What’s kind of cool is that if you own a share of Apple, and I own a share of Apple, those shares are exact copies of each other. You could buy a share in Hawaii or Timbuktu, you can buy it on Schwab or Robinhood and it’d be the same. The market price is set every second of every day (when the markets are open) by thousands upon thousand of people looking at the exact. Same. Thing.

Real estate is the exact opposite. If I gave you a map and told you to find Cape May, NJ on your first try, could you do it? What if I asked how far off the shore you can be and still get a sea breeze? What blocks flood during hurricanes? Which houses have south facing windows? Which 1870’s Victorians have been rehabbed and which ones are falling apart? Which ones are close enough to the action to walk to bars but far enough away to be quiet when you want to sleep?

99% of you won’t know the answers to any of that. And why would you? Every single house on every street in every market in every city/state/region of the country/continent/world is different. It’s chaos.

That’s why real estate offers so many deals. There’s no mass market deciding the price for everything because it’s physically impossible. And when markets are inefficient, there is opportunity. (Reminds me of my NFT habit, but that’s a different rabbit.)

I once read something that struck me as weird at the time, given I usually invest in the relative efficiency of the stock market:

“A real estate agent friend of mine once told me, “If I submit an offer, and it doesn’t make me blush, I offered too much!” In other words, when you’re trying to get a good deal, submitting offers should make you a bit uncomfortable!” - Brandon Turner of Bigger Pockets

It sounds odd, but he’s totally right. One of the savviest buyers of real estate I’ve ever known is a man I love dearly: my brother-in-law. Except he doesn’t blush when he makes his offers. He offers you three shiny pennies, a six pack of craft beer, and a kick in the nuts in exchange for waterfront property, but he does it in such a way that the owners actually consider it. He’s hypnotic. It’s probably how he proposed to my sister (and got her to say yes!).

If you buy a stock, you need to be right about the entire market undervaluing it relative to future growth. That’s hard.

If you buy a piece of real estate, you need to be right about a single person - the seller - undervaluing it. That’s (relatively) easy. Few people do it though because finding those deals requires, well, work. You can sit at home with your morning coffee and buy stocks with your index finger. To find deals in real estate you need to get out into the world and pound pavement.

So for those curious, how do you do it? Get local. I can build the most complex model on the planet, full of excel formulas that look like Chinese and more tabs than a Bourbon Street bar, but if I don’t know the market of the property I’m trying to underwrite, my understanding of finance is worthless. You don’t need a Wharton MBA to invest in real estate, you need to be a hustler, a negotiator, and you need to network.

Go out there and find the person who’s owned a building for years and has no debt on it. He or she will be less price sensitive because they got it for $12 in 1962. Discover a house that’s not selling because it has a terrible smell and ugly countertops but actually has great bones. That’s the sort of thing that will often produce a discount on sale but is easy to fix. Run in there with a bottle of Febreeze and throw some quartz in the kitchen and you’ve suddenly got bargain. Talk to neighbors, talk to people you know, let them know you’re interested in buying. I got one of my single family rentals at a great price because the guy knew me as a potential buyer and was going through a divorce, he just wanted to get rid of it and not think about it anymore. He knew he could have gotten more if he marketed it, but cared more about it being easy and having liquidity. Win/win.

Recall the first secret to real estate investing is debt. Now you know the second secret of real estate: it’s inefficient because it’s so idiosyncratic, and that leads to deals. You just have to be willing to look.

Instead, it went up 15x. In a week.

Now, knowing the outcome, you know that’s a great investment, right? Bet the house, we’ll be millionaires! But what if I told you that when buying a digital picture of a hairy primate eating a slice of pizza there’s a 10% chance it goes up 15x, but a 90% chance of it becoming worthless? Would you bet your house? Your car? Your kid’s bike? Probably not. This is because there’s a high chance of ruin, which is a fantastic concept I learned from reading Nassim Taleb (the guy who came up with “The Black Swan” concept).

“…a situation is deemed non-ergodic when observed past probabilities do not apply to future processes. There is a “stop” somewhere, an absorbing barrier that prevents people with skin in the game from emerging from it—and to which the system will invariably tend. Let us call these situations “ruin,” as there is no reversibility away from the condition. The central problem is that if there is a possibility of ruin, cost-benefit analyses are no longer possible.” - Skin in the Game by Nassim Taleb

Put more simply, no matter how high the payout, if there’s a chance that it could completely bankrupt you, it’s not a bet you should take. Because then you can’t play anymore.

Speculative crypto investments* can make you rich, but have a high chance of ruin, so betting a large portion of your net worth on them is ill-advised.

*as somebody who loves and invests in Web 3.0 (aka crypto) I want to be clear that not all crypto is speculative… but some is akin to playing darts drunk and blindfolded.

Now let’s travel to the other end of the risk spectrum. To something boring as bricks. To real estate. To an apartment building. Say you buy an apartment building for $1,000,000 and I told you there’s a 25% chance it goes up 15% in value, a 25% chance it goes down 15% in value, and a 50% chance it stay the exact same. That’s it. It won’t make you rich overnight, but there’s also essentially no chance of ruin. Owning an apartment means you can always live to fight another day because there’s a hard asset serving a need and it will never be worth zero. In fact, it’d be unusual for it to ever even be worth significantly less than you paid for it (assuming you paid a market value). This means two things: 1) you can put huge chunks of your net worth in real estate given that there’s (effectively) no chance of ruin and 2) other people will give you money to help buy the real estate - i.e. debt. And it’s glorious.

Debt is not unique to real estate, obviously, but the debt you can get with real estate is extremely favorable. And on some things you can’t get debt on at all. For example, good luck getting a bank to lend against your picture of an ape.

I’m going to present some numbers to you to crystalize the importance of debt on real estate. They aren’t complicated, so try not to be intimidated. I bet if you focus for a minute you can follow along.

We’re going to assume that the $1,000,000 apartment building we just made up produces $50,000 of cash flow every year. This means it yields 5%. Said another way, every year you get a 5% return on your investment.

If you buy the building with your own money that’s called equity. A bank’s money is called debt. Buying real estate with entirely your own money is quite rare. Most of the time real estate has debt put on it. Why? Because the people that lend you that money feel confident they’ll get paid back due to the low risk of most real estate, and they’ll give you that money for relatively little cost.

A common convention is 75% loan-to-value, meaning a bank will lend you 75% of the value of the property. In this case, that’s 75% of $1,000,000 apartment, or $750,000. And debt rates right now are quite low, call it 3%. That means that you’ll owe 3% of that $750,000 you borrowed to the bank every year, which is $22,500.

I can hear you crying, “But then I owe the bank money!”

And yes, yes you do. But clam down Bob Cratchit. All of your tenants also owe you money. As long as this is properly managed you’ll be fine 99.9% of the time. Recall you’re getting $50,000 of cash from your apartment building. You owe the bank $22,5000 every year, meaning you still net $27,500 of cash flow after interest.

Before you make a bad conclusion, let me point out that despite getting less cash flow on your apartment you are NOT worse off. Why? Because by using debt you only had to spend $250,000 to acquire that apartment building. If you purchased it all yourself (100% equity) recall your yield would be 5%, but now that you used debt, what happens?

Using just your money: $50,000 of cash flow / $1,000,000 of equity = 5% yield

Using the bank’s money: $27,500 of cash flow / $250,000 of equity = 11% yield

Oh snap, you more than doubled your yield!

What does that mean in dollars? It means that if you invest all $1,000,000 you’d make $50,000 without the bank’s money, and $110,000 with the bank’s money. Winner winner chicken dinner!

Why does the bank do this? Because they still collect 3% at a very low risk position with none of the work of managing an apartment. Both sides win.

I grew up hating debt. Like most humans, I hate feeling like I owe other people things. But real estate is a different game. Don’t be afraid of cheap debt on quality real estate! The entire business is predicated on arbitraging the cost of debt vs what you can cash flow assets at. And it’s a huge piece of what makes the entire asset class tick.

What’s another piece? Inefficiency. I’ll touch on that one next time.

It turns out people like gold. A lot. Some 300,000 people flocked to California in search of the glistening, inert metal. So many people, in fact, that just two years later in 1850 California had enough of a population to reach statehood.

People like mining for gold for the same reason they like playing the lottery or shopping at TJ Maxx: it’s a sense of adventure, of getting your hands on something you couldn’t otherwise touch. You can get rich! You still have to do the work of actually mining, and nothing is guaranteed of course, but you can get rich and that makes the work exciting. People get into it. It’s not just the payoff, it’s the anticipation.

Bitcoin is often called digital gold. This is an appropriate moniker because Bitcoin is intended to be a store of value, much like gold. It also doesn’t really do much other than store value, also like gold. But there’s another angle on this metaphor that is probably pretty obvious by now: you can mine both gold and Bitcoin, and once you find some it’s quite valuable. People like mining Bitcoin despite sometimes questionable economics because it’s an adventure. It’s a challenge. And because, yes, you can get rich!

The actions of mining Bitcoin are decidedly different though. Mining for gold likely paints a pretty standard picture in your head. An old, colorless photograph of a toothless white guy in a hat and jeans, focused on the contents of a metal pan in his hands, river running under his feet.

If I asked you to describe Bitcoin mining though, what would you say? I’m guessing nothing at all. You’d have no idea. Let’s fix that.

Bitcoin mining looks nothing like this:

The reality is that it often looks just like this:

At it’s most simple: Bitcoin mining is the equivalent of being a notary. You verify parts of the blockchain for Bitcoin, and get paid in Bitcoin. As a miner you provide a valuable service by updating the underlying technology (the blockchain), which requires an enormous amount of computing power and energy. Miners use racks of machines to try and solve complicated mathematical equations as quickly as possible, which is what builds new blocks of the blockchain. That valuable service is paid for with the exact thing that you just made more valuable by supporting it: Bitcoin itself.

The reason this is so critical is that Bitcoin’s appeal is centered around it being decentralized. That is, there’s no Bank of America verifying the transactions from a central authority. Decentralized finance needs people from all over having input in order to be, well, decentralized. Bitcoin mining and its rewards entice people to verify transactions the way Bank of America does, just in a very decentralized way.

