SOTM 66: The Road to Economic Recovery in 2021

Aaron Amuchastegui 

Real Estate Rockstars, this is Aaron Amuchastegui. Hey, it is now the end of January. I’m coming back on with Ari Rastagar. So back in the end of, I think it was October, you know, right before the election, we came on. And we talked about, you know, predictions of what will happen in the world if Biden’s elected or what will happen in the world if Trump’s elected. And even though it’s only been a few months, it feels like the world is starting to change. We’re starting to see some really quick kind of transitions. And we want to come on just chat about some some 2021 predictions and what we’re seeing now. Ari, thanks for coming back on the show.

Ari Rastegar 

Thanks for having me, man. Yeah, surely, you know, I surely don’t have a have a crystal ball. And I think this pandemic has taught us to stress test our analyses even even more. But I agree with you this is looks like there’s a lot of positive things on the horizon. No doubt.

Aaron Amuchastegui 

Yeah, a lot of stuff is changing really, really quick. And yeah, the funny thing is like predictions change all the time. In mid December, I’m, you know, I’m telling people on here, well, Biden got elected, but the house didn’t change hands. So we’ll probably see a lot of a lot of the same. And then a few weeks later, that actually changed. And so it’s like, well, now I gotta eat those words a little bit. So we keep trying to come up with good info. One of the reasons I wanted to have you back on is like, every other day, right now, in the Austin Business Journal, all the local Austin papers, they’re talking about developments that you guys are doing, new stuff you’re buying. And one in particular, I thought was pretty cool was about kind of the new way that some of your developments are are changing because of COVID. And I thought that would be kind of some fun ways to start with the predictions. So in one of your projects, it kind of sounded like everything had kind of changed, like with parking, elevators, things like that. Talk about that for a second. And how long ago did you guys start making those changes?

Ari Rastegar 

Yes. So look, the one project that we have in Austin, that we’ve really, really got granular into — this is an office project. Our architect started to draw that building at the beginning of the pandemic. And so we started to really think from inception for the first time, you know, what will be the future of design? Like how will this pandemic shape how we work, how we get to work, you know, how we stay at our offices, you know, how residential towers will change, etc. And so this building, you know, has staircases on the outside mind you it’s a smaller building, it’s only about 30,000 square feet. But the type of filters that we’re putting inside of it have UV lights, you know, the the open spaces, the windows actually open, they actually create airflow, which is very unique for office buildings. And we think of our, you know, windows opening in our houses is a no brainer, but most office buildings, the windows don’t open. And so thinking about those types of things, and knowing that we have to take safety and wellness, to a whole other level, right? And we have a building in Dallas, a 26 story high rise we designed that was going to have the largest elevator ever built in North America. But once we kind of saw this pandemic happen, because oh my gosh, we have to rethink the sizes of the elevators. What’s the you know, what’s the interest is what are the exits look like? Where are we going to put the filters? The size of the lobby? Like you really have to think very, very differently about this pandemic and expecting you know, something like this could happen again, and if it happens again, or how do you prevent it and really putting safety and wellness of your tenants at the at the very top of the totem pole, whereas before, I don’t think developers thought about that as much. It wasn’t something that really was at the forefront of everybody’s thought process, but it stayed is a testament to you know what a post COVID development will be. Having all of those kind of all those mechanisms, so it’s, it’s pretty exciting, you know, looking at the silver lining — looking at the innovation that it’s bringing, because, you know, to have those types of HEPA filters with UV lighting, you know, viruses, it kills 99.9% of viruses and bacterias from what they say. So I mean, it’s a pretty cool thing, even aside from COVID, even if someone next to you is the is has a cold or the flu or touching surfaces, to have that type of, of safety and wellness is a pretty cool thing.

Aaron Amuchastegui 

Yeah, it’s kinda like all the all those amenities are, whether COVID happened or not, it’s neat that people will put a value on, I think they’re putting a higher value on it now, right? Like the open windows and offices, you’re, you’re totally right, being able to get some fresh air when you’re a few stories up for a second, like, Who knew how much that would be a value?

