Discover more from The 21 Hats Morning Report
The Economics of Real Estate Have Shifted
Urban car lots are in high demand, starter homes are all but impossible to find, and small landlords are having a tough time.
Here are today’s highlights:
“2022 is a bitch,” says a landlord.
More and more, those trying to reach Gen Z are turning to TikTok.
You may be offering employees perks they don’t even want.
Fast food restaurants are using A.I. to guess what customers will order. Is that creepy?
The best deal on urban car lots may be the land: “Standing on the outdoor terrace of an office tower being built on the west side of Los Angeles, one can easily see why the location is such a selling point. The Santa Monica Mountains lie to the north, the Expo Line light rail has a stop one block south, and the Pacific Ocean stretches westward. But Dan Martin sees history: His family’s car dealership, Martin Cadillac, once the busiest on the West Coast, previously sat on the five-acre construction site; he was born in 1974, the same year it opened. A massive bank of garages and maintenance bays where Mr. Martin used to fetch parts as a summer job will be replaced by 600 apartments. New office space, leased by Riot Games, and storefronts will stand where rows of flashy Eldorados and Coupe DeVilles once impressed commuters ...”
“The rising cost of land in downtown areas and a premium on walkable commercial districts have recently made urban car lots tempting targets for developers. And with the move toward online car shopping, dealerships no longer need large sales spaces.”
“‘The car dealership is not going away, but it may look a lot differently in urban centers in the next 10 to 15 years,’ said Brady Schmidt, president and co-chief executive of National Business Brokers, a firm that helps owners buy and sell dealerships.”
“‘What dealers are hoping for, at least the dealers that I’m talking to, is to be able to get the best of both worlds: They want to redevelop these sites to include high-density housing and not have to sell or give up their dealership to do it.” READ MORE
These days, it’s almost impossible to find a starter home for sale: “Nationwide, the small detached house has all but vanished from new construction. Only about 8 percent of new single-family homes today are 1,400 square feet or less. In the 1940s, according to CoreLogic, nearly 70 percent of new houses were that small. Those starter homes came in all kinds over the years: mill worker’s cottages, shotgun homes, bungalows, ramblers, split-levels, two-bedroom tract homes. American families also found their start in brick rowhouses, cozy duplexes and triple-deckers. But the economics of the housing market — and the local rules that shape it — have dictated today that many small homes are replaced by McMansions, or that their moderate-income residents are replaced by wealthier ones.”
“A little 1948 Levittown house on Long Island, the prototypical postwar suburban starter home, now goes with a few updates for $550,000.”
“In Portland, Ore., a lot may cost $100,000. Permits add $40,000-$50,000. Removing a fir tree 36 inches in diameter costs another $16,000 in fees. ‘You’ve basically regulated me out of anything remotely on the affordable side,’ said Justin Wood, the owner of Fish Construction NW.”
“In Savannah, Ga., Jerry Konter began building three-bed, two-bath, 1,350-square-foot homes in 1977 for $36,500. But he moved upmarket as costs and design mandates pushed him there.”
“‘It’s not that I don’t want to build entry-level homes,’ said Mr. Konter, the chairman of the National Association of Home Builders. ‘It’s that I can’t produce one that I can make a profit on and sell to that potential purchaser.’” READ MORE
Even companies selling serious products with serious messages are relying on TikTok: “With TikTok videos, bright colors and sleek packaging, the morning-after pill is getting a rebrand—one aimed at Gen Z consumers. Amid widespread efforts to step up digital marketing for morning-after pills, more female-focused healthcare companies are turning to TikTok campaigns that encompass a mix of education and humor. Though the methods of companies like Get Stix and Hey Favor are unusual within the drug market—including memes, viral audio clips and upbeat explainers—they are becoming more common as brands across industries aim to reach Gen Z shoppers now coming of age. Now Julie, an emergency contraceptive pill out this week, will launch with a TikTok-video campaign and influencer promotions—the clearest sign yet of blurrier marketing between female-health pharmaceuticals and other lifestyle products.”
“[Co-founder Amanda E.J.] Morrison said that in its use of TikTok, Julie intends to combat misinformation about sexual health and will create content with the help of its medical advisers: ‘We want it to be fun and shareable.’”
“When Get Stix Inc., which does business as Stix, launched its Restart emergency-contraception pill earlier this year, a promotional video from a news-focused TikTok account was viewed five million times and yielded thousands of product sales in a day, according to Jamie Norwood, a co-founder of the company.”
“‘TikTok is the most-used search engine for Gen Z, so we rely on the app to increase access to sex education that young folks can trust and rely on,’ Ms. Norwood said, adding that the company works with board-certified physicians to vet the information in its videos.” READ MORE
On Twitter, a recent thread asked employees to name the perks that sound good but really aren’t: “The tweet came from Jessica Rose, a developer relations advocate, founder of a meetup series for programmers and aspiring programmers and co-founder of Trans*Code, a hacker org devoted to drawing attention to transgender issues and opportunities. Rose’s ‘hard no’ was to those so-called benefits that have been around since time immemorial (or at least since the dot-com era). ‘Don't give me food or hammocks or video games, just let me work remotely or go home on time,’ said Rose.”
“Research shows that today’s employees don’t want snacks as much as they want work that aligns with their values, and that extends to benefits.”