There’s no Sutter’s Mill that people are flocking to in order to mine this particular asset, but you still need a very specific thing when looking for real estate on which to erect your ultra-fast energy hog of a computer: cheap energy. This is why half of all Bitcoin mining has been in China where they can burn coal to power the machines. The electricity is cheap from a money standpoint, but horrid for the planet, which is why Bitcoin mining has drawn so much ire from environmentalists around the world.

There are always better ways to do things though, so let’s put our real estate caps on for a second. It doesn’t have to be this way. And in many instances, it isn’t. Solar farms have been set up to power mining, smog free. The push for better energy options is helping to progress innovation in clean power. The demand for computing power has lead to chip innovation, which does more with less power, so you can use less real estate and pull less from the grid. And there are numerous examples of Bitcoin mining operations being set up next to rivers, harvesting the natural, renewable power of running water to do the mining. Just like a mill. Just like Sutter’s Mill. Which is, as you now know, where the gold rush first started. Today, it fuels the digital gold rush.

And we come full circle. Beautiful.

Today though, today I’m doing something less complex than Bitcoin. Something furry. Something bucktoothed. Today I’m going to talk about beavers.

Why beavers? Well, because beavers were the OG developers of real estate. And sometimes it’s best to let rodents run wild instead of tossing around millions of dollars so that 6 construction guys can stand around and watch a 7th one actually work.

Beavers aren’t just tree gnawing oversized rats. What they do is actually vitally important to a lot of ecosystems. I recently discovered that places up and down the western coastline of North America have been busy promoting busy beavers to solve a surprising range of issues. Their work is economically free and ecologically valuable. They never complain about healthcare benefits or ask for raises or take sick days. They’re awesome.

A place outside of Sacramento is using beavers to wetify (TM pending on that word) a dry creek bed and help reduce fire danger. A biologist in Seattle traps beavers (see picture below) that are damning creeks and flooding people’s homes, then takes them to Mt. Baker-Snoqualmie National Forest where they can turn the landscape back into sloshing wetlands. The WWF and Canada are working together to promote beaver dams in their rivers to help fish. Who knew?!

The beavers change the land by intelligently flooding it, which they do in order to raise their own young in a nice, quiet pool of water. But contrary to common belief beavers don’t actually live in the dams, they build the dam and then build a fortress with underwater entrances in the middle of the pond the dam creates, which sounds like the kind of badass fort my kids would dream up.

Beavers expend an inhuman (inbeaver?) amount of effort just to make sure their babies are safe and happy. Which feels, actually, quite human. But the benefits don’t stop at the cute little buckteeth of baby beavers. The dams the adults make provide an incredible service to the area around them. This is especially true for everyone’s favorite fish: salmon.

Salmon are a lot like my mother-in-law in that they need icy cold temperatures all the time in order to be happy (you were all wondering how that comparison was going to shape up, weren’t you?). Beavers provide that because they increase the depth of water with their dams, preventing the sun from working it over too much. Beavers cool downstream water by more than 2 degrees Celsius! Ask any iceberg, 2 degrees Celsius is a lot. And the salmon appreciate it.

Every beaver can create a swimming pool sized pond for every 328 feet of stream. Beyond the cooling effects of these reservoirs, the extra water means that in dyer periods the land stays wetter longer. Not only does this reduce fire danger, but salmon fry (baby fish) love the calm pools of water. The reproduction of salmon is enhanced by giving adults a cool path to baby making, and then the pools give their fry a place to grow. Mother Nature is a clever girl.

Now, these industrious rodents are not a silver bullet. Will beavers manage to bring back salmon populations all the way back to the pre-human era on their own? No. Will they stop all of California’s fires? Also no. Can they do basic math? The answer might surprise you. It’s no. But beavers do help with two of those three issues and if we’re honest with ourselves, we, as humans, need all the help we can get.

So take a moment to pause and appreciate a real estate developer that’s never been paid a dime or bothered to pull a permit, the humble, social - and needed - beaver.

The company is called Republic Realm and frankly I’m a little worked up about the fact that I didn’t come up with it first. The busiest intersection of my mind is where tech and real estate meet. This is a fascinating combination of those things.

First, some context, as this concept might make your head hurt.

We’ve all played a video game at some point. Maybe it was only Pacman. Maybe it was Candy Crush on your phone. Maybe you’re a nerd like me and love massive open worlds like Skyrim or Breath of the Wild. You likely got into it, at least a little bit. It sucked you into a different place. And real estate, really, is just a sense of place.

Let’s assume for a second that you accept that idea. That real estate can be anywhere that occupies your attention, anywhere that’s a place to your mind. Then the worlds in video games or anything else created by 1 and 0’s can be real estate. The major difference between the dirt world and the digital one is scarcity. You can’t just ctrl+c Manhattan and put it somewhere else. That’s what makes it so valuable. But you could always quite easily copy something ad infinitum on your computer, which made it hard to keep digital assets scarce… until the blockchain came along.

There is a relatively new technology called an NFT (a nonfungible token) that allows you to make a digital asset unique by assigning ownership of the original source code to somebody on the blockchain. It’s like having the original Mona Lisa instead of a copy. It looks the exact same but you and everyone else knows which one is the original, and that matters. We all line up at the Louvre despite exact copies of the Mona Lisa resting just about everywhere. We don’t go to Paris to see what it looks like. We know what it looks like. What we crave, us dumb humans, is novelty. And we’ll travel for it, clamor for it, pay for it.

This idea that NFTs are valuable as art isn’t just a theory, somebody actually paid $69m for digital art that I could simply google image search and make my desktop picture for free (which I did, it’s the below picture). Why? Because that person with the insanely deep pockets owns the original, and everyone knows it.

For you naysayers, let’s make a point. Look, I copied a $69m piece of digital art for free. Must mean it’s worthless. Can’t believe those dumb crypto guys would pay for something you can just copy.

Look, I did it again! If you found yourself nodding along to the logic above, then naturally the Mona Lisa doesn’t have any value either. I can copy it forever just like anybody else. What’s the fuss then? Must be worthless, right?

Obviously, the answer is no. Both of those images are still worth millions if you possess the original copy.

Let’s assume your brain is accepting that idea instead of throwing a shit fit. Which is normal. NFTs made me borderline angry when I first learned about them. It seems stupid. But the more I thought about it the more it made sense. If some expert told me that some canvas with pigmented paint on it was the original Mona Lisa I’d be in awe. He could be lying. It could be a copy. It wouldn’t matter. What matters is the belief. (Note: on the blockchain nobody can lie to you, it’s immutable. You will always know who has the original and so will everybody else.) It’s part of being human. We assign value to ownership.

Anyways, pause for a moment and move that idea to digital real estate. Say there’s a game that people love playing. In that game people take their mind (via a smartphone, Playstation, whatever) to a digital “place” where a lot of other people playing that game also go. The place is beautiful, well thought out, and fun to be in as you play this game. That place isn’t “real” but it has value. Now make it an NFT so everyone knows which one is the original. You can make a copy, sure, but would it have value? No, the copy has no more value than that picture of the Mona Lisa I just added to this newsletter. But the original? The real thing? The best place in the best digital world in the world? That has tons of value. People want to be there and there’s only one.

This is the opportunity waiting for those who go after real estate in the metaverse. And the plan for investing in the metaverse sounds stunningly like investing in real estate in the dirtverse.

This is how Republic Realm describes their process:

We create value by developing districts and bringing anchor tenants and experiential pop-ups.  We build assemblages by acquiring adjacent parcels that allow for more dense developments, a process which unlocks value.

I could pull a presentation from just about any real estate developer in any city in America and the verbiage would be the exact same. It’s unreal. (Pun intended.) Below is an example of a digital district built by Republic Realm. It’s just a cool shopping area copied into a digital world. And it works.

Ok, great Alex. Fine. That sort of cool. I guess. But how do you actually make money off all this fake stuff?

Real estate in the metaverse produces income in similar ways to what you’d be used to here in the dirtverse. You can sell the real estate itself that has appreciated in value. You can sell things directly out of your stores by selling clothes to digital avatars. You can advertise by partnering with real or digital businesses and advertising in the game. Domino’s Pizza, for example, advertises in the metaverse.

One of the risks, of course, is that you need to be in the right metaverse. Think of it like MySpace vs Facebook, you want to invest in the one that attracts the people or it has no value. For a real world real estate example, you’d rather own in Austin than Detroit. You want to own the land in the places people want to be.

One of the dominant metaverses is Decentraland, and it’s so popular it actually has events that it hosts in its digital world. The below screenshot isn’t for summer events in Atlantic City, it’s for a completely digital world. There are things do to, money to be made, places to go, all digitally. It’s the new final frontier.

If you’ve read a lot of SciFi over the last 30 years this probably won’t sound as crazy or jarring. For the rest of you, well, I know it’s a lot. It sounds like snake oil. So for now, I’ll stop here and let it sink in. Wrapping your brain around the idea that this is “real” is hard enough. But I think it’s important. This trend is growing exponentially. And a lot of people are going to make a lot of money doing it.

Pay attention.

Ocado is one of the players spinning the Rubik’s cube, and has built some incredible warehouse technology to help fulfill online grocery orders. It is a UK based company that is crossing the pond to help Kroger stave off whatever entrée Amazon is cooking. They automate the picking process so that all the nearly infinite combinations available at a grocery store can be made real to you the human, via the coordination of them, the robots.

I find the below video of an Ocado warehouse in action absolutely mesmerizing.

Traditional grocers know there’s money to be made in perfecting picking. For example, Kroger’s new strategy, ‘Leading with Fresh, Accelerating with Digital’, puts fresh food at the core of its growth plan. This is wise, as it’s reported that fresh food offerings account for 70% of a customer’s decision making when they figure out where to roll their wheels to grab grub.

As was the case with many businesses, Kroger more than doubled its digital footprint in 2020. By 2023 they want to double again, this time with both revenues and margins in the digital space. The margin nugget is especially pertinent as in store purchases are currently about twice as profitable as an online one. The grocer that figures out exactly how to make online orders more profitable will be in an enviable position. In 2020, the company reduced the cost to fulfill online orders from a store by 14%, and expects an additional reduction of 30% over the next three years, mostly enabled by technology enhancements.

What does this have to do with Ocado? Well, they are the “technology enhancements.” In 2018 Kroger committed to building out 20 of Ocado’s incredibly specialized facilities. So far Kroger has 11 of them underway, with two ready to start moving melons.

