Austin Tiny House

This is the last post in the Real Estate Trends and Issues series. It covers the last three days of topics since we toured Wednesday, we discussed on Thursday and then we have topics for today (Friday) but no class.

All those topics are residential markets, multi-family, single family residences, appraisal, valuation, development, construction, adaptive re-use, redevelopment, transportation, TOD, architecture and facilities management.

Out of all of that we mostly talked about residential which is the hottest market right now. Multi-family is still selling well as residential prepares for another wave of foreclosures. Then we talked about adaptive re-use (for which there is another entire class later this semester) and finished with transportation. Obviously I still have some thoughts about architecture so I’ll include those at the end.

If you can believe it, we actually watched Jay’s Tiny House Tour as part of our class. While I don’t think that’s a major trend, I think it does fit in with the trend of changing living situations. Accessory dwelling units (ADUs) are becoming more popular and many cities have issued guidelines on how they can be built. Call them what you want – granny flats, mother in law suites, guest cottages… or tiny houses.

The trend is that more families are moving back in together to save money and recover from the recession. And as the Baby Boomers start needing more medical care, we’ll see a lot more of them either move back in with their kids or have their kids move in with them to provide care.

And then many more Millennials are moving back in with parents to save money. They don’t feel the need that previous generations did to go out and buy a home – especially in this economy. They’re more interested in socializing, traveling and collecting experiences. A mortgage on a house that may or may not appreciate is low on the agenda.

As for development, the trend seems to be that private-public partnerships are slim pickens given the budget shortfalls that most cities seem to be experiencing. I tried to argue the case that developers would do better for themselves to avoid adopting a business model that depended on government help. I saw one article that major developers like Trammel Crow have opted out of the mixed use development trend because they concluded that most of them required public funds to be successful.

Think of it this way. If you can generate a product that stands on it’s own, then you can do even better with public funds. If you can only create a product that requires public funds then you’re at the mercy of public funds being available. While there does seem to be a trend of government getting more involved in everything, I think there’s still something to be said of learning to be profitable.

Also in development is foreign investment. I read earlier that a gambling company in Malaysia had bought up ocean front property in Miami to build the world’s largest casino even though gambling isn’t legal there. No matter though, they’ve also hired 13 lobbyist to get that fixed.

Turns out the same company is building the world’s largest convention center for NYC and – wait for it – another huge casino. The government is all for it because they get a convention center out of it. And… it’s all privately funded.

In appraisal it seems that they recently (past 2 years) passed laws to separate appraisers from lenders. Some claimed that part of the real estate bubble was from appraisers and lenders having too cozy a relationship and inflating prices. The result we have is that often appraisals are done by non-local appraisers and they’re turning out to be less accurate due to not knowing the local market.

In construction, costs are going up due to higher demands for medical coverage and insurance fees. A significant portion of the residential demand for construction is going to remodels. When people can’t sell their homes, they fix up the one they have.

Adaptive reuse is getting a lot of press. Some of these are privately funded and some are public-private partnerships. This is like rehabbing for the commercial market. A lot of the value in a commercial property is in the leases it has. If a slightly run down building is sitting vacant, it can be bought for a lower price, updated and then find good tenants. Many green building projects are being featured as redevelopments too.

As for transportation and TODs (transit oriented developments), that’s a big trend too. Of course cities want to build in density and promote public transportation. Market trends though are that everyone still wants to drive their own car where feasible. We watched the Japanese bullet train go by at 300 mph.

There’s no question that train stops help shape future development. Whether they’re so important that the future will be cities around these nodes is to be seen. What’s important at the moment is that there are opportunities to be had where transit oriented development is done well.

Another point of interest is that there have been rumors of high speed rail coming to the DFW/Austin/San Antonio/Houston corridors. If you were able to work in Dallas but commute 45 minutes to live in Austin, that would be a significant game changer.

Finally on to architecture. I have strong feelings about this one as I recently had a fairly unpleasant experience with my architecture department. As I’ve continued to read and study, I’ve come to figure out why.

I came to architecture with a builder’s perspective. I built on spec and then wasn’t able to sell for as much as I’d anticipated. Having studied marketing and been a Realtor previously also informed my background.

What I’ve come to learn about the current state of architecture is that it’s still functioning under faulty premises. If you’ll allow the comparison, modern architecture is like Newtonian physics while our better understanding is now quantum mechanics. Things are much more connected than our simple aesthetic of architecture as art trying to communicate something.

