Accredited Income Property Investment Specialist Episode 61 – Mascia On Real Estate Markets & Tenant Analysis

Accredited Income Property Investment Specialist Episode 61 – Mascia On Real Estate Markets & Tenant Analysis

Transcript from Accredited Income Property Investment Specialist Podcast Episode 61 – Mark Mascia Real Estate Markets & Tenant Analysis

Introduction:
Welcome to the AIPIS Show, for Accredited Income Property Investment Specialists, and those who aspire to be. If you’re a real estate, mortgage or financial professional, this is the place for you. We’ll explore innovative investment analysis, sales, marketing and income generating strategies for the most historically proven wealth creator: income property. Learn from the experts as they show you how to build a better business and a better life.

Jason:
It’s my pleasure to welcome Mark Mascia to the show. He is President and CEO of Mascia Development and has some interesting insights on different markets around the country, so I wanted to talk to him about that today. Mark, welcome, how are you?

Mark Mascia:
Thank you, Jason, it’s great to be here. I’m very well thanks, how are you?

Jason:
Fine thanks. When you look around the country and you look at your market sectors – by the way, why don’t you tell the audience your market sectors, and then let’s talk about what markets you like and what you don’t like.

Mark:
Absolutely. We cover 350 markets nationwide – US only – and we focus predominantly on multi-family, retail, medical office and property sectors.

Jason:
And I’m anxious to talk about each of those sectors too, but 350 markets – you haven’t done business in all of those markets, have you?

Mark:
No, and that’s a great question. We are basically the inverse of a traditional real estate model, which is where you find one micro-market and know every single block, every single building. We started that way and found it to be a real problem with tunnel vision, where we lost track of the relative value of the asset class. If you just focus on one block all day long and that block continues to increase in price, you tend to think that real estate is always going to increase in prices like that. If you don’t follow along with the market, you’ll be left behind. We found that in certain circumstances, at least with our exposure, that’s a recipe for making bad investment decisions. Feeling like you’re being left behind often leads you to a market that might be peaking and then you could make some bad investments towards the end that in the beginning were very good investments. We’ve focused on 350 markets that attract the metrics that we find attractive, and we then look more specifically at deals that become available. We’re not actively pounding the pavement in every single one of those markets, but rather we find markets that meet our criteria and now if a building becomes available we look to see if it’s in one of those markets. If it’s not we eliminate it immediately. If it is, we drill down to the individual specifics of that deal. It’s just a way of allowing us to have a diverse enough base to look at without being so diverse that we’re looking at literally any deal that comes across our desk.

Jason:
That’s a great point. One can develop a certain degree of marketing myopia. There’s a famous article from the old days about that called Marketing Myopia, and that definitely happens with traditional real estate firms just being in one place.

Mark:
Yeah, there’s a million people out there for every story I could tell about someone who went bankrupt for following it right to the peak but there are also lots about people that made it through and showed a lot of self-restraint, so I’m not saying that the old model is broken and everyone should do what we do. I just find that it’s a lot easier to keep that perspective if you are looking at market-to-market averages. You can say ‘Oh, what does Phoenix look like compared to San Francisco? What does that look like compared to New York?’ Even though they’re very different markets, they have a lot of similarities within them. There are still people that need to live in places, they still need to shop, they need to go to the doctor, and while income thresholds and other things change very diversely, the fundamentals are all still exactly the same. They’re also a lot of the same tenants in a lot of those places, so if you look at a Barnes and Noble in any one of those markets, or a Starbucks or any one of those chain tenants, they’re pretty much exactly the same. Their rents may be drastically different, but they’re still selling coffee in Oklahoma the same as they’re selling coffee in New York.

Jason:
Absolutely. There’s just a little bit of different economics behind it. Tell us why you picked those sectors. I certainly like housing, so the multi-family I completely understand. I love housing! Medical office, that would be pretty good – but retail! Gosh, I don’t know. Retail seems like it gets beat up pretty easily by the Internet. There’s just a lot of changes in that model.

Mark:
Absolutely.