Grocery stores are not going away, but there is likely to be fewer of them and more online fulfillment centers. Just like we’ve been seeing with malls and apparel for over a decade. Why? Because customers like convenience even more than picking out their own kiwis. One fulfillment center is equal to twenty stores worth of sales, but requires 60% of the capital and 60% of the labor. Um, yes please.

It should be a no brainer for everyone to do this, right? Well. Maybe not. The facilities lose money at first and don’t expect to break even until year 4. You need extremely well capitalized players to make this kind of investment. But for massive grocers like Kroger, Ocado is the shield that might allow them to avoid the obsolescence of so many industries before them.

Kroger has shrunk its store base in each of the last four years, although modestly – the store count has dropped ~2% since ’16. I am not here calling the death of the grocery store. Even if e-grocery starts gaining significant penetration, many customer still like being in charge of grabbing their own ginger. And “buy online, pick up in store” is immensely popular, which is a sort of in between model. You can order the groceries online, then drive by the store to grab the bags. This saves you time and the grocers the trouble of delivery, which feels like a win/win. It also keeps the physical locations of the grocers important.

Books aren’t bananas, as each banana will be slightly different, whereas each copy of Harry Potter will be the same. Still, this brave new digital world is impacting the way we shop for everything, even food. Ocado is cool. Maybe you shop in store most of the time, but for those moments when the kids are nuts and you just need the raw bits of dinner delivered, Ocado will be there for you.

Turn your mind back to 19th century America. New York, Philadelphia, and DC held most of the country’s population in the haunches of its eastern seaboard and yet the nation’s newest attractions were being created across the plains. The Atlantic side of America was more than a little grumpy that the West was getting all the national parks and we weren’t.

In 1872 the world’s first national park was created, grabbing a big chunk of Wyoming along with some slices of Montana and Idaho. It was aptly, if not creatively, named Yellowstone. The boundaries encompass the Yellowstone Caldera, the largest super volcano on the continent. Well over half the world’s geysers are in this magnificent stretch of land, the outward expression of thermal activity so potent that if it erupted - as it has at times over the last several million years - it would wipe out the entire Northern Rockies. Come to think of it, maybe Yellowstone was created more as a quarantine than a park. Still, it’s gorgeous.

On the heels of Yellowstone came Yosemite in 1890, a place famous for both legendary beauty and climbers with a death wish. (For those National Park buffs and trivia junkies out there: Sequoia National Park was formed a mere 5 days prior to Yosemite, making it the second park and Yosemite the third.)

By 1900 it was clear the East needed to step up. We have the Appalachians, which were, believe it or not, at one point as high as the Rocky Mountains and the Alps. But being one of the oldest geological features on earth they’ve shrunk like an old lady over the last 480 millions years. Time and erosion have turned them from soaring, jagged teeth into a gentle, wooded spine stretching from Georgia to Maine. Virginia looked to its interior, saw the gorgeous Blue Ridge section of the Appalachians and said, “hold my beer, I got this.”

Except they didn’t. See, the first national park in the world was created on top of a friggin volcano with relative ease because almost nobody lived there. Cause it’s, ya know, a volcano. This wasn’t the case in Virginia, or anywhere else near population centers… kind of by definition. Impressively determined, men in Virginia spent over 3 decades from 1901 to 1935 using various strategies to cobble together the long, skinny stretch of land that is now Shenandoah National Park. For the most part they tried to raise money to buy people out of their land, but of course many didn’t want to sell. Eminent domain (a legal tactic where the government is allowed to seize your property) and evictions worked where money and promises did not. It wasn’t always pretty, but the end result sure is. The beautiful map below is from xplorer.

The skinny spit of a park contains lengthy stretches of famous paths. 101 miles of the Appalachian trail run through Shenandoah, which is right next to 105 miles of road called Skyline Drive covering roughly the same territory. Guess which one is used more? #‘MERICA.

The highest peak is Hawksbill Mountain at 4,051 feet. My friends and family in Montana are giggling as they read that. They way LeBron James would if he heard I’m pleased with my 8 inch vertical leap. But you don’t live in DC to rub shoulders with wild animals (I mean you do, they’re just a peculiar species of barely sentient creatures called politicians) and the fact that this kind of accessible, beautiful escape is there at all is remarkable.

A shot from the peak of Hawksbill Mountain. Photo credit: moi.

As the song says, Shenandoah, I long to see you. Glad you’re within a relatively quick drive of Philadelphia. You may be old and stooped by geological standards, but you’re still beautiful!

Even more nuts, he sold it despite the minor obstacle of never even having owned it in the first place.

Maybe none of this is surprising now that we’ve seen him as president, but the story around it all remains an incredible tale of New York real estate titans battling it out.

In the early 1990’s Donald Trump was engaging in one of his most treasured of activities - defaulting on debt. The New York real estate market was in a downturn and he was behind on the payments on nearly $1 billion of debt. Here’s the thing though, he was SO in debt that the banks knew he was worth more dead than alive, so they didn’t go after him. Instead, they encouraged him to find a way to pay it back. Trump knew his chance to recover wasn’t just about a single deal that could make the money back. He needed something big, something flashy, something that would get his name back into the headlines. Then his brand would make him rich again.

He found exactly the right opportunity when Marla, Trump’s wife at the time (his second, for those keeping count, the two are pictured below) met somebody named Kiiko Nakahara while at a gym. Well, the gym is the official story. According to some reports it was really while at a party. On a yacht. Surrounded by mountains of… never mind. You can see why the gym story become the official version. Anyways…

This Nakahara person was the daughter of one of Japan's richest and most notorious men, Hideki Yokoi, who is widely rumored to have been part of the Yakuza gang in Japan. Unofficial rumors aside, he was quite officially in jail at the time. Ergo his daughter was in control of his empire.

Kiiko told Trump that her father had secretly purchased the land under The Empire State Building years ago and that while he was in jail she wanted to sell it. At the time, the land was making just $2m in rent as two other New York real estate Barons - Harry Helmsley and Lawrence Wien - had a long term lease on it. Those two in turn owned The Empire State Building itself. The land was leased until 2076, far longer than any of them expected to live. The only way for Kiiko to monetize the land her father bought was to either break that long term lease or sell it. She chose to try and break the lease because it would allow her to own both the land and building, and the only way to do that would be by attacking Helmsley and Wien in court, claiming they were breaching the lease by being poor stewards of the building.

She couldn’t do it on her own though. She needed somebody who understood Manhattan real estate. Somebody who could negotiate. Somebody who understood the legal system and how to generate publicity to help push a fabricated case against somebody else to gain control. Her chosen champion for this dirty, high profile task? Donald Trump, of course. She was also rumored to be one of Trump’s mistresses, though that salacious detail is almost a mere footnote to this story given how nutty everything else is. The two of them are pictured below.

Using every bit of public toxicity he could muster, Trump went after the building owners, saying the building was infested with rats, that the elevators didn’t work, that they were bums. He accused Peter Malkin (the now in charge son-in-law of Wien) and Mrs. Helmsley of turning the building into "a mess," a "laughing stock," a "high-rise slum." The tactic didn’t work though, and in 1999 a judge threw out the case.

The Donald though, he was not done. Despite not putting a penny of his own money down (recall he didn’t have any) he had struck a deal with Kiiko. If he sold the land he would get to keep half of anything over $40m. This seemed like a crazy amount because the lease only paid $2m a year, making a $40m sale just a 5% yield. Maybe this sounds reasonable today but remember the federal funds rate at the time was 6.25%. The risk free rate was higher than the lease yield at a purchase price of $40m, so nobody in their right mind would pay that much. That would be irrational… right?

Lucky for Kiiko, Trump understands irrationality better than anybody else on earth. The men he just slandered in order to try and break the lease? He knew that land was worth more to them than to anybody else. The building owners wouldn’t want the sword of Damocles over their heads, knowing that at some point the ground owner would effectively take over their building, even if it wasn’t until 2076.

Trump approached Malkin and Helmsley with an insane offer. 65 million dollars. Double what a rational analyst anywhere in the city would have told you it was worth. Malkin balked. He bristled. He said unkind things. But at the end of the day, Trump had him and he knew it. Malkin wanted the land underneath his building. The control was worth an enormous premium to him.

So it was, that on March 18, 2002, Malkin and his son (who is now the CEO of Empire State Realty Trust, the public company that owns and controls the Empire State Building) met Trump for lunch. Peter Malkin swallowed both some grub and his pride, and bought the land under his building for $57.5m, shocking just about everybody but Trump.

Donald, for his part, collected his half of the money over the $40m hurdle, or just under $9m. Not a bad day.

To me, this isn’t about our old POTUS at all. Really, it just goes to show the value at the end of the day is in the dirt. Real estate is about the land as much or more than about what’s on top. We’ll explore that a bit in subsequent weeks.

The name is whimsical, reminding me of Narnia or Never Never Land. And it’s a perfect tiny mirror to the big island it huddles up next to: Manhattan. The $260 million public park is a piece of art, a phoenix rising from the banks Hudson River. A brilliant display and hopeful harbinger for the metropolis next door, rising concurrent with a new, post pandemic dawn.

The project was not a reaction to the pandemic though. Nor was it the brain child of a real estate mogul, (usually) men that tend not to let beauty get in the way of a better excel model. It had been under construction for nearly five years before finally delivering this Spring. It’s the real life version of the vision of billionaire media executive Barry Diller.

Diller’s philanthropy arm funded the majority of the 2.4-acre Little Island, which sits atop the site at Pier 54. For those who can’t place where Pier 54 would be, it’s just west of Chelsea and the West Village. In the picture below you can see the skyline of Hudson Yards on the left side of the picture, which is just north up the High Line from Chelsea.

The aptly named Little Island is built atop 132 tulip shaped concrete posts. It contains a 687 seat amphitheater, which set to host hundreds of local artists and performers starting this month. There’s also a central plaza serving food and beverages. It’s a hell of a shot in the arm for everyone begging for a new and fun thing to experience after the COVID lockdowns.

The pier is moderately famous because from 1910 through the mid 30’s it was a launch point for transatlantic ocean voyages, meaning that in 1912 it was the place where the rescued survivors of the Titanic finally got back to land.

