Punk’s Posterous

I attended a real estate opportunity seminar this morning to see what the industry experts have to say about where the opportunities are for the next 12 months and wanted to share what I heard and resounded with me. 

I talked about another major collapse in the real estate market during this summer that has yet to happen.  I'm not backing away from that prediction (for lack of a better term).  Economic activity in a capitalistic society is wholly dependent on consumers (you and me) consuming.  There was a 5 month rally in the stock market largely fueled by what look like companies rebounding on their overall numbers (showing flat to low growth) for the respective quarters and beating street expectations.  The key here is, if you dig into the numbers, those rise in profits were not from an increase in sales but rather from an collective increase in cost cutting (laying off workers).  So while a company showed better profit margins, it wasn't necessarily from selling more, it was from cutting the fat so to speak.  This is an unsustainable growth as companies can only cut so much.  The fact of the matter is, as was reflected in this week's stock lull, consumers still aren't spending any money.

With that, real estate (an investment vehicle where there is (typically) limited supply and almost always a growing demand) has the following trends (in each category) to consider.

Office Space 

There is far more inventory than there is demand.  With companies laying off more than they are hiring, there is going to be an increase in the number of empty office buildings.  Typically these are in the $10M+ range, but if you have the capital, you can literally buy large office spaces for dirt cheap as major portfolio companies look to dump these assets.  There are a ton in the valley. 

The strategy for office space is to convert a Class C to a Class B, a Class B to a Class A and a Class A to well a better [greener] Class A with the hope that when the market demand comes back you can bank on the appreciation of your asset + invest improvement.  The improvement capital can be written off in taxes and the depreciation schedule and property tax will be minimal given the low appraisals being put out right now.  TMG (The Martin Group) is the bay area king pin of this market.  [Note they offer a 20% return to their investors].  The CEO mentioned that these deals are not advertised in the [doomed local] papers but are almost exclusively relationship deals.

Retail Space 

All the experts recommended steering clear away from retail space as consumer spending is showing no signs of rebounding.  Historically consumers only start spending lavishly after a sustained period of economic growth.  They forget about the hard times.  No one sees the horizon on this and the general consensus is unless you're purchasing a grocery store or some other retail front that is essential to life, the worst is yet to come.

Condos 

With the number of new condo's in the city and the lowered overall prices, there are bargains to be had in this market.  The key here as with any private real estate is the management of it.  TMG calls private real estate labor intensive off setting any gains.  So from a business perspective, if you factor in time, miles and ALL the costs of owning the property it usually doesn't end up being as lucrative as one projects.  It was recommended that if you're looking for a place to live, this could be good, but as an investment property, proceed with caution.

Apartment Buildings

The panel was bullish on apartment buildings given the low supply and high demand.  One consultant is under the impression that the overall economic turnaround will first be felt in San Francisco, making it that much more attractive to pick up an apartment building.  There was some discussion on the costs of renovating and if the "liberal administration" does in fact mandate green initiatives, then the cost of owning one could be prohibitive with the retro fitting the old buildings.  I personally think someone can make a KILLING by pushing a modern window bill through local legislation.  The old windows are awful aesthetically and even worse from an energy conservation (not that I have an A/C or heater in the city).  But imagine if building owners were mandated to replace old windows...  The contractors/suppliers/distributors etc would make a killing in the city!

Private Real Estate

There was little discussion on single family homes as most of these guys don't look at them as investment opportunities.  There was one guy that is buying a house a week to build a portfolio to bank on appreciation when the market comes back.  But mostly everyone was under the impression that the bottom isn't here and even when it comes it isn't going to hockey stick back up, but rather we are in for a long flat portion for the time being.  At which time, cash is king.

Globally

I thought the discussion on China and India were pretty interesting.  In China, the equivalent of a city the size of Houston needs to be built every MONTH to sustain the mass migration of population from rural areas.  That number is staggering.  Basically everyone from the farms is trying to move to cities and there are premier cities, worker cities and slums.  You move up through the ranks with economic improvement.  Most of the investing dollars comes from the government so while its secure, there is really one way of getting into the business:  Connections.

