NYC Residential Real Estate Trends with Lisa Simonsen

Lisa Simonsen, a high-end real estate broker from New York City, described the real estate market, prior to COVID-19, as robust and overpriced.
Lisa Simonsen, a high-end real estate broker from New York City, described the real estate market, prior to COVID-19, as robust and overpriced. Since the pandemic, sales have dropped roughly 20%, but Simonsen is confident that there are still and always will be people who want to live in New York City.

As people become more cautious and prioritize safety, townhomes will become increasingly popular and could be a potentially rewarding investment at this time. These new norms may benefit areas such as Brooklyn as well as parts of Florida where wealthier residents have already begun to migrate due to an increase in property taxes.

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Ryan Morfin:                    Welcome to Non-Beta Alpha. I’m Ryan Morfin. On today’s episode, we have Lisa Simonsen from Douglas Elliman. She’s a top end real estate broker in Manhattan. And will tell us a little bit about the trends on New York residential real estate post the COVID impact. This is Non-Beta Alpha.

Ryan Morfin:                    (singing).

Ryan Morfin:                    Lisa, welcome to the show. Thanks for joining us today.

Lisa Simonsen:                 Thank you. Thank you.

Ryan Morfin:                    Well, why don’t you take a moment just to explain to our viewers a little bit about what you do in New York City and a little bit about Douglas Elliman, and then we’d love to jump into where the markets are.

Lisa Simonsen:                 Hi again, thanks for having me Ryan, and I hope everyone listening is staying safe and healthy. So I work for the largest company in New York City, Douglas Elliman, and run a top team. And we are known for the high end of the market, but my team does… We do everything. So we do all neighborhoods and all price points.

Ryan Morfin:                    Fantastic. So, New York City is a very deep international real estate market. And given that unfortunately, New York City is one of the epicenters of the outbreak for the coronavirus, would love to hear a little bit about what was happening at the end of 2019 and coming into January, February, what the outlook was of the market. And then maybe we could pivot to what happened when the city and the state started to get shut down.

Lisa Simonsen:                 Absolutely well, we were certainly off to a very robust end of 2019 and ’20. And prices since Corona, they have reduced, which have caused sort of an uptick in the market sales. March 2020 was on track to outperform actually 2019 for the first two weeks of the month. As of March 16, sales have diminished about 20% from a year ago.

Ryan Morfin:                    And so international buyers have been coming into the marketplace quite a bit over the last decade or so. Has that slowed down, and people have grown accustomed to Chinese and Russian buyers coming at the super high end of the market? What’s your view of that dynamic playing out in the year to come?

Lisa Simonsen:                 Well, I mean, currently I’m actually doing some very significant transactions with overseas buyers, actually for townhouses. I think ironically, they were doing this pre Corona. And I think that there’ll probably be even a more, I think the townhouses are going to become even more popular because of the obvious reasons of security and safety and not dealing with people and being on elevators and all of those things. So I think that, I mean, look, obviously the market has slowed down right now, but if you ask that sort of what’s happening in since March 2020, sales have as significantly reduced at least by 25% in terms of employees being laid off and just new contracts that are being signed.

Lisa Simonsen:                 But I do think that over the next period of time, we are going to see the overseas buyers that we have been working with that are wanting to be in New York. I think that they may be thinking about it right now or slowing down, but I do believe that they are going to come back and I think they’ll come back, perhaps, they’re going to look at things slightly differently. Maybe they’re going to want to discount in price, or maybe they’re not going to want to be in a condo and they’ll want to be in a town home. But I think that it’s just, it’s a pause, and then it’s going to be a refresh.

Ryan Morfin:                    So you bring up a good point, amenities and common areas that a lot of people sought after may actually turn out to be a liability for building layouts given that people are going to want a little extra space to spread out. How do you see that playing out? So you think that’s going to be leading for greater demand of townhouses or for larger square footage spaces?

Lisa Simonsen:                 Yeah, I mean, I speak to sort of some of the leaders of the industry and nobody knows exactly, Ryan. I do believe there’s going to be a new norm. And I think that some of the things which we all found very enticing for at least the purchasers over the last few years, the biggest, the best, the playrooms, whatever it was, the swimming pools, I think there’s going to be certainly a group of people that, that’s not going to be it’s attractive to. And they are going to want the privacy and security of being in a controlled environment and not with all of the people on the elevators and in the playroom, et cetera.

Ryan Morfin:                    So, it’s hard to change a floor plate of a building, but you can definitely change the layout, but that requires a lot of CapEx and improvement money. I guess the other scenario is you could start going into other types of neighborhoods and having a spillover effect for more space like Brooklyn Heights or even Harlem. Maybe you can go in a little bit about kind of some of the new markets that may be positive beneficiaries in New York City for kind of a change in demand.

Lisa Simonsen:                 Well, I think, I mean, I don’t even think you have to go to Harlem. I think that a lot of the townhouses that have been under the $10 million mark, maybe even around the $5 million mark in the city may see an up spike of their value. So I don’t even think we have to leave the city. And obviously there are areas potentially in Brooklyn that people may be pushing toward, again, getting out of the city. But it may not be Brooklyn, it could also be other places, but again, I don’t think we have to leave the city because there are townhouses under the 5 million mark that have been not so popular over the last few years that may actually, we may see the prices definitely going up and their value and just, again, lifestyle changes.

Ryan Morfin:                    One interesting thing that happened, a dynamic that occurred in your industry is that the governor and the mayor, I guess, shut down the residential brokerage industry for a few days, and then it came back up. Maybe you can talk a little bit about what happened and what the changes were driven by.

Lisa Simonsen:                 Well, I mean, the changes obviously have been driven by everything that’s gone on in terms of COVID. I’m sorry… I don’t quite understand the question.

