February 2024.

It’s February, and we are in the thick of winter here in New England. The holidays are behind us, but Spring is nowhere in sight. Property issues arise that otherwise don’t during the warmer times of the year. It’s a grind.

But the days get a little longer with each passing week. The occasional Masters golf commercial graces the TV, which means April is coming. And investors, lenders, and property owners are in full steam implementing their 2024 plans. I hope that everyone is getting after it and off to a strong start to the year.

This month we are covering the following:

1. New Hampshire Real Estate News

2. 8 Ways to Disrupt the Real Estate Industry

3. Maintaining a Long-Term Perspective

New Hampshire Real Estate News.

Following several conversations with lenders and investors over the past month, I believe the following to be true:

· Lenders still have PTSD. The memories of aggressive, and somewhat unpredictable, rate cuts of the previous two years have not faded. Although the Fed has indicated that they will cut rates this year, banks have not yet baked this into their pricing. Rates and terms remain relatively unchanged. That said, I have spoken to a couple lenders that are offering very competitive terms given the current environment. Happy to provide an introduction if you need one.

· Some banks are out of the market. Tough way to keep relationships and customers happy when you pull out of the market during volatile times.

· There is a lot of equity looking for deals. Investors are scratching their heads at the prices in which properties are trading. Are the buyers losing money on the buy? All cash? House hackers? 1031 Exchange buyers? It’s likely a mix of all of the above. I don’t anticipate it changing in the near-term due to the great imbalance between supply and demand.

· There are still deals. Sift through all the garbage, look for off market opportunities, and know when to lean in on your pricing to buy quality real estate. For every handful of deals that trade at values that have you scratching your head, there is a good buy. I see high-quality investors transacting, and I am close on a couple deals myself. They are out there, you just need to find them.

Property Values.

Last month we covered how less restrictive zoning for ADUs could help alleviate some of the pricing pressure on housing in New Hampshire. While there are projects under construction in cities like Manchester and Concord, these projects will need to garner top of market rents to be financially viable. The introduction of “luxury” units will not make a dent in the sub-1.0% vacancy rate in New Hampshire.

This chart shows a visual representation of how NH home prices have changed year-over-year compared to the nation. You can see that most of the state is a dark shade of blue, meaning that the increase in home prices is in the upper echelon relative to the nation.

Below are median home values according to Zillow and Redfin. NH home values are up 5-8% year-over-year.

Rental Demand.

How about rents? Similar story. Low vacancy and increasing demand led to rent increases that significantly outpace inflation and wage growth.

Not only that, but New Hampshire rents have closed the gap by ~20bps on Boston rents over the past three years. In 2021 Boston rents were 170% – 200% higher than New Hampshire rents. Today, they are only 150% – 185% higher. This narrowing gap in rental pricing is evidence of the increasing and unmet demand for apartments in New Hampshire. As described in this article, Manchester is now a top 3 outbound search destination for renters in Boston.

This all creates tough sledding for renters and primary residence home buyers. But it’s serious momentum for landlords and investors that I don’t anticipate slowing down.

8 Ways to Disrupt the Real Estate Industry.

I think that 2024 will be the beginning of several transformations in real estate. But not for the reasons you may think. It’s not due to changes in interest rates, or housing shortages, or anything like that.

The real estate industry is archaic when compared to other industries that create and store massive amounts of wealth. And I think that real estate is ripe for disruption. Not all of these ideas are due to advanced technology. Some are simple changes or improvements applied to an industry that has been allergic to technology and change for the past 20 years.

1) Communication with Tenants.

Today we have rudimentary, automated ways to communicate with our tenants. Basic responses to tenant requests and inquiries that require human intervention to call the handyman or shop for the replacement appliance. Instead, AI will receive these requests and inquiries, determine the appropriate action based upon how it is programmed, and respond or facilitate the work. We should be able to eliminate 95%+ of the human-to-human interaction in responding to routine maintenance and repair issues.

2) Purchase & Sale Agreement Negotiations.

Most Purchase & Sale Agreements for small and medium sized multifamily are simple. AI will negotiate with the counterparty (potentially also using AI) to get the optimal deal for you based upon your requirements.

3) Property Rights and Deeds.

Have you ever reviewed a deed and realized that the property boundaries are defined by things like a rock wall and coordinates that would require Lewis & Clark to figure out? Oh, and then there is a poorly defined right-of-way from 150 years ago that was intended for your neighbor to access his horse. This property information needs to be digitized, synthesized, and processed so that we have clear definitions and boundaries of property lines and rights. There are GIS tools that give you a rough indication of property boundaries, but they are not exact enough to be useful in transactions. It shouldn’t require a professional surveyor to determine property boundaries for otherwise simple properties.

4) Realtors.

The traditional realtor job and commission model is already under attack with the lawsuits against the NAR. With advancements in new technology, coupled with the potential dismantling of the standard buyer / seller fee structure, the realtor industry may not be recognizable in 5+ years. Many of the services that a realtor provides are addressed in this list as opportunities for disruption – Purchase & Sale negotiations, property tours, documentation, and underwriting. In the near-term, a good realtor may find ways to add value and complement the work that technology does. But they may no longer be able to demand the typical 2-3% for that work. In the long-term, I imagine that all of their services will be automated.

