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Economic Outlook for 2020 & 2021

Watch this free webinar about economic insights of past pandemics, prudent investment decisions during a recession, and emerging opportunities in today’s market.

Transcript:

Tyler Combs:
Okay. It looks like we are live. My name is Tyler Combs with the investor lab, and I am excited to moderate this live event put on by Northwest private lending. We have a fantastic group of industry leaders right here, and Eric Larson is going to explain what we’re doing here.

Eric Larson:
Well, uh, thank you, Tyler. Thank you everybody for joining. We’ve got a really nice reception on this. The questions that each of us talk to on a daily basis with our clients come up so frequently. Uh that’s. It is something that we thought it would be just good to get in front of, uh, an audience and just talk through together. Jared from Delap and Brad from Colliers, each have different perspectives. I’ve known, both these men for over 20 years, actually, Tyler I’ve known for over a decade and, these are just conversations that we have regularly and it’s hard to figure out as the world is changing. Where is it going? And I think the best way to do that is just talk with people that you trust, hear perspectives. And then the goal of this time is just for you the listener, to be able to walk away with your own perspective. I’m not, we’re not trying to share any specific thing or to point you in a direction. We just want to share our, our data points and then you can go utilize that as you see fit to make your own investment decisions.

Tyler Combs:
Awesome. And so we’re going to have some good banter and some conversation that, that we’ve kind of picked some,some questions or some topics that we really want to cover. And then we’re also going to have an opportunity for people to ask questions. So at any time, whether you’re on Facebook or to YouTube, feel free to throw comments and questions out there, and we will take those as they come in. We’ll also have some dedicated time at the end to address those questions. So feel free to put those in at any time, but let’s jump into our first question that we wanted to talk about. And that is a really interesting metaphor that we’ve discussed in the past. It’s the metaphor of kind of looking at the impact of COVID on our economic state right now, whether that’s a blizzard, which would be a very quick change that reverts to normal a winter, which is a longer-lasting change, but still a change that would have a reversion back to some sort of normalcy or an ice age, which would mean permits permanent structural change. So let’s talk about that and let’s start with Brad. What do you think, is it going to be a blizzard, a winter or an ice age?

Eric Larson:
And Brian, you introduce yourself as well?

Tyler Combs:
Apologize. That’s all right.

Brad Christensen:
Brad Christiansen, I’ve been in commercial real estate for 22 years and, grateful to be a part of this. The quick, thought that we’ve had is that, we are definitely in a long storm with ice age effects. I think ice age by itself by might be too strong. But there are going to be some real structural changes. We’re seeing it already in how people are using space. Uh, it’s obvious when we think about hospitality and dining, but, long-term, we actually see the greater effects on both healthcare and education. And, I could get into dialogue around, office space and how that’s going to be effected, but, but the real industries that we see the greatest impact will be education and healthcare. Jared, do you want to introduce yourself?

Jared Siegel:
Yeah, absolutely. My name is Jared Siegel. I’m one of the owners of Delap Wealth Advisory. We are an independent wealth advisory, wealth planning practice. And as I think through that question of, are we in a blizzard, winter or ice age? I’m going to answer that, I guess from the perspective of, that it’s an emerging question that the marketplace is seeking answers to right now. I mean, each and every day, there’s almost $450 billion of stock trades that occur in as new information is made available all of the bears and all of the bulls, price, all knowable information into current asset prices. And so if we evaluate where we are today versus where we have been, I’m inclined to answer that question, that we’re somewhere between a blizzard and a winter. And by that, I mean, the recession that we we are in, or were in, was one of the deepest, quickest recessions that we’ve occurred, or the market’s experienced. So as we look at the last nine recessions on average, the top to trough is about 33% in 2020 was 34%. So square in the middle of where we’d expect it to be. What made that one different than other ones, assuming that we don’t retest bottoms is essentially that the, speed in which it occurred over the last nine recessions that took the stock market about 340 days to find the bottom, whereas in this, this testing of the bottom, so to speak, it only took 23 days. And so, uh, the, the time from the bottom to ultimately where the market recurrent returned to its prior highs has historically taken almost two years, right? So 756 days. And depending upon the specific industry, we’re back to about where we were across most global indices. And so by that, I mean, there’s a fair amount of uncertainty still, as we look going forward, how the global economies respond to the pandemic and when vaccines become available and whether there’s a second wave, what I like to do is remind people that history doesn’t always repeat, but it often rhymes. And as we think back to the last global pandemic that really had a monstrous impact, we think of the Spanish flu of 1919. And what we often forget is that after that moment, we had the roaring twenties. And so the Spanish flu of 1919 looked and felt a lot like what we’re in now, churches and schools shut down sporting events canceled, stock market experiencing record volatility, but then ultimately money moved to where it would be treated best in the following 10 years were rather prosperous. And so in that answer, it’s not really a forecast, but more an explanation in terms of where the markets are pricing all knowable information. And it appears to be somewhere between a blizzard and a winter.

Eric Larson:
My name’s Eric Larson. I own Northwest Private Lending. We’re a private lending company, making loans to people who are buying investment real estate. I am a student of the economy and one of my, favorites mentors that I’ve never met before is Ray Dalio. And, this question hits home for me and I have people who are investing in real estate for long periods of time. And I have people who are flipping homes and they need to be right. They need to pick well now and they need to be right on the sell as well. So they have to both buy and sell well, in a short period of time. So this is a question I get a ton. Will you slap up slide number one, Chris? In Ray Dalio terms, the idea of cycles, and I’m a big fan of cycles. Everything in God’s creation is intentioned and cycles are all around us, but they’re hard to perceive. The idea that we have short-term cycles that we’re aware of are the periods of expansion and the periods of recession. And that’s, that’s kind of shown by the little squiggly lines up and down. Those short-term economic cycles generally lasts five to eight years. The long-term economic cycles are really based on credit that is printed both by banks and the government. And we have the ability to have increased credit, increased money supply, uh, but all debts as a lender, I can say this all debt is, has to get paid back at some point. So we get to borrow money today and enjoy the fruits of the money that we can spend today. But when it’s credit, you gotta pay it back someday. And so that’s the other side of the cycle. The longer term credit cycle is more, I think, around currencies and those cycles generally lasts 75 to a hundred years. So, we experienced a credit, currency change with, the European union, where we had all people in all countries, but their own currency in the last 30 years ago, they switched to a new currency, which was the Euro. A currency cycle or a long-term credit cycle can look more like that. And, I can’t tell you if we are, at the end of our long-term economic expansion, which would be the long, the larger wave, or if we’re just one on one of these shorter waves, I am probably leaning towards we’re towards the end of our currency cycle. We’re at 26 to $28 trillion in debt. That’s not uncommon with countries and currencies. They all currencies, all Fiat currencies, print them, put themselves into, you know, death. And the dollar has had a really good run at it. And at some point in time, we will do the same. I don’t know if it’s this year or 10 years from now, but, uh, I think that we’re probably more, you know, winter more moving towards a blizzard, which would change where would be larger longterm economic changes. And I think that we for sure are the end of a long economic cycle, which was this 11 year expansion period. I do not believe we have hit the bottom. I think we have, we, we started to go towards, we’ve started to go down and the government has stepped in and printed trillions of paper dollars to try to cover that up. I don’t think we’ve hit bottom at all. I think we got, I think we’ve received a really nice bump from printed money. And I think that there’s still a lot of change and a lot of people unemployed in a lot of businesses that are not going to come back. And I think that that’s going to, I think there’s, there’s more, more down to go. That’s my opinion.

Tyler Combs:
And Eric, to clarify your answer to the metaphor, you’re saying that you think we’re going from, uh, either a winter going into an ice age, is that what you’re saying?

