S.E.C. Real Estate Observer

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It is no secret among S.E.C.s that some of our Members enjoy tactical shooting: we sweat and roll around in the mud with rifles and handguns and see if we can outdo each other in different tactical situations, shooting hundreds of rounds of live ammunition. We spend time thinking of different scenarios about what to do if there is an emergency. We also urge our wives and kids to put down their cell phones and quit texting as they leave the mall. If you pull up to the front of the bank and there is a guy sitting in the fire lane right in front of the bank with his engine running, wait a minute and make certain there are not four more in Halloween masks about to run out with bags of money. This is called “situational awareness”—always be on the lookout for what is going on around you and have a plan to react. Avoid the gunfight and have a plan. Sometime ask Wes Dingler what “scatter, scatter” means. Having a good sense of situational awareness could save your life.

It is no different in our business of commercial real estate (CRE). We always have to be on guard and know what is going on. Having Enron Corporation as a tenant was great in 2000 when its stock hit over $90.00 per share, but not so good the next year when it sold at $1.00 and then went bankrupt. While the Enron story might be an extreme example, you would not have wanted to be dependent on your Arthur Anderson paycheck either. We can save our retirement if we react in time; be ready to scatter.

Many S.E.C.s do not like the stock market because we have no control other than to buy, sell, or write options. We tend to favor CRE investments because we have so many ways to have an effect on how the property produces. But we must be on guard with diligence all the time to make certain the property serves us well. And sometimes we miss a slowly moving situation because we are not aware—or just flat not paying attention! Many of us are Type-A personalities. We tend to race through time, multitasking with a sense of urgency to get to the next deal, and treating our CRE like a stock investor who believes in “buy and hold.” It is imperative that we look at the updated market situation occasionally and adjust accordingly.

So let’s look at what is going on right now. We have several restaurants as tenants. Obviously the restaurant business is great because as humans, we are going to eat, and those leases are all NNN, making the buildings very easy to manage. But we must watch the trends. Restaurant stocks as a whole are lagging behind the general market this year by over 50% (6% gain for the overall market versus 3% for restaurants, according to Black Box Intelligence). Some restaurants are just hotter than heck while some are seeing decreased sales. Ignite Restaurant Group has lost most of its value this year. The owner of Joe’s Crab Shack and Macaroni Grill is trading at less than $1.00 per share versus over $20.00 not so long ago. Ignite was struggling with Joe’s and then bought Macaroni Grill, thinking that it would help the company. It didn’t. Personally, I like both concepts, but evidently the market does not, as sales are falling. Why?

Ruby Tuesday and Bravo Brio Restaurant Group have both lost over 40% of their value, again because of weak sales. Ruby Tuesday is closing 95 of its restaurants. Joes, Macaroni, Ruby, and Bravo Brio are all casual dining. And Logan’s Roadhouse has declared bankruptcy—another casual dining wreck. Do we see a trend where casual dining is failing? Maybe, but maybe not.

Papa Murphy’s has lost half its value this year, but Domino’s is up 35%. Two competitors in the same market with completely different results. Is Domino’s pizza that much better than Papa’s? What is the difference between these two firms?

Consider this statistic. There are more than 83 million people in the United States between the ages of 16 and 34 today. A lot of them have jobs. To some of us, some of these people look a little weird with a lot of body piercings and tattoos. The older portion of this age group is just now beginning to think about starting families and buying homes. Some of us old guys think this is uncharacteristic and even stupid, because the earliest investment we can remember was our first home. And besides that, if you do not start having kids until you are 33, how old will you be when the last one graduates from college? Nuts, right? But how soon do we forget Beatles-style haircuts and leisure suits? Who are these misguided citizens of the United States who are not doing things the same way we did?

These are the Millennials, and we need to pay attention. They will represent over 44% of the workforce by 2025, according to the Labor Department. I think Millennials are making a huge difference in the restaurant business in the future and are responsible for at least a good portion of the reset occurring today. According to Brian Halweil, editor-in-chief of Edible Magazine, Millennials are “the most food-interested generation” we have ever seen. According to Halweil, “Millennials have a radically different standard than the eaters of yesterday. They hold food to a much higher standard.” They are motivated by a vastly different set of ideals than the baby boomers and Gen X. They will pay more for their food. And because they are younger than the baby boomers, they will be around a lot longer to influence the markets. They grew up with and crave innovation. They are not surprised nor are they “mortified” by the iPhone, Uber, Airbnb, and wireless Internet. It does not bother them to be on a team with members from all over the world. They would prefer to be in their PJs working at home than going to an office. They do not hesitate to take a call at 3 a.m. from their team leader in Japan. So who is my new customer? Look at Abby (Pauley Perrette), the heavily tattooed crime genius who wears the weird clothing in NCIS, or Riley (Tristin Mays), the computer hacker who was taken out of prison to help solve crimes in MacGyver.

Uber has revolutionized the taxicab industry. Taxis have typically been government controlled, with all kinds of rules and regulations. Because of GPS and wireless technology, the taxi industry is on its way to the graveyard. Why should a taxi sit in front of a hotel and wait on someone to come out and hail it when an Uber driver can sit at home and get a call and be there in two to four minutes? And there is no cash to change hands—it is all done electronically and automatically with no paper.

A fellow broker who David Cook and I worked with years ago, Jerry, had a drinking problem. Great broker, but Jerry was a drunk and got three DWIs and his license was revoked. Had Jerry been arrested again for DWI, he would have been sentenced to prison. He had two choices: quit work or get a driver. While the driver was expensive, it was very efficient, because when he was going from place to place, he was working instead of driving. How would we like to have drivers so we would not have to worry about texting and reading e-mails while we are traveling? You will have that option within two or three years in some cities. According to one report I read, Google has already logged over 1 million miles in its autonomous cars without one accident caused by its cars. It was involved in 18 wrecks, but all were caused by cars being driven by humans!

What will autonomous cars mean to us? Will it mean that my garage can be smaller because I only need one vehicle? (I will always have to have a pick-up so I have a place for dead animals.) What might it mean for our shopping centers if we are required to have only half the parking? Either less land or more shop space and higher incomes. Would I be able to sell the pick-up because I could just go rent a truck when I wanted to go hunting? It has been estimated that autonomous cars might mean that we could do away with 90% of the cars on the roads today.

The situational awareness of our CRE world is all about slowing down and noticing what is going on in our markets. Take a little time each day or each week and look at a portion of your portfolio to make certain it is still relevant. This article just covers a couple of the radical changes that are on the horizon in the immediate future. Are we watching what is happening and taking advantage of the situation?