“The tweet thread was full of varied responses, but the paradox of unlimited vacation was the clear favorite. ‘Wow, people are just so suspicious about unlimited paid time off,’ Rose told Protocol when we caught up with her to ask about the tweet.”
“Other workers balked at in-office massages (‘don’t touch me’), free booze, open-plan offices (did anyone in the history of the world ever call this a benefit?), fitness rooms, nap rooms, escape rooms (really any rooms), and something called ‘blameless retrospectives.’”
“‘When they advertise a Ping Pong table in the job listing, it's a huge 🚩 for me. And I love Ping Pong. If a silly perk like this [is] such a relevant part of your benefits package, that says a lot about what the company values, and likely its culture.’" READ MORE
Inflation is hitting landlords, too: “While tenants absorb rent increases that often exceed their income gains, are landlords minting money? It depends on the landlord. Publicly traded owners of sprawling real estate portfolios, like Invitation Homes, have enjoyed some of their best returns over the past few quarters. Things look very different, however, for Neal Verma, whose company manages 6,000 apartments in the Houston area. Earlier this year, Mr. Verma experimented with raising rents enough to cover the cost of spiking wages, property taxes, insurance and maintenance. Turnover doubled in the properties where he tried it, as people left for nearby buildings.”
“‘It’s crushing our margins,’ Mr. Verma said. ‘Our profits from last year have evaporated, and we’re running at break-even at a number of properties. There’s some people who think landlords must be making money. No. We’ve only gone up 12 to 14 percent, and our expenses have gone up 30 percent.’”
“Many midsize landlords are also in the business of acquiring, renovating and building apartments. Rising interest rates have made that much more difficult.”
“‘I think this inflationary environment is a more negative to landlords than it is a positive,’ Mr. Schwat said. ‘Most landlords would tell you, I really liked 2021. Things were coming back, interest rates were low, things seemed to be going relatively easy; 2022 is a bitch.’” READ MORE
Mortgage rates continue to rise: “This housing correction is far from over. In fact, the shock hitting the U.S. housing market continues to grow: On Monday, the average 30-year fixed mortgage rate jumped to 6.87 percent. That marks both the highest mortgage rate since 2002 and the biggest 12-month jump (see chart below) since 1981. Anytime the Federal Reserve flips into inflation-fighting mode, things get challenging for rate sensitive industries like real estate. Higher mortgage rates lead to some borrowers—who must meet lenders' strict debt-to-ratios—losing their mortgage eligibility. It also prices some buyers out of the market altogether.”
“A borrower in January who took out a $500,000 mortgage at a 3.2 percent rate would be on the hook for a $2,162 monthly principal and interest payment over the course of the 30-year loan.”
“At a 6.8 percent rate, that monthly payment would be $3,260.” READ MORE
Lumber prices are back to pre-pandemic levels: “Lumber prices have fallen to their lowest level in more than two years, bringing two-by-fours back to what they cost before the pandemic building boom and pointing to a sharp slowdown in construction. Lumber futures ended Tuesday at $429.30 per thousand board feet, down about one-third from a year ago and more than 70 percent from their peak in March, when the Federal Reserve began raising interest rates to fight inflation.”
“For two years, climbing lumber costs lifted home prices. Now home builders say that cheaper wood is giving them wiggle room to offer buyer incentives and to trim prices without crimping their profit margins.”
“Now that supply issues have eased and the highest mortgage rates in more than a decade have slowed home sales, buyers are no longer hoarding lumber for fear of running out.”
“The rate at which new U.S. housing is being built is down about 13 percent from April, when residential construction activity hit its highest level in more than a decade, according to the Census Bureau.” READ MORE
Restaurants are using artificial intelligence to guess what you want to eat: “Businesses themselves determine the criteria for age, gender, and other characteristics. ‘Typically larger brands make their own definition. The smaller brands follow the bigger brands,’ explains Marhamat. Raydiant established rules around what kinds of categories the AI can sort. Race and body size are off limits. Gender, Marhamat says, is way down the list of sorting options that brands prefer to use. ‘Most brands are not looking at gender right now. They’re looking at age group, time of day … different inputs.’ Age groups are classified based on facial features like wrinkles. Mood is subjective and based on inputs like weather.”
“A camera in the sign detects customers as they approach. It determines if there is a single person, a group of people, and traits such as age.”
“Raydiant’s technology, though not implemented yet with AI experiences, is used by more than 4,500 organizations around the world, from stores to gyms to casinos.”
“When Bon Appetit wrote about the new software, the magazine called it ‘creepy’ for self-evident reasons. AI systems can be biased, playing into and reinforcing age and gender-based stereotypes.” READ MORE
THE 21 HATS PODCAST
‘It’s a ticking time bomb’: This week, Shawn Busse, Liz Picarazzi, and Hans Schrei debate the merits and risks of taking outside capital. Clearly, it makes sense for some businesses. But what are the right circumstances? What are the alternatives? And what do you need to understand before going to the dance? For example, what are the dynamics of the entrepreneur-investor relationship? Are the entrepreneurs hoping the investors will bestow an opportunity upon them? Or is it actually the entrepreneurs who have an opportunity to offer? And who pays for the coffee? Plus: What do you do on those days when no one seems to be following your lead and the entrepreneurial loneliness sets in? We’ve all been there.
You can subscribe to the 21 Hats Podcast wherever you get podcasts.
Thanks for reading, everyone. — Loren