Jason:
Yeah, so I just wanted to have you address that.

Mark:
Great question. It comes down to our model, which is more of a relative value model. When we hear a market that everyone hates, we get excited about that because it usually means it’s oversold. I’m not quite ready to say that’s a market that I love, but there are plenty of markets – Phoenix happens to be one of our top ten that was hugely hit by the housing bust. It was like a black flag was raised in that town and they’re still recovering from it. I think that’s a great indication of market value in a lot of cases. That’s when you see a market and everybody’s just throwing the baby out of the bathwater.

Would I have invested in housing in 2010? Probably not because that’s not our model. There was a lot of great real estate that was bought at phenomenal discounts to value in those markets at those times because of that. The same is true of retail. I think a lot of people are telling and believing the same story that you yourself said about this online idea that no-one’s ever going to shop in a store again and we’re all just going to sit at home and trawl along on the Internet and buy everything. I think that’s obviously definitely true and there are certain old world retailers that have been decimated and will continue to be decimated by that new online model, but I think it’s definitely one of those markets. There are so many people that are buying into that strategy that we can find huge, huge value with great quality tenants. People still do go to the stores to buy products.

I think it does well with our medical office strategy. We believe very strongly in the economy and the aging population and that’s pushing towards more and more medical spending, including the ObamaCare expansion of coverage etc. One of the big trends within medical is single-storey access. As the aging population, they don’t want to deal with elevators and wheelchairs and things like that. Retail provides a great access point with tons of parking for medical office – some medical office acquisitions have been former retail tenants that can be or have been repositioned into medical office.

We see it as a great blended use where, five years from now, if everybody throws up their computer for some reason and says ‘I love the physical interaction of retail’, we can position it as a retail space. If it continues to decline and retail does die off as everyone suggests, we think it’s a great traffic center for medical as well. That’s how we’ve become comfortable, and that’s given the very high relative yield. Again, if you look at some of the more competitive market segments like multi-family (even though I do love that segment, as you’ve mentioned) – the yields there are just way, way different than what we can now achieve in the retail fields. The risk that we’re taking is, in my opinion, being appropriately rewarded by the returns that are differential there.

Jason:
OKay, very good. Talk about some of those return differentials. I’m surprised you’re willing to do that conversion to medical office, because that’s pretty expensive. I do see the need for single-storey medical office though. What type of yields are you getting on the retail stuff, and what type of retail is it, if you could be a little more specific? And then compare it with the multi-family.

Mark:
Sure. Predominantly, we look at Suburban Strip Centers. Typically, they’re shadow anchors, either directly shadowed or just in the center of major markets. Later, I think we might be able to get into some of our specific deals, which will illustrate this more poignantly. Secondary and tertiary cities are some of the smaller city markets throughout the US – those are retail strip centers that everybody is familiar with – maybe it has a coffee shop like a Starbucks with a drive-thru, or it has a phone retailer like AT&T or Horizon, it probably has one of those branded places like Aston Dental or My Dentist, one of those. It’s just the kind of typical bread and butter shopping centers. The idea there is that it is potentially a multi-use location in terms of our long-term view on the medical side, it has parking and is always, always located in the core of the retail shopping area of that specific town so there’s high traffic. When you have a building that 30,000+ people are driving past everyday, I feel like the use is secondary in terms of the visibility of that space. If you have 30,000 people driving by it, whether it’s a doctor’s office or anything, they will be very happy to have that visibility to that many people – they’re all potential customers in that respect.

Jason:
I’m wondering how much you guys are thinking about the future and technology. You certainly alluded to it already, but I’ve got to ask you since you mentioned driving – is the self-driving car going to have a big impact? I just read a recent article that Peter Diamandis did, and he talked about how the need for parking lot will decline because the cars will be more of an on-demand thing; your car could go and do something without you. Granted, this isn’t happening tomorrow, but it is kind of happening in the next couple of years. Of course it’ll take like 8 years to replace the fleet, but I’m just wondering how much you guys are thinking about stuff like that.

Mark:
Sure. From a parking standpoint, we don’t own any high-rise parking decks, which I think would be much more at risk.

