As the year 2020 continues to shape our lives, businesses and investment future, I try to regularly remind myself to not exaggerate the novelty of this situation. The world has been through pandemics, many of them much worse than COVID-19, based on what we currently know.
The world, and the people in it, have lived through trade wars, depressions and large demographic shifts. I am not saying these things won’t, or haven’t, already caused serious hardship. Rather, that we will make it through these challenges, as we have in the past, and if I position myself and my partners appropriately, we will become long term beneficiaries of this massive shift.
Of course, there is one economic change that is currently unfolding. I am referring to MMT, or Modern Monetary Theory. It is the idea that any government spending can be paid for by the creation of money, and taxes will ultimately be the factor by which they control inflation. This is brand new territory, and I do not think anyone truly knows how it will play out. The central idea of MMT is that governments with a fiat currency can and should create as much money as needed to spend because ultimately, they cannot go broke.
It sounded like quackery when I first learned of it, but I never took the idea seriously. Of course, if you would have told me ten years ago that the US would have negative yielding debt, I would have also laughed at you. Fast forward to 2020 and not only do we have more than 14 Trillion in negative yielding debt, worldwide, but we have also largely adopted MMT as our current fiscal policy. Money supply since the beginning of the year (2020) has skyrocketed. Currently, M2 Money Supply in the United States has increased 19% since the beginning of the year. M2 includes things like cash, checking deposits, money market accounts, mutual funds, time deposits and savings deposits.
In simple terms, we have seen a massive spike in cash and cash–like alternatives that businesses and consumers use. There is a ton of liquidity sloshing around right now, and appears that is exactly what the U.S. and many other major governments want. Outside of digitally creating more money supply, Fed Chairman Powell, has also explicitly, said:
they are not even thinking about thinking about raising rates.Fed Chairman Powell
Then on August 27th, 2020, Fed Chairman Powell, went one step further when he told the world that, “the Fed will let inflation run higher than normal until the economy gets well back on track.” So, now instead of having a dual mandate of managing inflation and seeking full employment, they have moved the goal posts to full employment at any cost. There is no limit to how much money the Federal Government will print to try and inflate our way out of this mess. But make no mistake, this is ultimately a war on savers. It is what many have dubbed, QE Infinity. Moving forward, this is an important detail, and something that I will be basing many of my future investment decisions around.
Shifting gears for a moment – let’s talk about demographic changes that are currently taking place in this country. I turned 18 years old on August 30, 2001. I signed up for selective service on September 11, 2001, which also happened to be one of the most tragic events to ever occur on U.S. soil. The impacts were significant, and changed the course of this country permanently in many ways.
However, there were several things that many prognosticators thought would change indefinitely that never did. One hypothesis I’ve heard consistently: airline travel was dead and may never fully recover. Of course, we all know how that played out. Once the initial shock wore off, most consumers slowly went back to their old way of life, and in fairly short order, things were largely “back to normal”.
The events that are playing out today are causing a similar, but much more dramatic shift in the way people travel, recreate, and more importantly, where they live and call home. The lockdowns that came with quarantine have created what I believe is permanent scarring on the American public. This is not a one-time traumatic event like 9-11. It has been months of lockdowns, isolation, masks vs. no masks, and social distancing with no end in sight. On top of that, rioting and social unrest in many of your most densely populated areas, and you have a recipe for what I am calling the “The Great American Migration”. Simply, people all over the country are suddenly taking a critical evaluation of their lifestyles, and the places they want to call home.
I think this is a major shift that will take more than a decade to play out. More importantly, I believe this is the biggest investment opportunity in real estate that I, or we, may ever see in our lives and careers. A large percentage of people living in large cities with any level of affluence are going to leave. They are moving to smaller cities, attractive rural markets, and resort towns like Vail Valley, which I call home.
By no means do I have a crystal ball, but when considering this shift in demographics, indefinitely low interest rates and QE Infinity, I see major unintended consequences and even bigger opportunities. Inflation is eventually going to rear its ugly head, and low interest rates will make current real estate prices seem cheap. I am, firmly, in the camp that real estate and other hard assets are going to be huge beneficiaries. But, not all real estate is an investment safe haven, in my opinion. I would not want to be building office space in Seattle or high-end condos in New York City, that I can tell you for sure.
The places I want to be with my equity partners are smaller, attractive markets. Small cities and mountain towns that are attractive places to live and do business is where we will remain bullish. In a time where most people with any level of affluence are actively seeking residence in perpetuity across these lifestyle-driven markets, we remain focused on the migration opportunity.
I am not saying the entire country will move to the boondocks, but I am suggesting that a significant percentage of people are going to move for lifestyle and quality of life-associated reasons, and the implications are going to be massive for many small markets.
