“There have been few things in my life which have had a more genial effect on my mind than the possession of a piece of land.” – Harriet Martineau (British social theorist, often cited as the first female sociologist)
We couldn’t hope for a more appropriate quote to wrap up this miniseries! A piece of land providing peace of mind? Who could have come up with such a brilliant concept? But don’t go spending all your money on real estate just yet. As we’ve learned thus far, “pieces of land” can vary significantly, and I’m sure many of them could be hazardous for one’s mental health rather than reliably increasing mental well-being, as the quote implies.
In Part 8, I suggested that “the concept of a ‘mall’ is changing…we’ll see some very interesting reconfigurations in the coming years.” Coincidentally, David Bahnsen and our investment team sent a recent update to our clients that was relevant to this idea. I won’t name the specific company, but the earnings report from one publicly traded mall owner stated that former JC Penny stores are being repurposed into hotel rooms and apartments. Thus, to confirm my speculation about whether people could live at the mall, the answer is an emphatic “yes!” And consider one implication of this evolution: a multifamily or hospitality backbone balancing what used to be a retail-only property (aka “mall”) could improve resilience and appeal to a broader set of investors. It should be interesting to follow future developments (real estate pun 😊) on this topic.
The home stretch
Sorry, but as a dad, I’m obligated never to allow an opportunity for a pun to go to waste. But I am determined to keep us on track and get through the last four property types today. If you need a refresher on Multifamily, Office, Industrial, or Retail, please refer back to the previous two parts of this series. Here we go!
Hotels & Hospitality:
- Similar to what we’ve discussed with other property types, owning the best hotels or resorts in the best areas can provide resilience (i.e., more consistent performance) throughout economic cycles. There are particular cities, towns, or vacation destinations with an incredible demand for properties that offer the locations and amenities people want. At the same time, we have a new awareness of the reality of truly “black swan” events – like pandemics – that prevent people from traveling or gathering at hotels/resorts. That may affect the hotel-room side of hotels, but many high-end properties also have residences with occupants who may spend even more time at home during pandemic situations.
- That said, hopefully, Covid was the only pandemic event we encounter during our lifetimes, but it’s worth mentioning as an outside risk. Even iconic properties, like the Roosevelt Hotel in NYC (which we know well, as it’s about two blocks from our office) shuttered its doors after almost 100 years, citing the pandemic as the main factor. However, others – especially the high-end ones in the heart of Fifth Avenue shopping – like St. Regis and Penninsula, are alive and well (and thriving, at least based on my recent visits to them).
- When it comes to less glamorous hotels/motels, it’s worth a note on a different sort of model that can mitigate downside risk: A mediocre (or even seedy) motel in a location with a supply/demand mismatch. We’ve discussed college towns in the past; these areas offer an egregious supply/demand imbalance at certain times of the year, like home football games, graduation, homecoming, and parents’ weekends. Because of this, even the least attractive motels in those areas command egregious pricing at peak times. For example, how about paying $989/night for the Best Western during the upcoming September 2nd football weekend at Penn State – at a location that’s nowhere near town and leaves you with a 1 hour, 26-minute walk to Beaver Stadium (source: Google Maps)? That’s pricing power! [Unfortunately, I can’t give you the prices of hotels closer to campus or downtown State College because they’re all sold out].
- Extended-stay hotels utilize a different model. I’m very familiar with them from my full-time travel days as a field engineer in the early 2000s. When you travel constantly, having a sense of “home” – via a non-mini fridge, kitchenette, and the ability to cook a meal is a must. Large companies or governments are generally footing the bill for the occupants in the area for business reasons and may stay for months at a time. As long as it’s an area where people need to keep doing business (e.g., the Extended Stay America in Secaucus, where you can commute into NYC via the train – like a real New Yorker), I can imagine an impressive level of resilience.
- The sharing economy, including solutions like Airbnb and VRBO, has undoubtedly impacted this space. Still, there has been legislation in some areas to help regulate or limit that impact (whether that’s good or bad is a different conversation).
Mixed Use:
- We’re not going to spend much time on this, as these properties are simply combinations of the aforementioned types in this series; common examples are having apartments upstairs from retail/office space or downtown high-rises with several businesses on the ground level and residences above. Combine the best types in the best locations, and you have something special that can be an all-weather investment.
Land:
- Land isn’t in and of itself income-generating, so the concept of recession resilience essentially doesn’t apply. But, as we’ve already discussed, the resilience of many properties is tied to location, so land in the right spot is the sine qua non (h/t to David Bahnsen for that vocab) of real estate recession resilience.
Special Purpose:
- This is an excellent note to end on since many of these property types represent places for fun or passions (or both!). However, the message isn’t significantly different from other property types; the best of the bunch will be our best bet for weathering more challenging economic times. Even once-great amusement parks (e.g., Palisades Amusement Park, which was very close to our current home) have shuttered to make way for new real-estate adventures, as the value of the underlying land may increase exponentially over time. Many cultural and educational properties have demonstrated longevity, like iconic theaters, zoos, schools, and churches, and I don’t see why that should change any time soon.
- Parking lots, on the other hand, are worth watching. In the best areas, they represent land that would likely become much more valuable as something else, e.g., multifamily developments (which still may have just as much parking underneath the building). In addition, the ride-sharing economy has already diminished some people’s need to own a car. At some point, reduced ride-sharing costs (say, with fully embraced autonomous driving) may make the math of owning a car completely unattractive. And I don’t think it’s far-fetched to believe that – as autonomous driving becomes increasingly better and more widely accepted – human driving may become a thing of the past. I know YOU’RE a great driver, and I’M a great driver, but other people are pretty bad at it; thus, that could mean less traffic, safer roads, and many fewer parking lots – especially if legislation shifts regarding mandatory parking spaces!
The idea with many of these resilient subtypes is that you don’t necessarily need to sacrifice a lot of upside return for the benefit of reduced downside risk and a smoother ride through economic cycles – but it may require a lot of legwork or good professional management to uncover. When you find that ideal combination, a piece of land can provide peace of mind.
Until next time, this is the end of alt.Blend.
Thanks for reading,
Steve
