see mass famine, social unrest, anarchy and the impact of that could be worse than the coronavirus. So you clearly need to keep the economy moving. That’s important. Number 3, is protecting the health care system. If the hospitals become overwhelmed, then you end up with health care workers coming down with the disease. They get taken off the job and now you’re dealing with a major staff shortage, and you also lose beds that would be needed for the numerous other ailments. This is the difficult balancing act that governments have to orchestrate. I predict that you will see an increasing amount of triage taking place. In a triage environment you are only handling the most severe cases up to your capacity. Everything else gets pushed to the back of the queue. Make sure you have a plan for your family that includes the possibility of lockdown for 30 days or more.

Matt Faircloth is the author of "Raising Private Capital: Build Your Real Estate Empire Using Other People's Capital". He can be reached at the DeRosa Group. www.derosagroup.com.

Eric Bowlin comes to us from sunny Puerto Rico where he is looking out over the water during our interview. On today's show we're talking about how Eric designed his life to manage his investments remotely and live in the location of his choice. 

On today’s show we’re talking about the fallout from the gold rush in Cannabis. As more and more states and countries have decriminalized marijuana, investors have rushed into the market to plant acreage, build greenhouses, and create indoor manufacturing using vertical hydroponics. All of this was in anticipation of an increase in demand. To be clear, in states like Colorado, Washington, and California, we have seen an increase in demand. I have to say, even though it’s been legal for a while, it is still a bit jarring to me to be walking down the streets in Manhattan and smell marijuana. I’m not a user, and this podcast isn’t intended to speak to the merits of cannabis use. I’m merely covering it from a real estate perspective. California's legalization of cannabis for adult recreational use was expected to be massive. Back in 2016, industry investors claimed sales could top $6.5 billion by 2020. And by the end of 2019, California is indeed home to the world's largest cannabis market, totaling close to $12 billion in estimated sales. But here's the problem: $8.7 billion of that is changing hands in the underground market, leaving only about $3B coming through licensed channels. It seems that prices for growers have been falling significantly and many businesses are laying off staff. CannaCraft recently laid off 20% of its 240-person workforce. Smiths Falls Ontario based Canopy Growth is one of Canada’s largest indoor grow operation and occupies the site of the old Hershey Chocolate Factory. They are orchestrating a massive overhaul involving a layoff of 500 workers, and a writedown of $700 - $800 million dollars, the closure of two greenhouses and the cancellation of plans to operate a third. The two greenhouses based in British Columbia were opened in February 2018 and represent about 3 million square feet of greenhouse space. The company, has struggled to create free cash flow as the cannabis market did not mature as fast as it anticipated and federal regulations permitting outdoor cultivation were introduced long after Canopy had begun investing in their greenhouses. Constellation Brands is a major share holder in Canopy having invested about $5B for a 38% share of the company. Canopy now operates an outdoor production site that's made cultivation more cost-effective. It believes that site will play an important role in meeting demand for products necessitating cannabis extracts. Over the past 4-5 years, farmland throughout several states and provinces was sold at top dollar in anticipation of the growth of the cannabis industry. Many of these investments are being written down as the money has failed to materialize. The industry has struggled to grow because the opening of legal retail outlets is very tightly regulated. The number of retail licenses issued has not kept pace with the increase in supply at the production level. Getting the product to market doesn’t work if the retail channel hasn’t been developed. This too has been a major impediment to the industry growth. Like many new markets that are still developing, it’s sometimes hard to anticipate where the inefficiency is going to appear in the market. A quick survey of licensed farm land for sale, shows that prices for licensed land have been falling as oversupply has hit the market. Let’s be clear, there is still big money making investments in Cannabis. AB Inbeve, the world’s largest beer company recently made a $50M investment in Tilray to research infused beverages. Constellation Brands is also betting big on the infused beverage market. While beverages are still a growing segment of the market, the volumes are low. This segment is expected to represent about $5B in revenue annually by 2026.

On today’s show we’re talking about how to make sure the budget for a construction project has integrity. I regularly receive questions from new developers looking to grow from buy-hold investment into new construction. The first thing I ask for is to see their budget and the pro forma. On today’s show we’re going to highlight the most common mistakes that I see in a construction budget. Understand that when you’ve made mistakes in the initial analysis, there’s very little that can save you apart from a miraculous increase in rents. The number one mistake that I see is having an incomplete list of construction expenses. This is where you need to adopt the discipline of a pilot and use checklists for your budget. If you’ve ever flown an aircraft you’ll know that everything that happens in the cockpit uses procedures and checklists. Whenever there are a lot of items that need to be taken into account, the human mind is bound to miss a bunch. That’s when mistakes happen. If you don’t have a system, you’re going to make mistakes. The key is to have a systematic way of ensuring nothing gets missed. When budget mistakes happen, they can come from one of two possible sources. The first is that things were more expensive than originally estimated. This is where people expect to find cost over-runs. Maybe there’s a material shortage and all of a sudden prices are higher than you originally forecast. These types of mistakes can result in modest increases in your overall budget. But the biggest issue is when you have an expense that was missed from the budget altogether. You’ve budgeted zero for that line item and in reality, the number is not zero. That’s a huge problem because the entire amount is offside, not just a small mis-estimation of say 10%. The most important thing you can do is make sure your list of budget line items is complete. In addition, on today’s show I’m going to highlight 7 of the most often missed budget line items. The first three relate to costs associated with the construction loan. 7) Title Insurance. Most lenders will want a title insurance policy issued in their name for the construction loan. Depending on the value of the project, this can add up to a lot of money. 6) Loan Fees. Most investors remember to include the lender’s origination fee, but often forget to include the cost of preparing the loan documents. When you convert from your construction financing to permanent financing there will be additional fees associated with the permanent loan. These need to be part of the project budget. 5) I often see new developers underestimate the cost of the architectural work. Architect’s fees can vary widely depending on how the project is structured. They sometimes hire the engineers for mechanical, structural, civil, plumbing, and electrical as subcontractors and simply pass through those costs. Unless you’ve got a quote for the engineering work, you can be fooled. 4) Site related work. This encompasses everything from drainage to landscaping. The number of times I’ve see a project fail to include the cost of removing the material excavated from the foundation is astounding. I’ve seen so many projects include the budget for the building, but fail to include any money for landscaping. 3) Draw Inspections. When a lender loans money for construction. They advance the funds in draws. At the end of each phase of the construction, the bank sends an independent 3rd party inspector to verify that the scope of work included in the most recent draw request was in fact completed. These inspection fees can vary widely from a few hundred dollars each to a few thousand dollars. 2) Initial Operating Deficit. This is when property takes longer to lease than you planned for. 1) I’ve seen many budgets where the borrower fails to include an interest reserve in the budget to carry the cost of the construction loan.