Weaver: Beyond the Numbers

On this episode of Location Cubed, Rob Nowak and Howard Altshuler sit down to discuss recent economic news. They focus on JP Morgan’s earnings as well as the Fed’s release of the Beige Book and what those insights tell us about the real estate industry.

To preface it all, Altshuler said, “real estate is always still local. We have to look at it from the standpoint that each market is going to be different.” The conversation turns to cracks that are showing in the façade of the real estate market. “One is home sale contract cancellations, which are up,” said Nowak.

Due to an increase in interest rates, negotiated home contracts are increasingly being canceled. The contracts, which determine a certain price, may be beyond the buyer's means due to the hike in interest rates. “That tells me that people may have overextended themselves,” said Nowak. According to the Washington Post, interest rates averaged 2.88% in July 2021 and were averaging 5.3% in mid-July 2022. “A good rate is 5-6%, a few months ago it was 3-4%,” said Altshuler. Altshuler predicts that some buyers who were ready to leave multi-family homes are now staying, which shows a promising turn for that sector of the market.

The episode continues to explore what the reports mean for other sectors of the economy. “The question isn’t ‘is there going to be a recession? Is there going to be a decrease in value?’ That’s probably a given. The question becomes, ‘how much?’” said Altshuler. “The National Bank said, ‘We’re starting to reserve for consumer credit.’ A consumer credit crisis will drag on the housing market.” said Nowak.

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©2022

Brian Hunt is a Texas native whose career focus includes insurance and risk management. Today, Hunt is a VP at USI, the seventh largest insurance broker in the country, where he specializes in construction and real estate.

“It’s not my job to tell you what you want to hear. It’s my job to tell you what you need to hear,” said Hunt. Insurance used to be transactional: the client would go to dinner with the broker, and the policy would be decided for a year. Now it's more of a partnership and risk is considered on a holistic level. Hunt believes that approach is primarily due to natural disasters and global events.

“You need to have a risk advisor who’s thinking outside of the box a little bit, someone who is considering a global or regional conflict somewhere and how that’s going to impact [your business],” said Nowak.

The pandemic taught us a lot about how linked and connected our globe is. When it comes to insurance, that means understanding all the relationships or events that could impact your business. “Awareness is more important than anything else,” said Hunt. “With modern technology and tracking, we have more data than ever before.”

Using that data and knowledge, insurers can quantify the risk of some aspects of the business. Of course, this starts with transparency between the insurer and the company. “You need to think about your risk but specifically what is your plan if the worst-case situation occurs,” said Hunt. It comes down to knowing all the links in the chain and identifying the weakest links.

Further, Hunt describes how the advent of “Big Data” has led to new parametric-based insurance. These new solutions are now available to transfer risks (e.g., weather) that in the past were not covered by traditional insurance. In addition, event-based options are now available to help provide additional risk strategies from macro-level events.

Subscribe to the Location Cubed podcast on Apple Podcasts and Spotify for the next episode of this series.

Learn about upcoming real estate webinars and subscribe to Weaver’s event invite list.

©2022

Howard Altshuler, Partner-in-Charge, Real Estate and Construction Services at Weaver, and—world traveler? Did people know this about him? It’s true. Altshuler spent four years living and working in China, and during that time, he did quite a bit of traveling around that country. To prove it, Altshuler brought his China coffee mug along on his recent talk with Rob Nowak, Tax Partner of Real Estate for Weaver, where the conversation was all about hospitality.

Altshuler said, regarding hospitality services, China was a land of two extremes. A budget hotel in China took the term ‘budget’ to a new level. Not many services were available in budget hotels and room sizes were small-scale, to put it mildly. “But the nice hotels were over-the-top nice,” Altshuler said. “Lots of great services. You’d walk in, and twenty people would be standing behind the desk. The restaurants were fantastic. They would have breakfast buffets every day.”

A lot has occurred since Altshuler’s travel days before the pandemic, but what’s changed? Is service still the trend driving hospitality? Altshuler said that today, people are expecting less. Services such as daily room cleaning are no longer the norm or the expectation. Some reasons point to cost savings, staffing shortages and product availability. But travelers also understand these shortages and savings needs and are more forgiving than before 2020.