Ari Rastegar 

Really, it’s unfathomable. I mean, this whole pandemic, you know, certainly for us is operated in an area of like, knowing you don’t know what you don’t know. Like, it’s so far in the in the blind side, but it has created enormous opportunity. I mean, as you mentioned, I mean, we’ve been very active buyers throughout this entire pandemic, seeing really deep value. And I really believe, you know, people are going to come back to the office, I mean, Jamie Diamond, the CEO of JP Morgan was talking about productivity really has plummeted and a lot of ways since people have been working at home. And, you know, I know that you’re the father of four with a father of three and managing the, you know, the zoom meetings and the school. Our eight year old is, you know, back in back in school, but it’s been a very difficult difficult time, but us as humans, we’re very tribal beings who like working together, breaking bread together, the brainstorming, the whiteboarding. So I’m very much of the belief that you know, that office is going to have a major major recovery, because people want to be at work, they want to be back in that setting. They don’t want they want to be sitting at home, and I think people really have zoom fatigue. I mean, even the CEO of zoom the other day said he’s sick of it. I was like, “Oh my god, you spent, you know, however many billions of dollars and you’re sick of zoom meetings?” I’m grateful that we have that technology to bring us together, but I love the human direct interaction and just being you’ll be in front of people talking with them and being able to share those exchanges.

Aaron Amuchastegui 

Yeah, it’s like a zoom is almost as good, but it only goes so far. And so like right now I’m sure you’re having to travel a bunch for a lot of the different things that you’re working on. Because just seeing somebody in person is just a little bit different. And I think it’s it’s easier to sit with somebody for three hours in person. I met with some guys yesterday, and it was easier to sit with them for three hours, you know, spread out around a table than it is to have a three hour zoom call. I mean, man, I’m going to the chiropractor way more often right now, because a three hour zoom call is totally going to change it. You know, one of the one of the things the articles talked about was like going in an elevator and not even having to use your hands to like pick a floor anymore.

Aaron Amuchastegui 

Do you think that technology will develop into stuff like that? Is it just gonna keep getting crazier and crazier?

Ari Rastegar 

Yeah. Well, I mean, look at this series of examples. So my five year old, I mean, it’s unbelievable how good he is with using voice like, for YouTube for, for texting, for emailing. I mean, he utilizes the voice mechanisms that are in our devices, and we have the Alexas, and we have Apple devices and those things. And I guess he really taught me how advanced it is, like he sends me, you know, he can’t read yet, but he writes me full text messages, like, like you hear him like writing or searching for songs that he likes, or, you know, videos that he likes on YouTube. And it’s no different when you talk about entering like an elevator because you can use voice. Like, “Where would you like to go, sir?” And so the technology is actually very basic and sitting in every one of your smartphone apps.

Ari Rastegar 

And again, real innovation is comes from necessity, right? When you go back to like World War Two, and you look at all the calamity and the you know, horrific stuff of World War Two, you know, and put that aside for a moment. The innovation that came out of that era we’re using, we’re still using so much of that technology, because we had no choice. Yeah, though, when you look at the stuff of me telling an elevator floor to that’s so rudimentary, I can have a full conversation with Alexa.

Aaron Amuchastegui 

Yeah, well, I guess all that was in every futuristic movie that was supposed to happen. 10-20 years from now. Nobody was touching anything. Yes, the technology’s been here. It’s been like that for a while now.

Ari Rastegar 

It’s like, I mean, it’s commonplace technology. So it’s just a matter of utilizing what we already have in one industry. We’ve seen this over time in other disruptive industries, like, if one piece of technology disrupting e commerce, then you go and use that in something like real estate, that, you know, still, you know, real estate still operates, you know, like it did in the ’80s, but how are we going to repurpose that existing technology for something like real estate? It’s not new, it’s just being used in a place that hasn’t been used?

Aaron Amuchastegui 

And that’s where innovation happens. So much innovation happened this year. So kind of a different storyline right now is there’s a lot of hotels are getting foreclosed on and sold right now, like they’ve had just a horrible year. But over the last couple months, a lot of cities have been buying up hotels to turn into low income housing or housing for homeless and, and I put a thing on my Instagram yesterday, and I had so many listeners send us an article from Austin — the city bought two hotels, and everybody all over the US sent me the same article from their city. So it’s happening everywhere, and kind of some redevelopment type stuff, you guys have done a lot of multifamily redevelopment, have you looked at all at what it would be like to buy a hotel and convert it to low income housing? Do you think there’s going to be more of that? Is there money to be made in that?