Eric Larson:
We, we are either for sure in a winter, this is not going to be a quick storm. Cities are changed. Landscapes of businesses are changed. Some percentages of restaurants, hospitality, there’s whole markets that are not going to come back the same way they did. I think there’s other markets that are going to explode. I think Amazon is a perfect example of that. I don’t, I would not want to be owning a mall right now. I think that type of shopping is going to change. I think people are moving more towards online and that’s a change that’s not going to stop. I think that movement’s going there. Um, so I think for sure, when a winter, this isn’t, we didn’t, this isn’t a super V-shape recovery. I think this is going to be drawn out. And I think if it’s drawn out a long time and we have to print a lot of money, then it could be the, the ice age where everything changes.

Tyler Combs:
So let’s move into what are we going to do about it? So can you guys address how this crisis, that we’re in, how we’re going to navigate that impact in real estate and equity specifically, let’s start with Jared talking about equities. How, how would you recommend personally and, and what you recommend to your clients and how, how to navigate that impact? Yeah,

Jared Siegel:
I think it’s important to define what we’re talking about. Because words, words matter and so do definitions. And so, I think often one of the challenges, that impair these conversations in terms of their overall efficacy is we fail to really define what we’re trying to accomplish. I think it’s more productive to think about your financial decisions more as a track meet versus a singular race, right? When we, when we have these conversations, and imply that we have to be right with our money, a hundred percent of the time all the time to me, is it from a track meet metaphor perspective. That’s like running the a hundred meter. You don’t have very much time to be right on next year’s money, but none of us need all of our money next year. Right? That’s and so most of us have hundred year, you know, to me, a hundred meter money, 200 meter money, 400 meter money. You, you don’t have all of your, you don’t need to be right with all of your decisions that all the time. And so what I appreciate about Eric inviting me to have this conversation is, is he strongly believes in the power of, you know, iron sharpening iron in the, the impact of a long form conversation to really identify truths. And so appreciate that opportunity. So he quoted Ray Dalio. Nice. So let’s quote Ray Dalio. If we could pull up slide three, uh, business cycles do occur. Um, so you could, but the thing that’s interesting is the empirical data says that we can’t predict when they occur, but we can prepare for them in advance. And so, you know, Ray Dalio talks about these business cycles as well as secular cycles. And so let’s start with kind of how he’s thinking about the preparation, you know, because he manages billions of dollars. He talks about diversifying well, as the most important thing you need to do to invest well, diversification can improve your expected return to risk ratio by more than anything else that you can do.

Eric Larson:
I know what you’re trying to say and, explain that again,

Jared Siegel:
But he’s saying diversification diversify well, it’s the most important thing you need to do in order to invest well. And so diversification can improve your expected return to risk ratio because evaluating a decision in the absence of truly, truly inventorying the risk is probably not really appropriate, right? Uh, and so, uh, risk adjusted return is important. And so as we can you, we transition to slide five. So he Ray brings up the importance of inventorying all the different risks that are out there. And so I think it’s easy to overlook some of the risks right now, as I think through how I would be trying to protect my balance sheet and my client’s balance sheet. It’s thinking about inflation risk, credit, risk industry, risk market risk interest rate, risk, reinvestment, risk, liquidity, risks, political risks, tax risks and currency risks. And so what I like about this slide is, is often we can think that owning a lot of the same asset class creates diversification. And in reality, when Ray says talk or talks about diversifying, well, he talks about acquiring assets that move up and down independent of one another, that move up and down at different times. And so if you own an asset class, that’s subject to the same risks within a specific tax jurisdiction or a specific marketplace or city, uh, you might not be as well diversified if you owned a hundred homes in the same county, that’s not being as well diversified as if you owned a variety of different asset classes, abroad across a variety of different geographies. And so when I talk about the market, what I’m talking about is, is global capitalism because there are times that the United States stumbles and the rest of the world thrives. And so if we think back from 2000 through 2010, you know, within the last 20 years, the, the standard and Poor’s 500, the S&P 500 returned a negative rate of return over that 10 year period, it was called the, the lost decade.

Jared Siegel:
And so if you owned assets outside of the S&P 500, Assets that weren’t just large-cap stocks in the United States, even if you own small cap stocks in the United States, you had a positive expected return. And so I guess change is the constant. Things will never change as slowly as they change today. Each time each crisis is different. So each time we’re in one, we hear “this time it’s different.” So I would say that there might be new winners in tomorrow’s market, but it’s going to just be a reallocation of GDP. There’ll be new winners that will prosper in the economy of tomorrow. And the kind of creative destruction of global capitalism will persist.

Tyler Combs:
Before we get in there, Brad, I forgot mention at the beginning was that none of us are giving financial advice right now. And we are just sharing our perspectives about what we see in our individual industries and from the conversations that we’re having with people on a day-to-day basis. But none of this is to be perceived as tax accounting, investment advice, legal advice. We’re just sharing our perspectives on here. And we just wanted to make sure that that was clear to everybody. Now, Brad, you can have the floor.

Eric Larson:
Our attorneys made us say that.

Brad Christensen:
Um, I’m probably going to come at this a little bit more from a layman’s standpoint and, uh, you know, in terms of markets, uh, I, I do think we’re going to see about as much change as, as we’ve seen, uh, really in the last couple of decades over the next 12 months. And what I mean by that is I’m, I’m talking about those structural changes, the idea of ice age. So, uh, you know, let, let’s just kind of break it down. How does that affect these different investments? Well, I think everybody could say right now, if I owned a downtown high rise in Portland, I’d be more nervous today than I was a few months ago. I might be a lot nervous depending on where that building is, is specifically located if I had a shopping center and it was big box retailers and it happened to have a JC penny or a Sears in it again, I’m, I’m very nervous as compared to where it was. On the other hand, and I’ve shared this a little bit with, Eric and Jared, if you can follow me in this thought, if you had gone to bed on March 16th, 2020, and you had woke up on March 17th, 2030. So think a decade later, how much of this was, was actually going to happen anyway. And we would start by saying that if you are heavily invested in REITs that were in a commercial real estate and it was shopping centers or malls, uh, this was, this was bound to happen. This wasn’t going to be a significant change. It just was going to take a lot longer. We had a number of clients that were already testing heavily. The idea of working virtually work from home work from anywhere in our only, you know, taking that to the next level, putting that on steroids is how I’ve characterized it. Uh, we we’ve had a number of, businesses that are trying to understand how do we, quantify the amount of space that we need for our people. It’s been a, smaller per square foot demand. In recent years, what we’re seeing right now is corporate, users, the Googles, the Amazons, the Microsofts, they’re actually looking at taking more real estate to satisfy their people. So I think, you know, there’s, there’s gonna be more change that’s going to happen. And, and some of those are going to be long-term. I think key thing, if we were to kind of look at this at a micro-level here, Portland area, and what’s going to happen to the Metro, well, I can tell you that, we, we even tested this just about a month, month and a half ago. And if you looked at Redfin today and the number of potential buyers that are in the market, more than 20% are from outside the Metro area today. So 80% of the buyers are within the Metro, uh, or we’ll call Western Oregon and 20% are outside. And where are those places? Well, of that 20%, it was 17% were from San Francisco bay area, 13% LA and 11% from Seattle Puget sound, uh, we’re in a different world than, than the one I grew up in we’re in a different Oregon than the one I grew up in. Oregon was always, you know, a second third tier market. It was timber based. There was some financial services, but it was pretty low-tech. And that has changed radically, over the last decade, decade and a half. If you can, Chris, could you pull up slide five for me real quick? So, this, this is probably one of the most tell-tale slides is actually–give credit where credit’s due, state of Oregon economist, was presented late this last year in a presentation. But what people don’t realize is that that Portland and the Metro areas already gone through a pretty significant structural change from the mid two thousands to today. We went from being, you know, 28th in terms of income, annual income per household to 13th from 2005 to 18. What that really is telling us is that A: we have a much more educated workforce, but more importantly, when I got into this business, you know, we, we might have a few national corporate interests in, in the Portland Metro area, but predominantly they were flying over Portland. We use that term quite a bit. They were going to Seattle. Even at that time, Denver was more interesting. Austin was definitely more interesting than Portland in the beginning as a second tier second location chasing talent. Well, that’s changed radically in the last 10 years. We’ve seen more demand for both office and industrial space in our market in about the last four or five years than in any period prior to that of a similar number of years. And, and how that affects us today is that when you have Amazon’s, presence in downtown Portland, about 220,000 square feet, more specifically, they built their one innovation center in the entire world, in the city of Portland that that has future, ripple effects. It’s, it’s the pebble in the water that’s going to create more new business, more entrepreneurship, more innovation. And, I would say, you know, similarly right now, as an example, Microsoft, who has about 35,000 square feet in the market, although the paper relayed that, uh, they were looking for 50, it’s actually closer to a hundred thousand square feet in our market right now. Apple just signed a lease for 35,000 square feet close in downtown Portland. And, and why that matters to us is that each one of those hires are, generating an income that is plus or minus six figures. Number two, they’re going to need a place to live. Number three, they’re going to need services. And although we do recognize that in the interim, this is really, really going to be hard on hospitality and dining, and there will be some significant losers. The practical reality is that we’re going to see, uh, you know, much more, uh, demand and growth in this market over the next 24 to 36 months. We’re actually predicting that 2022 to 2025, in migration is going to be north of 50,000 a year. And, and prior to this period, when we hit 50,000, that seemed to be, a record. So, Chris just did me the favor of bringing up the slide on the current unemployment. And I think this is tell-tailing it’s only showing unemployment, so we’re not talking about the growth in tech that’s taken place over the last few months. We’re not talking about certain industries that are hiring, we’re talking about pure unemployment. And if you were to take leisure hospitality. So again, dining, entertainment out of the mix, our current unemployment’s right at about 6%, which is really striking. And I think… This is Oregon state of Oregon. So why this is, you know, a real unique indicator is that it only helps support why we’re seeing the moves in housing right now. Uh, we’re seeing the amount of re-fis that are actually going through and we’re seeing real appreciation in the market. And, uh, I don’t know the local numbers, but I, you know, Jared and Eric and I talked about this, housing year over year resale housing, for the month of June was up 20%. So I, again, I think this is a little bit short term. I think we’re going to see, uh, you know, some adjustments in the fall. I’m more, uh, bearish on the markets as a whole going into the fall. But again, if, if you’re a long-term hold, back to kinda, uh, you know, Jared’s point, you know, we look at 2022 to 2025 as being pretty robust years to be in the Portland Metro area.

