Archive for August, 2020

The Rent is Too Damn High

Posted on August 14, 2020. Filed under: Uncategorized |

I’ve started to develop a thesis around what I perceive to be one of the most fundamental breaks to come out of the pandemic. I’m by no means an expert in real estate, but what I do know is that when residential, commercial, and retail tenants stop paying rent en mass, that is a break at a pretty low level in our societal stack. In aggregate, unpaid rent is a massive amount of value that is not flowing in the historically prescribed pattern within our broader system. I’ve started to think about the implications of this break from a few different perspectives. I like to begin thinking about a market by defining all of the key stakeholders within it, and then starting to isolate their distinct incentives and likely future decisions. In this case, I think the key stakeholders are 1) Property Owners/Landlords 2) Tenants 3) Lenders.

Across the country, but especially in urban centers, the same conversation is playing out over and over again. Whether it’s a person renting an apartment, a business renting an office, or a retailer renting a storefront, either out of necessity or opportunism, tenants are not paying their rent or paying partial rent or renegotiating their agreement with landlords. It’s contentious and landlord’s are in a position of less leverage than they have been in a long time. Demand is so low, that tenants collectively can turn the screws in a way that they haven’t been able to in recent times.

On the other side, landlord’s have obligations. Most physical buildings are highly levered. Developers borrowed heavily to build their buildings with the expectation that rental income would be used to amortize the debt over time. Nobody’s models contemplated such a uniform break in cash flows, and as a result landlord balance sheets are starting to get stressed. Property owners typically don’t enjoy much societal empathy, and going back thousands of years, tend to be the “haves” that can afford to lose money, but the “haves” balance sheets can only last so long when they have levered up their assets as they have. So just as tenants are coming to them and saying “we can’t pay,” they are going to their lenders, which might be banks, credit funds, mezzanine lenders, etc…and they’re saying “I need a new deal or I’m not gonna be able to meet my obligation.”

Lenders are listening and have a choice to make, whether they want to float their borrowers or become equity owners in the case of default on secured loans…and at some point of exposure, especially if liquidation of the equity doesn’t cover the outlay, banks are gonna start knocking on the governments door and saying “bail us out.”

This is a grim picture that harkens back to 2008, albeit in a different shape. Without the data to back it up, the exposure feels as great, if not greater.

So anyway, questions/observations that are on my mind that I would be interested in investing around to the extent there are Series A stage companies tackling or addressing them:

1) In the case of unpaid rent by necessity, the capital that was flowing from tenant to landlord has evaporated and won’t be reallocated. But in the case of opportunism, tenants of all types can and will reallocate unpaid rent to new channels. What are they and why?

  • Interestingly, I see opportunity for thin margin businesses where rent is a high percentage of the overall cost structure to thrive on the other side of a reset. For example, the beta on the restaurant industry may be more attractive today/tomorrow than it has been in a long time.

2) Where there’s pain it’s good to be a pain killer: Who’s aiding the landlords in meeting their obligations. Ironically, it’s an optimal time to buy lease exposure in bulk across property types. If there were ever a good time to build Wework, the residential version of Wework, whatever…it is coming. It’s a tricky timing question, but I’m a buyer of long term exposure here, especially in an asset light way.

3) Similarly, who’s aiding tenants in meeting their obligations? Income smoothing, lending, gig economy, etc…all speak to assisting consumers and businesses in meeting rent and other obligations, but there are likely more targeted products that speak to rent as a specific expense. My sense on the retail and commercial side, is that there’s a class of more equity like financial products that will have fit in today’s world, and those that are able to underwrite said products effectively will be well rewarded. Revenue shares, novel payment terms, non-traditional forms of security, etc…

4) Both of the above speak to a more general opportunity: negotiation between tenants/landlords and landlords/lenders is happening in a very one-off way without standardization or uniformity. This type of one-off negotiation doesn’t scale. There’s an incredibly ripe opportunity for 3rd parties to either facilitate or even obviate the need for parties on either side of said negotiations to come to an agreement. That could take the form of buying one side’s exposure, but also at the ornizational level, concepts of collective bargaining, standardized structures that are proposable by either side in volume, or even something as simple as arbitration as a service could find fit quickly.

5) Unleased retail space: Even before the pandemic, and especially at today’s volume it’s hard to walk by empty storefronts without thinking about what could be done with all the empty space. Companies like Spacious or whatever marketplace facilitates “pop-up” agreements play with the idea of unrealized value here. What else can go into these spaces with selling goods or food don’t make near term sense?

  • Related: I’ve been thinking about how screwed scaled fitness companies like Equinox must be, not collecting membership fees for the past 6 months. Even when gyms do open back up, demand for working out in shared space is gonna be a small fraction of what it was pre-pandemic. That said, demand for exercise will remain constant if not higher than it was pre-pandemic. I kind of like the idea of turning empty storefronts into on-demand private gyms. The model in my head looks like Breather. Can you buy up a ton of cheap storefront leases, put a standard set of exercise equipment in them (treadmill, free weights, mat, bench, elliptical, bike) without any or much additional buildout), and then let people book 30/60/90 minute slots 24 hours a day, 7 days a week? Most people in urban centers don’t have the space for at-home workout equipment and I believe would pay either their unused gym dollars, or even likely a premium, to “go the gym” without sharing space.