The piles of the old pier (seen easily in the picture below) were left as both homage to its history and because they provide habitat for aquatic life, which helps us all have a future.

Architect Thomas Heatherwick was behind Little Island, another feather in the cap of the firm that designed the nearby marquee honeycomb-shaped Vessel attraction at Hudson Yards. Apparently if you want to build something cool in NYC that’s the firm to hire!

More than 350 species of flowers, trees and shrubs can be found at the park, with the plantings varied to provide an environment that changes with the seasons. 66,000 bulbs and 114 trees have been planted, some of which will grow to 60 feet.

In the words of the designer:

“The lifted corners of the pier create distinct microclimates that reveal themselves through color, texture, light and shadow. Whether meandering along paths or taking alternate routes of stairs or boulders scrambles, the eye is at times directed downward to the rich palette of plants or outwards to spectacular views of the city and harbor. Little Island will be a maritime botanic garden with 35 species of trees, 65 species of shrubs, and 270 varieties of grasses, perennials, vines, and bulbs, many of which have been selected for their fragrance and attractiveness to birds and pollinators. The landscape is one of sweeping swaths of textures and seasonally calibrated color themes punctuated by magnificent trees.”

Signe Nielsen, principal of Matthews Nielsen Landscape Architects, which led the landscaping design, in a video described the park’s vision as “a leaf floating on the water that you arrive at.”

I look forward to arriving. To all my friends in NYC, see you there this summer!

I’ll set the scene: during World War I in the early evening of April 22, 1915, the German Army unleashed something entirely new. After carefully checking the winds, they opened the valves on more than 6,000 seemingly benign steel cylinders. Within 10 minutes, 160 tons of lethal gas had drifted over the opposing French trenches, engulfing all those unfortunate enough to be in its path. The steel cylinders were filled with something vastly different from bullets: they were filled with chemistry, with pressurized liquid chlorine that immediately morphed into lethal gas.

The surprise use of chlorine gas decimated the French line. Within a matter of minutes, the plodding but inevitable wall of gas killed more than a thousand French and Algerian soldiers and wounded another four thousand. It was devastating.

This admittedly brilliant man who came up with this weapon was a German named Fritz Haber. Unfortunately raw intelligence and a rigid moral compass are not always tied at the hip. During World War I he developed and weaponized gasses with a stunning efficacy, earning his nickname as the Father of Chemical Warfare.

But what does this have to do with real estate?

After last week’s article my wife brought up yet another farming trend I should write about: regenerative farming. Which is funny because today there’s a special name for “regenerative farming”, but if you had asked somebody a century ago most would have looked at what it is and just called it “farming.” No special qualifier needed. What changed?

Well, the same Fritz Haber that weaponized gas also invented the world’s fertilizer. As I mentioned last week, for the most part, if you want more food, you need more land. But as Mark Twain once joked about land, “they are not making it any more.” So Fritz, who apparently enjoyed playing God, came up with a workaround. Instead of making more land, he made more of a vital component of plant growth - nitrogen. Using his skills as a war chemist he basically brought alchemy to the real world, figuring out how to pull nitrogen from thin air. He pioneered new ways to make people go boom. He also figured out new ways to make plants go bloom.

"Brot aus Luft", as Germans put it, or "Bread from air".

Haber was responsible for killing thousands. He is also responsible for feeding billions. He is considered a war criminal for the former. He won a Nobel Prize for the latter.

However, bread from air has a cost. In this case it’s a lot steeper than we first imagined. Only about 15% of the nitrogen makes it to the plants. The rest runs off, polluting waterways and causing nitrogen induced algae blooms (a map illustrating the magnitude of this effect is below). It also takes a lot of energy to create nitrogen, and that energy usually comes from burning fossil fuels, leading us to a net negative impact on our world.

So what do we do? How do we avoid this? Part of the answer lies in things like vertical farming, as mentioned last week.

Another option? We go back to basics. Basics are what we’re calling “regenerative farming” these days, which sort of implies that current methods are “destructive farming”. And they kind of are.

According to Land Think:

Many current land & farming practices damage soil quality, including the use of tillage, inorganic fertilizers and pesticides. As the soil is depleted of essential nutrients, crop yield significantly reduces, which prompts more demanding and unsustainable agricultural practices.

This isn’t only bad for the planet, but it’s also a bad proposition economically. It’s the definition of throwing good money after bad. You’ll always be spending more and more money to get the same fixed output back. Not a good use of time, money, or real estate.

As somebody who went fully vegetarian at one point for environmental reasons, learning that regenerative farming could make it possible for me to eat meat again was a boon to my life. Done right, raising animals to eat isn’t coming at the expense of a decent earth for my kids to live on. Again from Land Think:

Another regenerative agriculture practice that is drastically improving the economic output and overall soil health is the reintegrating of grazing animals back into cropping systems. As livestock are left to graze in cropping areas, their movement breaks up the soil, allowing nutrients and sunlight to new plants , which expedites the building of essential organic matter. The livestock’s manure adds nutrients to the ground, reversing years of damage from unsustainable agriculture.

Regenerative farming is amazing because not only does it satisfy the tree hugging hippy in me by acting as a biodiverse carbon sink, but it also make economic sense. First, you aren’t throwing more money into the system to keep the same yields as just mentioned. It’s also better from a risk standpoint. Regenerative farms don’t rely on a single crop harvested at a single point in the year, thereby avoiding the potential for completely ruinous growing seasons. For example, if all you grow is corn and you harvest your 1,000 acres once a year, you’d better hope that nothing happens to that crop or you’re left with nothing. But of course things do happen. Flooding, fires, drought, pests. The farmers and their bank accounts are left decimated. Regenerative farms avoid that tail risk because something is always growing.

Regenerative farming supports a diversity of life that makes the entire system more robust. The farmer could sell asparagus in the spring, strawberries in the summer, and squash in the fall. Pigs and chickens can roam and live off the land in a healthy way without antibiotics, without being force fed grains that their bodies don’t process well. Excess pests are eaten by the chickens and wildlife. The land itself is more productive because the dirt and the microbiology and the plants and the animals are all working in concert. The plants and animals themselves are healthier, and as a huge bonus, when we consume healthier plants and animals WE are healthier too!

Regenerative farming better utilizes real estate, makes it more robust, and makes us all healthier. It’s a win all around. Sorry Fritz. Your technology is amazing but sometimes being a Luddite is the right move. I’m not against fertilizer, I just like the organic kind that isn’t produced by burning slippery pools of old dinosaurs.

Let the animals eat the plants. Let them poop on the ground. Let the plants eat the poop. Queue your mental soundtrack of Elton singing “It’s the circle of life!”

Call me crazy, but I like my chicken salad made out of chicken shit.

Let me introduce you to vertical farming. Which, naturally, I shall do via yet another cool SPAC. Spring Valley is taking Newark, NJ based AeroFarms public, with the merger taking place sometime this quarter.

Let’s start with a few numbers: by 2050 it’s expected there will be 9 billion homo sapiens pulling at Mother Earth. AeroFarms uses 95% less water than traditional farming and grows 390 times the amount of plants per square foot. Those aren’t marginal improvements, those are absolutely staggering leaps towards solving our ability to feed the planet in a healthy, sustainable way.

The real estate angle of this is a no-brainer. Think of how many people can live in an apartment building in a city vs a detached home in the suburbs. When you build up you take far better advantage of any given plot of land. This basic concept is called density and has been used for humans for hundreds of years. Plants? Not so much. Using land, which is a scarce resource, in a dense way for us leaves more room for everything else: foxes, trees, alien landings, you name it. It’s why squeezing yourself into New York City is actually a pretty “green” way to go. You don’t take up much land when you’re stacked on top of each other. Same with plants. A farm with so many acres of wheat you need a plane to spray the plain displaces a lot of bison. A single tall building in the middle of a city? Zero bison displacement.

Vertical farming can help turn this…

Back into this:

Let’s take this better use of small land parcels a step further. First, did you know that on average it takes 12x the energy of a food to get that food to the average American plate? Said another way, if a taco gives you 100 calories of energy, it took 1,200 calories of energy to produce it and get it to your mouth. That’s… inefficient. To say the least. Much of that energy cost is in the transport of the food itself, getting it from a farm outside De Moines to your plate on Park Ave. We do this because there is abundant land in Iowa, whereas the dust on a sidewalk in Manhattan is worth more than an entire house in Prairie City (it’s a real place, look it up). But what if we could make it so that the farm was nearby, even in a place like Manhattan? Simply by growing the food closer to where it’s consumed you’d save an incredible amount of energy. You would never have a horizontal farm in New York. You wouldn’t even do that in Newark. But a vertical farm? Now that makes sense.

Another bit of real estate dogma is that location is paramount. Plants tend to agree on that point even more than people do. Ever tried to grow an avocado tree in Maine or plant cucumber seeds under a foot of snow? No, because plants care deeply about where they are and the weather of that place. Just like you won’t leave your air conditioned apartment in Miami during the entire month of August, plants don’t want to be blasted by heat or blown by ice or beaten into the dirt either. AeroFarms gets this, and one of the remarkable things about growing plants indoors is that we grab the remote control from Mother Nature. We can make New Jersey into New Mexico. We can dial up the humidity or take it away, we can make it rain or make in drain, we can put winter into a headlock so the lettuce head has no idea that it’s really December. This method produces reliable crops of food year round. The randomness of farming is tamed and we can plant whatever we want, whenever we want, wherever we want.

Lastly, while I unfortunately can’t tell you that AeroFarm’s greens are technically organic, because they aren’t (the growing method doesn’t use soil so it doesn’t meet organic requirements), they still check a lot of boxes: they are pesticide free, fertilizer free, and local. Growing crops indoors means they don’t have to worry about bugs or rodents, and they don’t need to speed things up with fertilizer because the growing season is “always”. My family is about as deep down the rabbit hole of wellness as you can get and this method of farming strikes me as remarkably superior to the awful techniques that have become popular over the last century. I’d happily much the arugula produced by AeroFarms. Perhaps we all should.

That’s it for this week. If you see some vertically grown green on the shelf, give them a chance. It might be the way most of us get our food someday!

A week later, I moved that same set up to my mostly unfinished attic. At least there was more natural light.