Ari Rastegar 

Yeah, well, look, I like what the cities are doing in that regard. And, you know, we’re very, very cognizant of that, you know, of affordable housing and those things from a, from a living standpoint, you know, the typical hotel room is very small. Okay, so having a full service kitchen, but you know, converting an extended stay type hotel into multifamily has been done several times really, really effectively. But typical hotels, you know, the footprint of a one single unit is really small. So you’d have to knock out the doors and combine some units, you have to add kitchens. So there’s definitely a way to do it. And, and I’ve looked at a few deals like it before, but it can be pretty expensive, if it’s not one of those extended stay, you know, type situations, because when you have the, you know, the the plumbing that goes in and the like there’s a lot more that really goes into it. So I think the waves the cities are using it make a lot of sense, but you know, back to, you know, I guess they call it a K-shaped recovery, right is like it’s a fancy way of saying that, you know, different asset classes will recover at different speeds. You know, I’m bullish that hotels will, you know, make a comeback. I mean, again, people, you know, especially industries where your client facing right, if you’re, you know, if you’re anything in marketing or sales or interfacing with clients, you know, you’re going to have to travel. That means airlines are going to come back and means people are going to stay in hotels. And I think that hotels are going to make a, you know, a serious resurgence. But again, they’re gonna have to reinvent, you know, how room service works, the cleanliness that goes into the rooms, and I’ve traveled pretty consistently throughout the pandemic. And watching that change has been pretty incredible. It’s things as simple as you know, all the remote controls for TVs or now little Ziploc bags, or these like little you know, little teeny changes that you never really thought about of these high touch surfaces and the amount of sanitization that exists. I wash my hands now more than I ever have in my entire life. And so yeah, I think that all real estate in general I mean, until they can learn to digitize me, you know, there’s a place for a lot of this. And I think hotels are definitely going to have their place and definitely have their comeback and have that recovery. Same with retail. I think retail has really got a bad rap. And if you look at Amazon as an example, obviously, you know, the biggest e commerce site in the world, their largest acquisition to date of $13.2 billion was Wholefoods.

Ari Rastegar 

So when you’re the biggest ecommerce site in the world, you just bought a brick and mortar company, the largest acquisition you ever made was brick and mortar. And so people talk about this retail apocalypse. I’m like, wow, pretty sure, you know millennials and Gen Z like to be out of the house, I’m pretty sure they’re looking for new experiences, I’m pretty sure that you know, they don’t want to buy everything online. Right? So there’s, so again, these things are going to need reinvention, and they’re going to need innovation, those those things are going to need to happen. But I’m looking forward to a pretty powerful comeback for all those asset classes.

Aaron Amuchastegui 

Yeah, there’s certain things that, as they adjust, they’ve talked about taking even the you know, the the lower end hotels, and they can convert them to almost like a, you know, homeless mission because they can have a cafeteria set up because they don’t need kitchens in every room.

Ari Rastegar 

And that type of thought process is wonderful. I think that’s a great way to go about doing it. And look, a lot of these hotels, as we mentioned, as you mentioned, are in foreclosure or just having just a lot of distress, which is, you know, which is kind of a, you know, a tragedy of itself. But if it turns into something like that and there’s a silver lining there where we started having these types of solutions for homelessness and things like that, I think that’s a phenomenal way to repurpose that asset.

Aaron Amuchastegui 

Yeah, the foreclosures for commercial investors is totally tragic, right?  Like some stuff had been over built and adjusted. But there are plenty of examples where you go, man, that guy did everything he was supposed to do. And it was in the wrong city at the wrong time.

Ari Rastegar 

A lot of this falls on normal Americans in the 401 Ks and people don’t look at how far the rat rabbit hole goes, because a lot of those loans are securitized and sold as bonds to retail investors. So those are foreclosed on those bonds take a hit. A lot of those bonds are in people’s 401 K’s or they are owned by public pension funds or by teachers pension funds. So it’s not just you know, the you know, the owner operator that’s you know, getting kicked in the teeth but sure they are and the investors are, you know, that are probably in that project, but it goes further down that rabbit hole when that debt is not paid and that debt gets written off or you know that foreclosure happens. And there’s a lot of people that suffer from that like the the rabbit hole goes much deeper than that I think a lot of people are cognizant of.

Aaron Amuchastegui 

You know, when we think of like recovery, talking about different industries right, like the real estate side of residential single families, you know, nine out of 10 cities that’s stronger than it’s ever been.

Ari Rastegar 

In the stuff outside the urban core, especially in the Sunbelt areas, it’s just going gangbusters crazy.

Aaron Amuchastegui 

It’s crazy as we see it. So then the ones that are going to take a little bit longer, you talked about like, so your commercial office style stuff, the retail, and then kind of that back end is the hospitality or the travel like out in Maui people are not traveling to Maui like they once were. So that’s kind of like the whole, the whole state out in Hawaii has kind of its own things. And maybe downtown New York has its own thing. Do you think retail comes back before hospitality?

