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“Computers are useless. They can only give you answers.” – Pablo Picasso

july 2018 monthly letter 1Happy 4th of July to all! Boy when our founders signed the constitution do you think they could have imagined where we are at now? Of course, life changes and evolves. Who would have thought that the mechanical pencil company, “Sharp” would now be a giant electronic and TV manufacturer? Who would have thought that an online book seller (Amazon) would become the dominant retailer they are? What can we expect in the future from the like of Uber, Google, and Facebook. A few clues to ponder – Walmart Stores has dropped “stores” from it name. Microsoft has added AI (artificial intelligence) to its name and Google has dropped “don’t be evil” from its long-time motto (and the first thing they did is lie and say the didn’t change it. – Gizmodo 5/18/18).

The heck with “Fake News,” it looks like we might be moving forward in a “post truth” world. According to the infamously secretive Bilderberg elite (about 120-150 of the worlds political elite, industry, finance, academia and media), the most pressing issues in global affairs are:

  1. Populism in Europe
  2. The inequality challenge
  3. The future of work
  4. Artificial intelligence
  5. The U.S. before midterms
  6. Free trade
  7. S. world leadership
  8. Russia
  9. Quantum computing
  10. Saudi Arabia and Iran
  11. The “post-truth” world
  12. Current events

Well since I said I was going to write about it last month and seeing the Bilderberg elite list has it at #4, I guess it is important to address Artificial Intelligence (AI). Most of us grew up hearing that jobs will be replaced by robots. Well that time is here, and it is going to affect our jobs, our real estate and our bank accounts. Forty-seven percent of U.S. jobs could be automated in the next two decades. There is an 83% chance that workers earning less than $20/hour will have their jobs replaced in the next 5 years. Those in the $40/hour range face a 31% chance of having their jobs taken over by machine. Clearly, robots are coming!

Imagine what it might look like to a commercial real estate broker. You go to a website and type in your size, space requirements and financial and location parameters. Moments later a recommendation list and map are produced along with a virtual tour of each site. Market intelligence tells you what terms and incentives to expect (free rent, cpi, cap, etc.), you put in your bid along with an upload of your financial info, credit check and an intelligent assistant checks out your Linkedin and Facebook profile, Uber ride history and determines you have only a 2% chance of not fulfilling your obligation. It also determines that your business should grow to need more space in 3 years, but the space next door will be expiring then. It asks if you would like to pay now for an option or “buy it now” to lock in the space. You are asked if you need insurance, utilities transferred to your name, movers arranged. With all of the boxes checked, you summon your driverless Uber to take you to the golf course for some exercise.

Adapting to change is going to require us to understand how man-machine partnerships are going to evolve. HUMAN + MACHINE = FUSION SKILLS (or in Star Trek – Cyborg!). I like the quote, “AI – use it or be used by it.” If you would like an in-depth dive into the effects AI will have on commercial real estate, I highly recommend the following YouTube video.

July 2018 Monthly Letter

If you don’t have time, here are the 17 real estate work flows in the crosshairs of AI;

  • Investment strategy
  • Customer segmentation
  • Portfolio construction
  • Customer chum prediction
  • Risk management
  • Content personalization
  • Client services
  • Customer experience
  • Asset Monitoring
  • Price optimization
  • Discovery & due diligence
  • Infrastructure optimization
  • Compliance
  • Demand optimization
  • Predictive maintenance
  • Security
·         Asset performance

On average, it costs about $60,000 to replace a departing employee. Furthermore, it takes 3-6 months to get a new employee up to speed. Knowledge transfer of a departing employee is a difficult and typically not well documented process. How do you transfer experience, context and interpersonal relationships? I used to say, “I wish I could clone myself” so I could get twice as much done. Businesses are now looking at ways to use AI to clone you so as to retain a departing employee’s knowledge and experience and allow a new employee to come up to speed almost instantly (or completely replace said employee!). If you don’t think that’s realistic (and if you need an AI friend), check out Replika in the app store. You can upload text messages, social media posts and create you own chat bot who will text with you any time and not judge – plus your chat bot can stay around after you die and text with your friends and family…hmmm…

On the National front, I continue to worry a bit about the yield curve and the message it is sending (It is about where it was in 2007). Locally, inventory is continuing to absorb, new buyers are upgrading old buildings, rents are rising. I also notice more construction cranes in the sky (usually a sign of prosperity).

Well as real estate values rise, and you enjoy family pictures around the barbeque this 4th, just remember some things change, some things evolve but if you don’t want to pay an arm and a leg we’re here to help you with your real estate needs. Hope you enjoy the story…

 


In George Washington’s days, there were not cameras. One’s image was either sculpted or painted. Some paintings of George Washington showed him standing behind a desk with one arm behind his back while others showed both legs and both arms. Prices charged by painters were not based on how many people were to be painted, but by how many limbs were to be painted. Arms and legs are “limbs,” therefore painting them would cost the buyer more. Hence the expression, ‘Okay, but it’ll cost you an arm and a leg.’ (Artists know hands and arms are more difficult to paint).