Months after that I got a monitor to connect to my laptop. I kept accumulating bits and pieces of a sweet set up like I was playing some kind of bizarre Office Space video game, gathering a full set as I went along. By the Fall I had a standing desk, an ergonomic chair, new light fixtures for the attic, a new computer, and two monitors. I even refinished the century old wood floors. Basically I knew the world would return to some version of normal at some point but didn’t know when, so I decided to prepare to work from home forever.

Amazon, when it came to office space, took the opposite approach. I mean, yes, they took full advantage of the pandemic from a business standpoint, delivering enough smiling packages to make a wobbly staircase to the moon, but they didn’t stop planning for what their offices would look like when the world got its feet underneath it again.

The happy result of their efforts is The Helix. Quite possibly the neatest building I’ve ever seen.

It will be located in Amazon’s HQ2 in National Landing, Virginia, just across the river from DC. The site is next to the Pentagon, which is probably just a happy accident given that Amazon is actively trying to win government contracts in the defense space. And it’s right next to Congress, another coincidence, I’m sure, given that the one thing Donald Trump and Elizabeth Warren ever agreed on was that Amazon has too much power. They can’t even agree that pizza is delicious, but somehow neither liked Jeff Bezos. Whatever it takes to find handshake in Washington I guess.

The location is great, but let’s move past the diamond dirt for a moment and focus on the building itself. It’s named The Helix because it’s modeled after DNA strands. I have no idea if it was on purpose, but the thing that will allow The Helix, a building modeled after DNA, to be filled with people is a vaccine that uses mRNA, the messenger of DNA. It’s quite poetic.

The 350 foot tall structure will be surrounded by 22 story office buildings. It has duel pathways lined with plants ascending to the acme. It’s not even technically an office building. It’s a gathering space for Amazon employees to interact with nature. The entire principle is predicated on biophilia, the idea that humans crave access to nature and natural light (which I can vouch for given that I moved from the basement to the attic chasing photons). As a bonus that I’m sure Amazon never even considered, being around light and plants increases human productivity. The Helix is like a cheat code to make all the workers around it even better at delivering you things you don’t need. This sort of boost really matters when you’ve promised to hire 25,000 new employees in the immediate area.

Note that while it’s a place to get away and connect with nature, Amazon has also emphasized that it’s a place you can actually go and work in too. Because, ya know, profits. And even though it’s full of plants the structure has the capacity for meetings of roughly a thousand people. But it’s not an office. But you are also more than welcome to work in it and have meetings in it. It’s not an office though. It’s not. Shut up.

I make fun, but I love it, and I will probably go see The Helix once it’s constructed because I’m a real estate nerd and don’t live too far away. See you there!

Lumber prices seem to set a new record almost daily, now up 67% this year and up 340% from a year ago. And those shaved trees aren’t just needed to frame a house. Those costs hit your floors, your cabinets, your fence, your new sauna. Wood is used in just about everything because throughout most of history it’s been cheap and abundant. But now… now it’s not.

And why do we all care about this huge lumber shortage? Because it’s costing us a small fortune!

This stat blew my mind:

The surge in lumber prices in the past year has added $35,872 to the price of an average new single-family home and $12,966 to the market value of an average new multifamily home, according to the NAHB.

So let’s chat. I’m sure you’re curious, why do the trees hate you and your attempt to build things?

Play the tape of Econ 101. Demand and supply are why, and they went in opposite directions during the pandemic.

Lumber producers were staring down the barrel of a recession and, getting flashbacks of the housing crises, slammed the brakes. The average person was staring at the inside walls of their home and, getting flashforwards of going insane, decided to move to the suburbs and/or renovate their existing space.

Builders and contractors started to snap up lumber. Mills were caught flat footed. The saws were still, their workers were home and scared to come to work, even parts of the supply chain like trucking were stuck in park. Mills have been trying cover the lost ground ever since, but like my 4 year old on a family walk, they can’t ever seem to catch up.

WHY?!?!

1) Inventories are depleted. Builders used up their existing inventory and so as they build new homes they need to get that new lumber right now. That puts strain on the supply chain.

2) New mills take a long time to build and cost millions upon millions, so all that’s really happening is owners are trying to squeeze more and more out of existing mills.

As Devon Stockfish, the CEO of Weyerhaeuser (the largest forest owner and lumber producer in America) recently said:

[Are we] going to go out and do a greenfield mill? Our inclination is to really focus in the near-term on our existing mill set. And the reason behind that is just we think we can get better risk-adjusted returns by putting that capital to work in our existing mill footprint.

Translation: nobody knows how these crazy prices are going to play out, so even the lumber producers aren’t willing start big new projects that might not even arrive until well after the party ends. You want to deliver that six pack while the party is raging, not while everyone is hungover.

3) Workers are still just as short in supply as cedar posts. And it’s not just the mills, it’s the whole transportation supply chain. Even if a mill could produce all the lumber in the world it wouldn’t matter if they can’t get it to the nearest Home Depot. Which they can’t. There are bottlenecks everywhere.

4) Demand is overwhelming, so the goalposts keep moving.

Mr. Stockfish again:

There is so much demand for housing right now that the builders are able to - even though they're experiencing some increased costs, they're able to pass that on to the buyer. And ultimately, you can't see housing prices continue to go up at this level year after year. There's obviously some limit where that starts to take some increments of the buying community out of the market… but the reality right now is there is a real shortage of housing in the market, and the demand is just overwhelming.

All of this has lead to expensive houses, expensive renovations, and even expensive raised garden beds. As a silver lining, it’s also lead to some great memes. I’m taking my wife to Lowe’s for our next date.

Is there relief in sight? I think so. As unemployment benefits tap out and those stimulus checks get spent and vaccines blunt the pandemic’s threat workers will return, helping to supply the lumber everyone needs. Mills are doing things on the margins to boost capacity, and more and more lumber should come out. There is usually a seasonal lull in building as the year wears on, which could ease demand pressures. Rates are rising, which hits home affordability, and that could dampen demand.

These sorts of tulip squeezes are always temporary, it’s just a matter of when the squeeze ends and where it levels out.

The pieces are in place for a sustained boost to lumber prices, but the insane prices we’re seeing now aren’t likely to last past this year. If you can pause on a new house or renovation, now might be a good time to push that button.

Good luck!

They did not disappoint.

Quick aside to explain the title of this week’s newsletter: the wife of the host came outside at one point to ask what we were doing. Upon hearing my intentions she laughed and said her husband didn’t count as one whole sharp mind. Then she offered me cookies, pretzels, chips, Yiddish lessons, and a free sombrero. She’s good people.

The 1.5 sharp minds in the below interview are Mark Malcein of Kades-Margolis and Brian Walsh Jr of Walsh & Nicholson Financial Group.

For some faces to picture as you read: Mark is on top, Brian below.

Let’s get started!

Should the average person think of their primary residence as an investment or a lifestyle choice?

Mark Malcein: “Before I ever owned a house I thought it was an investment. The dollars and cents is that it’s yours, you can customize it, do whatever you want. You’re paying for a sense of place. It’s money well spent, but it’s not an investment.”

Brian Walsh Jr: “Totally agreed. It’s not an investment, it’s a savings account.”

MM: “If I get all my capex and interest back when I sell it, that’s a win. That’s all you should reasonably expect.”

When does it make more sense to buy? When does it make more sense to rent?

BW: “To illustrate with an example: doctors in residency who perhaps could afford to buy, still shouldn’t buy. Anybody in a potentially temporary situation should rent.”

MM: “Owning a house is not an equal proposition. Is it an old house? Can you handle home maintenance on your own? If you can’t, that house will cost you a lot more than the person who fixes their own issues. You need the ability to do some basic maintenance. There could be a middle ground in something like a condo where you own it but pay an HOA to do most of the maintenance. But you’ll get slower asset growth there.”

BW: “That’s why a lot of older people like condos. No maintenance but it’s still an asset.”

MM: “I always assumed that people who rent were a certain age, mostly young. But there’s a lot of older people that rent too, especially those who are alone because it gives them peace of mind that if something comes up it will be dealt with.”

BW: “People just want to feel good where they live. It doesn’t have to be fancy. That’s the first problem to solve, then ponder rent vs own. Affordable housing is a huge issue.”

Me: “That is absolutely correct and such a big topic, it feels like it should be an entirely different newsletter.”

BW: “Yep, and it should be. Super important. But back to the point, I used to live in San Francisco, and even back then rents were crazy. But owning was even more crazy. It’s an interesting dynamic. Maybe in a market like that it actually makes more sense to rent even if you plan to stay.”

MM: “The takeaway from all this is that there are different markets. It’s real estate, it’s all different. And every person is different. Point is you should talk to a good financial advisor!” [laughs]

Is debt on your house good or bad?

MM: “Neither, but it's usually fine. Just don’t be emotional about it. Don’t cash out your 401(k) to pay off your mortgage just because you don’t like debt.”

BW: “Debt is your friend if you use it appropriately. If you have the discipline to manage it, it’s a huge asset. When you use debt properly, you shouldn’t be afraid of it. The problem is when people see it as free money. For some it works well. For some it’s a disaster.”

MM: “It comes down to cash flow. A lot of realtors will suggest looking for a house that is 4x income but that seems high to me. But the other extreme doesn't make sense either. Should you buy a house with cash right now? No, that’s insane, interest rates are so low. What you need to look at is cash flow. The question to ask is can you afford whatever you’re doing and still buy beer for some friends without worrying about it? Just don’t overspend. Don’t ruin your lifestyle with too much house.”

MM: “To illustrate with an example, my dad is a machinist. He’s been laid off a dozen times in his life because of plants shutting down and because that’s just the nature of the job. He paid down his mortgage as soon as he could because he needed the security of not having a payment. You can find an instance where anything makes sense. Everything depends on individual circumstances, but generally, debt on a house within your means is absolutely fine.”

Primary residence aside, what would you recommend to clients that want to get started investing in real estate?

MM: “Just let people know you’re interested. Eventually something will come up. Find somebody with a small multifamily building that’s completely paid off and get them to provide some seller financing.”

BW: “Find somebody else to pay your mortgage. A rental that you rehab a little bit will add value and get paid off in 30 years. Just educate yourself first so you know what it takes to own a rental. Most people want to do it in theory but have no idea what it means in practice.”

