Circle of Competence Issue #94

January 12, 2020

QUOTE OF THE WEEK

 

"The dead outnumber the living 14-to-1, and we ignore the accumulated experience of such a huge majority of mankind at our peril." 

 

- Niall Ferguson

 

 

FOOD FOR THOUGHT

 

 

A few thoughts on the Raleigh-Durham-Chapel Hill Triangle area in North Carolina

 

Recently someone asked me to write about my new job in commercial real estate development, but I thought that instead it would be far more interesting for me to answer the questions "why real estate and why the Triangle?" 

 

For starters, if I am going to invest in a piece of real estate, a stock, or a company, I like to make sure that it has a few things going for it. As I've written before, it has to be within my circle of competence. Coming out of a career in professional baseball, I felt reasonably knowledgeable about finance, technology, and real estate, but felt that my interests were by far the highest in real estate finance and investments. Circle of competence, check. 

 

Next, in assessing various industries, I tried to look at the decision like an investment - a piece of real estate, a stock, or private company. After I know for certain that a particular opportunity is within my circle of competence, I like to assess the downside risk. Contrary to popular opinion, commercial real estate was in fact NOT at the heart of the last financial meltdown. That honor belongs to excessive leverage - real estate was merely the vehicle to which that leverage was applied. The beauty about real estate is that it is TANGIBLE and lends itself to leverage in a wonderful way that most other asset classes don't. But with leverage, the sword cuts both ways. Like Buffett says - bankers give you their umbrella on a sunny day and ask for it back on a rainy one. I once read that Seth Klarman only uses 50% leverage in Baupost's real estate holdings. Conservative leverage allows for a cushion during the entire economic cycle from expansion to the inevitable contraction. In terms of upside, one can profit from an investment in real estate in multiple ways: recurring cash flow, appreciation of the underlying asset, and building up equity through debt payments. The downside of a well-located piece of real estate that is conservatively financed is small and the upside typically takes care of itself. Just ask Bruce Flatt from Brookfield Asset Management. Downside protection, check.

 

And last of all, when considering job location, I began first by looking at jobs based on conventional wisdom rather than thinking critically about location. However, what used to be conventional wisdom for white collar careers is quickly becoming obsolete. For example, it used to be true that if you wanted to go work in tech, it had to be in the Bay Area. If you wanted to work in finance, New York was your only top tier option. To some extent these remain true and are the 'elite' mainstays of each industry. However other second tier markets are beginning to open up options for young graduates that are over looked and under valued, and just as, if not more, rewarding from a quality of life (financial, cost of living, work culture, etc.) perspective.  After speaking with dozens and dozens of people in multiple industries and locations, I knew that I still wanted to ultimately end up in North Carolina in the long run because both my wife's and my own family were here. However, I also began to discover that significant opportunity is deeply embedded in the triangle's economic fundamentals. Here are several reasons that I believe the triangle will begin to emerge as a power player in the southeast as well as nationally:

 

- Raleigh-Durham was recently ranked the #2 real estate market in the country according to the latest PWC trends in real estate report based on growth of residents, jobs, vacancy rates in multifamily and office, business climate, and other factors. 

 

- The triangle boasts the #5 public institution nationally (UNC Chapel Hill, Go Heels!), #10 ranked private institution (Duke, Boo!), and #12 ranked public university for engineering (NC State), all within 30 miles of each other, not to mention numerous other small colleges and technical colleges.

 

- As of 3Q19, the Raleigh-Durham multifamily market sported a 96% occupancy rate with rents growing at 5% year over year. It is estimated that over 80 people move to the triangle every day.

 

- The startup scene is thriving, with over $1B in investments in 2017 with the success continuing into 2018 and 2019.

 

- The Raleigh-Durham area was ranked #10 in the nation for tech talent according to CBRE's tech talent report.

 

- Duke and UNC system's hospitals are nationally ranked (top 50 out of thousands of hospitals) and the state's #1 and #2 medical systems.

 

- Both the cost of living and cost of doing business are at or below the national average.

 

- Raleigh is currently ranked the #2 place to live in the world based on quality of life index according to Numbeo.

 

- Durham's population has grown roughly 20+%, Raleigh's has grown 16+%, and Cary's has grown 24+% over the past decade, with a total combined population of nearly 1 million residents.

 

Hopefully, I answered the questions "why real estate and why the triangle?" I love my state, I love the area I live in, and I am certainly biased. But it is hard to ignore the facts above. So if any of you are in the RDU area, please reach out! I would love to show you what southern hospitality is all about.

 

--

 

Did I miss something? What other second tier cities are experiencing rapid growth besides the following:

 

- Nashville, TN

- Denver, CO

- Jacksonville, FL

- Chattanooga, TN

- Austin, TX

- Columbus, OH

- Richmond, VA

- Tampa, FL

- Dallas, TX

 

 

LINKS


Investing

 

Scott Galloway on SoftBank's implosion and latest boo boo - Oyo (No Mercy No Malice)

 

Money-losing companies comprise nearly 40% of public market listings (Wall Street Journals)

 

What is happening to US shale production? (Goehring & Rozencwajg)

 

The art of not selling (Akre Capital)

 

J.P. Morgan's 1Q2020 guide to the markets 

 

St. James Investment Company 4Q letter to shareholders

 

Where to invest in the next 10, 20, 30 years (13D Research)
 

 

Geopolitical

 

The EU can look to 1783 for a way through Brexit (Rational Optimist)

 

The future of America's contest with China (The New Yorker)

 

The known unknowns of 2020 (Absolute Return Partners)

 

 

Technology


The end of the beginning (Ben Thompson)

 

Picking a career (Wait But Why)

 

7 reasons gaming will take over (Matthew Ball)

 

Pokemon GO has $900M 2019 in player spend (Sensor Tower)

 

Sequoia's original YouTube investment thesis

 

Bell unveils a 4-duct flying car at CES (Vertical Mag)

 

Uber and Hyundai are working on a flying car (New York Times)

 

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