5) Virtual / Remote Property Tours.

Today we have early versions of this concept with 3D models that allow you to click through the house to see pictures from different vantage points within the house. Instead, imagine if you could put on goggles and have the perception of walking through the property viewing it through your own eyes. I think something along these lines is coming. It’s probably not this year, maybe not the following year, but it will come. For example, see this interview that was done in the Metaverse. The two people in this video are on opposite sides of the country, yet they see each other as if they were sitting in the same room.

6) Virtual Storage of Property Documentation.

Have you ever bought a property that has existed for 50 – 100+ years and wanted to understand the changes that have been made to it? Besides looking up the permits, which are only sometimes filed, there is not a great way to track the history and improvements of a building. How many times has the roof been replaced? When was it last replaced? The seller doesn’t know. Did Larry Landlord do the electrical himself when he added an extra bedroom and didn’t pull a permit? The older the property, the more unknowns to the condition of the property. A virtual storage solution that collects and stores this information would be a valuable asset to any property owner. And the cleaner a property owner’s documentation, the more valuable the property has become because there are less unknowns. This doesn’t require advanced technology, but does require a shift in how we document and care for real estate that we own.

7) Underwriting.

As someone who has made a career in Excel modeling real estate deals, I fear this skillset is coming to the end of its useful life. Should the ownership of the inputs remain with me as the underwriter? Yes. But technology should model out the cashflows and the probabilities. Scrape comps and data from the internet to form the basis of my assumptions. Produce outputs and provide recommendations that allow me to make the decisions. It would be my own personal analyst at little to no cost.

8) Virtual / Remote Property Inspections.

Same technology as #5, but different use case. Inspectors can use it to “walk” the property without physically visiting the property would effectively replace the in-person work required of an inspector. I know of a company that does virtual inspections for cost segregation studies via Facetime. That still requires a human to physically walk through the property, but it can be the owner rather than the cost segregation professional. Next step in this evolution is that the inspector or other real estate service professional virtually “walks” through the property.

Maintaining a Long-Term Perspective.

You know the saying “don’t catch a falling knife”. In theory, it’s straight-forward – don’t buy an asset that is falling in price and continues to fall in price after you buy it. Big no-no. If you buy while the price of an asset is going down, and it continues to go down, you lose money on the buy. And losing money on the buy is the hardest thing to come back from and the quickest way to having a bad time. I talked about the importance of patience last month when acquiring assets in the current market for this reason.

But in practice, it’s difficult to know if the knife is still falling, and how fast it is falling. I recently listened to a podcast with the CEO of Fundrise, Ben Miller. He made a thoughtful point when discussing office valuations in today’s market. The host said that office valuations have piqued his interest because they are 50-75% off their highs in many major cities. Ben countered by pointing to valuations on malls. Malls have been dying for nearly 20 years – ever since the introduction of e-commerce. Although it was beginning to disrupt physical retail, e-commerce looked significantly different then and was a much smaller percentage of overall consume spending. If you had bought malls 20 years ago after you saw the initial disruption that e-commerce caused, even at a discount to malls prior to e-commerce, you would’ve bought an asset entering into a 20+ year decline. You had no idea the knife would continue to fall at a brutally slow pace, until the point at which many malls are being repurposed to other uses. Ben used this analogy to offices. We’ve seen the initial disruption that remote work and Zoom-like technology has caused on office valuations. But we have no idea what the future holds. How will VR, globalization of talent, advancements in Zoom/video, etc. impact the utility of office spaces? Could office enter a slow 20-year death spiral similar to the way malls did? [These observations are general in nature. Although there are still some profitable malls, and there are still some profitable offices.]

I found this to be a helpful story to reframe my reactions to news, advancement in technology, and economic events. We have a tendency to react quickly and address only the immediate issue at hand. But maintaining a long-term perspective is critical to building a good, long-lasting real estate portfolio.

As always, if you found this letter valuable, it would mean a lot if you would consider forwarding this email or sending this link [The Promote: New Hampshire Real Estate Newsletter] to at least one friend or colleague that may also benefit from this information. Please feel free to reach out if you would like to discuss any of these topics or have recommendations for future topics.

Articles and Podcasts that I Enjoyed.

A collections of business, real estate, personal development, and technology news and media that I found interesting this month.

ResiClub Analytics: “The Demographic Landscape Has Transformed”

Analyzes a recent report by Redfin about ownership by generation and affordability across the United States.

Redfin: The demographic 'landscape has transformed' in the housing market as young families own less of the nation's 'large' housing stock

Interview with Fundrise CEO Ben Miller

I am hesitant when someone who makes a living on real estate is on a podcast titled ‘Past the Real Estate Market Bottom With Brighter Days Ahead’. But Ben is really informative, backs up his opinions, and has a really interesting perspective on the market.

Financial Samurai Interview with Fundrise CEO

Interview with John Fish, Suffolk Construction

This may not be a podcast for everyone, but John Fish is one of the most important and influential people in the Boston real estate market industry. He has built a national vertically integrated company with a tremendous track record and reputation. If you have any interest or ties to Boston, it’s worth a listen.

Good Dirt with John Fish