Ryan Morfin:                    Oh, when the governor shut down the residential brokerage industry for about a week and then it came back online, because I guess they said that finding a home is an essential service. I assume that’s what happened, but I’m wondering if there’s more clarity that you have it shutting down and coming back on.

Lisa Simonsen:                 I think right now there’s movements of all kinds because of that. So they’re scaling up, they’re scaling down. The home second market and home markets are increasing. The suburbs are increasing and obviously there’s going to be opportunities which will arise with tremendous reductions for some quick sales.

Ryan Morfin:                    So are people moving right now? I mean, do you see people moving in and out of apartments and buying and selling right now?

Lisa Simonsen:                 The rental markets are on fire in the city. So I think some people maybe they were going to buy, now they want to rent. And the Hamptons, and all of these sort of, I’d say, anything within three hours of New York city, the rental market has been on fire over the last six weeks.

Ryan Morfin:                    Yeah. I wonder if portion of that is people just moving out of the city for a period of time. I know a lot of friends have gone out to the suburbs to rent houses or apartments, and the Hamptons to get out of the city. Yeah, so I’m wondering then, the market’s open though, it seems that commercial movement has been slowed. Commercial moves, tenants trying to leave.

Lisa Simonsen:                 I mean, obviously all of the new dev is dead right now. No one’s allowed to work. The sites are down. So everything is on complete lockdown for the next period of time.

Ryan Morfin:                    Yeah. And it appears that commercial tenants that want to move out of their buildings are not able to, until I think May 16th in New York state.

Lisa Simonsen:                 Exactly, until further notice. But certainly right now it’s May 16th.

Ryan Morfin:                    Well, it’s interesting. So your industry is, as is ours considered essential services. People need shelter and if they have a lease coming due, they’re going to have to move out or find a new place or buy a new place for that matter. Yeah. Well, that’s very interesting. I think the international component of some of the demand, if you will, I’m wondering if you’re talking to international buyers today, what’s their view? I mean, it may be harder to travel in the next six to 12 months into the city to spend time at their pied-à-terre. Are they buying this just as a place to park some assets and cash… The real estate market is a very secure place in New York City. Are they just putting it as an investment and don’t really use it? Or are they trying to get to the States, in your opinion?

Lisa Simonsen:                 I mean, listen, it’s too soon to decide exactly what all of our foreign buyers and money is going to do. We’re in the midst of it right now. So it’s mostly speculation. But I believe living in New York for several decades, that this is a city, I still have children here. Everyone, New York is resilient. People always want to live here. I’m doing deals right now with people that have children under five years old and they may be trying to secure a better deal, but they have no thoughts of leaving. They’re thinking of the best schools, what schools they can get their children into. And as I said, they may be taking a pause or trying to get a better discount, but they’re certainly not planning on leaving.

Ryan Morfin:                    Yeah. No, it’s definitely one of the global gateway cities we have here in the States. And I do think that’s one of the reasons maybe we saw high outbreak. I mean, so shifting gears to a personal set of questions. I mean, so you’ve been living in the city for the last few decades, and now you’re, you’re sitting here during this pandemic. What’s it been like in New York City for our viewers that aren’t in the Northeast, how have you guys been impacted?

Lisa Simonsen:                 Well, I mean, look, obviously I’d be foolish to say we haven’t been impacted. The city shut down. My family, we’re fortunate, we live across from a park. It’s a quiet area anyway. So if you were to come and visit us, actually, it doesn’t really feel that different. There are people in the park they have masks on, but it’s still very beautiful and serene and quiet. Obviously, when you get into sort of more Midtown and those areas, which I haven’t been into only once, it’s completely quiet and much more surreal feeling. But I do think listening to everyone that this is a period of time, and I am very confident, New Yorkers are resilient. And there is sort of like when taxes came a few months ago, there’s always people that probably were going to leave anyway. My chairman says this, they may go a little quicker.

Lisa Simonsen:                 But then at the same time, as you have people leaving, you’re always going to have people that want to be in New York. And so yes, New York right now is one of the pandemics, been hit very hard with COVID, but it is a period of time. There will be a cure and then there’s going to be, as I said, I think there’ll be, of course there’ll be people that don’t want to be here, but then they’ll be people that want to be here. And they’ll be just a lot of rethinking. So as I said, I think there’s certainly going to be a lot of real estate moves, a lot of opportunity. And a lot of people that probably are going to want to be in single family homes, but not leave New York.

Ryan Morfin:                    Yeah. I know it’s one of those cities that continuously refreshes itself and no doubt at some of the toughest people in the world. So this, this concept of the working rich, right? People who work on Wall Street and hedge fund industry and private equity that all live in Manhattan, are you starting to see any weakness in the labor market there, are you guys concerned about layoffs in the coming months or what’s your view of kind of the consumer of these high end townhouses?

Lisa Simonsen:                 Well, I mean, look, clearly there’s been an incredible impact on everything, from if we think of restaurants and we think of my offices, companies have been shut down. So, I mean, there’s no question that it would be foolish to say that there’s not a concern. However, I think business will come back and I think it’s just going to be a whole new norm. We’re not sure what that will be. Restaurants will be… they probably will not be allowed to have as many people, the tables may be half of what they were. But I think that over a period of time, I mean, obviously there’s been a lot of influx of capital in terms of trying to make sure that there are compensations right now for small business loans and all of the things, all of the surpluses that the governments are working on right now.

Lisa Simonsen:                 But I believe that we will come back and we’ll come back in a strong way and it’s going to be a new norm with obviously some bumps along the way. I mean, listen, some of these things are not that bad. The sort of being cleaner and more observant of germs and all of that type of thing. And the taxis made me that needed to be refreshed anyway, I don’t think… I think that’s probably overall and over a long period of time, not a bad thing.