The impacts will be magnified by the fact that a huge amount of money is going to flow into many small markets that, by default, already have very little depth. I am most bullish on housing, currently, but the spillover will be incredibly positive for most asset classes in these markets.
So, maybe your next question is who are you, and what can you do for me? Let me start with who I am. Then, I will elaborate on why my firm is uniquely positioned to capitalize on the events currently unfolding, as briefly described above.
My name is Mike Pearson, and I am the founder and President of Fortius Capital. We are a Real Estate Private Equity firm and Developer based in Avon, CO. I was born in Vail, grew up in the construction business, and in 2005, decided to start what would eventually turn into Fortius Capital, the business I have proudly built today.
I started in 2006, as Vail Commercial Advisors, with the goal of building a commercial real estate management, brokerage and development company. Fast forward to today, and we are the local leader in commercial brokerage, property management and residential development. It hasn’t been an easy path or a one way trip, but the one thing I have done really well is spot big opportunities or trends and go all in on them. In short, I have spent my entire career managing, developing, buying and selling real estate assets in the mountain markets.
One of the biggest trends that I got in front of was entry and midlevel housing. In 2005, I was sure we were in a housing bubble. I was so sure that I built a short position in Countrywide. At the time, I had a good friend that ran the region for Countrywide Home Loans, and I just couldn’t wrap my brain around how much money these folks were making. Home prices seemed to be a one-way bet, and many of my friends were getting rich riding it higher.
Unfortunately, I was early, which really means I was wrong. Countrywide stock surged higher, and I eventually closed my short position and significant loss.
To make matters worse, I started to believe the hype that resort markets were insulated; that regardless of what housing did in major markets, areas like this (Vail Valley) would not feel the impact. I went against my own judgement, and in 2007, my wife and I bought an 1,100 square foot new construction condo in Edwards, CO, for $489,000. In 2014 when I started a family, I sold that same condo for $390,000. Writing a six-figure check at the closing table taught me several valuable lessons, but the biggest was to drown out the noise and follow the facts.
In 2013, I became extremely bullish on mountain housing. I looked around, scratching my head, and saw that nothing was being built. Nothing was being entitled. The overall feeling was that sentiment for housing was quiet, to say the least. Many parts of the country were bouncing back, but resort markets were just bumbling along.
I started looking at land deals, and made several offers on one-off lots. This was a big opportunity, and if I was going to get in front of it, I needed to find projects big enough to build a real business around, not just a couple of one-off spec homes.
In 2014, that opportunity came to fruition when my brokerage team took on the listing for a large failed subdivision, known as Two Rivers Village, on the west end of Eagle County. They shopped the listing extremely hard with the goal of getting somewhere around $18k per lot for the remaining 255 single family lots. Despite our efforts, marketplace receptivity was nonexistent. So, I put my money where my mouth “was” at the time, and proposed a joint venture with the existing owners. We would all contribute some fresh equity, I would take over as builder/developer, and try to salvage the project. I remember one broker in my office, in particular, that looked at the deal and told me he, “wouldn’t pay $5k per lot and that I was out of my mind”.
We broke ground on homes in late 2014. To date, we’ve built 240+ homes, and are in the process of building our last twelve homes in Two Rivers Village with deliveries in early 2021. In addition to Two Rivers Village, we took on several other large and small projects, all of which have been very successful.
So, if you were to ask me what is Fortius Capital, I would tell you this: Fortius Capital is a story of entrepreneurship, and as you might have already guessed, I am the type of person that most certainly suffers from something best described as frequent entrepreneurial seizures. Luckily, over time, both my wife and my most tenured staff have grown to embrace it.
I am always looking for the next project or opportunity that will propel us to the next level. When people ask me what I do, my answers vary from commercial real estate, to developer, to real estate private equity. At the end of the day, I consider myself to be in the opportunity business, but telling people that typically just creates more questions. As the architect of the business structure, my aim has been to build the enterprise in accordance with my own abilities, as both an entrepreneur and investor. Our model is not suitable for everyone, and conversely, the management and investment style of others may be unsuitable for us. I am quite alright with that.
At this point, you know my thesis for real estate across the mountain markets of the U.S., and have a flavor for what we do. We are seeking to add a few significant equity partners that understand the vision, and are willing and able to deploy capital with us into real estate opportunities in parallel. We are looking for patient money, but we are also looking for partners that we can build real, synergistic relationships, working with another again and again. The best use of my time and my teams’ time is not to be constantly chasing new equity partners. It is better spent finding excellent opportunities and executing on them.
If you like what you are reading and feel like this is an opportunity you would like to pursue, please shoot me an email or a call, and we can schedule some time to discuss in greater detail. We have a few projects currently in underwriting, and a massive database of upcoming opportunities that we are tracking closely.
President & CEO, Fortius Capital