Eric Larson:
Can I ask just a pointed question, Brad? Yeah, we’re looking right now, we lease our commercial space and right. Um, at some point in time, the next one to 10 years, I’d like to buy a commercial building, should it, should I be buying now? Should I be waiting? What are your thoughts? You know, for people who either own investment real estate should be, should they be hanging onto it? Should they be selling it for those who want to buy, should I be buying now, or should I be looking to buy?

Brad Christensen:
I, I think, you know, it qualifiers I’ll, I’ll put out there, you know, we’ve got, three sites that are in escrow right now for businesses that are buying. And part of the motivation to do it is again, interest rates are borrowing on an SBA 504. The demand is being priced at 2.6. Bank of the west is at about three and eight. I would say most conventional banks are somewhere around three and a quarter plus or minus. So, so you’re looking at blended rates on a 25 year and 10, maybe up to 25, fixed at 2.9, 3%, which is really an usual. I mean, I, again, I keep

Eric Larson:
Inflation is going to be that much.

Tyler Combs:
Right. And, and I, and I also tell people it’s, it’s a fixed cost. You know, rent is, is always, long-term going to go up. We might renegotiate today and get some real incentives put on the table. But it’s going to be very difficult to, to have that cashflow will be the same. So if I were in a situation where I’m going to have a cashflow associated with, a space, do I want to own versus do I want to lease? I don’t think we’re going to see enough contraction in the values of real estate. And then you add that, you know, the feds are willing to pay principal and interest. If you close by the end of this, September, uh, through next March, if, if you’re at the right time, let’s go. But on the same front, if I’ve got five years remaining on my lease, uh, you know, the prospects of me subleasing my space in the next 90 to 120 days is much lower because most people are still trying to figure out, do I even want everybody coming back to the office period? or, whatever the workplace might look like?

Eric Larson:
Can you go back? I didn’t know about that. The government’s doing what?

Brad Christensen:
So, through part of the SBA, if you want to call it aggressiveness through the PPP and the Cares Act, one of the offers that’s been put on the tables that if you close on a sale by September 27th, and you are using a SBA financing, traditionally we say that’s the 504, the 7A that the feds will actually pay the principal and interest payment for the first six months.

Eric Larson:
Wow. And then SBA loan, they generally want you to have 20 to 25% down. Is that right? No,

Brad Christensen:
No. The SBA is a 10%. Uh, that’s why we call it the 504. The five is, basically the 50%, 40% debenture, through the state, 10% down payment. Again, there’s strings attached– if I own my business and I want to own a building and I’m going to occupy that building. I need to be in 51% of that building. And generally there’s going to be some level of personal guarantee by you, the owner.

Eric Larson:
Yeah. So the key for an SBA loan is you have to own most of the building. You can’t just go buy buildings that someone else you lease out, you have to, it’s mostly for you.

Brad Christensen:
Your business. Yeah. And again, we would also say on the investor side of real estate, there’s going to be certain product that’s going to perform right now are a vacancy on industrial space in the Metro area is about 4%. The demand for industrial space is only growing. It’s not just going to be in our Metro, but in multiple metros, if I’m putting my money into a rate, I am very bullish on industrial space nationally. What we learned through the pandemic is that that last mile delivery is really, really critical. And if you ordered something on Amazon and it took, you know, a week longer than it was supposed to, that was because last mile wasn’t set up correctly in any other online shopping, uh, best buy target, uh, even the grocery, you know, the whole, the whole issue with getting toilet paper here is because we just, we couldn’t get it into the truck fast enough to get it here.

Jared Siegel:
Eric, can we, can we go back and revisit your question one more time? About, should I buy a commercial? Absolutely. Yeah. I think that’s a great question. And, and for you, the question was, should I buy an office building, but for others let’s swap out like a financial decision. Should I do and fill in the blank? Well, I think the tendency then is to again, create kind of this faux finish line. Like when, when are you going to evaluate that decision? Because in, hypothetically, I mean, it could go down value. If you had to sell it in two years, that’s not the plan, but you factor in origination costs on the mortgage and sales commissions from a realtor perspective. One of the things I think is interesting is a behavioral finance. So Daniel Conaman was a Nobel Laureate who identified all the interesting ways that our, our brains work, that kind of create challenges for us making profitable, predictable financial decisions and so one of the biases that we have is an outcomes bias. So I would encourage you to define your finish line, like when do you actually need that decision to be right? And then in second of all, based upon all of the things that you know today, right? There’s a lot of things that matter, but there’s only a subset of things that you can control, if you got, if you purchased a great asset with the right amount of leverage with historic low interest rates, you know, whether the asset is worth more or less than 24 months, it doesn’t, it doesn’t materially change your plan. And so I think there’s a heightened anxiety to evaluate a decision based upon the outcome. Sometimes the right decision doesn’t always have the right outcome. And sometimes the wrong decision does have a right outcome. I mean, to pick an extreme, if you’d had one too many drinks, but still chose to drive home and get, didn’t get a DUI, it doesn’t make that decision,the right choice. Right? And so it knows based upon all the things that, you know, creating a timeline of, when does that decision actually need, need to be right to support you in your plan. It’s a different way of evaluating that decision because you, again, you don’t need to be right on that decision in 18 months. You’re not planning on flipping it, right. You’re planning on working for decades and holding that asset maybe for the rest of your life.