Ryan Morfin:                    Yeah, no, this great pause has caused us to all kind of reflect on the world that we’re living in, in a good way, I think. I hope. One quick question is, so a lot of the projects that have been going up over the last few years have been really large projects, at least the ones that we hear about that we’re not in the industry day to day. Is there an over supply right now, or do you think supply has been kind of moderated of new product coming into the market?

Lisa Simonsen:                 Yeah, no, that’s a great question. And in fact, what’s going to happen is there’s not going to be any inventory for now several years. So I think that at one point when people were concerned there was a surplus, but there’s not going to be any new construction. So now there’s not going to be an over surplus, at all over the next five years.

Ryan Morfin:                    And is construction still going on? Are some projects still moving? I know-

Lisa Simonsen:                 No, there’s no construction right now. Everything has been halted.

Ryan Morfin:                    Interesting. Yeah. And we’re seeing different pockets around the country. Miami is still working. Dallas is still working. But New York and Chicago have been shutting down a lot of these projects. So that’s going to definitely slow down the delivery dates with all these supplies. I mean, some of the developers you must have relationships with, are they worried about how the banks are going to react on the construction loans? Or what’s the view from a developer standpoint, would you say?

Lisa Simonsen:                 Well, I mean, I think it’s definitely, it’s a time of uncertainty. And I think that the buyers and again, I certainly, I don’t want to call it a silver lining, but perhaps some of the prices were over… Sort of higher than maybe was realistic as they were going up, up and up. And maybe sellers were not realistic. Buyers maybe were trying to… I think, maybe there’s going to have to be a more of a meeting of the minds that can be favorable for everyone to get inventory moving again.

Ryan Morfin:                    And so if I was coming into Manhattan, say next month to go buy a town home, what kind of discount would you say I should be expecting from a price break given where we are today? Is it a 5% discount? 10%? I know each property is different, has different build-out, but what’s a kind of a reset expectation on property prices?

Lisa Simonsen:                 Yeah. That’s a smart question, but unfortunately it’s really a case by case. First of all, I hope you have a good broker when you come to the city, because obviously that’s a critical, but also you need… It depends on the price… Was the house worth 10 million, but it was asking 20, and now they have to… So there’s a lot of variables because sometimes that asking price was never realistic anyway. So a combination. A combination. And it does need to sell. I mean, there’s a lot of variables in that. But, certainly, listen, there’s no question there’s going to be some very, very good deals. In a way probably we won’t see again for a long time.

Ryan Morfin:                    And so, the other half of the question is most people put a mortgage on, were you seeing a lot of cash, all cash deals or did most of them have some type of financing?

Lisa Simonsen:                 I mean, most of my personal deals are usually all cash, but certainly on our team, we do everything. There are mortgages of course, and listen, some very high net worth people that have the cash, would prefer to use their cash in other ways, because the interest rates are so low.

Ryan Morfin:                    Yeah. No, that’s a very interesting comment. I think rates are going to be low for a while. And so hopefully it’ll be an opportunity for people to get in, increase home ownership across the country. I think the mortgage market is getting harder and harder to fulfill new residential purchases, at least in other parts of the country that we talked to. But it’s going to be interesting to see how the residential market bounces back, especially for some of these. And a lot of these larger properties, right, or higher purchase price properties, it’s interesting, because sometimes you run into a dilemma where the person who’s buying doesn’t have a W2, which kind of makes it a harder purchase, doesn’t it?

Lisa Simonsen:                 Well, it depends on your attorney. Yeah. It depends on your team and the creativity of the purchase and the LLC. There’s always loopholes. I mean, a legal loopholes and ways of purchasing.

Ryan Morfin:                    And I know you’re an expert in New York City and maybe Florida as well, I don’t know if you’ve been paying attention to what’s happened in Chicago, but the States changed a lot of the property tax laws. Do you think there’s any risk of that coming to New York, increasing the property tax on overall property in general?

Lisa Simonsen:                 Oh, that’s happened.

Ryan Morfin:                    Oh, so what happened… What happened in the property tax stand point?

Lisa Simonsen:                 Over the last six months the taxes have increased dramatically and there would’ve been an actually a large group of New Yorkers, certainly high net worth that actually moved to Florida for exactly that reason. There have been a significant tax implications.

Ryan Morfin:                    Okay. Got it. Yeah. I know people like Carl Icahn have moved down and other hedge fund folks from New York and New Jersey for that matter. Some large hedge fund folks moved down to Florida, and that’s unfortunate.

Lisa Simonsen:                 Increased. So there’s been… It’s significant.

Ryan Morfin:                    Yeah. And you guys must be… What are your thoughts? I mean, the Amazon headquarters was supposedly coming to Long Island City and it had busted, did that change any of the pricing dynamics in Long Island City? Because that’s a booming area, but it probably could have gone gangbusters had Amazon moved in.

Lisa Simonsen:                 I mean, listen, that was a big hit. I mean, clearly this was going to make a big difference for Long Island City. And I think that the prices, no one knows exactly where they would have been, but obviously they have certainly not increased because of that. I mean, they’re not on the up… the upswing that might’ve happened, but again, with everything with COVID, who knows.

Ryan Morfin:                    And going back to the personal side of questions, have you guys had any difficulties or the last few months on access to food at the grocery stores? Or has it been pretty well stocked up? Or has it been all Amazon deliveries?

Lisa Simonsen:                 Our deliveries, we really haven’t… No, there’s not been any change. I mean, obviously we’re not in restaurants, but certainly in terms of at home and getting access to food, no, there hasn’t been an issue.

Ryan Morfin:                    Fantastic. Well, your outlook, if we had to wrap up here, your outlook is positive. Maybe give us two or three trends that we just start following, you think, from here on out as to get a better beat on the residential market in New York City.

