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What All of Us in Commercial Real Estate Can Learn From Billionaire Warren Buffett

By Jim Gillespie | March 3, 2011

As most everyone knows, Warren Buffett is one of the most seasoned, successful investors who ever lived. So when I heard that his Berkshire Hathaway, Inc. had purchased Burlington Northern Santa Fe Corp. in the Fall of 2009, I told everyone close to me, "This man definitely understands Peak Oil and its coming ramifications for all of us, and he’s positioned both himself and his investors to fully capitalize on it."

Peak Oil, in case you’re not familiar with the term, is the underlying cause of all that’s going on economically in our world right now, and I first began writing about this subject more than five years ago. And within these last five years, everything that’s been evolving economically within our world has been following precisely what the Peak Oil experts have predicted. So if you’re not familiar with this subject, here’s an article I wrote about it back in 2009 that will give you a more detailed explanation of it, and provide you with some solid resources.

So as our worldwide energy resources continue getting scarcer, the price of petroleum is rising due to supply and demand. And as businesses keep getting squeezed financially, they’re looking for more ways to save money. So with all of this in mind, as the price of petroleum continues to rise, the greater the cost savings that will occur in shipping by rail instead of shipping by truck. So the amazing investor Warren Buffett has now positioned his investors very well. And in terms of how well he’s actually positioned his investors, here are two excerpts from a recent letter he sent out to his shareholders:

"The highlight of 2010 was our acquisition of Burlington Northern Santa Fe, a purchase that’s working out even better than I expected. It now appears that owning this railroad will increase Berkshire’s "normal" earning power by nearly 40% pre-tax and by well over 30% after-tax. Making this purchase increased our share count by 6% and used $22 billion of cash. Since weve quickly replenished the cash, the economics of this transaction have turned out very well."

"Both of us are enthusiastic about BNSFs future because railroads have major cost and environmental advantages over trucking, their main competitor. Last year BNSF moved each ton of freight it carried a record 500 miles on a single gallon of diesel fuel. That’s three times more fuel-efficient than trucking is, which means our railroad owns an important advantage in operating costs."

And Warren Buffett’s entire letter to his shareholders is available for you to read on the Berkshire Hathaway Web site.

So with energy costs on the rise and companies looking to cut back on their expenses, look for more companies to now transition into shipping and receiving their products by rail instead of by truck. When gasoline was much cheaper, the overall price of shipping by truck was not that big of a deal to companies, but now it’s becoming a bigger deal. Which means that there will be shifts occurring within industrial communities as companies will want to locate in areas where they can minimize their overall costs for shipping to their customers.

So as a broker, if you specialize in industrial properties, there’s money to be made by understanding your clients’ overall needs including their shipping expenses. Because when the price of gas was lower, it may have made great sense for your clients to be located where they are right now, but it may not make great economic sense for them anymore.

And if you’re not an industrial broker, there’s still money to be made. Buildings with lower energy costs will become even more important as time goes on, when the price of a barrel of oil climbs to $150 and beyond. This price may not look like it’s right in front of our faces right now, but neither did $100 a barrel oil just 3-4 years ago. 

With all of the uprising that’s been going on in the Middle East lately, there’s a good chance that the government of Saudi Arabia, the world’s largest oil producer, will be overtaken by its own people sometime within the next year. And if that happens there’s no telling where the price of a barrel of oil will end up. Oil right now is four times what it cost us just 8-9 years ago,
and as you can see here on this chart, there’s a direct correlation between the price of oil, and the price of food. That’s because there are approximately ten calories of energy that go into growing, processing, packaging, and shipping every one calorie of food that we consume within our homes, before we ever even refrigerate and/or cook the food in our homes. So with this kind of relationship between food and energy, we can see how rising energy prices means rising food prices for everybody around the world. And with the price of food now skyrocketing everywhere, combined with 40% of the people in places like Egypt now living on just $2.00 a day or less, we can see why some of the people in the Middle East have finally decided it’s time right now to overthrow their dictators. Because when a lot of people begin having great difficulty providing food for their families, they demand change.

As the price of energy rises, the demand by people to live closer to the heart of the major cities will increase, because when you live closer to work, it’s less expensive to drive there. And the outlying areas, where middle-class people have long commutes into the major cities for their jobs, will suffer more in terms of vacancies and overall declining real estate values. Commuting great distances to and from home to work will not be affordable to many of these same people anymore, unless they’re utilizing good public transit when commuting.

As an example of this, in the area where I live here in Southern California, a solid percentage of the people living here commute 90-120 minutes in traffic each way to work every day by driving. And since the price of gasoline has now gone up considerably, people have been organizing carpools among themselves in order to spend less money on gasoline. And at the same time, this community that grew from 27,000 people to more than 100,000 people in just 20 years, now has 92% of its homes that are on the market for sale…for sale as distressed properties. And home values have now gone down 40-50% during this economic downturn, too. So while this community was growing, and many new homes were being built, this expansion of people moving away from the city to live here made great sense to so many people…when gas was inexpensive. But now that gas has gotten much more expensive and it’s taking a major bite out of people’s budgets, the economics just aren’t working anymore.

So as a broker, understand the shift that is going on because of the rising cost of energy. The price of energy will continue to move both up and down, but the long-term trend of energy costs is definitely upward.

Recognize this trend and the opportunity it presents for you to create and close more transactions. Educate your people on this trend and get them to take action now before other property owners even recognize what’s going on. Move your owners out of owning non-rail-served buildings and into owning rail-served buildings. Move them out of owning less energy efficient buildings and into owning more energy efficient buildings. And move them out of owning properties in areas with lower or middle-income populations, where many people drive great distances to work, and into owning properties within the major cities, where the commutes to work for most of the people will be much shorter. Because when people begin having great economic difficulty living in the outlying areas, the commercial properties within those areas are going to take a beating.

Recognize what’s coming our way, get out ahead of it, and strategically and professionally guide the people you do business with to make the right decisions. And in doing so you’ll generate a lot more transactions than the other brokers you’re competing against right now.

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