Eric Larson:
That’s a really good point, Jared. And, uh, I’m really happy you said that it’s amazing how we each get biased. I predominantly am dealing with investors who need to buy right and sell, right. They need to do that within, you know, six to nine months. And so it’s easy for my brain to get focused on a finish line that is very short, but the truth is, is that depending on your age, the race that we’re all running here in our, you know, early fifties, you know, forties is a longer race. It’s, you know, it’s a 30 year race. And the truth is, is that when we bought our house, our last house we bought, we bought in 2008 about the peak of the market. And it dropped 20, 25%, but I didn’t care. I wasn’t going to move and it’s come back and it’s worth more than it was today. and I still don’t care because I’m not going to sell it. So, um, that’s a really good point, I think, uh, and it just kind of goes to show how each of us can get into a mindset that we believe is true and it may not be true. And I think part of the reason we’re having these dialogues and I’d like to have more of them is to shake out and change bad truths that we were hanging on to. So me wanting to buy a commercial building should be more about when does it make sense for my business, uh, and if I’m going to hold it for 20 years, I certainly believe we’re going to have inflation. We printed $6 trillion just in the last couple of months. And I think that’s going to create, you know, inflation and I think asset prices are going to go up. Long-term so that’s a really good point here. I think that’s… Thank you.

Tyler Combs:
I think both of those perspectives are really good for kind of a top level philosophical wisdom, tempering your decisions, not being reactive. The questions that Eric started asking Brad inspired some people in the audience to ask more specific real estate commercial real estate related questions. So let’s take some of those real quick. Larry asks will small business in Portland, specifically downtown leave a larger leave, larger companies like Amazon to take over our city? That’s a great question.

Brad Christensen:
Yes. It’s a great question. Uh, love you, Larry. Glad you guys can tune in. Um, I, here here’s my quick answer is that when we’ve been counseling, both national, regional, and local, and I’ll break those up real quickly, uh, national doesn’t take much of a definition, but think you’re fortune 1000 plus, uh, the majority of those businesses are in we’re in active transactions are still coming to fruition. They’re still taking space downtown. I think the regional is the really interesting position. You’ve got businesses that are locally controlled. Uh, they’ve got somewhere between 20 employees and, you know, 200, 300 employees and, and all of a sudden, wow. Uh, half my employee base is not coming into the office. And I live in Tualatin, Beaverton, Lake Oswego, but somewhere in the perimeter of town. And currently we’re working on four active assignments where people are truly moving from the central city, both close in Southeast or downtown to the suburbs. So I, there is going to be a flight to the suburbs. It’s it’s for certain, the, the question mark is that as a second tier city, again, uh, national companies are recognizing cash. We need a distress recovery. We need to have a position where we know there’s a place we can do business, uh, where the market isn’t as dense the population isn’t as dense. And I, I tend to believe that we’re going to be surprised. There’s going to be new demand by businesses that are again in the Puget sound, uh, the bay area LA, and maybe even the east coast that say, Hey, I, I keep looking at, uh, on a map and Oregon’s not red hot. And whether we appreciate some of those restrictions that have been put upon us by the governor, not, uh, the, the rest of the country is watching it, just like the protests. People are watching the protests and saying, gosh, looks like Portland’s blowing up. So, um, you know how that plays out? I think, uh, yes, you’re going to see more corporate users downtown. I think over time, uh, that there is going to be measurable vacancy that’s created in both office space and retail space. Uh, we’re predicting office space in the central city. It goes up over 20%, uh, over the next 12 to 18 months.

Eric Larson:
So real quick, I haven’t, haven’t been down a lot to downtown Portland. But if you watch the news, I mean, depending on which news station you watch, it looks like Beirut down there. Yeah. So it’s not a bad question to ask. I mean, every, every office that is on the first floor, that’s got boards up, how long can those people sit there not having a business open? And it’s, really sad to watch. I mean, just from a business owner perspective, how hard that might be. And I wonder how many of those people aren’t going to make it, and it’s going to create vacancies. It would seem like a lot. I think it’s really a good question that he asked.

Brad Christensen:
Yeah. Yeah. I think I w we’re going to see a continued, um, gosh, I mean, what’s, what’s the correct word, use decimation, destruction, disappointment. I mean, I’ve, I’ve used them all, relative to, you know, the experience in downtown Portland and just survey understands this isn’t just Portland. This is Seattle San Francisco, LA, every city is having it. There’s a little more attention right now to Portland because of bringing in the Feds and the National Guard. But, but we do tell people that every downtown right now is pretty quiet. You know, uh, I don’t, again, I really don’t see people frequenting retail services in the downtown until at least, uh, first, second quarter next year. And that’s going to have a real damaging effect again, the other side of it is during the day. And I’m one of those guys that, uh, the work from anywhere work from home only lasted so long. So I’ve been back in my office daily since, uh, really about the, third, fourth week in April. And, and, you know, aside from it being, you know, like a Sunday morning that quiet, uh, it’s it’s, I haven’t had any issues of safety. So everything that we’re watching and seeing, and, and the media does a very good job of selling fear. You know, once that comes to an end, how long is our memory gonna stay there around it not being safe? I tend to believe it’s going to last probably three to six months. More importantly, if a business can’t be open, if there’s not more liquidity that’s provided to the small cafe dining, I think it’s scarier to see how many of those doors will be closed. And, uh, and, and, uh, you know, it’s, it’s likely, again, going to be the first part of next year before we get to any kind of new normal.

Tyler Combs:
Do we have any other Portland specific commercial real estate questions that have been coming in the queue?There we go. So Larry asks: He moved from his Tigard office to a new home office that he’s built out, still can use that space for classroom activity. If that returns, I don’t plan on having an outside full-time office again.

Brad Christensen:
No. Great, great word, Larry. Again, everybody’s asking how can we do work from anywhere, work from home, uh, into perpetuity. What’s that going to look like? Our, our, you know, a multitude of conversations literally with, uh, you know, next to a hundred clients would have been that about a third of the space that’s being used today probably comes back to the market in one shape or another. And, and I think that what we need to hold on to is that, uh, there, that we’ve kind of defined this as five chapters. The first chapter was the, oh my gosh, what is this pandemic? Everybody stay at home. The second chapter was the PPP in the number of, you know, conversations, phone calls, you know, between, I know, uh, you know, a CPA firm basically advising or, or holding hands through that application process, getting those funds into the marketplace and then really Chapter Three was okay. I think maybe we’re going to figure this out. That was me. Maybe it felt like, okay, I can get up in the morning and finish the day. And that something is actually getting done. June was fatigue, fatigue set in a big way. It’s, it’s set in with families, uh, especially when they start talking about, again, no school in the fall or homeschool or whatever that’s going to be. And, and yet fatigue has also now led us into, Hey, we do need to strategize. We can’t say we’re going to stay in this space for years to come. So what is going to be the best thing for our business? And what we’re finding is that most people are still wanting to have an office space with 10 employees or more, that’s kind of our measuring stick. Uh, the, the second reason that they want an office is not just because I, I want a place for people to come to work, but culture is so critical today. And connectivity between human beings is just too difficult. And I’m going to borrow a phrase from a friend of mine. I’m not going to mention his name, but he was one of the first thousand employees at Google. Um, we, we happen to have a conversation here a few weeks ago, and I was being very bearish on hospitality and travel for business. And Chris said something to me that really got my attention when you’re choosing a supplier, a vendor relationship, and the one vendor, uh, 18 to 24 months from now says, I can be there tomorrow to, to work this out. Or, the second vendor who’s competing says, let’s do a zoom call, which vendor’s going to win that business. And so he actually suggested that competition–competition in the workplace, uh, with, with, you know, the responsibility that I have in my day-to-day job to my employer and employer seeing me every day, uh, compared to not, being outside the office and doing what we’re doing right now. Uh, similarly, if, if I’m looking to hire a, uh, vendor or supplier to do workforce, again, being able to build relationship, we’re designed to be in relationship, I believe in that whole heartedly. And I think that, uh, the opportunity to work from home works, but it only is going to work for a smaller business. And it’s only going to work with certain industries for so long. Uh, people still will need to find a way to be in the office. Now, the outside of that is our firm had done, uh, surveying on monthly basis, continues. And of the 6,000 firms we’ve interviewed, We went from either no work from home to all work from home. And really the middle ground seems to be people want the flexibility. So, um, Eric and Jared are gonna love this, but we’ve said, this is, this was the gen X gen Y gen Z dream come true. I can go to work and I don’t have to go to the office. I can be in central Oregon. I can be at the beach. Uh, but there are still going to be days that I probably need to be in the office to be able to do the work that our team needs to do to take care of our customer. And, and we think the prevailing long-term, you’re still going to see, uh, 60-70% of the workforce going into a workspace of some kind. Brad, let’s get one more specific question, and then we will go into a different, a different topic. The question is, is now a good time to refinance and take a cash out to purchase another investment property? Uh, Dahl is the, uh, the user that asked that. And I want to make sure we hit that question. Great question. No, I, I actually, uh, as part of going into this and, and we didn’t talk about it so much, but if I were to make the top recommendation, whether it’s on a personal basis or commercial, uh, I would be pursuing a refinance aggressively as much as possible. We, we still think rates will stay here. In fact, it’s possible that, uh, as, as home sales start to drop, as they do during the end of the year, that, uh, we’ll even see better pricing, uh, January, February next year. But, but as a whole, yes, if, if you could, uh, you know, either keep your cashflow the same or reduce your cashflow, uh, there’s no better time to be going to a bank. And, and, and the key to that right now is keep your balance sheet strong, keep liquidity strong. The banks are lending, but you’ve got to have liquidity in order to, to get a transaction done.