Lisa Simonsen:                 Yeah. I mean, Ryan, I don’t want to act sort of like foolishly up the beat because there’s clearly, there’s a worldwide, global epidemic. However, I do believe that we will come through this. And I also, having three children in New York City, I’m very confident that there’s always going to be a group of people that want to be in New York City. As I already said, I’m working on several deals right now from people that are still moving forward. They actually slightly dropped their offers, but they didn’t pull out, they didn’t pull back. They’re still moving forward. So they want to discount right now, but they still want to live in New York. So I think that’s a great sign of moving forward. And I do believe that New York is resilient. There’s going to be obviously, this will pass. And I think it’s going to be a new norm.

Lisa Simonsen:                 And so buildings like everything else in fashion, what was in perhaps two years ago is not now. So I think we should really look for the next trend. I would put my money on town homes. I’ve always thought they were undervalued. And I think there’s going to be a lot of people that are not going to want to be in the buildings. All those things that have been popular and sort of very glamorous for the last few years, these huge amenities and playrooms and gyms and saunas and swimming pools, there’s going to be a group of people that are going to say, “No, I’m not interested in that. I want a private house.” And that same group that could afford the condominiums, there are a lot of “affordable” homes in New York City, that would be the same price as a condo where you can have your privacy and have your kind of… We’re designing something right now, have it your sort of germ free room, instead of your mudroom, you used to come in with the dog and [inaudible 00:23:29]. Pardon me?

Ryan Morfin:                    Yeah, I’m laughing. Yep, I know exactly. That’s an interesting insight. Yeah.

Lisa Simonsen:                 The thing with the mudroom, which is how I’ve sold townhouses, “Oh, this is where your dog and the nanny and the kids come in.” Guess what, that’s going now, we’re going to design that, that’s your COVID room. So you come in, you drop your clothes, take a shower and go in. So we’re going to redesign houses and have… those are the steps going forward I see. And I do feel optimistic. It’s just going to be different. So instead of me going and selling something and saying, “This has the biggest playroom in the city,” I might say, “This is a private townhouse and I have your COVID room. So instead of your mudroom, this is where everyone can come in and get ready to come into the property.”

Ryan Morfin:                    No doubt. And UV lights, UV closets, like the hospitals are using to disinfect clothes and quality of air filters, things like that are going to be critical. Is it HVAC or PTAC, and things like that.

Lisa Simonsen:                 Isn’t that great? I was always a germaphobe anyway. So for me, I’m like, I lover it. I think it’s… And again, I don’t want to make light of it, for me, all of that, I like anyway. Prior anyway, but this is just, wow. Now we have this… It all sounds great.

Ryan Morfin:                    Well, from one germaphobe to another, thank you for joining us. And no doubt the city that never sleeps is still one of the best cities in the world. And of course, it’s going to bounce back. So Lisa, thank you so much for joining us and we appreciate your time.

Lisa Simonsen:                 Okay, great. Thank you so much, Ryan. Thanks.

Ryan Morfin:                    Thanks for listening to Non-Beta Alpha. And before we go, please remember to subscribe and leave us a review on Apple podcasts or our YouTube channel. This is Non-Beta Alpha, and now you know.

Ryan Morfin:                    (singing)

 

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Ryan Morfin: Welcome to Non-Beta Alpha. I'm Ryan Morfin. On today's episode, we have Pini Althaus, CEO of USA Rare Earth, talking to us about the supply chain glut in rare earth minerals. This is Non-Beta Alpha.

Ryan MorfinPini, Welcome to the show. Thank you for coming on today.

Pini AlthausThank you for having me, Ryan. Good to be here.

Ryan Morfin: So you're an investor and a miner in rare earth minerals. Can you share with our listener base, what are rare earth minerals? Why are they important and why is there a geopolitical race going on globally?

Pini AlthausYeah, I mean, rare earths are an extremely ubiquitous part of all advanced manufacturing or technology manufacturing today's day and age. Several years ago, I had not heard too much about rare earths myself. I was not that familiar with it and being involved in this sector, in this company, for the past few years has given me an education of course. And I mean, I was sad to hear that 50% of all imports into the United States contain are earth elements and it runs the gamut from consumer electronic devices that we use every day. Our cell phones, our laptops, most communication devices, medical equipment. So there's a tie with COVID, which we can touch on at your discretion. Electric vehicles, defense equipment. So pretty much anything or everything high tech today has a rare earth element or critical minerals contained within them.

Ryan MorfinAnd what are some of the names of some of the more important rare earth? I know there's lithium for batteries, but what else is considered in this category, critical?

Pini Althaus: Yeah, so lithium is a separate category to battery material. The rare earths are 17 rare earths. The four, let's call it, key rare earths that we're focused on at our company, the four rare earths that go into the permanent magnets. And these are the magnets that are found, there are a number of them in your back of your cell phone or an iPad. But if you look at an F35 striker jet, you've got about a ton of rare earth magnets in those. And we've got two heavy rare earths and two light rare earths is part of the permanent magnets. You've got dysprosium, ytterbium are the heavies, and then you've got neodymium, praseodymium as the two light rare earths. So those would be key rare earths that are the focus.

Ryan MorfinAnd you use these in, I guess, in military applications as well, but historically, where has the United States sourced the rare earth for supply chain?

Pini AlthausYeah. And that's the shocking part. We've been securing those materials from China. So China controls the rare earth sector and has done so for the past 30 years or so. And it was a significant misstep on the part of the United States, allowing China to have this control. And actually this wasn't a question of China coming in and doing anything nefarious as far as stealing IP or anything. The US government made a conscious decision about 30 years ago to allow China to come to the United States and acquire the processing capabilities for rare earths. So just as part of some background, you've got the rare earth materials containing various mining projects, but once you extract them, you have to then process them and they go through certain phases before they get to the magnet phase. And China, the thought process was let China do the mining, let China do the processing.