An interesting side note.  Did you know that the number of people employed by the communist party in China is...  You ready for this?  The total population of the United States!  Basically, if you have any level of education or economic pull, the communist party invites you to be in their club and receive the benefits of being attached.  So in order for China to go democratic, all the educated/rich people would have to convert, and we're not talking millions, we're talking 100's of millions.  There is literally no incentive for them to do that. 

The danger here (which no one brought up, but I was thinking) is, as we've seen, there is no such thing as a limitless growth cycle.  At some point there is inevitably going to be a downturn at which point, China could very well close its doors (as it did in the 50's) to foreign investment leaving anyone with vested money high and dry.  Its not really a matter of if, but when.

Most construction projects in Dubai came to screeching halt in Sept '08 when the developers realized that with the global economic crisis, they would be able to re-negotiate all their contracts.  They've just started to do that.  Abu Dubai has a population of 200K, yet has 9% of the world's oil reserves...  They are bullishly building to create an economy to last past the fossil fuel boom.

India is 10-15 years away from similar growth just due to the bureaucracy created by democracy and sore infrastructure.  India's government can't just create money to fund projects, it has to keep an active [publicly voted upon] balance sheet.

There were some notable quotes thrown out there with context that I think we should keep in mind:

"Be fearful when everyone is greedy, and greedy when everyone is fearfull."  --Warren Buffet

"Skate to where the puck is going to be."  -- Wayne Gretzky
 
There was extensive talk about not paying any attention to forecasts as well as they are "full of shit."  If hindsight is 20/20, there wasn't a single outlet (despite very clear signs) that there was going to be a market crash.  The CEO of TMG, said he went to a meeting where he had a sick feeling in his stomach.  Everyone at this meeting was cheering and fat from all the money they were making, all the way down the pipe.  Its just not sustainable, he felt, yet even he didn't have the wherewithal to start unloading assets fast enough. 

My closing thoughts

The rich are born in times of economic straits, not during booms.  It takes years and years of toiling to be prepared when the time comes to make money and unless you are prepared, you won't recognize it when the time is there.

I'm about 2 weeks into netbook immersion.  I started off really skeptical, carrying my MBP with me in case my netbook didn't suffice.  At this point, the keyboard isn't too small and the screen is perfect for browsing.  I'm sold.  I didn't get a 3G wireless plan because I'm hopeful tethering will become a reality off my smartphone, but I'm already tempted.

The first thing I did was create 4 partitions and put all the different available OS's on it to try each one.  Moblin is easily my favorite, though the beta release has some issues.  Ubuntu Remix is stable and nice, but doesn't have any built in web widgets making the browser the central application.  Windows is awful.  Its easy to hate on windows, but really did anyone there even try to use Windows on a netbook?

Market adoption for Operating Systems is still very much in the air, although Mircosoft, through their extensive OEM relationships, is claiming 80%.  Anyone that is serious about having this be their primary device is going to want something different.  Since Netbooks are primarily being marketed to college students, Moblin should burn 10000 bootable USB sticks dropping them into select college campuses and launch a viral marketing campaign that makes it cool for students to share the stick to "unleash their netbook and share the favor."

The key to success is for the installation to literally be, reboot with USB stick, quick easy setup for social networking services and its ready for use.  Its too complicated right now.

A funny thing happened yesterday, I found myself in an old book store in Russian Hill while waiting for my friend to arrive.  Since purchasing the Kindle I haven't physically bought a book in months and actually having moved from suburbia only recently to the city, I haven't been to a non-corporate bookstore since my days in East Village, Manhattan.  They are few and far between in suburbia.  The great thing about spending any amount of time in a bookstore like this is, I always end up looking at books that I'd never normally think would be interesting.  There is definitely thought put into the organization of the material, but it is clearly not commercially driven.  The Dan Brown books with movie posters aren't glaring at every corner.  There is no special shelf specifically for Oprah's book club selections.  The layout has not been analyzed to maximize revenue.  Its just a hodge podge of books, mostly used and read.