Eric Larson:
I think that’s one of the best questions. Um, I think, I think going into a challenging time, we were talking about the blizzard/winter/ice age…anytime you’re going into a fight, you don’t want to go in half cocked, unbalanced. You want to be prepared. I think a lot of people, who are going into a downturn feel a lot of fear, but for those people who are stable and set up and ready to take advantage of a downturn, they’re excited. It’s an opportunity to buy. And I think right now we are kind of in this lull before the storm, I think the storm is going to get worse and I’ll explain why I think that, but the best thing you can do as a person in my opinion, is to be flat-footed right now to cash up. And there is, there’s never been a cheaper time in human history to borrow money. And you have a government who’s printed a ton of money, which is going to create inflation. And if you can lock in a 30 year fixed rate, and that’s, that’s one opinion I would say is I would not do a five-year or 10-year. I would do a longer-term rates because if even if the rates drop another half percent, 3% is so cheap. And if you can lock that in, have a little cash out, I think that’s a really smart thing to do. And the key for me in being a lender, it’s not about leveraging yourself too much, even though I’m a lender, I lend money. I encourage people to borrow responsibly, no matter how much you borrow, it has to be something you can service. So you say, I want to pull money out and let’s say, my house is free and clear. Should I borrow half a million dollars against it to have some cash? I, it depends. But the key is is that if you borrow half a million dollars, it’s going to cost you three, $4,000 a month, whatever the interest rate is, and you have to be able to service that now. And the key is if you borrow so that you have cash, do you have the ability to service it? If, if things change in the market servicing, debt is a really important thing to consider.

Jared Siegel:
Can I plus that idea? Yeah. So, uh, I guess one of the thoughts would be that the empirical evidence would suggest that the best predictor of tomorrow’s price is today’s price. And so in order to, to make an active decision, uh, to go against kind of the consensus of the market, uh, you do have to be smarter than, you know, one of us being smarter than all of us, but generally speaking, that’s, that’s a challenging strategy. And so certainly printing money could, could create more inflation. That is one of the possible outcomes– it’s concerning as our debt load continues to increase. But one other way of looking at what inflation expectations would be is to be looking at all of the willing buyers and sellers that are out there, because we all benefit from markets every single day. And it’s really what has made America wonderful. And capitalism is super special: It takes a willing buyer and a willing seller, you know, consensual exchange where both parties leave a little bit better than they were prior to the interaction. And so ultimately that’s a great, great measure of kind of what, what the consensus is for where inflation is going. So you can look at real asset prices, but there’s considerations around the Fed and the Central Banks, you know, in the liquidity, that’s been flushed into the market that might’ve manipulated asset prices. So a different way is to look at inflation swaps, people that are basically making bets with one another, where inflation is going to be in the 30 year consensus right now, from all the willing buyers and sellers–some of the smartest finance people in the world is 1.7% over the next 30 years. And so, again, inflation can show up.

Eric Larson:
Are you saying that the buyers… I don’t fully understand what you said.

Jared Siegel:
I’m saying that there are there’s inflation derivatives there on the, on the right. There’s a there’s inflation derivatives. And so that’s essentially, they’re the, of those two charts, the one on the right that that’s where markets are currently predicting inflation to be. And so that chart on the right is, is inflation swaps. And so that’s the consensus. So you see a lower rate, and you see a flatter yield curve. And so people, people that are actually putting their money behind the bets, not just kind of running their mouth, having, expecting inflation to be somewhat muted. It could be wrong. And there could be new information that’s made available tomorrow. And you could see the yield curve immediately steepen, but based upon all knowable information today, that’s where millions of investors have put their, their bet. And so it’s lower than 2010, but you can see that in 2010, the general consensus was 30 years out was 2.5%. There was fear in the last kind of the financial crisis, right? The, the response was going to trigger inflation, but we really see inflation. It can be measured a variety of different ways. And the chart on the left kind of shows you some of the ways that inflation can be measured, but the hyperinflation that many were fearful of from the government’s response to the global financial crisis, it never showed up. And so you, you certainly want to be prepared for it, right? And owning assets and owning things that do well in a rising rate environment would make sense. Commodities do well when inflation is high, gold does well when, when, when inflation is high. And right now those asset classes are, uh, commodities are certainly low and oil is certainly very low. And so some view that as a form of inflation insurance tips, tips are low right now. And so that would be a way of making sure that you have a portion of your portfolio that does well. If, if the global consensus of where inflation is going to go is wrong. Cause it, it happens that crises happen because they’re unpredictable. Each of them are in, in an, in and of themselves, a black Swan, you know, tough to predict them.

Eric Larson:
That’s a super good point. It’s good just to realize our own biases, just to say this one more time. I am a porcupine. When it comes to investing, I want to protect myself. I want to stay safe and I can want to put my spikes out and stay safe. But I miss a lot of food and opportunity that comes across my face, by being in that position. And that’s a really good point.

Tyler Combs:
I want to take that opportunity to kind of transition to a question that I think is, is kind of a unique one for the fact that we’re all friends. And that is the question, what are you most afraid of? So let’s get real vulnerable and honest. Let’s start with Eric, the porcupine. What are you most afraid of?

Eric Larson:
I do not want to be a fearmonger, but I, if I’m honest, I fear is more my mindset just because I’m risk averse. I’m just a risk averse person. Uh, Chris, will you pull up a slide 2 slide two? Coming back to cycles. So this is a a hundred year, uh, it’s an 80 year graph of the S&P 500 and it’s a, it’s not logarithmic. It’s plotted 1, 2, 3, 4, 5, 6, all the way at the top. And I like this graph because it, I think really well shows the last two bubbles that we all remember, uh, for investors right now, we have the first bubble is the.com bubble in 2000. And the second bubble is the housing bubble. And w the reason I, I regularly look at this slide is because bubbles happen, stocks go up and down. And we were just in the longest expansion period of our entire US history. And that bubble is big. It that’s, uh, that is much larger than the.com bubble the lot, much larger than the housing bubble. Now, I think a big reason for this, And I think Chris, can you go to slide three, please? Um, that’s one slide three. Yep. So if you take that exact same slide and you got a hundred years of S&P 500 data there, and you can still see it’s a little bit more compressed. Uh, so you still can see the, how the.com bubble, the housing bubble and our current bubble. And what I’ve done here is I’ve just taken on the right-hand side, is the US national debt. And we’re actually, this is old data because our debt is now $26 trillion, not $23 trillion. And if you take that debt curve, which is staggering, when you actually look at it and you move it over to align it with the S&P 500, there’s a really high correlation between how much money our government prints and how high the stock market prices go.