Ari Rastegar 

That’s a really difficult question. I love that question. Actually, I need to think about it. I think hotels come back first, if I had to pick one. But I think they’re very connected there. I mean, they will almost be in tandem. But hotels as a general rule, you know, have to do with travel, okay, like people are traveling to this other location. And retail as a general rule is, is localized. It is localized in a lot of ways. So depending on what that local government is doing with that local municipality is doing. Look, if Biden and he has all my prayers, and all my hopes, gets those 200 million vaccines out, you know, by the end of the summer, and they’re able to achieve that plan. I mean, you’re gonna watch a recovery happen that is much, much quicker than people are anticipating, I think you have to handicap that statement with the mental trauma that people have gone through, which I think is going to take a lot of time, you know, for people to get comfortable, again, not wearing their masks. So you have a whole, you know, microcosm of people that even with the vaccines are still going to have, you know, live in that fear state, but the vast majority of people will get back on the road again, you know, this pent up, there’s so much pent up demand. Like, for example, our kids ask us all the time, “When are we going to Disneyland?” We always go to Disneyland or Disney World once a year, you know, we always have a little trip. And so people have been waiting and waiting. So once that vaccine hits, I think you’re going to see an explosion of travel back to these retail destinations, to the Disney World or Disneyland or, you know, the beaches, the vacations because people are just dying to get out of the house. And, you know, business people are dying to see their clients and take them out, go to dinners and wanting to have human interaction again. So I think it’s going to create a big boom once people feel safe again.

Aaron Amuchastegui 

Yeah, yeah, my kids talk about Disney and Hawaii almost every day, like, “When do we get to go back to Disney?” You know, one of the things you talked about last time was kind of the idea that there’s going to be less kind of stuff, but the stuff that’s left will be awesome. What I mean by that there’ll be less restaurants out there succeeding, but the ones left, we’re going to be these amazing experiences, less stores out there, but like the hands on toy store with the cool stores, those are the types of things, if any, anything to add from that are things that might have adjusted with that over the last three months?

Ari Rastegar 

Well, I think that’s that’s exactly what it is. And that’s gonna be, you know, looking, some of that is just capitalism, right? Some of these businesses, some of these restaurants, they shouldn’t be there. Right? I mean, they just should not be there. And they’re just kind of hanging along. And so that’s just business and capitalism in some regard. And, but then there’s some that obviously, have done a lot of things right. But I think when you talk about restaurants, to have good food, great service, you know, to do something a little bit differently. And those types of restaurants and those types of retail experiences that are truly creating value, and really creating some experience that’s visceral, are going to do remarkably well, I believe, but it’s just going to be your plain old plain Jane, or you know, walking into some whatever restaurants you just pick up a meal for. That’s just something kind of grab and go. I think that space is going to become hyper competitive, and a lot of those places are not going to come back. And maybe they shouldn’t come back. But a restaurant that has great food and stuff will will do great.

Aaron Amuchastegui 

Yeah, even before COVID, most businesses fail, most restaurants fail eventually.

Ari Rastegar 

Right? Like 5% make it. It’s a ridiculous number.

Aaron Amuchastegui 

Yeah, as entrepreneurs, we almost have a sickness, right? And when people say like, that’s not for everybody, because being able to be okay with the ups and downs or see the challenge and have it be exciting instead of, you know, depressing, but yeah, even before this 95% of new businesses failed, maybe that’s amplified, you know, but I think we get excited for you know, people stepping up their game. You know, the experiences being better as people get back to them. But another thing that’s happening right now there’s so much talk in eviction moratoriums, which we are, we are starting to see that happen more than it was a few months ago. So six months ago, we were like 100% occupied on 300 units, you know, 100% collection rate, you know, only a few people were behind. Right now, we’re probably 20ish people that should be in eviction, right, somebody hasn’t paid us in nine months, for 2000, you know, dollar a month place. And I think that’s going to be it looks like right now those eviction moratoriums are going to keep getting extended until like September, you know, and one of the things the government’s doing to offset that is there is stimulus that’s going to pay like two thirds of the back rent. I think it’s something like 75 billion in rent is owed right now. And there’s 50 billion from the stimulus going toward back rent. And we’re trying to get very active, like helping residents know about it. You have a lot of, you know, property, too, you’ve got a lot of rental properties all over the place. How are you feeling about that? What are you thinking about that? Are you strategically doing anything different? 