I find the lack of organizational analysis for maximum monetization allows me to visually peruse hundreds of titles in various subjects indulging my subconscious.   I go down thought trains that otherwise would never be explored.  This is how I used to broaden my horizons.

Today broadening my horizon means googling a keyword and subsequently jumping links.  Yes, I do subscribe to a number of news aggregation sites, and was sort of intrigued by stumbleupon for a while, but for the most part Google is it.  The issue with this is Google has become a revenue driven corporation.  It had no choice, even with the best intentions and the brightest minds, once you have shareholders your vision and strategy are to increase marketshare to make more money.  There is nothing wrong with that, its the natural evolution of every successful company.

But just as a Barnes & Noble or Borders feels too commercialized, Google searches have long lost that raw edge where your discovery feels original (even if its not).  The search results are dominated by results that corporations have paid money for.  Much like a book publisher cutting a deal with Borders to have every corner of the store to remind you about the upcoming Harry Potter book.  

Then along came Twitter.  I have absolutely no qualms about Twitter becoming a revenue driven corporation like every other company before it.  Like I said its the natural evolution, but until then we have a way to find information by the people (not corporations) for the people (anyone who knows how to search) to the people (with no ads or tricks).  I read an analogy that Twitter is much like a stadium full of people all shouting.  Well, I wager that there are far more interesting things being said (by sheer magnitude) then what all the major companies say in hopes of driving revenue. 
 
I did a google search for Grandma's apple pie recipe and all the search results were professional pages (food network, allrecipes, americanapplepie.com).  I did a twitter search for grandma's apple pie recipe and came up with nothing.  So I tried apple pie recipe and got 30 links out of some 45 tweets.  All of the links went to personal looking blog pages that had some variation of an apple pie recipe.  All of the tweets had some form of praise for how it turned out.  None of the tweets matched google's top links.  Among the tweets were ways of making the apple pie vegan, or doubling down with cranberries, a recipe from a Godfather off a car racing site, an apple chocolate chip pie, etc.  Wow, when was the last time you did a search and said, who would've thunk?
  
Excellent.

In an effort to elevate my golf game I took a video of my awful swing and compared it to a Tiger Wood's YouTube video.  You can do a pretty sweet analysis to see precisely what you're doing wrong.  

Despite having to do it every single day, most people find waking up is hard to do.  There are no shortages of remedies for ways to ensure that at the sound of your alarm clock, you will pop up.  Most notably, from a great mind at MIT, a mobile alarm clock that at that fateful hour turns itself loose forcing you get out of bed to chase it down, thereby reducing the likelihood of crawling back under the covers.  My favorite example of the resilience to wake-up gimmicks was an ex-girlfriend, who put her alarm clock near her feet, such that she'd have to get up to turn it off.  It was only a matter of weeks before she had trained her toes to peek out from the blanket to reset the snooze for another 15 minutes, this was a multiple button operation mind you, which she could do with her toes all without shifting position. 

In HP's latest post filed under Trends in Blade Server infrastructure, HP contends that should one choose to commission plumber to build a custom house, the end result would be a very expensive showcase of the waterworks and little else.

Recently the rhetoric around micro-payments for content has increased exponentially.  As is the case with any adoption of technology, baby steps are necessary for users to become acclimated with the idea.  With the significant drop off in the ad revenue, and users becoming accustomed to paying for software and music, the market for paying for content is ripe to explode.  The logistics of profitability have yet to be hashed out however a platform where it could make sense has finally emerged.  Feedly is amazingly good at presenting content you subscribe to through RSS feeds.  It leverages your existing RSS feeds and while there is currently no subscription fees associated with the service, micro-paying for content read is a logical next step towards monetizing the service.