Pini AlthausWe don't need to do that here. And we'll buy the materials from China cheaply and the premier of China at the time, Deng Xiaoping made the comment, he said, "The Middle East has oil. China has rare earths." And unfortunately we weren't smart enough to understand what he was saying. And the Chinese understood that the future of manufacturing is going to revolve around control of the rare earth and critical mineral supply chain. So if you think about it today, Ryan, we cannot build... Forget about consumer electronics and medical equipment. We cannot build the equipment that the US Pentagon or the US armed forces require, whether it's F35 fighter jet, Tomahawk cruise missile, communications equipment, without going to China and obtaining those materials. And it's obvious to all that this should be extremely alarming. We've seen China use this as a weapon, if you will, as far as how it interacts with other countries back in 2010, when there was a dispute between China and Japan on the East China Sea.

Pini AlthausSo China cut off rare earth exports from Japan for 40 days. Japan obviously being a significant user of rare earth elements for their high-tech manufacturing sector, that was stopped after 40 days. But in fact, it was President Obama that first made the United States aware of this, formed a division within the Department of Defense to handle this issue, but not much has happened. And we continue to be relying on China for these materials. And what has been made about trade war with China and whether the trade war is really the impetus for China withholding rare earth exports. And that is a huge misnomer. Whilst China had been talking or implying that they would cut off rare earth exports, the truth of the matter is that China, under it's made in China, 2025 mandate, its belt and road initiatives and others. And you seem to control the critical minerals and rare earth supply chain so that it can continue its dominance as a manufacturer or a global supplier of these materials and finished products.

Pini Althaus: It's the backbone of its economy. And in fact, China has become a net importer of rare earths from different countries like Miramar and others. So with that, they are decreasing the exports to countries like the United States, Japan and others.

Ryan Morfin: And was it ever a risk that the Chinese were going to turn off the exports of rare earth to the US during the trade war? How close were we to that? And was that ever some saber rattling that went down during trade negotiations?

Pini AlthausYeah, I think it was saber rattling. I think it would be paramount to an act of war. I can't say with any authority that that would not happen, but it would be probably, aside from war itself, it would be one of the most significant acts of war cutting the United States off from the ability to procure rare earths. But that being said, I mean, if you look at, as an analogy, the oil and gas sector and the reliance of the United States had for many, many years on OPEC countries to supply us with the oil. And we had embargoes and we had price manipulation by OPEC. This is far more significant given the ubiquity of where these rare earths go. And yes, we're always under the threat that China can cut off exports under the guise of a trade war or for any other nefarious reasons.

Pini AlthausBut I think even more importantly, to just as the natural run of the course of things with regards to their business and their desire to maintain themselves as the global leader in manufacturing and exporting of goods, China is in a position now where it actually requires these materials for their own domestic consumption and can legitimately cut off rare earth exports by stating that they need it for manufacturing and that would actually be somewhat correct. So we're in an extremely dangerous position here with this reliance on China. And it wouldn't just be China. If it was another country, it would be similar issues, not to the same extent, but reliance on one country for these materials is dangerous.

Ryan Morfin: And it's been mentioned in the past that in 2010, China flooded the market to really kill all the competitors in the rare earth mining industry. Where was the World Trade Organization during this period? And how did that play out and how does that set the chess board for China to run the tables?

Pini Althaus:

Yeah. So the WTO stepped in when China cut off rare earth exports from Japan, I think it lasted for about 40 days because the US and Japan protested the WTO, and they stepped in and China resumed exports. While I'm not an expert on these trade matters, one thing that I am aware of is that one of the reasons why China had to resume the export of rare earths was it did not legitimately need all the rare earths for domestic consumption. So therefore it was a nefarious act, if you will, to cut off rare earth exports. Now that has changed, which means China have to cut off rare earth exports today, they have a legitimate case to say that they require these materials. There's a shortage of these materials and they require them for their own domestic purposes. It is the backbone of their economy and there's very little we could do about this today, which is why it's becoming an even more urgent issue.

Ryan Morfin:

And the US government started stockpiling some of these after that incident. Can you talk a little bit about what DOD and DOE has done to start making sure that there's not a critical supply shortage going forward, and is it enough?

Pini Althaus:

Yeah, again, there is a national defense stock pile, and there are materials still that the United States needs to procure in order to shore up its stockpile. There are magnets, the finished magnet products as well, the United States government needs to stockpile. Again, there's a limited amount that the United States government has. It requires approval from Congress, whether it's in the NDAA or other approvals from Congress, to allocate monies for the national defense stock pile of these materials. That being said, there's no endless supply of these materials. And unfortunately, the apparatus, the way it's set up right now with the US government, it's going to continue to require having a secure supply chain of those materials for many, many years to come. So it's not a question of stockpiling for 10 or 20 years, and then this complacency and saying, we'll kick the can down the road. But keep in mind as well, Ryan, that US government accounts for low single digits of overall rare earth imports into the United States.

Pini Althaus:

We're talking about defense contractors, we're talking about the manufacturing sector. The direct impact this has on the economy, jobs, the automotive sector, and others is significant. So it's not just limited to the United States government. If you look at over the past couple of weeks, the sanctions that China have put on Raytheon, Boeing, Lockheed, et cetera. I mean, the question is where are they going to get those materials? And if we go beyond that, you need rare earths for the 5G network. Now that Huawei has been banned from installing the network, not only in the US but other countries, we have to have the ability to get a secure supply of these materials as well. Which currently, again, trying to control the hundred percent. So it runs across the board, both for government, defense and manufacturing in this country.

Ryan Morfin:

Well, and so help me paint a picture for our audience. Does China have all the mines for rare earth, or they're the only ones who started mining it? Or are their mines globally dispersed and nobody's been doing the actual infrastructure to do the mining?