 

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It seems that Jeff Bezos has experienced the same problem as many Amazon customers with having Echo ordering inappropriately:

Scene: Amazon’s Jeff Bezos’ trendy home earlier this month. He’s talking to his Echo.
Bezos: “Find me something to buy at Whole Foods.”
Echo: “Okay, buying Whole Foods.”

Bezos: “Oops.”

Amazon is killing a lot of businesses. In the process, it may also be killing inflation – they are squeezing prices of everything through their automation and efficiencies. Both factors that are bound to hurt commercial real estate. Although all of the focus this month has been on the Whole Foods purchase (never mind that Whole Foods has less than 3% of the grocery market), I think the breaking news was the roll out of Amazon Prime Wardrobe. Here the online retailer attacks the biggest problems of buying clothes; (1) the time it takes to shop, (2) the hassle of finding the right size, (3) returning stuff you don’t want (comes with pre-labeled return but you get a discount if you keep it all).
As we enter the second half of the year, I would like to take an assessment of where we stand and share some interesting data that I am seeing. First, I will tell you that we continue to be busy and are not experiencing any slowdown. Interest rate bumps have not affected most of our day to day investor/buyers. However, the think tanks and big data are pointing to a “slow-motion slow-down.” Low unemployment is generally good for commercial real estate (more workers – more space).
However, too low makes it tough to expand without a pool of workers. Slowing job growth may be the catalyst for the slowdown. E-commerce will continue to bring retail to its knees. Interest rates will continue to tick up which will put upward pressure on cap rates (and lower prices). With cap rates at record lows (I saw a 3.5% cap on a property in NYC!) it is hard to believe that there is much room for commercial real estate prices to run.
A couple of charts below help to illustrate my concerns.
commercial property price index
total deal volume by sector

(PRNewsfoto/Ten-X)

consumer board consumer confidence index

If you really like charts, numbers and big data then you will really enjoy the Cycle Monitor by Dividend Capital Research and Glenn Mueller, PHD.

While recessions are inevitable, it will not be anywhere near the disaster of 2008 (and we probably won’t start seeing the “slow-motion, slow-down” until 2018). Rather we will more likely see a prolonged flat period. The recession of 2007-2009 was the closest thing to the great depression. My guess is the next recession will be more modest. Commercial real estate has nowhere near the excesses that were built up in the mid 2000’s. In the meantime, low unemployment, low cap rates, low vacancy rates, head down, work hard and enjoy the ride. Hope you enjoy the story…
Jeff Bezo’s Email to Employees on Amazon’s Purchase of Whole Foods
by Ryan Garcia
Team;
Today is a significant milestone in the evolution of the Amazon brand. Our offer to purchase Whole Foods will finally consolidate the largest online and off-line retailers where consumers end up spending way more than they intended. I actually didn’t even mean to buy Whole Foods but after downing a few too many boilermakers at the Echo mixer last night, I accidentally clicked BUY IT NOW instead of just putting the grocery chain in my cart for future consideration.
Oh well, you know what they say-you can’t log off Amazon without spending $13.7 billion. So true!
Further details about the merger will be forthcoming, but I wanted to call out a few major points before we have to go silent and get this approved by regulators.
  • Our corporate cultures or perfectly aligned. The New York Times revealed that every Amazon employee has cried at their desk, and I personally made a Whole Foods employee cry when they couldn’t correctly identify their process for ensuring single-source coffee beans throughout the roasting process. It was an uncomfortable 38 minutes for both of us, but I think an experience so many of you can relate to.
  • Improved Echo functionality. Whole Foods has maintained a laser-like focus on organic foods and sustainable facilities and I’m excited to bring that same vision to Echo. Starting next week, when customers ask their Echo to order non-organic food products that receive a 12-minute lecture on the benefits of organic and local source products while our top-notch product matching software will send them the closest available organic item. Users on our website will find the “Customers Also Bought…” section replacing unhealthy items with notes such as, “Cookies That Went Straight to Their Thighs” and “Beef Produced By Clearcutting Rain Forest.” Needless to say, those products will not be available for purchase.
  • Drone changes. All Amazon drone teams will immediately switch to bio-fuels rather than battery packs.
  • Senior leadership. Once the acquisition is complete, John Mackey will take a new position as financial analyst and social media community outreach for the Washington Post. Synergy!
  • Location changes. Since Whole Foods is headquartered in Austin, Texas, I’ve asked EM to build the first hyperloop route between our offices here in Seattle and the Blue Bubble of Texas. All Amazon/Whole Foods employees Will office in Austin for the one week of good weather they have in late February, and in Seattle for the one week of sunshine we have an August (or May… or October… or whenever). The remaining 50 weeks of the year are up to you. Because I believe all Amazon employees should be free to cry at their desk no matter where that desk is located.
  • Product expansions. Amazon will soon carry all of the 365-branded products Whole Foods has developed in all Whole Foods stores we’ll be adding aisles for garden equipment, household electronics, sportswear, handbags, pet supplies, golf clubs, video games, plumbing supplies, luggage, headphones, and climbing gear. To start.
  • Cruelty free. We will be adopting Whole Foods policy of only purchasing products that are certified cruelty free. Please note this does not apply to any software we developed ourselves.
I am beyond excited by the possibilities of this merger moving forward and I hope the team feels the same. The combination of our two companies will account for over 85% of all hipster purchases in the United States. I’m looking forward to capturing the remaining 15%.
Now, I need your daily status updates and you aren’t excused for being late for reading this.
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According to her biography, Barbara Millicent Roberts grew up in the mythical town of Willows, Wisconsin. For a period of time she attended Willows High School but later moved on to Manhattan International High School in New York City. Over the years, she has had more than 40 pets including cats, dogs, various horses, a zebra, a lion cub, and a panda. She has held dozens of professional positions including doctor, pilot, astronaut, veterinarian, and flight attendant. Her taste in cars is legendary. Her favorite color is bright pink. That color has become known as Barbie Pink. On March 9th, the folks at Mattel celebrated Barbara Millicent “Barbie” Roberts’ 58th birthday. No matter what you think about this cultural icon, you have to admit that she’s looking good for her age.