Even with sky-high gas prices and rising inflation, Nowak said hotels expect record occupancies this summer. “Despite some of the high prices, the cost of getting there, and the limited service, people still want a vacation. There are three years of pent-up vacation and travel demand here.” And with testing mandates to enter various countries winding down, international travel is also expected to increase over the coming months.

With fewer travel restrictions, Altshuler and Nowak believe business travel and business conventions will also see a significant uptick for the second half of 2022 and beyond. “I’m going to anticipate that by this time next year, we are probably seeing a full return to a full conference schedule,” Nowak said.

Subscribe to the Location Cubed podcast on Apple Podcasts and Spotify for the next episode of this series.

Learn about upcoming real estate webinars and subscribe to Weaver’s event invite list.

©2022

There is no doubt that the world is a different place in 2022 than it was before the pandemic. Now that people are going about their business as they did in 2019, what lessons can companies take from the pandemic? Howard Altshuler, Partner-in-Charge, Real Estate and Construction Services at Weaver, joined Rob Nowak, Tax Partner of Real Estate, to tackle which trends will stay, what goes back to the way it was and what can businesses learn from the past two years.

One trend that Altshuler said has shifted since the pandemic is office square footage size. “Before the pandemic, everybody looked at the cost per square foot or the number of square feet per person. Offices got smaller and smaller. People started working not so much in offices, not even cubicles, but on benches and at desks. And you’d fit four or five people into a little conference room.” Today, the trend is more space, and while Altshuler didn’t expect much more square footage increases, the pandemic halted the space-squeezing movement.

Altshuler still sees spacing out of patrons in restaurants but staffing shortages shoulder some of this issue as establishments still face hiring challenges. People are ready to return to restaurants, but there are not enough workers to service them. While outdoor dining became a lifeline for restaurants during the worst phases of the pandemic, with patrons returning to the indoor ambiance, will restaurants reduce their outdoor dining footprints? Altshuler said the future remains unclear.

Businesses learned during the pandemic that maintaining better-quality systems, such as HVAC and water, promotes a safer and healthier environment for workers, associates and patrons. “Whether or not it relates to a prevention measure with respect to the pandemic, we’re now trying to reimagine how can we make life easier for tenants,” Nowak said. “How can we make life easier for our employees?”

What does the future of office value look like in a post-pandemic world where remote work will likely continue in a large capacity, certainly more than before the pandemic? Howard Altshuler, Partner-in-Charge, Real Estate Services at Weaver, recently read an article that put the number at five hundred billion or more of future office space value erosion. He spoke with Rob Nowak, Tax Partner of Real Estate for Weaver, to dispel the myths and try to get to the bottom of what return to office looks like today and down the road.

Altschuler falls on the side of believing widespread stay-at-home work will not continue to expand as the world enters its post-COVID phase. “I’m also a big believer in business creation and the ultimate need for space,” Altshuler added. “I also understand the need for more space per person in any given spot. Therefore, as they say, my death has been greatly exaggerated.” Altshuler believes the forecasting of such office value erosion is too extreme.

Playing devil’s advocate, Nowak wondered how the recent rise in gas prices, which play a considerable role in commuting costs, would affect return-to-office decision-making, at least in the short term. Could it be something employees might insist on, requiring employers to offer flexible in-office / work-from-home schedules?

Altschuler held firm that workers who typically need to come into the office weren’t ones whose positions could work with a flex schedule of the sort Nowak mentioned. “I think the people working from home (currently) are probably in a spot where the higher gas prices hurt, but not that big of an issue on their decision making,” Altschuler said.

Some motivating factors bringing folks back into the office and away from their work-at-home gigs are the contacts and social interactions they’ve missed over the past couple of years. “There’s always going to be people who are super comfortable working at home, and that’s fine,” Altschuler said. “When you’re younger, and you’re starting, think about how difficult it would have been to start out and work remotely. I’m so proud of the people who started working at our firm at the beginning of the pandemic and had to deal with starting the job remotely.” It’s quite a challenge to learn a new industry when one does not have the benefit of working alongside a mentor. And building those personal relationships in the office again will make a difference for those beginning their professional careers.