MM: “I’ve found that too many people who own real estate try to maximize not paying taxes instead of just making a profit. The tax shields are amazing, but you also want to actually make profit. It’s a good problem if you have too much cash flow.”

BW: “Yes! I’m always explaining that if you’re paying things like capital gains taxes it’s because you made money. You don’t pay taxes if you don’t make money. On some level paying taxes is a good thing because it means your money is working for you.”

BW: “What I want to own personally is a trailer park. The land is what you want.”

MM: “Yes, you want the land.”

BW: “Bill Gates buys land. What does that tell you?”

MM: “A lot. But of course not everyone is Bill Gates. There’s a huge group of people that unfortunately just can’t touch the asset class.”

BW: “Not privately. But if you don’t have enough for a whole building, you can just buy REITs. Either index funds like at Vanguard or individual names. You can get some real estate exposure for whatever change you have in your couch.”

A big thank you to Brain and Mark for their time. I found the conversation very interesting and had a good time talking shop with them for a couple hours. Hopefully it helps all of you think better about real estate! 

Now WeWork is going absolutely off the rails by real estate standards. They’re accepting Bitcoin as payment.

The first tenant to take advantage of this? If I made you guess, and you happened to be familiar with WeWork’s tenants, you’d probably guess right…

It is, of course, the freshly public Coinbase. The crypto exchange titan is one of WeWork’s more prominent customers and seems all too happy to help perpetuate the use of Bitcoin.

I think anybody reading this will agree that’s pretty cool. Just like everyone reading this agrees people calling themselves foodies is not cool at all. Here’s a nutty revelation: everyone likes food. I’m a breathie cause I like breathing.

Anywho, I’m not going to claim I’m a snowflake because I think it’s awesome that WeWork is doing this. Because duh. Instead, I’m going to try and go a step further and answer the obvious question: why would WeWork do this? I don’t get a W2 from WW, so it’ll have to be via divination. Here goes…

Theory #1: Sandeep Has Lost his Mind

I don’t think the CEO of WeWork has lost his mind. But I feel like I have to at least consider it or I’d worry I’m losing my own mind. A company worth dime billion dollars is letting users pay rent in currency that only exists in a digital universe. The currency could absolutely implode and that dollar of rent they just got could be worth a mere fifty cents overnight. That’s scary… yes?

Well, no. The vast majority of their revenue will still be in good old George Washingtons, so exposure is mitigated. Plus, they can hedge their Bitcoin to mitigate any movement in the value. And let’s not forget that the US isn’t exactly on the gold standard anymore. You know what else only exists in a digital universe? All of your “real” money. The US makes more of it every day with less effort than it takes you to pass your morning constitution. Let’s flip the script for a quick tic: maybe accepting crypto is a prudent hedge against the dollar.

Theory #2: They Want to Get That Flywheel Spinning

WeWork understands that the more people use Bitcoin (and other crypto assets), the more valuable it becomes. It’s a network effect. Think about Instagram - it’s fun because other people use it. The more great content produced by your friends and influencers the more time you spend on it, so they produce even more content, ect, and the value of the platform booms. Bitcoin is the same concept. The more people use it, the more it becomes legitimized, and the more valuable it becomes. WeWork is a powerful brand and influences what other corporations do. Tesla understands this too and recently announced they would accept Bitcoin for new cars. These first mover companies will start collecting Bitcoin as an asset while they concurrently make that asset more valuable as they normalize its use. It’s brilliant.

Theory #3: Marketing

Brand is everything at WeWork. Do they have a great platform? Yes. Do they have a better ability to cater to larger tenants than most other coworking companies? Yes. Is their global footprint extremely valuable? Yes. But are any of those things their most valuable asset? No.

WeWork’s most valuable asset is that everybody knows its name. There are documentaries on the company airing on Hulu. And people actually watch it. The company has an allure, a cache that pulls you in. The secret to their future success will be preserving that je ne sais quoi. One way to keep walking the walk is to do innovative things that people will talk about. Things like accepting Bitcoin (BTC) for rent payments.

That’s all for this week. I’m trying to keep these shorter so people like my wife don’t have curl up on the couch with a cup of tea and a blanket to get through them!

Yes, I started this week’s newsletter with an awesome pun. It’s how I keep my dad card from expiring.

I’ve asked for feedback, and other than a lot of people saying “I still have no idea what you do for a living!” the most common refrain is people asking for investment perspectives.

In an attempt to listen, this week I’ve assembled an investing playbook. I’m not telling you to go out there any buy any of these things, because make your own decisions based on valuation and risk tolerance and blah blah blah. Still, I’m hoping that by reading this it will help you think smarter thoughts when/if you ever decide you need some real estate in your life. If you want to find any public option (that is, stocks) for what I list below just google the sector + REIT. For example “cell tower + REIT” or “data center + REIT” and you’ll find options.

Let’s start with the most topical thematic: inflation. Even the legendary Howard Marks has called out the need to hedge against inflation in today’s environment.

Because the primary risk lies in the possibility of rising inflation and the higher interest rates that would bring, I think portfolios have to make allowances: even though we can’t predict, we should prepare. This possibility means (a) bonds with maturities much above ten years are obvious candidates for underweighting and (b) inflation beneficiaries should be considered for overweighting, including floating-rate debt, real estate capable of seeing rent increases, and the stocks of companies with the power to pass on price increases and/or the potential for rapid earnings growth. - Howard Marks, Oaktree Memo, March 2021

Let’s unpack that. “Real estate capable of seeing rent increases” is, frankly, nearly all real estate. To finish qualifying his thought though, he means real estate capable of seeing rapid rent increases. Things like hotels, RV parks, apartments, and self storage.

Hotels

A few weeks ago I touched on the popularity of leisure hotels as an investment thesis based on the travel surge expected after we hit herd immunity, but that’s not the only force pushing companies like Marriott to all time high stock prices, investors also love that Marriott is a great inflation hedge. So is AirBnB.

Camping

RV parks have seasonal visitors (i.e. rapid rent resets) and cheap rents. The cheap rents part is important too. How many of you would notice if your favorite campground raised prices by a dollar? None. Exactly. And for a $50 pad that $1 is a 2.0% increase. Boom. Inflation covered.

You Store It

Self storage is a very popular investment for individuals because it takes a relatively small check to buy one, requires very low maintenance, and needs almost no capex. As an added bonus, because leases are month to month, you can reset rents quickly. Great inflation hedge.

Ok, ok, I can hear you all yelling at me across time and space to stop talking about inflation.

Even Google Needs Real Estate

For all you Robinhood investors who love tech, real estate has that too! You want to capture the digital age? You can buy Apple or Fastly, sure, but your iPhone won’t work without cell towers - which is real estate. The signal from that nearby cell tower will travel down fiber, which is also real estate, and into a data center, which is, you guessed it, real estate. You can invest in any of those parts of the process. So next time you turn on Netflix imagine the fiber optic cable needed to pipe your signal from the data center to your TV so you can soak your eyeballs with pretty pictures. That’s all investable real estate, which is pretty cool.

Snake Eyes

What about one of the newest American vices that got a huge boost from the pandemic, online sports betting? Those bets you place on your phone are funneled through a local casino, which is, of course, real estate. The game you’re betting on is being played in an arena, which is real estate. The bar you’re sitting in making that bet? Yep. Real estate. And you can invest in all of that. For example, Penn National Gaming is public (they own Barstool), as is DraftKings, as are REITs that own casinos.

Let’s Go Out and Get Housed

Here’s a fun theme to play since most of us are Millennials: we are, as a generation, finally growing up! We’re the largest age group in America so whatever we’re doing matters a lot. As our peers get married and have kids we are increasingly moving to the suburbs of major gateway cities and to booming Sunbelt cities like Austin and Atlanta. How you do you play that with real estate? Single family rentals are a no-brainer. If you want a house but don’t have the money for a down payment or would rather get a root canal than do home maintenance, you increasingly have great options to rent entire homes. The landlords who provide this service are poised to benefit.

The Millennial slice at the bottom of this pie is YUGE.

Whole Paycheck

Another tangential way to play the suburban boom? Shopping centers, which are predominantly located in the suburbs everyone is moving too, could see more foot traffic. And if people work from home more, they’ll make more trips to local centers to eat and work out. Grocery anchored shopping centers, like those with a Whole Foods in them, are especially popular these days.

Generational Wealth

Let’s take it a level up: how about the the generation that give birth to Millennials, the Baby Boomers? Every day another 10,000 Boomers turn 65. They’ll need care, and that means seniors housing, nursing homes, hospitals, and medical office buildings. All investable.

Ecommerce and Warehouses

That Amazon package you just got came out of an industrial facility. This asset class has been absolutely booming, with everyone from Blackstone to your great Aunt Martha buying up every warehouse they see. Do you think ecommerce will keep growing? Most investors do, which is why these assets have feeding frenzies at every sale.

Life Sciences

Do you know where we found a vaccine for COVID? In life science facilities, which is a specialized form of office space where people much smarter than me do the R&D for all sorts of amazing things. Cures for cancer, genomic research, vaccines. This is another sector that’s beloved by behemoths like Blackstone.

Contrarian Plays

If you think work from home is a fad, you can buy traditional office buildings, you little contrarian you. Will people go back to malls? The largest mall owner in the country is a publicly traded REIT. You could buy a few shares then go shopping and tell your spouse it’s to support your investment.

Buy and HOLD

No matter what you decide to buy (if anything), note that, generally, real estate is the quintessential buy and hold strategy. It was diamond hands before Reddit and GameStop were a sneeze in the breeze. With relatively low risk, most real estate delivers decent yields that compound over years, which means time is your friend. Invest early, set it, and forget it. If you own real estate via stocks, this means it’s best held in retirement accounts so the dividends are tax free. If you go direct and buy whole buildings yourself (congrats on being independently wealthy btw) there are all sorts of ways to shield your income. Hire an accountant. They’ll be worth every penny.

I’ll update this post every so often, so check back if you want updated thoughts. Bookmark it. Send it to your friends. It should be a reasonable road map for those of you who want to dabble in the surprisingly fun world that is real estate.