Jason:
I agree.

Mark:
I hope it happens, believe me! Traffic will decrease, transit times will decrease, our commutes will all be better and we’ll be able to be a lot more productive. I think all of those things are great and it’ll actually give us a lot more access to things – I think people that can’t drive right now (elderly people, groups like that), will be able to get to the store.

Jason:
Kids, too.

Mark:
They’ll have access now. My grandparents, for instance, live in a town where there are no cabs. If they want to get somewhere and someone from my family is not able to drive them, they’re out of luck. That’s then a consumer that’s taken off the market because they don’t have computers. They’re of the generation that didn’t even know what that was. I think it’s all positive for real estate in general, I think it’s all bringing us back to the accessibility of space and I think the more accessible space is, the more used it will become. Obviously, real estate is only as valuable as the people that are using it. I’m very positive in that. I think it’s probably more like 20 years off, but I wish it was 5, so we’ll see. I’d love to be wrong on that prediction but we’ll see; I’m not a futurist and I don’t really know.

Jason:
Yeah, very interesting, very interesting. OKay, good. Do you want to talk about the yield difference? Just define that yield difference a little bit more, if you would. You started talking about it but let’s think about retail versus multi-family because with multi-family, these cap rates are getting so bad you just can’t make deals work anymore.

Mark:
Right. One man’s good cap rate is another one’s bad cap rate. If you own a bunch of multi-family, cap rates right now are probably not low enough, but I think it’s a great time to sell, as you’re alluding to, and I agree with you exactly. Everyone’s story of rent growth is true. I think that will happen, I think rent will continue to grow in most markets and things will need to improve in terms of fundamental occupancy and things like that. I think we have seen a shift in a generational desire to own homes. There’s been the generation where everybody buys a house and it’s the only investment you’ll ever make and it’s the best investment you’ll ever make – but that’s gone now.

Homes will still be purchased; I’m not saying no-one will ever purchase homes again, but there is definitely a huge shift to choosing to rent for convenience and rent for mobility, and that’s all great. That’s great for multi-families. We love multi-families and we still own a ton of multi-families. I do still look for multi-family, although as you pointed out, it’s almost impossible right now to make the kind of transit that we desire currently. I think if you’re banking just on future growth and future appreciation, it’s still a great place to be. I would part generational money there, and we have, so it’s not that it’s totally oversold or overbought, but it is a market that I think it really tough to buy stuff in. When I say market, I mean nationwide. It started in the urban markets and we saw that in 2006-07, and basically the demand has been unabated since then for multi-family in those markets, even through the downturn. Now, on the other side, rates have continued to stay low and it’s just been voracious. There’s just been an unbelievable appetite with mostly constraints applied, as I’m sure you’ve seen with all the demographics – you probably have 50 other podcasts that talk about that, so I won’t belabor the point.

Relatively speaking and on a broad basis, we’re seeing anything between a 300-400 basis point cap rate different between other product types and multi-family, specifically. Other product types could be anything, and they could obviously be larger if you’re talking about hotels or about operator-driven real estate. It could be as much as 400-500 basis points, but I think that what we see between the retail that we’re acquiring and the multi-family (even in the secondary and tertiary markets that we play in), we’ll see things like 6 caps on predominance of multi-family with bias towards an 8 cap, I would say, in most retail.

We feel like that risk premium is attractive.

Jason:
OKay, very good. What other cities are there? Do you want to talk about geography a little bit more?

Mark:
Absolutely. The Top Ten that we selected are pretty diverse – they do run the gamut of location and employment base and population size. Just quickly: Albuquerque, New Mexico..

Jason:
Okay, now wait a second. Before you talk about the top ten, remember how you said that one man’s great cap rate is another man’s terrible cap rate – top ten for what? What specifically is this about? Entering a new market to invest in either of the three product types that you’re doing; is that what they’re for?