The ubiquitous Barbie doll made its debut on March 9, 1959, at a toy fair in New York City. She was an instant hit. About 350,000 dolls were sold in the first year of production. Since then, it is estimated that more than a billion Barbies have been sold worldwide.

Negotiating the emotional minefield between whims and dreams is a difficult task for any parent (or consumer for that matter). The marketing machines of companies flash shiny objects in our eyes forcing us to make tough decisions, ones that don’t always leave us happy, satisfied or popular.

I once read that in a grocery store there are over 100 salad dressing choices. With so many to choose from we are never able to be satisfied since we can’t try all of them. Whereas with only 3 or 4 choices we can be sure of our favorite. Could this be the root of IN-N-OUT Burgers grand success?

I remember a bumper sticker that used to say “I want to be like Barbie…that bitch has everything.” Well before you become rich you must decide whether you want to be secure, comfortable, or rich. These are called core values, or the reasons you want to invest.

The first reason most people invest is because they want to feel more secure That’s why Social Security or a retirement plan is very popular with people whose core value is the need for security. Security is a very important aspect of investing. You don’t want to be a destitute out on the streets with nobody taking care of you.

Unfortunately, many people who are counting on government or their employer to provide for their retirement will be sorely disappointed. A person who invests to be secure or values security will always say, “Well, I have to have a roof over my head and I need to put food on my table.” Their whole orientation is security or survival.

The next level above security is to be comfortable. They say, “I just want…” They want the house, the second vacation house, or the extra car. They want to take a cruise every now and then. Their highest priority is the need to be comfortable.

The third core value that motivates people is wanting to be rich. Most people dream of becoming rich but if the dream of becoming rich disturbs any of the lower core value of security or comfort, they’ll forsake being rich.

They’ll dream of being rich but if it means giving up a safe, secure job, then being rich remains a dream. If it’s just too much trouble to become rich and they’re comfortable at the moment, then they won’t pursue becoming rich. Those are the three core emotional reasons why certain people chose certain investment paths. Money is just an idea. It’s a formulation of the mental, emotional, and spiritual ideas inside of you that determine what you ultimately become. In the end, you need to fight for the future you want.

Today Big Data is to commerce what oil was in the past. Data helps retailers interpret what consumers will buy and when and for how much. The data comes from everywhere. Indoor tracking systems like Bluetooth beacons or Philips lighting or facial recognition. From web browsing and app use. From transaction data aggregated by Visa and MasterCard. Even from Uber, who knows that riders spent 2 billion directly after getting out of an Uber. How about the father who got a call congratulating him on becoming a grandfather before his daughter told him she was pregnant – all courtesy of Big Data and browsing history!

In 1890, Samuel Warren wrote a paper called, “The Right to Privacy” and in it he cited “recent inventions and business methods” – including instant photography and tabloid gossip – “have invaded the sacred precincts of private domestic life.” In the paper, they called for the “right to be left alone” and what they called, “the right to one’s personality.”