Pini Althaus:

Yeah. So finding rare earth projects or rare earth elements is not the difficult part. It's finding them in significant quantities that makes a project economically viable. And part of that consideration are the environmental rigors that companies in the West have to adhere to. And China, even by their own admission, have had a complete disregard for mining these materials and even for processing these materials. And in fact, just the last week or so, the BBC did an expose on this, 60 Minutes has done an expose on this. But the Chinese have not denied this and have talked about cleaning up their act, but it has an effect on the bottom line for what the costs of mining and processing are if you have no environmental standards to adhere to. So China have exploited those rare earth projects they have, primarily in inner Mongolia, and have brought a number of projects online and quite quickly, and in a significant way, with a complete disregard for the environment.

Pini Althaus:

So it was seen as an environmental no-no in the West for many years. Now, what's happened over the past few years is you're starting to see rare earth projects in different parts of the world sprout up. You've got the Mountain World project in Australia owned by Linus, which is a producer of Nd and Pr, neodymium and praseodymium. So two of the light rare earths. They may have some heavy rare earths coming online at some point in time. And you've got Arafura, which is another company in Australia that we're working with to assist them with their processing so they don't have to send the materials to China for processing. But really these are a drop in the bucket for what the requirements are for the United States. And certainly what the requirements are for allied countries, the EU, et cetera. So there is a race, if you will, worldwide to start bringing projects online. The Chinese are very active in trying to secure assets outside of China.

Pini Althaus:

So in Africa. They have ownership of a project in Greenland. So there is somewhat of a race. The Australian government has stepped in and has started limiting the ability for China to own, or have ownership in, or off takes for the Australian rare earth projects. And that's part of the strategic Alliance between Australia and the US. Canada, similar thing as well. There are a number of projects that are looking to come alive, but these projects are, for the most part, will take many, many years to come online. We have to expedite the process. We have to assist with a [inaudible 00:14:41] supply chain and the domestic rare earth sector, because previously investors have been scared off by things like China flooding the market, which is not a possibility at this point in time, given that China can't actually afford to flood the market. They are already very heavily subsidizing their mine to magnet supply chain there.

Pini Althaus:

This is more now a case of being able to get production from non-Chinese sources so that the United States and allies have a viable, secure supply chain of these materials. And it's a concern worldwide. We speak to governments all over the world, and we're all facing the same issue. Some more than others, especially countries like Japan, that don't have their own rare earth projects there and are reliant on Australia where they've made some investments there. And in the United States, they've made an investment recently in Africa. So there is this race, if you will. And I think we've got a five-year window here to at least stand up a few projects worldwide. Otherwise we've lost this race and we will be dependent on China for many, many years to come. And Ryan, it's a bit of a hypocrisy. If you look at it where you've got materials going through clean, green energy applications, like electric vehicles, wind turbines, et cetera.

Pini Althaus:

That we're sourcing these materials from China, where they've, again by their own admission, has been complete environmental devastation to water bodies around these mines and processing facilities, to the communities. People have been getting sick around these projects yet we're putting these materials into our electric vehicles or wind turbines. It makes no sense at all. And people are starting to wake up to this. And that's why the sector is starting to see a lot of support come out of Congress and bi-partisan support. And in fact, it's one of the only bi-partisan issues right now in Washington. And it's good to see that some things decided to move in the right direction.

Ryan Morfin:

And is there a special process? You talk about the expense, is it really difficult to mine these? You have to go through a special chemical process to extract and clean and purify. Is it a lot harder than, say, gold or silver or some of the other, we'll call, more traditional elements?

Pini Althaus:

Yeah. It's all about the processing to some extent. So if you look at MP Materials in California, which used to be Molycorp before they went through their bankruptcy. They are a miner of Cerium and Lanthanum, which are two of the light rare earths, the lower valued light rare earths. Given that they do not currently have processing technology, they are sending those materials to China for processing where China is tariffing those heavily. Linus is also, they're doing their processing work in Malaysia and elsewhere. So it's really about the processing at this stage. One of the things that we've done, after we put out our PDA last year with our upgraded resource, which now includes a significant amount of lithium. We make a decision that, based on the test work that we had done around our processing methodology, that we were not going to send our materials to China. That it's paramount for us to do this work in the United States and in a collaborative effort as well.

Pini Althaus:

We've been asked by some of our investors, "Well, why would you be looking to help other projects with their processing?" And the answer is simple. There's no one project or one company that's going to put China out of business or make a dent, or somehow be able to take care of the overall demand worldwide for rare earths and critical minerals. And it's very important for us to have processing capability in the West. So that was the impetus for us opening up our own rare earth and critical minerals processing facility earlier this year, which we did in Wheatridge, Colorado. And in fact, we've made some significant progress on the method that we're using for this. And we're starting to collaborate with Australian companies, Canadian companies. We're currently talking to a group over in Europe as well, because this has to be a collaborative effort.

Ryan Morfin:

How does Europe solve for these problems? Do they have this better under control than the US?

Pini Althaus:

No, they're in a far worse position than we are. The EU commission recently put out a report, I think, a couple of months ago that the requirement for rare earths is going to increase tenfold within a short period of time. Lithium 18 times. They don't really have rare earth projects. Again, there are the Greenland projects, which people have heard in the news recently. Those need to further development work so they don't have rare earth projects ready to come online there. There are a couple of lithium projects that are spread around Europe, but for the most part, Europe is in an even more precarious position. If you look at Germany with the auto manufacturers, you look at the big companies like ThyssenKrupp and others, all these countries and companies are looking for alternatives to China, because we've already seen in the news about China withholding or reducing exports of some of these rare earths that are required for these industries.