Mark:
To come up with the Top Ten, we had a analytical approach that followed a bunch of criteria that we analyzed each market upon. One was cap rate – just very simply, average cap rate for the market in terms of entry cap rate and what new products it acquired for. We had demographic points, so population growth over a 12-year history, diversity of employment base. There was also an education component in terms of education of workforce. All of those factors combined into sub-selecting out cities that were good and cities that were great.

Jason:
It makes sense. Okay, go ahead, you were going to say your top ten. I know you like Albuquerque. You like Mesa, Arizona, which is a Phoenix suburb; and Kansas City, I guess, right?

Mark:
That’s right. There’s also Columbus, Ohio and Tulsa, Oklahoma. You have a diversity of locations there that we think is indicative of our overall strategy.

Jason:
Do you care to mention any of your stats and talk about how many square feet you own and control, or number of units and what your plans are, something like that?

Mark:
Sure, we own 86 different properties right now, which are in a variety of those asset classes I talked about. We do still have a huge portion of multi-family assets. It’s roughly around 2 million square feet, and it changes every day. Luckily right now it’s around $500 million of total portfolio value, so it’s small to mid-size so we can focus on those markets. We’ve been lucky enough to continue to expand that into this recovery market by diversifying out throughout the market. A lot of those assets are still in the core markets and as we’ve been either recycling that capital through sales or through cash-flow, it’s been replaced in these secondary or tertiary markets that I’ve been talking about.

Jason:
Okay, good. Just as we wrap up, anything else you’d like people to know and please give out your website too.

Mark:
Sure. Our website is www.MasciaDev.com. I guess the idea here is that we’ve been traditionally an investment arm for a third generation real estate family and we’re now looking to start diversifying. We did our first crowd-funded real estate project as a way of introducing ourselves to outside investors and it’s really the first time in our history that we’ve been able to have non-family investors. It’s an excellent time for us to be growing and exposing ourselves to new investors and showing them what we can do for them. We’d encourage people to either check out those deals on those platforms or contact us through the website.

Jason:
Which platform are you crowd-funding through? Not your own, right?

Mark:
That’s correct. We do have our own investor funding relations platform that we’ve created, but recently we had a deal with RealCrowd that we’re wrapping up shortly, and that’s done well. We will have another deal with RealtyShares shortly so we’re testing out the different platforms and seeing what makes the most sense for us as far as the investor base matching with our deal. It’s been an exciting time because we’re really getting the feedback from not just the larger family that we work with, but also some outside investors. It’s been a lot of fun.

Jason:
Good stuff. Yeah, I had RealtyShares on the show before and it’s an interesting time. I’m anxious to see where the crowd-funding revolution goes. I do believe it is a revolution, so I think that’s going to give people some opportunities and take some away from Wall Street, and I’m okay with that!

Mark:
I agree with you! This is a mediation of real estate which can only be good for investors and operators so we’re really excited about it. I think it’s still very new and we’re not in the wave of trying to figure out what they’re doing, but it’s been a great thing to be exposed to. I think both RealtyShares and RealCrowd are phenomenal operators; they know what they’re doing and they’re smart people, so that’s why we chose to align ourselves with those groups initially. There may be others that rise to the top and we decide to work with, but I think that for people who have checked it out and are interested in real estate, I would suggest these. Even if nothing else it gives you a ton of data which is just never available to investors. I wish I’d had it available to me when I started because there’s just so much data that you can compare. You’re looking at it in your market and they’re looking at it in their market and the people that are on there are relatively sophisticated. I’m not going to go as far as saying that they all know what they’re doing, but a lot of them do, and if they think that market and that deal is good and you have something similar, it gives you that immediate confidence to know that you do know what you’re looking at and you do know what you’re talking about. When you’re starting out or even just when you’re making a new investment at any time, having an extra confidence boost is always good. Even after 86 deals, there are always some questions and having that can put your mind at ease. We definitely like that.

Jason:
Absolutely, good stuff. Well, Mark Mascia, thank you so much for joining us today and keep up the good work.

Mark:
Thanks for having me.

Written by Mark Mascia

Mark Mascia

Mark has the overall responsibility for managing the investment and operating activities of Mascia Development.

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