Eric Larson:
And so that red line that’s lined up with the green line is the debt. And so one thing I am afraid, so one thing I think is true, and I’ve heard it said before is fight the Fed. The Fed’s going to print a bunch of money. Don’t fight it. It’s like the wave or the current is going the direction of the Fed is pushing it. So it’s trying to swim upstream from the Fed is a really painful experience. Uh, I do believe that at some point in time, the US the US just cannot continue to print money forever. I don’t know if it’s $30 trillion or $50 trillion or a hundred trillion dollars, but at some point in time, you can’t keep printing debt into perpetuity. And at some point in time, no matter how much money we print, it will not keep inflating real productivity. And right now we’re seeing really high correlation between printing money and higher stock prices, printing money, higher real estate prices. And so I think that the inflation rate is much higher than 2%. I don’t believe that number I, and the reason is, is because if you take the inflation across all asset prices, uh, and you have oil go down to 20 bucks from $80, that’s deflationary. And they’re, they’re including that in with the fact that housing prices have gone up, you know, 10 to 15% every year for the last 15 years. So, and stock prices have gone up it’s, you know, it’s doubled or tripled in the last 10 years. So…

Tyler Combs:
What does all this mean to you as far as, what does this boil down to? As far as the big worry for you

Eric Larson:
At some point in time, people are not going to be so excited to take our printed money in when that happens. I think that’s going to be very, uh, it’s going to change things for us. And I think what will happen is I think we’ll see a deflation in our asset prices followed by an inflation, a big inflation because you’ve got half of the United States currency is inside the US. And the thing about us being a world reserve currency is half of our currency is outside the US. And as long as people are happy to hold dollars, they will, those dollars will stay outside the US. But when people are afraid and they’re like, I don’t want to hold these dollars anymore. I want to buy something real with it. Those dollars are going to flood back to the United States and they’re going to buy US companies. They’re going to buy US land. They’re going to buy C real estate. Those dollars exist. And when they, when all that money floods back to United States and people want real things instead of dollars, it’s going to jam our prices up. And we’re going to see a lot of inflation in assets, which is part of the reason I agree with Jared. I think the stock market has nowhere to go up long-term uh, because people are gonna want to buy US companies. I think real estate has nowhere to go up long-term because people are gonna want to own real things.

Tyler Combs:
Okay. Let’s go on to Jared. So you can respond to that agreement and talk about worries.

Jared Siegel:
Yeah. Um, I do think that there’s an interesting dynamic when we start comparing asset classes that are essentially measured and monitored differently. You know, there’s often, I think a lot of the time, a lot more anxiety about the stock market than other asset classes that, uh, and it’s simply kind of a pricing kind of mark to market on a daily or to the minute basis. You know, if there’s many business owners or real estate investors that are listening today, and if you receive text messages, every couple of minutes of people putting in offers on your, on your home, your business, your real estate, you’re not selling it doesn’t matter, but it creates a lot of noise and anxiety. And so, um, I guess at the end of the day, again, we just looked at a chart that included 500 companies in the United States, but it excluded twenty-five other, you know, 2,500 other us companies and it excluded the other 46%, excuse me, 54% of the opportunity, to invest in capital markets outside of the US. And so, uh, cycles do happen. There’s moments that things don’t do well in the United States. And I guess that’s getting back to the Ray Dalio diversify well. If we do kind of stumble here in the United States, what would you own that could do well? And so for, for the way that I think about things, that’s why you would own treasuries that went up by over 6% during Q2, or excuse me, Q2 Q1 during, uh, a really turbulent time in the marketplace. Uh, you know, it’s why you would own a portfolio that could have 30 currencies. Um, and so you again want to diversify well. So I guess as I think about some of the stuff that I’m most afraid of, I’m certainly I wake up every single month, every single morning. And I put on this meat suit, otherwise known as my skin and I have feelings and emotion, and we live in the attention economy. I get my news dominantly from places that I don’t pay for. They’re monetizing my attention in that they have cognitive scientists that are designing their interfaces of designing the software, designing the hardware, and they’re competing against one another to capture more of my attention. And they know that fear and uncertainty and doubt. They know that I’m two times more motivated to avoid fear or avoid bad outcomes. Losing a hundred dollars, hurts twice as much as winning a hundred dollars. And they know that. And so the information that comes at me, the noise that comes at me is certainly stimulative. So I guess I’m most afraid of, uh, the state and local government issue. We have 50 states and, and they’re all very financially distressed right now, some more than others. So I’m anxious about that. You know, the pensions got really hard hit in this last downturn. And so, uh, some of this stimulus and the way the federal government responds, that’s a of great interest to me. Um, I think global tax negotiations is something that’s going on right now that isn’t on anyone’s radar. And I’m hoping that those shake out well.

Eric Larson:
What does that even mean? What do you mean?

Jared Siegel:
Global tax negotiations? So essentially, you know, are many of the companies here in the United States that have really prospered over the last decade, have prospered without having to pay a lot of tax here in the United States and abroad. And so, you know, think about Amazon’s effective tax rate or Apple’s effective tax rate or Facebook’s effective tax rate. The global governments were negotiating, uh, essentially a tax treaty, a tax agreement of how they would establish tax nexus for one another. And so the same dynamic that many of the business owners have been dealing with here in the United States over the last 10 years, where governments would prefer to tax out of state businesses. It’s a lot easier to collect tax revenue from people that don’t get to vote for you, uh, than it is to, to tax individuals. And so Oregon just took advantage of the corporate activities tax here in the, the beginning of 2020. And so I think that same trend where you have state and local governments looking for out of state and local taxpayers, you could see that at a global level where the United States is going to respond to some of these tax, uh, rulings, unfavorably. And so this general trend, uh, maybe a way from, from global capitalism to, uh, maybe re-shoring some of the manufacturing or some of the globalization that’s been occurring, you could see it kind of pull back a little bit. So I think that’s a risk that’s even more dangerous right now than, than the political, uh, political policy, foreign policy conversation that’s going on. Um, and then at a macro level, there’s a general, uh, general deterioration of the demographics. So we have more and more retirees, fewer and fewer new people jumping in. And we have a growing pen… You know, liabilities, the pensions, the healthcare expense and social security. And so I think that dealing with those liabilities in the future are going to be problematic and politically it’s kind of suicide to try to tackle any of these challenges today. So there’s this perpetual can-kicking.

Tyler Combs:
Thank you for giving us so much to be concerned about Brad. Can we get your, uh, your take on what you are most worried about? And then we’re gonna transition to what your guys’ top strategies are. Yeah. Uh, so I’ll, I’ll start it kind of as simple, which would be, what do I fear? I fear, fear. I am so sick and tired of fear. I am so sick and tired of having to wear a mask. We’re all sick and tired of wearing masks. I think that, uh, the part that maybe we started with here in maybe would’ve gotten glossed over was Jared talking about 1918 and the fact that this has occurred before and what were the economic outcomes. But I think there’s a huge part of society right now. That’s saying, when can I get back to normal? I mean, we hear this every single day and it’s going to be awhile now through that, there’s going to be winners and losers. And then you have to look at the micro and macro. And I tell a lot of people, would you rather be living in Philadelphia right now, or Detroit, or, you know, a mid America, uh, state? I think you’re going to see, uh, especially down in the Southeast, there’s going to be some real changes in, in the micro. Uh, we sold a rental property in central Oregon. Uh, during this time, uh, between June and March, I think I had about a half dozen closes or excuse me, half dozen tours of the property. Uh, it, it started to multiply very quickly, uh, beginning in March to the point where we were seeing multiple tours a week. And then the backup offer was, uh, sight unseen, uh, offer cash over asking [price] from New York city. Again, we have to think about these population centers. You know, we, as a state are not even 4 million. If you look at the Portland Metro area, we’re 2.75, maybe a little more. And then you look at, you know, the Puget sound at five and a half million, you look at, uh, the bay area and surrounding at 13 million, it doesn’t take very many people to move to this market and it changes things. So again, demand for housing, demand for services, and even for, you know, commercial real estate at some level ends up going up with very little in migration. And so it is, I tell people if, again, you’re looking at it from an investor standpoint. Yeah. Get rid of the fear, think about where we’re going to be in two to three years and, uh, and then act, uh, but, but no matter what, uh, probably the greatest battle we all have is just kind of, you know, staying out of the media and not paying attention to it. It’s gonna affect our brains if we keep doing it, I’ll just say it that way.