There’s fantastic article on a permaculture site regarding the state of architecture:

Architectural Myopia: Designing for Industry, Not People

The trend for architecture will be to adapt to design for people, not for industry. Terms such as “evidence-based-design” and “biophilic design” are coming more into play.

Architecture must design within the context it finds itself and strive toward functionality. Profitability is an intermediate step that most architects haven’t made it too yet.

I’d say we’re a ways away from it yet. If you tell an artist that their work needs to be functional, you’d probably be scoffed at. But then that’s probably why architects in general are having a hard time finding work these days and that they only design something like 3% of buildings.

Either they need to learn to design for people or stop designing buildings that people will inhabit. If you want to build art, build art and keep that separate.

We met in Dallas at Recycle Revolution for this class.

This one didn’t have much to do with real estate either but it was still an interesting trend. This facility is a recycling facilitator rather than a recycling facility themselves.

Their business model is to charge companies to haul away their recyclables which include just about everything. The idea is if you’re going to pay a waste disposal company to come pick up your trash, why not pay a little less to have it picked up as recycling instead.

They also facilitate the recycling of hard to recycle items like electronics, glass and even toilets. They consult on other projects like LEED construction waste management and zero waste businesses.

The owner is a great guy and wants to see how this model can scale. Right now they’re primarily serving the downtown Dallas area though they can service anywhere in the DFW area though they might charge extra for mileage. If you’re close enough, you can drop off household items too.

The next thing he wants to do is use synergistic approaches to community building. He was showing us a diagram that would integrate a community center, his business, composting and local schools in a particular Dallas neighborhood. It sounded like a good permaculture system though he didn’t mention that specifically.

On Tuesday we took a field trip to The Botanical Research Institute of Texas because it was LEED Platinum. Then we returned to class and discussed the rest of the topics.

It’s been interesting to see LEED projects up close and see that average people not only wouldn’t do them, but couldn’t.

This project had a lot of really interesting features, some done impractically and some that wouldn’t have been done at all if a cost/benefit analysis had been done.

They’re an independent non-profit dedicated to botanical cataloging and research. See more about their mission here:

http://www.brit.org/

Some of the cool features was that one wall was made of reclaimed sinker Cyprus wood which was basically wood lost and abandoned years ago in the logging industry. But then the architect went and made funky designs out of it and used a lot more wood than needed.

They have a green roof where they’re trying to grow native prairie grass. Another roof has solar panel tubes on it. The tubes can catch solar energy from any angle. Unfortunately it wasn’t very practical because the company who made them has since gone out of business. They provide 14% of the building’s energy. The tour guide thought that they cost 2-3 times more than regular panels but that they would recoup the investment in 5 years. That doesn’t sound right though as most regular solar panels take longer than that to recoup.

They tried to do their parking lot according to low impact development which is a way to maintain the natural hydrology of a place instead of contributing to the storm water runoff problem most buildings have. When I was leaving I didn’t see many curb cuts where they probably should have been. But they say they’re able to collect enough rainwater in a retention pond that they can continue to irrigate in the summer when everyone else has water restrictions. Of course they have to do press releases to explain that they’re not violating the restrictions.

The put 100% wool carpet in many of the rooms which was a bad idea. While it doesn’t have VOCs, it sheds terribly when vacuumed. In the low light I could see it was worn and dirty from foot traffic. Even the tour guide thought that one was probably a bad idea.

They have a geothermal well that we didn’t get to hear much about. Evidently their cooling/heating bill is pretty low.

They have flushless urinals which we were encouraged to go see. Honestly, I think those things need to be flushed at least a little. It was kinda gross.

The research area made more sense. The floors were frequently dirty from plant clippings and dirt and were made of recycled rubber which were easy to clean, durable and hid the dirt well.

They have to keep the storage areas cool for the 1 million plant clippings they have. Most of the plants carry an interesting story though none of that seemed relevant to our real estate class.

Overall, it was an interesting science and sustainability tour. Like I said, the more I see of LEED projects, the more I understand why most people don’t do it.

When we returned to class, we touched on the topics of the day. Honestly, this was the hardest discussion for me. Emerging markets are interesting. I could talk about Brazil, India, China, Chile, etc all day.

But the rest of the institutional money… well there just isn’t that much going on with it in the news. Everyone knows we’re in a recession and this percentage point or that percentage point just isn’t interesting. So we didn’t talk about that much other to make the point that debt is usually cheaper to use than private equity.