Although technology may be making our lives more public than we want, loneliness seems to be an epidemic. The number of Americans who say they have no close friends has nearly tripled in the last decade. While technology offers us an easy way to keep in contact with friends and meet new people, technology encourages shallow conversations that can distract us from meaningful, real life interactions. Smartphones have transformed grocery lines from a chance for small talk with neighbors to an exercise in email checking. Starbucks has sealed the fate of the coffee shop as nothing more than a place of mutual isolation.

So what does this have to do with commercial real estate? Shopping centers? Office buildings? Well let me tell you. Successful real estate in the future is social real estate. Location, location, location brings new meaning in a social setting. The best location is where people will want to live, work and play. Shopping centers will be social centers.

Although you may buy your Barbie dolls now on Amazon, most of you still go to the grocery store to buy your groceries. The grocery store has been largely immune to the ravages of online shopping. But a war is coming. Beside the current intense competition of Vons, Ralphs, Wal-Mart, Target and Costco, you have the growth of niche players like Trader Joe’s, Whole Foods, and Sprouts. Soon you will see the growth of ALDI, LIDL and Grocery Outlet. Not to be outdone, Amazon is stepping up its grocery delivery business and is now rolling out stores that will just deduct your purchase from your credit card as your walk out the door – no cashier needed. To make things harder, struggling brick and mortar retailers such as dollar stores and pharmacies have increased their inventory of grocery items (can you image Amazon buying Rite-Aid or CVS? Amazon delivering your drugs and an Amazon store on every corner.)

Like the grocery business, our activity has increased but business has gotten harder to close. Although we are working hard to get rich we are trying to be happy being satisfied. We have ventured into the Big Data market and done a Barbie analysis of the San Diego market (I apologize ahead if you or your neighborhood is insulted).

San Diego Barbie from KGB Bob and Coe Show

La Costa Barbie – this princess Barbie is only sold at the brand new La Costa Forum. She comes with an assortment of Kate Spade handbags, a Lexus SUV, a long-haired dog named Honey, and a cookie-cutter house. Available with or without tummy tuck and face lift. Workaholic Ken sold only in conjunction with “augmented” version.

Rancho Bernardo Barbie – this modern-day homemaker Barbie is available with Ford Windstar minivan and matching gym outfit. She gets lost easily and has no full-time occupation or secondary education. Traffic-jamming cell phone included, headset sold separately.

Escondido Barbie – this recently paroled tattooed and nose pierced Barbie comes with a 9mm handgun, a desert/river ready lifted Chevy truck with dark tinted windows, and a methlab kit. This model is only available after dark and can only be paid for in cash, preferable in small, untraceable bills. Unless you are a cop, then we don’t know what you’re talking about.

Del Mar Barbie – this yuppie Barbie comes with your choice of BMW convertible or Hummer H2. Included are her own Starbucks cup, credit card, and a country club membership. Also available for this set are Shallow Ken and Private School Skipper. You won’t be able to afford any of them.

Santee Barbie – this pale model comes dressed in her own Wrangler Jeans, two sizes too small, a NASCAR shirt, and Tweety Bird tattoo on her shoulder. She has a six-pack of Coors Light and a Hank Williams, Jr CD set. She can spit over 5 feet and kick mullet-haired Ken’s ass when she is drunk. Purchase her pickup truck separately and get a confederate flag bumper sticker absolutely free.

La Jolla Barbie – this collagen injected, rhinoplastic Barbie wears a leopard-print bikini outfit and drinks cosmopolitans while entertaining friends at the beach house. Percocet prescription available.

Lakeside Barbie – this tobacco-chewing, brassy-haired Barbie has a pair of her own high-heeled sandals with one broken heel from the time she chased Beer-Gut Ken out of Lemon Grove Barbie’s house. Her ensemble includes low-rise acid-washed jeans, fake fingernails, and a see-through halter top. Also available with a mobile home.

Leucadia Barbie – this doll is made of actual tofu. She has long, straight, brown hair, archless feet, hairy armpits, no makeup, and Birkenstocks with white socks. She smokes good sinsemilla buds and prefers that you call her “Willow.” She does not want or need a Ken doll, but if you purchase two Leucadia Barbies and the optional Volvo wagon, you get a coupon for a free wheat-grass smoothie at any Whole Foods Market.

National City Barbie – this Barbie now comes with a stroller and infant doll. Optional accessories include a GED and bus and trolley pass. Gangsta Ken and his ’79 Caddy were available, but are now very difficult to find since the addition of the infant.

Chula Vista Barbie – this Spanish-speaking-only Barbie comes with a 1984 Toyota with expired temporary plates and three baby Barbies in the back seat, but no car seats. The optional Ken doll comes with a pickup truck loaded 10-feet high with mattresses. Green cards are not available for Chula Vista Barbie or Ken.

Hillcrest Barbie/Ken – this versatile doll can be easily converted from Barbie to Ken by simply adding or subtracting the multiple “snap-on” parts. Bonus: free rainbow flag with proof of purchase sticker.

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