Ari Rastegar 

Yeah, that’s a great question. I do think that there, there’s a very high likelihood of extending some of those. And I think that, you know, some people are really suffering, and you know, they’re not able to make those payments. And you can tell the difference, you know, when you communicate with them, you can see the person that is communicating back and maybe lost their job, or is going through some sort of struggle or something. And, you know, working with them, working out payment plans, we’ve been very fortunate that, you know, we’re in the high 90s. Our collections have remained pretty stable in that regard. But you can kind of see where some people are kind of gaming the system a little bit, maybe using it a little bit to their advantage, and I’m amazed to see that any industry or in any situation where someone can find some kind of angle, right. And, you know, we’ll let karma kind of deal with those kind of folks. And, you know, they’ll figure it out. But I think normality is much closer, or the new normal, so to speak, or that new status quo is closer than we think. And so, again, going back to these vaccines, what’s the excuse gonna be if you have 200 million people that’s vaccinated, and you know, cities have been opened up, people are going back to work. I don’t know what the basis would be to extend that, you know, that beyond a certain date, if we’re nearing the end of this, right? So I’m hopeful that that the Biden administration is very successful, and what their goals are, it’s ambitious. But I like that. I like that level of ambition, because for the right cause, and for the right reasons, but I’m inclined to agree with you that that eviction moratorium could be extended. And, look, again, I think people once they feel comfortable, or they’re able to go back to work, they want to go back to work. And I think that’s the vast majority of people, I think people want to be at work, they want to get back to a normal life, but there are going to be some stragglers that, you know, game the system as long as they possibly can, but in our experience has definitely been the vast minority, you know, of, you know, on a unit by unit basis that haven’t been able to pay completely or, you know, or tried to, you know, try to hang along, you know, longer than they’re welcome.

Aaron Amuchastegui 

Yeah, it’s a great point that actually. Yes, the vast majority of our residents are doing great. The vast majority people do want to go back.  But maybe that’s why they’re talking about September because if by end of summer, they’re wanting to have the, you know, everyone’s gonna have a vaccination. Well, then, then maybe that timing will get there. So one last thing: I think commercial and retail are allowing less parking for new developments because they’re saying, “Hey, now buildings are going to be kind of 50% occupied, like people are going to take turns coming to the office or work at home, things like that.” Do you think that that’s gonna catch on later? Or do you think that they’re like, in worse comes to worse cities?

Ari Rastegar 

Look, I definitely think on the long term, you know, parking requirements will decrease. Yes. Okay. It gets much longer than people think it is. You know, parking it, you know, we’re a driving culture, especially here in the United States, you know, just by nature, and having our cars having that autonomy to control kind of where we’re going, you know, even with the advent of, you know, the Ubers, and the lyfts and things of that nature, you know, people want to still kind of maintain that level of control. Yes, I think parking requirements are going to decrease dramatically. But over the next 10 to 15 years, I don’t see, you know, the city certainly really lessening those parking requirements to the degree that maybe, I don’t want to say the degree that they should, because a lot of these parking lots, they don’t have as many people in them, like, if you look at the parking requirements in some cities, they’re just outrageous. I mean, you look at the parking lots, and they’re 30% 40% vacant. So there is a need for parking, but it’s a very difficult balancing act. So if you go long term, yes, the parking is going to decrease. But, you know, these statutes have been long been standing, you know, there’s a lot of people on these councils that you know, don’t see, you know, that future coming? Certainly maybe not even in their lifetimes, a lot of these individuals are baby boomers. And so they’re not seeing, you know, that writing on the wall. So I’m a little bit a little bit bearish, unfortunately, that those parking requirements are going to change in favor of less parking as much as developers think that they should.

Aaron Amuchastegui 

Yeah. Developing in Santa Barbara, that was always the toughest part. You’d have this lot. And you’re like, “I could put nine condos here.” Yeah, even back in January in February, they started to say, well, with self driving cars and with Uber and stuff like that cities are going to start requiring some less parking, maybe the pandemic type stuff allows that shift a little faster, but we will see but already the I know you’ve got a busy day. I appreciate you coming on to get to talk about kind of this week’s State of the Market update if people want to follow more of kind of your advice or your tips or things you’re doing how should they go find out more?

Ari Rastegar 

Yeah, they can go to rest of our property calm or they can you know, follow me on Instagram. It’s pretty easy to find me if they’re looking, but we’re definitely going to be very, very active in the market for the coming years. And you know, really see this, this pandemic as a huge opportunity. I mean, just unbelievable generational opportunity. And so yeah, absolutely. It’s pretty easy to find me if you’re looking.

Aaron Amuchastegui 

Awesome. All right. Thanks for joining me. Real Estate Rockstars, thanks for listening. 

Ari Rastegar 

Thanks for having me, buddy. Talk to you later.