Paper Boy:

The one where RV sales are booming

As I mentioned above, RV parks are a great investment. My neighbors just bought an Airstream. My family and I have several camping trips planned for this summer. Snagging a house on wheels for a voyage over asphalt used to be an activity for the wrinkled but now it’s being picked up by a younger generation. Look out Yellowstone, the Millennials are coming. We’re used to the world exploding around us. We’ll feel right at home.

The one that combines altruism, real estate, and technology to provide affordable housing

“PadSplit provides shared housing – a “PadSplit” – with private, furnished bedrooms and fixed utility costs as well as access to 24/7 telehealth services so that members can obtain safe, clean, and affordable housing. PadSplit members average $25,000 in annual income and report $516 in monthly savings between housing, utility, and transportation costs. PadSplit’s model is overall designed to leverage housing as a vehicle for financial empowerment, and to that end, it has helped its members increase their credit scores by an average of 102 points. Many members have been able to save enough to purchase their own vehicles, move into their own apartments and even purchase their own homes, which they could then convert to PadSplits to begin the cycle for others.”

The one where I swerve a little off topic because it’s interesting

Here’s a fun fact from Marc Rubinstein’s Net Interest. The final bit of the below quote is hysterical. Reg FD essentially made the exchange of non-published information more restrictive, cutting back that casual chats and extra information you might get just because somebody likes you. What that last line is saying is that attractive people were getting more/better information until the rules leveled the playing field!

In one study, a team of researchers used machine learning-based algorithms to extract key impressions about personality traits from LinkedIn profile photos of sell-side analysts. They used the photos to identify measures of trustworthiness and dominance, which they then regressed against the analysts’ performance. A high degree of trustworthiness was reflected in earnings forecasts closer to management guidance; and high dominance was linked to more active participation in conference calls. The researchers also measured attractiveness, and concluded that any benefit that provided for forecast accuracy diminished after Reg FD!

That’s all for this week. As always, thanks for reading!

Stories need a bad guy though. What fun is following a protagonist if they don’t have somebody to battle against?

Today, expensive housing is battle everyone seems to be fighting. Which makes everyone their own protagonist. And they need a bad guy. The media is only too happy to serve one up, because that’s what the media does.

“Humans think in stories rather than in facts, numbers, or equations, and the simpler the story, the better.” - Yuval Noah Harari, 21 Lessons for the 21st Century

That last part is critical. The simpler the story, the better. If you can’t get the whole point of an article across with just the headline then, well, that’s simply un-American dammit. That’s why we invented Twitter.

Ergo hating large institutions for buying up single family homes has become very popular. We love this narrative because it gives us exactly what our brains are craving - an enemy that’s easy to point a finger at! Something to battle! It’s not my fault I can’t buy a home, it’s that dude in a suit from Wall Street! F**k that guy!

Pump the Brakes

Of course that’s not the only, or even the most important reason housing is so hot right now. That gorgeous old craftsman that’s been recently and lovingly renovated in a highly amenitized yet walkable suburb with great schools? You just got a Zillow alert and call your realtor the second you get off the can, only to find it’s impossibly already pending for sale. Your cursing can be heard in the neighboring apartment. What. Is. Happening?!?

Those companies with lots and lots of money? I’m not here to absolve them. It’s their fault.

Let’s go ahead and bury the enemy I just shone a spotlight on. Yes, buying single family homes to rent them out has seen a boom in institutional interest. Large REITs like Invitation Homes and American Homes 4 Rent that collected cheap homes during the housing bust over a decade ago continue to buy one-off homes from regular listings. Their size and resources allow them to use artificial intelligence to check things like how much light is in the kitchen, then make make instantaneous offers that will beat any human to the table. Which is pretty cool from a technology standpoint, but means sometimes you’re shit out of luck when you’re the one with thumbs.

But it’s not just older, existing homes. Whole tracts of newly built single family homes are being purchased so that all the stoves, all the flooring, even the types of grass seed are exactly the same. This makes it very easy to manage. Real estate guys have dubbed this strategy “horizontal apartments” because we are nothing if not out-of-this-world clever. It’s possible everyone in real estate is simply made of up of the people that failed out of marketing 101.

What’s more striking to me is that the homebuilders themselves are getting in on the action. They aren’t even selling some of the homes they’ve built, they’re keeping them! Major homebuilders like Lennar have announced huge programs to build and then keep $4 billion of homes so they can rent them out instead.

To keep things in perspective, these institutions still represent a tiny 2% slice of the housing market. You thought it was bigger, didn’t you? It’s not. They are a rapidly growing share of the pie and are certainly have some effect on pricing, but they’re still pretty small. And it’s not like they buy these homes to then raze them and raise bunnies on the wild land. The homes are being rented out to families that want to live in the suburbs, easing some of the demand pressure.

Buying homes has become unaffordable for a lot of people, but the home ownership rate is actually back to historic levels. People, not just institutions, are still buying homes. A lot of them.

So what else is afoot?

All your friends that already own a home? It’s their fault too.

Existing homeowners tend to fight tooth and nail against any new construction around them, with restrictive building codes as the inevitable result. Which makes sense, really. Those homeowners bought that house/condo/yurt because they liked it the way it was at the time of purchase. They don’t want a big new high rise blocking their condo’s view of the water. Nobody wants a dense townhome complex built on the pretty green lot that currently sits in their backyard. I get it. The problem is this screws everyone else who wants to move to the area after you.

Two striking examples of this are in San Francisco and New York, though of course these types of building code restrictions can be found just about anywhere. In the below charts everything in color could not be built today. In San Francisco, this is saying that over half of all the housing that currently exists would currently be illegal to build. People moved in and then said “no more!”. What do you think that does to prices?

The good news is a lot of places are starting to get the joke. Oakland, for example, is considering a bill to ban zoning that only allows for single family homes. This would help promote the development of more, denser housing, which would ease price pressures.

Alan Greenspan, Ben Bernanke, Janet Yellen, and Jay Powell? Yep, their fault.

Look at this chart of mortgage rates over the last half a century. I considered drawing a trendline for you but thought it’d be insulting. It’s pretty clearly straight down.

When rates go down, mortgage payments go down if the home price stays the same. That’s great, right? Well, it could have been. What’s happened instead is that the savings from lower interest rates hasn’t accrued to new buyers by making payments lower, it’s accrued to existing homeowners by making existing homes more expensive. If you bought a home in the 80’s, good for you! If you’re trying to buy one now… well, that’s kinda sucky (technical term) for you.

Are you a Millennial? It’s your fault.

As the Millennial bulge crosses into their 30’s they’re all getting married, having kids, and wanting more space with better public schools. There are too many of us, and we all want to move to the suburbs at the same time. The pandemic greatly accelerated this trend, the result has been like putting your thumb over the end of a hose.

What happens when a generation with 17 million more people than the generation before it all decide to want a single family home at the same time? Prices go boom boom.

Three L’s are preventing supply from catching up to demand. It’s the letter L’s fault.

We aren’t building enough homes. There’s been a chronic shortage of single family homes ever since the housing bust and Great Recession. Below is the number of new single family homes built in the last quarter century. As you can see, we never really recovered from the dip.

As demand has popped, the builders have had trouble catching up because of the 3 Ls.

Not enough Land

Not enough Labor

Not enough Lumber

Those lumber costs are absurd. I’ve started pilfering toothpicks from restaurants so I can glue them together to form my raised garden bed. I’ve even considered building it out of gold bricks. It’d probably be cheaper.

Remote Work. It’s Technology’s Fault.

If you can work from anywhere there’s no need to be next to your office. You can live on a farm. On a beach. In the mountains. Rural land sales have been en fuego. Home prices in my gorgeous hometown of Missoula, MT have been gamely chasing Bitcoin’s performance. Most enduringly, the suburbs of major cities are booming because even as we go back to the office, it probably won’t be every day. That means that 1) we need more space for a home office and 2) we can live further away in a single family home to get that space. This all creates more demand for houses.

Nobody’s Selling. It’s the happy homeowner’s fault!

Homebuilders aren’t building enough. That’s a problem. But existing homeowners aren’t selling either. There are many reasons for this (perhaps we’ve all just learned to be happy where we’re at), and one of the biggest is that current owners are afraid that if they sell they won’t be able to find another home, which of course means there’s even fewer options to buy, and it becomes a self perpetuating problem.

Conclusion? It’s everyone’s fault!

As with nearly everything else in the world, the reasons single family homes are getting so pricey are complex and multi-factorial. As with nearly everything else in the world, the media tends to boil it down to a bad guy and a headline. In my opinion, there really isn’t a bad guy. It’s just the way things are given a lot of different causes and effects.

Maybe next week I’ll write a sister article to this one with ideas for how to solve the housing crises. Teaser: build more homes so that supply meets demand. Nailed it! That economics degree is really paying off in spades.

Special thank you to my Coffee Dads text chain for the inspiration for this article. Good luck finding that renovated craftsman Andy. I’m rooting for you!

Because of all that, I’ve followed the WeWork saga closely for years. I love the story arc. I am fully vested in the characters. To me, WeWork finally going public feels like watching the goodbye season of my favorite TV show.

To catch you all up on why today was the right time to write this newsletter: WeWork (a coworking firm) is going public via SPAC in a merger with BowX. Your head just exploded. Totally understandable. Let me unpack that for you.

Coworking is when you rent out desks in trendy office space on a short term basis to disparate clientele. Like a cross between normal office space and a coffee shop.

BowX is a SPAC, which is a public company made entirely of cash. It’s sole purpose in life is to find a private company with an actual business to merge with. The SPAC gets to be a real boy and the private company gets to go public. If going public via a traditional IPO is the equivalent of running for class president, going public via SPAC is like getting picked first for dodgeball at recess. It’s (relatively) easy and scrutiny free, which is a lovely way to approach the altar when you have a history as beleaguered as WeWork’s.

Everyone Loves a Good Back Story

WeWork began in 2010 with just 3,000 square feet of exposed brick in SoHo. The founders were two gentlemen named Adam Neumann and Miguel McKelvey. Adam became infamous as WeWork first attempted to IPO in 2019 for things like flying a private jet to Israel with chunks of weed in cereal boxes, and coming up with a name for his company, trademarking it personally, and then selling the trademark to his own company for $6 million. Miguel has some interesting, lesser known roots of his own, as he grew up dad-less in a five mother “collective” in Eugene, Oregon. These guys combined had the unique perspective and robust hustle that turned WeWork into a juggernaut.