Ryan Morfin:

And you mentioned earlier the regulatory posture of the US makes it difficult to mine. Is it becoming a more bi-partisan issue that we need to maybe relax some regulation around the mining exercise, to incentivize private sector to come in and start producing this? Or is the Republican party versus the Democratic party on two separate pages of music?

Pini Althaus:

Yeah. Good question, Ryan. I mean traditionally the Republican party is obviously being more pro-mining and in favor of less regulation when it comes to these things. With regards to our project, we're on Texas state land. So we don't trigger federal environmental permitting at this point in time. And obviously Texas being Texas, a mining state and oil and gas state, things are a lot easier in Texas than they are on projects on federal land where the Bureau of Land Management controls the environmental process around that. But the thing is here, and I don't want to step into what other companies are doing, et cetera, but we do need to be reasonable about allowing projects to come online if they're adhering to environmental standards that are acceptable worldwide. And what we do know, is that China is destroying the environment and cities and water bodies around their mines and processing facilities.

Pini Althaus:

We have standards here in the United States, and I think what we need to do is make it easier for companies to mine, while at the same time protecting the environment. And there are ways to do that. And we're definitely seeing buy-in from Congress, from both sides, with regards to looking how we can stand up a secure supply chain. And, obviously under the Obama administration, they had very strict regulations when it comes to mining. And that's changed under the Trump administration. Hopefully what we start to see is some normal middle ground that'll allow other projects to come online.

Ryan Morfin:

And typically in these rare earth mines, is it amalgamation of different minerals that are all consolidated together and you have to separate them out? Or do you ever find pure play, Europium, I can't even pronounce some of these. Gadolinium, Cerium. I mean, are they all mixed together and you've got to filter and sift them through, or are they pure play mines?

Pini Althaus:

No, they're generally they have a mix. So they're polymetallic projects. They have a number of different materials. Some projects, you more to what we call the light rare earths like MP in California or Linus in Australia. Our project is actually on the opposite end of the spectrum. We have a very high concentration of heavy rare earths. That being said, we do have to go through a process of separating these materials. But the case of our project where we've got 30 materials. We're not going to produce 30 materials. We're not going to market 30 materials. So what we're doing is we're focusing on the key materials that are marketable, that we need for permanent magnets, lithium as well, and working on the separation and the optimization of those materials in particular. But we're all faced with the same processing challenges and that is something that can't be set.

Pini Althaus:

There's no easy way to do this. There are different technologies that have been used in different parts of the world. So predominantly there's a process called solvent extraction, but it's big, it's bulky, it's not benign. It's a bespoke solution for one particular project. So it doesn't work for feedstock from other projects. What we've done is we're using a processing technology that's actually been around since the 1940s. It was part of the Manhattan Project. It's called continuous ion exchange. In fact, the Chinese use it to increase the purities from 99.99 to four nines, five nines, and even six nines. So for some applications you require higher purity levels. It's a far easier processing method to scale up and to take feedstock from other projects. In fact, we've demonstrated for the Department of Energy that we can take coal waste from Pennsylvania and do high purity separation of rare earths using our processing methods. So it's not a step that can be skipped unless one needs to send it to China for processing, which is not going to help us with our objectives here.

Ryan Morfin:

How many other, we'll call it, going concerns on any other businesses that are doing this, that are trying to, I guess, start the development of these mines. Are you guys one of a few or are you one of many? And is it an international or just a US game? Who's leading the charge at going after this?

Pini Althaus:

Yeah, well, I'd say the Australians are leading it outside of China right now. You've got some really good projects in Australia. Again, more skewed toward the light rare earths. There's one more heavy rare earth project in Australia, which is not yet producing. The United States, you've got MP Materials, you've got Ucore in Alaska, you've got the Bear Lodge project in Wyoming, which is also another light rare earth project. So as far as a heavy rare earth project that looks like it will come online in the near term, that would be our project. In Canada there are a couple of projects there as well, and again, more skewed toward the light rare earths. But we really need to get as many of these projects online as possible. Because again, I don't see it as competition. We all have a problem doing supply agreements or offtake agreements for our materials.

Pini Althaus:

In fact, one of the things that we're going to have to consider is looking at potentially scaling up our production, based on the demand that we're already starting to see. And I think other companies would find that as well. So it's all about the economics of the project. You have projects that were economically viable back in 2012 or rare earth prices with 35% or so higher than they are today, and are not necessarily viable today. So that's the challenge as well, economically viable projects. And we've got to get as many of them online as possible. It takes many, many years. I mean, our project has had over $70 million put into it to get to where we are today, and we're close to getting to the production scenario. It all revolves around processing at this point in time.

Pini Althaus:

We'd be very happy to see another couple of projects come online, because this is extremely important for national security and for the economy as well. I mean, if you think about it, Ryan, if you've got a billion dollars of rare earth materials, that translates into a trillion dollars or I should say trillions of dollars of finished product. So you've got a magnet in your phone there that's worth a couple of dollars and the cell phone's a thousand dollars. And electric vehicles and defense applications even more.

Ryan Morfin:

Yeah, everyone has one of these iPhones now, and there's tremendous amounts of rare earth on the circuit boards here. And I think people take it for granted that that supply chain is not secure right now. So one question for you, there's talk of this maybe medium term to longterm, but there's talk about mining in space. Do you think that's a feasible option in the longterm, medium term? What are your thoughts on that?

Pini Althaus:

No, that's just ridiculous. I mean, we're trying to find ways to make mining on earth economically viable. I think the cost of going up to space would be more than what our capex will be bringing our entire project into production. I mean, we've got about a 350 to $400 million capex to bring 130 year mine life into production. I'm not an aerospace expert, but I think sending a rocket, building a rocket ship and sending it up, I think maybe on the fuel alone, you could bring a couple of projects into production. So unless we have a fortunate situation or an asteroid lands on earth, and fortunate if it lands somewhere where we don't care, I don't see how that happens. And if it's big enough, it's a problem as well. It's nonsense. And even, options aside of the deep sea mining for rare earths, I mean, you've got all sorts of environmental issues around that as well. I think we need to look at projects that we can bring online, that can be done so in an economic way, that can be done so in an environmentally responsible way.