As for emerging markets, we looked at China’s building boom and their ghost cities. They’re building cities to meet mandated growth goals but only a small fraction of their population can afford the price so they’re sitting vacant. They’re also already starting to need maintenance and may become uninhabitable before people can afford to move in.

There are a few videos out there on China’s modular building prowess. See this 2 minute video on a Chinese Hotel Built in 6 days:

http://www.youtube.com/watch?v=E76uJi744Do

We talked about modular or prefab building a couple of times. The reason I think it hasn’t caught on here yet is the scale needed to make it profitable. China has production factories constantly running with orders for these things. A factory like that here would need a lot more business. If some major builder picks it up, we’ll probably see a lot more of it.

We compacted two class discussions into yesterday’s discussion since we don’t have class on Fridays but do have writing assignments.

The full list of topics assigned for Friday and Monday were hospitality, travel, resorts, international property, debt markets, lending, financing, foreclosures, REOs and workouts.

We started off talking about all the resources available at the Texas Real Estate Center:

http://recenter.tamu.edu/

It’s worth checking out if you have any interest in Texas real estate.

We were also shown the Wall Street Journal’s real estate section.

From the prior class we started off with picking back up on affordable housing. One example we looked at was:

http://www.newhopehousing.com/newhopehousing.html

It’s a non-profit in Houston that’s building SROs – single room occupancy units. The rent is around $415 a month all bills paid. They are very small apartments but they’re renting out like hot cakes.

The most surprising feature we saw was that they do not allow couples, children or pets – only on person per unit. That doesn’t sound like what we typically think of when it comes to affordable housing but it probably makes production of additional inventory easier. There’s probably less management required and an endless supply of tenants that fit that demographic.

One conversation that we started what the ethics behind affordable and especially subsidized housing. My point was that if you’re just going to have the city pay the person’s rent, why not instead lower property taxes and cut out all the bureaucracy? The arguments went from improving schools (it doesn’t) to redeveloping blighted areas.

While we were advised that we were getting into policy issues rather than real estate per se, my argument for developers was whether you’d want to base your business model on government funding. No doubt the trend is that government funding is taking a larger role in just about everything but that can’t last forever. At some point we need producers instead of simply redistributors.

I see it as a win-win if you hone your business skills to survive without government support. That way you can thrive with government support and make it just fine when it runs out. There’s also a perverse loss of sense of things when you exclude normal market feedback such as supply and demand and price.

Take education for example which we also mentioned. When government funded education fails miserably, we think we need to give it more money. When a company (without inside political ties) fails, the capital is reallocated to something that’s more appropriate as evidenced by profitability. Without profitability we can’t know if anything the government does benefits the consumers more than what they would choose for themselves.

Then we got to hospitality. We watched a video on an ice hotel in Sweden. That’s not a trend but trying to be more unique is. Capsule hotels in airports seem to be catching on. I can guarantee you they beat sleeping in the waiting area which I’ve done before.

Other hotel/travel trends we discussed were couch surfing, house swapping, and hostels. We briefly touched on convention center and attraction hotels, kid free establishments and dog hotels.

Another big trend are all inclusive hotels and online pricing channels. Mobile is playing a big part not only in finding hotels but in check-in, ordering room service and even acting as keys.

We finished up talking about the debt markets. The big news yesterday was that the White House is working up a deal to sell off government REO in massive lots of 50-500 houses at a time to investors to be used as rentals. The big issue with that (policy ethics aside) is the management of those properties. It will be a massive undertaking to locally manage property that’s spread across the country.

We briefly talked about foreclosures and short sales. Of note was that last year foreclosures decreased. Not because the market was improving though. It was due to slow processing from “robo-signing” paperwork. That automation led to missing documents and fraudulent foreclosures. Servicers backed off until they could revamp the process and experts are anticipating foreclosures to increase again this year.

The situation some owners are finding themselves in is that their properties aren’t worth the remaining value of the mortgage. It’s becoming more popular to simply walk away from the house and let the bank take it back. That’s called “strategic default” and it’s on the rise. Thirty percent of foreclosures were strategic defaults in 2011 up from 22% in 2010. That trend will probably increase this year too as property values across the US decreased by 7.5% in the third quarter last year.

Today we were planning to discuss Industrial Markets, Low-Income Housing, Taxes and Government. Instead, we went on a field trip to see two green built homes.

The first was done by the daughter of a green builder. They’d bought a completely run down house near downtown Fort Worth and renovated it. If memory serves me correctly, they said they bought it for $110,000 and put $80K into repairs. They said it only cost them 10-15% more than a conventional rehab would have. Now their electric bill averages $70 while they have neighbors paying upwards of $700 for their drafty old home.