Weaver’s Rob Nowak (Tax Partner, Real Estate) and Howard Altshuler (Partner-in-Charge, Real Estate Services) channeled their inner Siskel & Ebert with a movie review and brand-new studio to help talk about supply chain issues.

The new film Top Gun: Maverick was on Nowak’s mind as he was freshly back from his second viewing of the film. For his first viewing, Nowak watched the movie with Altschuler, and one thing they both recognized was that the theater struggled with supply chain issues. From half-stocked shelves of movie candy to fewer soda options, cinemas are not immune to the supply-chain woes plaguing all business areas.

Altschuler said distributors like Amazon are pumping the breaks on fulfillment center expansion and other property purchases on the commercial real estate front. Until the market settles, Amazon is shifting to subletting additional space and placing other build plans on hold. It is a little unclear, at this stage, if Amazon is weighing out the future to see if demand will hold up or if they don’t see supply-chain shortages ending anytime soon.

So, are product shortages the new normal? Indeed, product delays are something people need to adapt to, whether they like it or not. “Go back five, six years ago, you’d order something whether it be a part or material or book, and you were used to saying, well, I’m going to wait five-to-seven days to get that,” Nowak said. “Then we got spoiled with one-and two-day shipping.”

Material prices still impact the real estate industry. “I think the biggest issue right now, and what I’m hearing from talking to our construction group and construction clients, is there’s so much uncertainty around material prices and materials delivery,” Altschuler said. One of those uncertainties is interest rates, and Nowak and Altschuler said they’d keep an eye on what impact that will have on the real estate market and subsequent ripple effects on new construction.

The Employee Retirement System of Texas is one of the most significant pension funds globally, managing over $35 billion in assets. The fiduciary responsibility is no small feat, and it takes relationship-building around all aspects of government. Weaver's Adam Jones tapped Porter Wilson, the system's Executive Director, for his perspective on the role of government in the stability of the Employee Retirement System of Texas and what indicators he has on the future of government employees.

Wilson says that in his ten years as Executive Director, challenges come with the territory, but things have not changed a great deal on a macro level. "On the pension side, we're trying to manage the four pension programs we administer for long-term sustainability. We're trying to make sure the benefits, revenue streams, and investment pieces are all working together so that these programs can continue for long periods."

On the healthcare side, Wilson says it's essential to ensure stability while managing costs and focusing on ways to keep employees healthy. But one of the most significant challenges to emerge over the past decade from Wilson's perspective is procurement. "It's a big piece of what we do. It's virtually everything. From the healthcare programs we administer to many of the investment funds where outside money managers are procured, there's been a lot of movement in the procurement space in the last seven to ten years." The balance comes in being nimble while obtaining the best value for stakeholders.

Current issues, including the great resignation and losing employees due to retirement, all impact the future of a pension fund, which begs the question, what do the next few years look like in terms of government employees? It’s something Wilson is keeping a close eye on. "One of the things we're doing is trying to envision what we're going to be as an organization over the next 75 years. A key piece of the conversation we're having within our agency is what we will look like as an organization. We're trying to be flexible and realize that one size isn't going to fit all."

The world of cryptocurrencies has had many ups and downs over the last decade, but investment funds are becoming increasingly interested in cryptoassets. Tim Savage is joined by Viresh Ohri, Manager Partner at Catenam Capital, to talk through the current crypto landscape of crypto investment funds.

Viresh was an early adopter of cryptocurrency, first trading bitcoin in 2012. Since then, he has watched the crypto industry evolve into a robust ecosystem of digital assets powered by decentralized applications and web3 technology. “Web3 is the future. Everything we’ve worked towards in the last decade has set us up to where we are today. The whole internet was made for web3, it was just the next part in the evolution.”

Since launching Catenam Capital, an investment fund engaged in web3 private equity and digital asset trading, Viresh has taken his crypto experiences from the past ten years to develop pragmatic goals and investment strategies. “I like to say that we know what we’re doing and we’re experts in our field, but I don’t think anyone in crypto is truly an expert.”

Tim and Viresh also discuss the abundant need for better digital asset policy and regulation globally. “It’s hard to know who to trust in the world of crypto, especially considering the many scammers who are only in this market for a quick buck.” Viresh stresses how important it is to have a stronger framework of regulation to stimulate investments in the industry while also helping investors.