6) The distributed fitness idea touches on a broader insight that I’ve felt recently, which is around personal space. In a world where we are trying to figure out what does and doesn’t persist post pandemic, I find myself believing that personal space will evolve from a necessity to a preference, but that preference will be larger and more widespread than it was prepandemic. Willingness to pay for personal space will be high amongst those with disposable income, while those spending on necessity will revert back to pre-pandemic level of space per service or product. A perfect example of this will be expressed in relative marketshare of Uber and Via post-pandemic. Even when there’s a vaccine and virus levels/risk are low, Via is undoubtedly gonna lose marketshare to “private rides.” I’m interested in services and products that deliver familiar value to consumers with evolved personal space profiles. Hyperloop, for example, is well positioned to take more marketshare from other forms of public transport than they would have on the value prop of speed alone, because they happen to contemplate individual/private pods as a form factor.

7) Affordable/low income housing: I’d like to have exposure to affordable housing in urban centers. I believe there is a high volume of people who won’t trade the urban experience for affordability, and therefore demand for the most affordable housing that can keep them in cities will grow. If you looked at vacancy rates amongst all bands of price in New York over the next five years, a like the cheap band the most. Who is building products/services here? Coliving would have been an interesting answer except for the unique safety/health issues of the moment, but there must be other people asking “how can i serve the furloughed waiter/actor in NY to help them stick around?

8) The exchange position: ownership of real estate assets is going to change hands in high volume. As a result, the exchange layer between old and new owners is valuable. Brokerage is the most obvious beneficiary, but in the case of forced transfer, there are other positions that might accrue more value. Chris had the thought that liquidation and foreclosure marketplaces stand to benefit, as would 3rd party property management in the case where lenders become equity owners en masse. One of the most interesting architectures I see at the exchange layer is in pairing a balance sheet with the exchange function. If an exchange can afford to take possession of the asset in order to protract the liquidity window in which a transaction must clear, that’d be a very compelling path to volume.

9) Lastly, the value of an incremental tenant across real estate types is higher now than it’s been in my memory. Owners (and by proxy brokers) stand willing to pay a higher CAC today then they have historically. Zillow spiked hard this quarter, not surprisingly, but any channel that catches tenant acquisition dollars is well positioned for the foreseeable future. I could even see standard broker commissions increase from industrywide norms as the leverage dynamics btwn landlords and brokers tilt toward the demand side.

So yea, if you are building around any of these themes, I’d love to lead your Series A:

P.S. I apologize for any blind spots or misperceptions I have in this market, i’m learning…smart people, please correct me on anything that’s wrong.

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Deconstructing the Fortune Teller

Posted on August 13, 2020. Filed under: Uncategorized |

I’ve been thinking more about seeing the present clearly vs predicting the future as venture investment frameworks (after writing about it yesterday), and it occurs to me that they are more related than I initially considered. To me, “seeing the future” is just an exercise in game theory. Even a basic product-centric approach to investing can be reduced down to a simple game, which is “if this is the best product today, then people will buy it tomorrow.” My supposition is that fortune teller investors who “predict the future” tend to spike in game theory, whether that be conscious or subconscious. In seeing the future, everything can be reduced to if/then statements, and the further out you see, the more consecutive or parallel if/then statements you have strung together. The interesting thing about fortune telling, is that there are many confounding and intertwined variables that influence one’s confidence level in the “ifs” upon which they rely and orient. I think great fortune tellers can hold a bunch of different, and not necessarily obviously related, lines of game theory concurrently in state, and in doing so, experience unusual confidence in the set of ifs they consider true en route to the terminal state. So back to the two frameworks, even though they appear at odds, in addition to game theoretic superpowers, fortune tellers are actually heavily dependent on seeing the present clearly. If they get the present wrong, they begin their game at the incorrect starting point (they fuck up the first if)…and even if all subsequent moves/logic are sound, they’ll end somewhere off the mark. Maybe these two approaches to venture investing aren’t such odd bedfellows after all…


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Snipers and Fortune Tellers

Posted on August 12, 2020. Filed under: Uncategorized |

I think it was Matt Cohler at Benchmark who said “our job is not to see the future, it’s to see the present very clearly.” I’ve never really identified with that perspective on venture, but I certainly see its merits and how one could build a very successful venture practice by internalizing and adhering to it. This morning I found myself wondering if the value of seeing the present clearly was as actionable in this moment as it has been historically. It feels like core to the premise of the above framework is an assumption that the near future looks more like the present than not, and that a company that is well positioned for the present will therefore thrive in the near future. Investing behind this clear view of the present presumes that one sees it before it is more broadly recognized, and eventually consensus catches up to reality.

So fast forward to today. It’s hard to see this present clearly. We’re dealing in very dynamic information and a state that feels more fluid than static. The present is always fluid, but I’d argue that it’s more fluid now. So many of the assumptions that shape behavior and people’s way of being on have been challenged…so many of the inputs to the systems that we’ve designed to organize/govern society and behavior have been upended. We are rewriting the way things are in a very compressed and abrupt way, and it’s happening with frequent real-time edits and little uniformity. There is definitely a true version of today’s present, but that version feels uniquely defined by motion.

It’s harder to see something clearly when it’s moving, especially if it’s moving faster and more erratically than usual. Nonetheless, a sniper level of vision can catch a glimpse of that truth, and then the question is…what do you do with it? If your investment horizon is short like some hedge funds, you trade on it. But if you are investing on a venture time horizon (10+ years), that is less obvious. The near future may look much more different than the present than it typically would. The value of seeing the present today decays outside the seeming microbubble that is pandemic times…we can extrapolate out and bet on what persists and what doesn’t, but that feels like a practice in seeing the future, which breaks the initial framework.

I’m sure I have a more blunt and unnuanced understanding of this philosophy than its creator and disciples, but it is interesting to overlay the volume of financing activity in today’s venture market on top of this approach. Perhaps there’s a disconnect? Perhaps this environment favors the fortune tellers…

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    I’m a NYC based investor and entrepreneur. I've started a few companies and a venture capital firm. You can email me at (p.s. i don’t use spell check…deal with it)


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