They’d done things you would typically associate with green building – spray foam insulation, double paned windows, tankless water heater, etc. They said they put a Class 4 roof on it which reduced their insurance by 40%.

Both the homes we saw used mini split units which are basically ductless HVAC units. Evidently they’re the green thing going these days. They cost more than central AC units when put in multiple rooms but save energy by only controlling the climate of the rooms you’re using.

The second home was custom built and qualified for a LEED certification but they didn’t want to pay the extra to get it certified. It was a modern design – open kitchen, dining and living room floor plan. Some of the features included a flat white roof, tankless water heater, hardipanel siding, and spray foam insulation.

They have a detached garage which improves air quality in the main house by keeping fumes from vehicles and garage chemicals away. They have a direct vent gas fireplace which doesn’t draw heat out of other rooms like traditional fireplaces and retains 80% of the energy versus 10% traditional.

The most interesting feature was a real time digital energy usage readout near the fireplace. It tells you how much energy you’re using at any given moment. The funny thing about it was that the husband would monitor it from his mobile phone and had called home to ask his wife about spikes in energy usage (she was drying clothes).

After the tour we returned to class briefly to discuss our topics. If you trace back to cloud computing and mobile devices, you could guess that warehousing and logistics are doing well in the industrial market. Companies that run warehouses of servers are locating themselves in cooler climates to keep their cooling bills down.

We didn’t discuss low income housing, taxes or government much. What I’ll say about that though is that the best way to create more low income housing is to build smaller units. Subsidizing housing discourages new development and reduces property values. No one should get a free ride to be able to live in nicer areas just because they make less money.

As for government, we have SOPA going on. Our intellectual property laws have been amuck for quite some time now. If you read foreign accounts of it, the US patent office usually favors US companies even when foreign companies try to register first. That’s been going on since before Edison’s time. And now we have companies patenting living organisms – seeds and even DNA last I heard.

SOPA is the stop online piracy act. We already have intellectual property laws that allow the enforcement needed. The only thing this law would do is give government permission to shut down websites it doesn’t like on technicalities. Just like now, thanks to laws like the Patriot Act, all you need to do to ruin someone is decide they’re a terrorist or have even the remotest association with someone who is associated with someone who might be a terrorist. If you consider the six degrees of separation, we’re probably all 2-3 degrees away from someone who isn’t happy with US foreign policy and could therefore be labeled a terrorist.

In the news was GoDaddy.com who came out publicly in favor of SOPA. Their backlash from their customer base was so strong that they were forced to retract their position and now oppose it. Given the fact that they helped draft the legislation, many of their customers still don’t trust their intentions and have permanently switched providers.

For retail, mobile technology is a game changer. Everything about retail is being changed by the internet, technology and social media.

What’s not changing is that retail establishments that want to do well need to have well trained salespeople. It would be a mistake to get all the newest technology but still have poorly trained staff due to high turnover.

E-commerce will continue to grow. The question in part is whether to emphasize online sales or not. If you do, you need to do it in a way that you’re not going to compete with Amazon because you’ll most likely lose that competition. If you’re going to emphasize your brick and mortar operation, you need to make your store an experience. Think The Apple Store. I’ve only walked by but every time, it’s the most packed store on the block. Evidently you have to make an appointment to get in now.

We saw a video about retail trends in which computers will be able to give you personalized recommendations or suggest complementary purchases based on tags on the clothing. It sounds a lot like what a salesperson would do. The only thing with that is that if you take the human interaction out of the equation, you take out a lot of the reason for people to get off the computer and come into the store.

And again, mobile is changing things. More consumers are comparing prices while in the store before making purchases. More people are using QR codes to get more information on products. They also have apps that will show information instantly while viewing products or locations through an iPhone camera.

As for the Internet and real estate, we looked at a number of websites that are enabling consumers to do more of their home buying without agents. Some of the sites we looked at were:

• Money360
• City Data
• Revestor
• Walk Score
• Zillow
• Texas RE Center
• Netro Online
• Padmapper
• Hot Pads
• Realtor.com

What we’re seeing is that real estate agents are going to have to find more ways to add value to the transactions. The only information they are privy to at this point is selling prices. They show that in some states but evidently not in Texas.

A Realtor needs to do more than a competitive market analysis to justify a 3% commission.  That’s why we’re seeing more web based discount brokers. If you look at listings on Realtor.com, most of them are poorly done. Teenagers upload better pictures to Facebook. And the writing needs help too. A marketing consultant should be able to make a killing consulting to consumers who’d like to sell their own.