Narratives rule the world though, and fair or not, both the genius and madness of the company often gets traced back to Adam alone.

His legacy has the ups and downs of a toddler on a pogo stick. Just four years after launching with nothing WeWork was raising $335m in a series D and had a valuation of almost $5 billion. They had gone from a single 3,000 square space to an impressive 1.5 million square feet. Another four years of hustling later and they were Manhattan’s largest tenant, eclipsing J.P. Morgan. Today they have a massive 22 million square feet global footprint. Adam did this by convincing stodgy landlords they should accept him into their buildings despite the credit risks, by convincing Masayoshi Son, the CEO of SoftBank, to bankroll the furious expansion, and by convincing tenants that they weren’t just joining an office, they were joining a community. Any one of those alone is no easy feat, much less pulling off all three, and I can only applaud him for it.

By the summer of 2019 Adam had built a blazing fast rocket ship. The only problem? He was on the verge of flying it straight into the sun. The brash behavior that grew WeWork into a force was now beginning to hold it back, especially as public scrutiny heated up prior to an extremely visible IPO. That planned IPO in September of 2019 and the (absurd) $47 billion valuation both failed, burning like a brick of magnesium tossed into a bonfire. Much of the failure can be pinned on a narrative that got increasingly negative, which was largely made possible by Adam’s behavior. Not coincidentally, just a week after the failed IPO Adam was ousted as CEO.

But Wait, There’s a Sequel

In October of 2019 WeWork had no CEO, no direction, and was bleeding cash. It had been humiliated in its failed attempt to go public and was in a heated competition with Facebook to be the most hated company on the planet.

Enter stage left: Sandeep Mathrani. In the world of public REITs (that is, real estate companies traded on the stock market) the man is legend for reasons that are on the flip side of the coin from Adam. He is a steady hand. He tells you what he’s going to do. And then he does it.

Sandeep was hired away from Vornado (an office company in New York) to be CEO of GGP (a mall company) in 2011, just as the latter was emerging from bankruptcy. With a head cool enough to make Jack Frost jealous Sandeep righted the ship. He took a company that had just set the dubious record for the largest bankruptcy in American history (at the time it happened in 2009) and sold it 7 years later to Brookfield for over $9 billion dollars.

For obvious reasons, the public market likes this guy.

For reasons just as obvious, he seems like exactly the right person to have taken over WeWork.

Grabbing the wheel of a coworking company predicated on “socially mixing” in February 2020 just before COVID 19 made “socially distancing” common vernacular was a poor bit of timing for Mr. Mathrani. The pandemic easily could have sunk the ship and nobody would have blamed Sandeep, but the man didn’t let a good crises go to waste. He used it as cover to cut $1.1b of overhead at WeWork. He used it to dislodge underperforming or not yet opened locations. He used it as a good excuse to continue shedding all the extraneous business lines that Adam had created like co-living and We branded schools so that WeWork could focus on, well… work. And it worked. The company survived and is poised to actually make money by the end of this year.

What Happens Now?

In the third quarter of this year WeWork is expected to finally go public, but it will look much different than it did during its failed attempt two years prior. It will have new leadership, a leaner look with a focus its core business, and, perhaps best of all, it can sniff profitability.

It will also have a much better set up for success, despite office space as a whole facing severe headwinds from the proliferation of remote work. There are three main things that have shifted in WeWork’s favor since 2019: first, the valuation is no longer $47 billion, but a much easier to digest $9 billion. Second, the pandemic has wrought a decade of experimentation with remote work in just a year. We have realized that hybrid, fluid work between the main office and other locations is not just preferred, but productive. Employers want to be able to hire the best talent from anywhere, and employees want to be able to work in Miami as easily as Manhattan. Third, the world remains uncertain. Uncertainty means tenants will pay a premium for flexibility. All of this speaks to the need for workspace that allows you to be dynamic. All of this speaks to what WeWork offers.

WeWork’s core business is coworking. And it should be, because they’re good at it. Instead of adding non-sequiturs in their 10-K to help grow revenue (like schools), they now wisely plan to add pillars to their core business. Those pillars are as follows:

1) WeWork All Access (WAA). This is the golden ticket. Given its global footprint WeWork can use its size to provide a unique offering: a pass that let’s you work in any one of hundreds of locations across the globe. You can travel to nearly any major city on the planet and pop into a WeWork for a flat monthly fee. That is powerful and echoes the network effect of a technology company. I love this aspect of their business. It probably wouldn’t be as juicy of an offering prior to the pandemic, but the gates have been thrown open to asynchronous working from anywhere. WAA catches that beam of light beautifully.

2) Marketplace. This is business 101. Once you have the customer, sell them add-ons. (“Would you like fries with that?”) For WeWork this includes things like HR services and insurance. Things that compliment what tenants are already doing in the space.

3) Platform. For a fee WeWork will build out your space and manage it for you. They’ve already done this for Bank of America’s trading desk in Manhattan and the guys I know there dig it. It’s a great business for WeWork as it requires no capital of their own and allows them to further expand and entrench their brand.

Will We work?

Forecasting is hard when you want to know if it will rain tomorrow. Whether a $9 billion business with an eclectic history of wild successes and the reddest of flags will pull off an incredible comeback is a smidge more complex. You don’t come here for empty platitudes and wishy washy bullshit though. So I’ll give you my straightforward opinion: Yes. We will work. Remember that fire from earlier? I believe the company emerges from the ashes as a winner.

I’ll miss you WeWork. I know going public will only make you more visible, but like a band before they clean up their act and go mainstream, I liked watching you jam out in the corner of a small, 3,000 square foot club in SoHo. You felt like mine. Now you’re everyone’s. I suppose that’s why you’re worth $9 billion though.

Godspeed. The sun is rising on coworking. Let’s ride.

My brother called me, leading with that line. “It’s called fractional ownership. I’m afraid it’s just a timeshare, but I don’t think it is. And I kind of love it.”

He’s not alone. The demand for leisure travel and second homes is scintillating. People everywhere are trying to figure out how to carve out their own slice of paradise. Hotels have been shut down. Rentals down at the shore are booked solid. Home prices have boomed, locking even those who are relatively well-off out of the market.

Enter Pacaso. Not spelled like the famous Pablo Picasso, but reminiscent of one of his paintings the business combines fractured pieces into a whole and the result is stunningly valuable.

So valuable, in fact, that Pacaso has become a unicorn just 5 months after launching. They are fastest US company ever to achieve that milestone.

How did this happen? First, kudos to Pacaso for seizing a moment. People want a place to escape that feels safe and stable, a place that feels like their own. Most people realize that the timeshare model has some serious flaws, but even if they do their best to avoid that method of owning “time” they still can’t afford a whole second home. What a conundrum.

The insight of timeshares was that most people don’t visit their second homes all that often. The problem with timeshares - for the customer, at any rate - is that they represent ownership of time, not real estate. What if there was a model that wasn’t a split ownership of time in an asset, but a split of ownership of the actual asset? Now that sounds appealing. Austin Allison and Spencer Rascoff understood this and launched Pacaso in October of last year. Because of their efforts anyone with a little spare change (ok, a lot of spare change) can buy a 1/8 share of the below home in Napa.

Brilliant!

Pacaso even has a handy chart detailing the important differences between their business and timeshares. Can you still overpay for a home on Pacaso? Of course. But you can also overpay for any home. You still need to make sure the total implied price makes sense, but at least with Pacaso there is transparency and clear ownership rights. The fees for all the work Pacaso does need to be considered as well, but again, it’s transparent and represents a value to the owner, which, importantly, is you.

The other reason for their success is that Pacaso emulates one of the best parts of WeWork, in that is it’s a real estate company that’s asset light. Pacaso isn’t Diamond Resorts because they’re not building and owning an asset then selling time, they’re finding listings, providing a service, and letting others provide the capital for ownership. This makes it more appealing for Pacaso’s customers because they own actual real estate, and more appealing for Pacaso’s investors because Pacaso’s asset is the platform, which allows growth to scale exponentially without a linear need for more capital.

The excitement from Pacaso’s newest investors is palpable:

"Pacaso's business vitals are nothing short of momentous and we're excited to be part of the journey," said Greycroft's Settle. "As the demand for second home ownership increases, gone are the days of these homes sitting empty for most of the year with little benefit to the owner. Pacaso is creating a new category that will dramatically change how people approach buying and owning a second home."

The biggest question swirling around right now is: does the valuation make sense? Should something this new, this unproven, be worth roughly a billion dollars? The answer is a classic shoulder shrug: maybe. Pacaso has a major benefit over most other start ups because it posted positive EBITDA this quarter, meaning investors won’t be waiting half a decade for the company to actually make money. As a related bonus, investors that get in now probably don’t have to underwrite much future dilution to their equity if the company can self-sustain growth with cash flow.

The press release gives scant stats on any actual performance figures, leaving my excel model quite empty, but the growth numbers would be so made up anyways the starting point almost doesn’t matter. What investors are paying for is an idea that can grow exponentially and a platform that, while nascent, has been established. Saying “the numbers don’t matter” is a great way to allow yourself to pay whatever you want for something. But they don’t. So you can.

The biggest risk I see is not that Pacaso’s idea won’t work, because I think it will. The biggest risk that the moat is shallow. Same as SoftBank pumped money into WeWork so that their name could be synonymous with coworking, I believe Pacaso intends to dig their moat with brand recognition. This way whenever somebody thinks of fractional ownership they think of Pacaso. To be so dominant you become the noun for what you do. “Oh, you have a Pacaso too? Mine is in Sedona, where’s yours?” In order to do this you need a lot of capital early on to grow so fast any copycats are rendered worthless.

Whatever happens, I love the idea. When Pacaso reaches the East Coast I will almost certainly peruse their listings. And if fractional ownership does catch fire it’s bound to cause asset inflation, meaning getting in early is the savvy move. At least that’s what I’ll tell my wife when I pitch owning 1/8 of a gorgeous home in the Poconos.

This week’s Paper Boy

The one where Diamond Resorts gets acquired by Hilton Grand Vacations

Because everybody wants a piece of the travel and leisure business right now.

The one where Blackstone acquires a public hotel company

Everybody wants a piece of the travel and leisure business.

The one where the largest public hotel REIT buys an Austin hotel

Everybody.