Brandon Donnelly — Daily insights for city builders. Published since 2013 by Toronto-based real estate developer Brandon Donnelly. — Page 1512

When I was in grad school at Penn, real estate mogul Sam Zell used to come in and talk to students about once or twice every year. He permanently endowed the Samuel Zell and Robert Lurie Real Estate Center at the school and so there was a strong connection.

Because of Zell, a few of us developed a theory that the entertainment value of a talk was more or less correlated with net worth. In other words, the richer the speaker, the funnier the talk. Zell, for example, would often come in jeans, a baseball hat and a hawaiian-like shirt, and drop f-bombs all throughout his talks. You can do that sort of thing when you’re worth a few billion and you’re signing the checks.

But beyond just being entertaining, Zell shared a lot of insights about the businesses he was in, getting into (Chicago Tribune) and getting out of ( Equity Office Properties ). Some of those businesses turned out to be a disaster ( Chicago Tribune ), but others (Equity Office Properties), made him look like an absolute genius.

One business that he always liked to mention though, was the manufactured home business–also known as the trailer park business. And that’s because, as chairman of Equity LifeStyle Properties , Zell is the largest mobile-home landlord in the US. They control 140,000 sites across 32 states and in British Columbia, Canada.

The reason Zell likes this business is, quite simply, because it makes a lot of money and it's growing. There are an estimated 12 million Americans living in trailer parks . That’s probably why Warren Buffet also bought Clayton Homes –another manufactured home builder–for $1.7 billion in 2003.

But it’s not just the big guys who like this business, it's entrepreneurs at all levels. In fact, I was just reading this article from New York Times Magazine about a couple of entrepreneurs who actually setup a school called Mobile Home University. The objective is to train aspiring entrepreneurs on how to profit from poor people in America:

“The bottom line is Americans as a group are getting poorer,” he told his students — and while that’s bad news for those living on the economic fringes, it also means opportunities for those willing to take advantage of the trend.

Just how poor? Here are typical rents:

The typical tenant who rents from Rolfe and Reynolds pays $250 or $300 a month in lot rent and another $200 or $300 if also renting a trailer. “The trailer park is people’s last choice,” Rolfe says, “and we recognize that.”

Now, trailer parks are not the sort of thing that architects and planners typically like to talk about it. They’re not sexy. They’re not urban. But as the article says, these guys are providing the “dollar store” of housing and making a lot of money doing it (annual returns of approximately 25%).

But is targeting people with rock bottom credit ratings and no other housing options an ethical business model? (The article also talks about 10% a year rent increases.) I’ve personally always found these ethical questions to be difficult to take a stance on and so, for this one, I’m going to put it out to the ATC community. What do you think?

Fred Wilson (New York VC) wrote a post on his blog this morning called The Bubble Question . In it, he talks about how everyone asks him whether or not there’s a tech bubble, which he has been asked for the past 4 years now. It reminded me of the debates that are also happening in the real estate community (particularly in Canada).

The thesis of his post is this:

I learned in business school that the multiple of earnings one should pay for a business is roughly the inverse of interest rates.

In other words, as interest rates drop, people are willing to pay more for the business or asset in question. And it’s because they can’t find the yields anywhere else.

The same phenomenon, you could argue, is also happening in the real estate space. Typically, income producing real estate assets are assessed using capitalization rates (or cap rates), which is defined by the Net Operating Income (NOI) of the property (revenue - expenses, but excluding financing costs), divided by the price of the property.

The real estate equivalent of what Fred is talking about is cap rate compression. When cap rates drop it means you’re paying more for the same amount of yield (or NOI). One of the reasons that might happen is because people are anticipating that the asset will appreciate. But it could also be because interest rates are so low that investors will take whatever returns they can get. 

So you could argue that the market is just responding to the macro economy. And since the feds are probably waiting for global growth to pickup (before raising rates), one could argue that the status quo is just going to continue. Ideally, it’ll continue until robust economic growth is able to take the place of cheap money.

I’ve been a big fan of MIT’s Senseable City Lab since I was a grad student at Penn. Their work sits at the intersection of cities and technology, and so I’ve always found it incredibly fascinating.

Recently, the lab examined data from all of New York’s 13,586 registered cabs and looked for ways that technology and mobile tech could potentially optimize the way the system works today. In particular, they were interested in examining instances where people were heading to the same place at the same time, and were within no more than a 3 minute walk of each at the start of the trip.

What they found was that, of the 150 million taxi rides taken in New York City during 2011, almost 80% of them could have been shared .

That is, 80% of the time, there was an overlap in both time and route. That’s an hugely interesting stat because it starts to show just how much waste and inefficiency there currently is in the system. Think about all the trips and carbon emissions that could be potentially eliminated through optimization.

Here’s a video they produced on the project. Click here if you can’t see it below.

[youtube https://www.youtube.com/watch?v=Gyq_Zr96uzs?rel=0]

It’s a great example of how technology is and will continue to creep into every segment of the economy. It’s exactly what I was talking about in my post, “ Disrupting everything .”