Pini Althaus:

I mean, one of the things that we've done at our project is we've got in excess of 60% of the materials that have come out around top, will have a clean green energy applicability to them. So we're using the benign processing method. We're going to be using renewable energy on site. In fact, we will likely be putting a solar farm on site as well. We've talked to a couple of companies that have approached us about that, and we'll be a net producer of power for the surrounding area. So there are ways to do it which don't affect the environment. Obviously if there's a project that's situated on a sensitive area, that's a unique situation for that specific project. We've seen it with the Pebble project, which is not a rare earth project. The Pebble project in Alaska where their environmental concerns is we've been recognized by both Republicans and Democrats, but we have to be reasonable about the projects that don't have environmental concerns.

Ryan Morfin:

So Pini, in season two, we ask all of our guests a series of six questions. They're usually, yes, no questions, but trying to take a survey of our conversations. And if you want to add a little context to the yes or no, feel free, but here goes the first question. If there was a COVID vaccine available today, would you take it?

Pini Althaus:

Yes.

Ryan Morfin:

Who do you think is going to win the election?

Pini Althaus:

Which election?

Ryan Morfin:

The US election.

Pini Althaus:

Well, I think it looks like Joe Biden's going to win it, but I think what happens, if we go past January six from my understanding is that the house will vote on it and it's one vote per state. But I don't know if I see it getting there at this point in time. I really don't have a crystal ball.

Ryan Morfin:

Third question. What type of economic recovery are we in? What type of shape is it taking? A V-shape, W, U, L?

Pini Althaus:

Yeah, I think 2021 is going to be challenging. I think we've been, and rightly so. I mean, we've had no choice as of almost every other country. We've been printing money for the past year because of COVID. And I think we've got to brace ourselves that, at some point in time, the chickens come home to roost. It was a necessary step. People needed it on an individual level. Businesses needed it as well, but I think we've got to do whatever we can to stimulate the economy, give people confidence to go out and work again, employ people. So I think we've got to watch ourselves, especially in 2021. And I have some concerns, but long-term, I think the approach in the United States is a healthy one.

Ryan Morfin:

During lockdown this summer and quarantine, was there anything in particular that you accomplished that you're particularly proud of?

Pini Althaus:

Yeah. A great amount of family time, which, if you would've asked me a few years ago if I could sit at home and be at home for six months, I would have told you absolutely not. I wouldn't be able to do it for six days, but it has... I'm sure it's done this with a lot of families as well. It's brought families together. We had a baby actually last year on Thanksgiving. So I was doing a lot of travel at the time and thought I wouldn't get to see my daughter in her first year or couple of years too often. And being home with her every day is actually been just the most amazing experience. So thankful at least for some silver lining in COVID.

Ryan Morfin:

Are there any silver linings that you see in the economy going into 2021?

Pini Althaus:

Yeah, I think we've gone through an absolute beating and it looks like we've got the ability to come out of it. And I think that's a testament to how strong the economy was built up in the years preceding COVID. So overall I remain an optimist. I mean, we are a country built on opportunity and going out and making it happen. And we're not a socialist country sitting and waiting for people to send us paychecks or wealth distribution or anything like that. I think the American dream still lives on. I think if you go out and you're willing to work and put your head to it and heart in it, I think we do have the ability to climb out of it. So if we look at what the economy is doing over the past few weeks, it looks like it's starting to rebound. And to me, that's assuring because it could go completely one way as well.

Ryan Morfin:

And the last question is, is there anything that you're watching, or listening to, or reading today that has been impactful on your thinking that you'd like to share with our audience?

Pini Althaus:

Yeah, that's a good question. I think it's been more personal stories. The news, I sort of take that in context or with more than a grain of salt. In some cases stay off the news channels for a number of days at a time, it became quite repetitive. But I think on the personal side, talking to friends, my family's all back home in Australia, they've just come out of 110 day lockdown, which we can't relate to that. It's been very trying on them and seeing the fortitude that they've had to come out of that and stay intact. I think the mental health issues that will come out of COVID are going to have a far longer effect than the economic issues. I think we're going to have to focus on mental health issues in this country for a long time to come.

Pini Althaus:

The impact on kids has been significant with regards to lockdown or remote schooling, et cetera. But to see people come through it. I think it's a testament to people in general and to the country and other countries as well, to see got that fortitude and survival instinct to try to get through whatever adversity we can. So hearing the personal stories, the challenges that people have gone through, I think it's made me a lot more aware of things that I have to be thankful for and where we can help out other people as well. I think we have to be united going forward because there are things...

Pini Althaus:

I think one of the things that COVID has shown us is we can get into this complacency and life goes on and we go one day to the next. And all of a sudden we get hit by something that affects everybody equally. I mean, COVID, whilst there were groups of people, whether it was the elderly or people with underlying health conditions, that got hit the worst. I mean, we all got hit in some form or another. So really, this should be something that unites us, not divides us.

Ryan Morfin:

Well, Pini, I appreciate you coming on today to talk to us a little bit about the supply chain crimp on rare earth and we'll definitely keep an eye on it and would love to have you back in the future.

Pini Althaus:

Thank you, Ryan. Thanks for having me.

Ryan Morfin:

Absolutely. Thank you. Bye-bye. Thanks for watching Non-Beta Alpha. And before we go, please remember to like, and subscribe on Apple podcasts and our YouTube channel. This is Non-Beta Alpha, and now you know.

 

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