Tyler Combs:
That’s a good perspective. Let’s get some positivity in our conversations, but it’s really fun to have this conversation where we talk about what is our top concerns. Now let’s transition to the strategies that you guys have. If you were able to give your audience one specific strategy that they wanted to take away from this conversation, what would it be?

Eric Larson:
And w real quick, Jared, would you, it was, I was very impressed in your last, uh, statement. And I, I loved the, I love the dialogue by the way, guys. This is awesome. I forget that my number one expense is taxes. It’s not, it’s not my mortgage, it’s not my eating, it’s my taxes. And I, and it’s, it’s one of those things I just forget. I don’t forget to think about it, but it’s something I don’t plan as much for as I should. Um, as you said, would you just something around taxes, tubes, I’m super curious about it myself.

Jared Siegel:
Yeah, absolutely. Um, again, I can’t predict the future any better than anyone else can, but when you look at the general trend, uh, with this last round of liquidity, we did crest over a hundred percent of our GDP. So that’s, uh, that’s somewhat, you know, from an economic perspective concerning, and you look out where are we going to be in 20 years in the forecasted, uh, debt to GDP is a little bit less than 200%. So now we’re starting to get into untested territory. So I do suspect that rates are likely to increase in the future. So, uh, if we pull up the slide,

Eric Larson:
What, what is current us GDP? And what do you think current us debt is? Because I would say that we’re, our GDP is much, our debt is much more than us GDP, but you said a hundred percent. So can you address that?

Jared Siegel:
Yeah. Uh, I’d have to go back and look at the, the specific, uh, number. I don’t have the number in front of me. I was just looking at the, the ratios. Um, I’m

Eric Larson:
Just thinking, I feel like US GDP is somewhere between 15 and $18 trillion somewhere in that range. And I’ve, and I’m pretty sure our debt is somewhere between 24 and 26 trillion. So that’s definitely more than a hundred percent,

Jared Siegel:
Uh, certainly, well, uh, the, the numbers I was just looking at earlier this week, put us just over a hundred percent. So, uh, somewhat concerning. Um, however, this is just a chart of, of the historical tax rates going back to 1926 and, and not to turn this into a political conversation, but from a historic perspective we’re at low rates. Um, and so I think it’s reasonable to..

Eric Larson:
Can you just unwrap this a little more? I don’t fully get it.

Jared Siegel:
Yeah. I mean, right now you look at a post-tax Trump, uh, Trump tax act stuff. Uh, we’re, we’re near historic lows, um, from a federal perspective. And, uh, if you were to anticipate how the country’s likely to respond to the, kind of the demographic deterioration that I’d mentioned earlier, it’s sensible to think that you could see tax rates go up. And so, uh, the point is, is, um, that I often make to people is sometimes minimizing taxes today competes directly against minimizing taxes over your lifetime. And so sometimes taking a bite of the apple today, the apple, maybe that you didn’t want to buy will be incredibly beneficial long-term. And so people that did have a plan going into this volatility, there was an opportunity they had liquidity there. And so in the midst of the bottom, we had clients that were converting qualified accounts to Roth IRAs. And so by that, a qualified account is a deferral of tax. Whereas a Roth is the elimination of future tax on gain and income. And so essentially they bought the tax liability out of their qualified plan. So that in the future distributions from their IRA worked were tax-free and moreover the growth between now and then it was tax free. So that required somebody to trust the capital markets globally. And it required somebody to have some liquidity to pay off the tax liability outside of their qualified account. And so,

Eric Larson:
I think I understand what you’re saying. I just want to say it in a less technical way, because I don’t, I just want to understand. So the green, the dark green line is the highest income tax bracket and the law, the lighter green line is the lowest income tax bracket. Is that correct? Correct. Yes. Okay. That makes sense. So we actually tax brackets of above 60% up to 90%, correct. Wow. So that’s in the last hundred years, that’s pretty crazy. And you’re saying right now, if I have a 401k, I am deferring my tax and I’m growing that that’s income stream tax deferred, but at some point in time, I’m going to have to pay that tax. And you’re saying at some point in the future, it’s possible, uh, taxes could be higher. And when I want to take my money out and have to pay taxes, that could be paying at a higher rate, and you’re saying, why not pay taxes now, convert 401ks to Roth IRAs, which, which force us to pay the taxes now, but then I never have to pay taxes again. Is that what you’re saying? Yes.

Jared Siegel:
So, um, qualified accounts could be, um, things that are deferred, right? So you have traditional IRAs and you have traditional 401ks. Certain plans allow you to have a Roth 401k, and you can, you can actually execute an in-plan conversion. And so you can convert all or a portion of your 401k to dollars that will be attributed to a Roth account. And so it wouldn’t be subject to tax ever, nor would your, um, your heirs be subject to that same thing. So if we think back, most people have since forgotten the Secure Act that got passed at the very end of last year, and that moves the required minimum distribution out of qualified accounts back from 70 to 72, which is great, right? So there’s a lot of people that they like that deferral, but what they ended up doing was also taking the way that an inherited IRA was distributed, where you could receive an inherited RMD or an inherited required minimum distribution over your lifetime. They changed that so that now you have to take it over the course of 10 years. And so if you look at most people who inherit money from an IRA, they’re often in their fifties or early sixties, and it’s their highest income earning years, thus they’re already in the highest tax brackets. And so if you inherit mom or dad’s IRA, and you’re forced to take the income over a 10 year period, so much more accelerated period, the effect of tax rate on that on the IRA dollars could, it could be significantly higher. Okay. So you’re saying,

Tyler Combs:
Are you to run out of time? So I want these strategies.

Eric Larson:
If I, if I’m, if I’m older and I’m planning on passing down wealth and I pass it down in a 401k or an IRA, um, my kids are gonna have to get that and then pay much higher taxes. But you’re saying if I put it into a Roth IRA and I don’t sell these things, this is my I’m just asking dumb questions. If I converted it to a Roth and I get, and that gets passed on my kids, they don’t have to pay taxes either. Correct. Okay. That’s all right. Great, great. Take away. It’s better than I have. So,

Tyler Combs:
Jared, is that your number one strategy or did you have something else in mind?

Jared Siegel:
I would just say that, um, uh, the old Eisenhower quote: “Plans are nothing, planning is everything” because something will change the second that your plan is done, the, the world will change around you, your world, or the world around you will change. But the process of planning creates clarity and your ability to kind of just respond to it as a significantly enhanced. So diversify well and plan often.

Brad Christensen:
Good words. Let’s go to Brad and then we’ll wrap up. Yeah, I’ll piggyback. Uh, Jared’s point. I mean, I think it, you know, number one advice to everybody right now is, is look at everything. I think that, uh, the, the simple that we would have all said is the minute the pandemic hit, everybody looked at where their expenses were going and well, I’m not going to pay for an athletic club or, you know, what else are we doing that we’re not going to use. And so immediately people are making adjustments well, just because we did it in that first call it two to four weeks doesn’t mean that you don’t need to revisit, you know, where are you investing today? How are you set up for what, you know, future, uh, changes might happen in the marketplace? I think, you know, I’m, I’m standing on the sideline saying this is a W. I think that we felt a really, really deep, uh, V in, in the initial 30 days. I think Jared’s right. Shorter on record than in history. Uh, we’ve had the most amazing recovery in a short amount of time, which the underlying fundamentals don’t support. So is the stock market going to adjust again? Yeah, I think we’re set up for a typical September, October, where there’s going to be an adjustment inequities. And if we’re gonna, you know, say there’s blood in the streets, it’s probably not going to be as deep a dive as what we saw in March. Uh, but, but it tends to affect everything else that we do. Uh, especially when we think about the number of baby boomers who are retiring, who have retired and who are actually living on those incomes. And so, you know, they’re going to be the ones that, that stop spending money. And, and if there’s one truth out of all of this, we still depend on consumer spending. And in fact, I think that’s probably why, uh, you know, we’re sitting as healthy as we are, as people are getting liquidity, it got to main street. People forget that even it took nine months to even get a, uh, you know, federal liquidity, a federal assistance program created after the last financial crisis. It happened here in less than 30 days. Some might argue two weeks that money didn’t just get to corporations. It didn’t just get to business owners. It got to main street. It got to people who needed it now. So the question mark is, you know, can we sustain, you know, all in where we’re at right now for the next, uh, you know, three to six months, and then hopefully start to see a real recovery start to take place for second quarter. Next year, I will add. And Tyler, I’m putting this out there because we have a lot of clients who receive PPP funds in general. Most of our clients are still doing plus or minus about 80 percent to a hundred percent of their annual goal, their year goal, their revenue goal for the year that PPP is going to start to work. At some point, everybody’s sitting on that cash. Um, I don’t know that Jared would say his clients are doing exactly the same, but our, our opinion is that money is going to get into the market. And it’s likely going to be early next year. And that’s going to change a lot of things. We’re going to see a quicker recovery than people anticipate going into a year from now. Cool.

