The Pursuit of Passive Income

So many things to talk about. There is so much happening lately that I’m trying to separate my thoughts. Jobless claims are up, but the Mid-west is being shredded by killer tornadoes. The Dow has recovered nearly all it’s losses from 2008, but the US has exhausted it’s credit line and we need to raise the debt ceiling. It seems that as bad as the bad news seems to be, we are either numb to it or we recognize the worst is behind us. After all, can it really get worse?

I inserted a chart from Starbucks first Qtr 2011 to illustrate a point that may relate to our Real Estate market. Starbucks Net Income is up a staggering 42%, despite nearly everyone I know telling me they are cutting back on their spending - because they have less to spend. And yet, the world needs their $4.00 Latte to go with their $4.00 a gallon gas.

The apartment market is in a similar dichotomy. Our expenses are up, our debt costs most likely to increase, our values clearly down and yet out occupancy is up and our net rents rising. Despite all the belly aching, we are doing better today than we could have hoped just 12 months ago. 

I received my weekly Loopnet, Inc Market report via email today and glanced at the section where they report the 10 most active listings in the Metro-Phoenix market by “Click through’s”. The top listing is a parcel of Land in Scottsdale (with nearly 1,600 views in the past 30 days) the remaining 9 on the list were all multifamily listings (very encouraging). But here’s the surprising part… each of those listings had over 1,000 views each in the past 30 days. 

One more observation: Yesterday I met a friend for lunch and the parking lot was packed..middle of the week. The restaurant was packed. We both looked at each other and said the same thing. “Wow, three years ago you called to make a reservation or chance not getting a seat. Last year you called to make sure the place was still in business before you drove there, and today the place is packed again.” Leaving the restaurant I looked across the parking lot at two vacant “For Sale” free standing restaurant buildings and empty retail space in the main buildings of the retail center. How crazy is that. 

I’m encouraged. Cautious, but encouraged.

Hoping you see more signs of improvement through the haze of the collapse. 

John

A long time developer/owner, friend of mine and I were talking yesterday afternoon about “Ah..Ha ” observations that changed his perception, influenced his course of action and saved him from a few mis-steps in the market. 

We were discussing how important it is to visit your own properties without warning and at random. He told me he learned more about about his properties from his residents and staff that didn’t know who he was because he had stopped by a property early in the evening, on a weekend and dressed in his street clothes, then he learned from the monthly management reports. 

He told me the moment he realized the market was over heated in the last run-up in the late 1980’s. He said before we all realized what the tax law changes were about to do to the investment market and before the first Savings & Loan faltered, he saw how his parking lots we filling up with workman’s trucks. His newly built properties were full of pick-up trucks with toolboxes and racks. He continued that the trucks were still displaying license plates from everywhere but Arizona. 

His concern and “Ah..Ha..” realization was that his management teams were reporting strong occupancy and proforma busting income, but he saw that his renters were transient workers who had commuted to Phoenix to find work and since the construction market had already stalled, he knew these folks would soon move on to markets still building. Leaving him with empty units. He stopped building and started to sell out before the market toppled.

He came back after the crash, bought into the market and built when the timing was right. Again selling off the majority of his assets early in this cycle and keeping a few key buildings with good locations and very low debt.

He still regularly visits his buildings and noticed over the past year how much worse his parking lots are looking. There are more older cars, more residents working on their cars in the parking lots and the newer cars are falling into dis-repair (bald tires, cracked windshields, missing parts, etc) While his occupancy has been increasing and they have seen some rent increases, he is convinced that he’ll soon see much higher delinquency and evictions. He points to a weakening job market (more unemployment, under-employment) and higher fuel costs. He says his residents are forced to fill up their tanks first, then ration their remaining dollars between rent, food, clothes, etc. Fixing their cars is last on their list and to him it means they are cutting corners they can’t afford to cut. 

Increased costs for staples like food and gas are considered a disproportional tax on the people living from paycheck to paycheck. A monthly increase of $50 in fuel for a family comes directly out of another part of their budget. As we are witnessing, an increase in oil prices effects not just gasoline, but food costs. 

Rising oil prices have the effect of siphoning the dollars we would have hoped to have captured as rent increases. 

Whether my friend’s observations and conclusions play out as he suspects is yet to be seen.

As Always, I’m open to your thoughts and comments. 

John Kobierowski