Our first class was on our individual personal interests, education and employment in real estate trends.

My personal interests in real estate trends are in the interconnectedness of cities. I think there’s a lot more going on there than either planners or developers take into account. For example, we didn’t use to know that Vitamin C cured scurvy.

Today a lot of people don’t know that Vitamin D prevents cancer and Vitamin B17 cures it. It’s also just about impossible to get enough B12 in your diet as a vegetarian but it won’t catch up with you for about 7 years.

The key is to eat food that’s as organic and local as possible. I think our cities are that way too. We don’t know what ingredients may be missing until we look at it and see there’s something not right. I’m interested in seeing how all the pieces fit together.

I’ve gotten interested in Permaculture lately too. Here in Texas, most of the cities around here are going to water restrictions and the price of food has been increasing for everyone. But then when you look at the vast majority of homes, they’re designed to have the water run off the house and into the street as quickly as possible.

Instead, we need to look at the patterns and systems that can sustain food production. We need our land to work for us instead of us slaving to maintain our little patches of green grass that does nothing for us. I’m interested in seeing how that all plays out and doing my own permaculture experiments.

Finally, I’m interested in our changing demographics. As baby boomers age, they’re going to start needing more intensive health care (many from simple Vitamin D deficiency). Many will move back in with their kids for the care.

And then Generation Y (aka Millennials) are sometimes moving back in with their parents after going to college. With the state of the economy, we’re having a variety of different living situations emerge.

There are a number of business opportunities associated with these trends. My parents do residential home care for 3 elderly persons (you don’t need a license for up to 3). My wife and I plan to start a Montessori school in our home (but may need to call it day care for zoning reasons).

And of course tiny houses fit into that equation too. The returning parent or kid can have their own place in the back and come and go more independently.

I noticed that Austin has an Alley Flat Initiative. After taking a real estate development course, I found a number of issues with it that planners may not have considered.

Yes, it makes sense to increase density inside the city – at least for planners. People generally like more space rather than less. And no one seems to have thought about what would happen if we parked an extra car on the street in front of every house.

But for the Alley Flats, the idea is that you invest about $100K to build a really nice tiny house (think social equity) in your backyard. For a fee, the city will set you up with a designer and fast track all your permits. But then you’re required to limit the rent you collect to $750 for a number of years so that you’ve just created affordable housing.

I haven’t learned to do the other numbers yet but anyone can see that cash flow isn’t going to work out. The point would have been to create more affordable housing which is a city interest, not a property owner interest.

For the property owner, this is what you may have just done – you got a home equity loan for $100K and after 6 months or so, you’re now collecting rent that’s equal to your new payments. If your renter moves out, you’re now in the hole an amount that could cause you to loose both properties. How’s that for affordable housing?

The other two topics of the class were education and employment.

I’m particularly interested in education as I was a substitute teacher and middle school math teacher in Austin for about a year. I’m also coming off of a bad educational experience in architecture where I wasn’t getting adequate feedback on my work. And then my wife is a Montessori teacher. And I’ve been working on accelerated learning projects for a few years now.

The main topics we discussed are the trend toward moving education online. My real estate development class was half in class (the discussions) and half online (tests and assignments). It worked out really well. My current class in Trends is requiring about 3-4 hours of research before class each evening.

The old model of teacher pouring knowledge into students and then checking that knowledge with multiple choice tests is dead. The only reason people are still getting away with it is the massive institutions that have been built up around it.

As evidenced by my tiny house, people can learn just about anything they want on their own without a degree. Some of the best architects in history were unschooled. Even so, there’s something to be said for going through a structured program and adding to the body of knowledge.

There are plenty of other educational trends. You can see most of them in TED talks. The top 2 out of the top 10 according to the Huffington Post were on education – The World Peace Game and Khan Academy.

Another facet of education in real estate in particular is LEED. Government has selected this particular certification as THE certification for sustainability and now requires new federal buildings to be LEED Silver. Of course LEED doesn’t address a number of important sustainability issues like a full cradle to cradle analysis, low impact development or permaculture. It also leads to weird designs like bike racks where no one is riding bikes. But then it’s a step in the right direction.

For employment we talked about the changing workforce. We’re moving toward a more knowledge worker based economy. That was going to happen regardless of any economic bubbles. A recession just makes people tighten their belts and get more creative to be more competitive. The people who are able to articulate real value are doing well regardless.