Tyler Combs:
And Eric, let’s wrap up with you. Um, what are your top, your number one, just one number one, suggestion, as far as strategy.

Eric Larson:
I, I agree with, uh, I agree with Brad. I think the W. I think that we did a big drop, we shut right back up really fast. And I think that there is another downturn coming. I think that we have the government has done a great job of papering over, giving people money, but it’s not for free. We gave a ton of people, a lot of money and, uh, and at some point in time that money flow is going to stop. And when it does, I think we’re going to feel the real effects of what’s going on, and then we’ll have to live with that and then come back in a more healthy sustained way. So I did put some, I will throw up slide six for me. Um, I don’t think there’s any one silver bullet, although I really liked Jared’s pay taxes now while taxes are cheap. I think there is wisdom in that. And I’m going to talk to you about that later. Um, but slide six coming up black.

Tyler Combs:
Why don’t you just paint the picture for us? Yeah,

Eric Larson:
There we go. All right. So I think one thing I just wanted to walk away with is no one can predict market peaks or market troughs, that it is impossible to see black swans. Otherwise everyone get rich doing them, but I do think that there are cycles in the world and in the economy. And I think we should be aware of those. Uh, I think that in the real estate space, I think it is generally better to buy in the wintertime. If you’re a flipper, my encouragement to people is I think you should buy in the wintertime because, uh, if you have a hundred percent of the houses being sold in 12 months, 70% of houses get sold between March and September. That means the other six months, only 30% of houses sell. So if I’m going to flip a house, I want to be buying in the winter time, November, December, January, it takes me three to six months to flip a house anyway, and I want to be selling in the summertime.

Eric Larson:
So I think a good cycle for people who are buying, selling real estate is to always try to buy in the wintertime and sell in the summertime. If you’re buying in the summertime, then you’re gonna be forced to sell in the wintertime, which is less good. I think that’s cycle. Um, I think during bubbles, when market is peaking, then I think selling assets, right, sell high so that you have cash to buy a low, I think is a, you know, Warren buffet coined that. And I think that’s true. Um, I think during recessions or depressions, I think take cash and then buy things when things are cheap, buy them, right. It’s good. And it’s cheap. You should buy it because it will, it’ll go up in value. And I think as a lender, I think one of my big takeaways is just don’t borrow money to buy liabilities. A liability is submit, takes money out of your pocket. Don’t ever borrow money to do that. Don’t borrow money to buy a TV, don’t borrow money to buy a car. Don’t borrow money to buy shoes, borrow money, to buy assets. And if you can borrow money to buy assets that produce income, and you can service that debt in general, I think that’s a really good thing to do during all times, but especially during recessions. Um, I think just as humans and as Americans, I think we live way beyond our means. I think we spend too much. My dad used to say, I don’t care how much a person spends as long as it’s half as much as they make. And I think that many of us make small amounts of money or big amounts of money, but it doesn’t matter. It’s how much you spend. So if you spend a hundred percent of your income, you’re never going to be successful. Um, and I think at the end of the day, when people feel afraid, the best thing we can do is realize we are each uniquely gifted. I am shaped and wired in a certain way. And the best thing I can do is be great at what I do, whatever that is. If I’m selling something, be great. If you’re a technical person, be great at that, learn, keep growing to classes, keep growing in whatever you’re great at because great people always have jobs. The world’s not going to stop. It’s not going to end. Things will change. And there’s going to be new industries, but be great at something so that you can go fill a space that you’re great at. Um, and then I think tax is going up in the rich. I didn’t have a cool slide like Jerry, but I think tax is going up on the rich is probably pretty likely to have strategies to deal with that I think was smart. And then I think we’re going to have continued political challenges. I think there’s a lot of divisiveness going on. I think you’ve got one media that says one truth and another media that says another truth. And you have people who are really lining into different camps and there’s a real division amongst Americans today, which I don’t like to see. I, I would like to see more of us move to the center to be able to hear the truth of each side to not be so adversarial with each other. Um, I don’t find myself being more political, a Republican or more Democrat. I want to be able to find that the truth. And it’s usually in between somewhere.

Tyler Combs:
Good words. Um, we got, um, a couple of comments coming on the screen, but for all the quiet, we did get quite a few questions that we weren’t able to address. So if you guys are up for it, we’re going to do another one of these where we’re going to be able to actually take the questions that we got before and during the event. And then some other questions that will come in in the meantime. And we’ll do this in about a or so, does that work for everybody? Yeah, that’d be, if you guys want to do it again, let’s go. Okay. We need to get Eric live again, though. I’m tired of the stoic face, my face, not coming in. I don’t know. You’re good. You’re good. Well, thank you to everyone for joining us. And, uh, and again, Eric and Northwest private lending are going to be putting out more information about our next event, doing this again. Any other final words, Eric?

Eric Larson:
Just Tyler. I just want to thank you for hosting this.Rare Bird is a, uh, organization that I sent all of our clients to. I think you’ve done a really good job in Portland, creating a place for people to congregate, to ask questions. You guys do a ton of you guys normally do live events that I’ve been to. And I think what you, what you do has been a great networking group. And I think everybody, whether it’s Northwest, or it’s Rare Bird, doing a place where you come together and ask questions and you do life together and business together, I think is really great. I really appreciate what you’ve done and I appreciate you narrating and, uh, hosting this Russ and Jared and Brad. It’s so nice to be on a call with people that are exceedingly smarter than I to ask these questions. I don’t know all the answers and I feel impressed upon your guys’ perspectives. And it’s great. Thank you.

Tyler Combs:
Thanks sir. We fake it. Well, Eric it’s okay. And just one point of clarity. So Rare Bird is now Investor Labs. So the, the online community and the in-person community, uh, that Eric was talking about, uh, we, we changed the name to Investor Lab. Rare bird is our, uh, our real estate and property management, brokerage side of things. Uh, but the Investor Lab is the community where we have conversations like these, um, going on, specifically about real estate in Portland.

Eric Larson:
And then Jared, just, you, you do what you do at Delap and it’s nice for people to know if they have more questions after this call, uh, we’re going to send out people’s contact information. I’m going to give everyone Jared’s, uh, home address and cell phone so that you can, uh, just docs me and same thing with you, Brad. I appreciate what you do. You done a great job for many years here in this area. And so those looking for commercial space real estate, I go to you every time I have a question. It’s just nice to have that. So thanks both of you for being here.

Tyler Combs:
All right, until next time. Thank you. Thank you guys. Thank you everyone.

Northwest Private Lending Inc NMLS # 1522364 // ML # 5496 is based in Portland, Oregon. NW Private Lending is an Equal Opportunity Hard Money Lender. We provide quick acess to capital for borrowers, real estate agents and mortgage brokers in Oregon and Washington. NW Private Lending is a collateral based lender focusing on bridge loans, fix and flip or rehab loans, commercial loans and non-owner occupied real estate investment properties.

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