May 2018 Monthly Letter

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May 2018 Monthly Letter

May 2018 Monthly Letter

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Brokers, who having no stock of their own, set up and trade with that of other men , buying here, and selling there, and commonly abusing both sides to make out a little paltry gain.”

~From Samuel Johnson’s “a Dictionary of the English Language”, 1755.

may 2018 monthly letterI prefer to think of the brokerage business like that of a virtuoso of the deal! Well as I write this the 10-year Treasury has touched the 3% mark for the first time since 2014. The 30-year fixed rate mortgage hit 4.46% also a high point. Consensus is that the 30-year fixed mortgage will reach 5% by the end of the year. Some perspective however, the historical average for the 30-year fixed rate mortgage is about 8%, so rates are still low by historical standards. The primary reason mortgage rates are rising is a healthy and growing economy. However, income levels must keep growing to offset rising rates (that means wages and rents).

The USD economic index set a record high for the third month in a row in March, indicating positive growth in the local economy through at least the end of 2018. The report does warn, however, we face a long run problem of shrinking employment due to improved technology. The key as always, is whether the technology changes will lead to new opportunities as it has in the past.

Computers are performing detailed image processing on x-rays, text mining of legal documents. IBM touts Watson, we all talk to Siri or Alexa, but AI is now even being used to read leases. An application called Dilligen can scan hundreds of lease and CC&R’s and tell you if there are any use conflicts or who needs to be notified in case of certain events. AI is starting to be used in locational decision making, in valuations and appraisal. You might also check out www.commonareas.com to help manage your property. It is an amazing way to track all the work and tenants at your property. In fact, we are even using an AI mining product that allows us to generate an amazing history and projection of rent, value and comparables of most properties on the market. Let us know if you would be interest in an evaluation of your property or one you might want to buy.

One area that San Diego ranks high in (not in a good way) but that might change with technology (can you say self-driving cars) is traffic. San Diego was 45th out of 1360 cities in 38 counties. According to the study, San Diegans spent 48 hours in peak traffic congestion last year. Ten percent of our driving time in 2017 was spent in traffic jams!

Well traffic jams always get me thinking about one of my favorite topics – bureaucracy! Last month, Jamie Dimon, the CEO of JP Morgan Chase had one of the great all-time quotes; “Bureaucracy is a disease. Bureaucracy drives out good people, slows down decision making, kills innovation and is often the petri dish of bad politics.” Wow! How true. You may have missed this but over a year ago, the City of San Diego acquired the 19-story former Sempre Energy building through a lease to own contract. They were supposed to move in July of 2017, but conservative accounts say they are still six months away from occupancy. In the meantime, they have paid nearly $15 million in rent and expenses- on a vacant building! Government working hard or hardly working?

In the swamp also known as Washington D.C. you will be glad to know that IREM (Institute of Real Estate Management) is hard at work advocating for seven major issues affecting the industry and maybe with a developer as President we will get some traction. Their agenda is;

  1. ADA lawsuit reform. IREM supports legislation to create “notice and cure” provisions within ADA to allow owners of businesses and property to rectify violations before facing costly lawsuits.
  2. Federally Assisted Housing. Federally assisted housing puts people into homes. HUD contracts with private owners to fund the difference between rent and 30% of tenant’s income.
  3. Rent Control. IREM urges elected officials at all levels of government to oppose rent control as being counterproductive to all segments of society and the well-being of the nation.
  4. Medical and recreational marijuana. The conflict between federal, state and local law creates a complicated situation for real estate owners, users and lenders.
  5. Flood insurance. The National Flood Insurance Program (NFIP) provides affordable insurance for those that need it. IREM supports reform and continued funding.
  6. Data Security. Property owners and managers collect and maintain huge amounts of sensitive data (it’s not just Facebook!) including social security numbers, account numbers and financial records putting them at risk from cyber criminals. There is a fine line between establishing standards and creating onerous legislation on property owners and managers.
  7. Online sales tax. This is a hot topic in the news lately. IREM supports creating a level playing field but opposes a “federal sales tax on internet purchases.” Instead it supports states collecting sales tax at the state and local level.

So, what can we do? Gene Simmons (yes, rocker with the Band KISS) said, “whether you are left or right the bad guys still hate us.” Former Speaker of the House Newt Gingrich says, “we need a national theory of succeeding in education and the economy. An unhealthy, uneducated and unproductive America will not sustain a global national security system and may not even be able to defend itself. Specifically, to be successful over the next 20 years, we must develop national security theories for:

  1. Shrinking and eventually eliminating Radical Islamic supremacism as an ideology capable of recruiting soldiers willing to engage in terrorism.
  2. Creating an American response to the Russian model of hybrid warfare which operates with the same capabilities.
  3. Developing systems, strategies, and structures for sustaining continuous competition with China and Russia.
  4. Being prepared for constant change across every career, institution, and system brought about by emerging technologies (this includes your real estate).
  5. Constantly communicating with Americans and allies to help people understand that mastering the scale and pace of change will be the key to success (this also includes your real estate).

This is a daunting agenda, but we need to face the music and look for a virtuoso (we hope that’s us for your real estate)…hope you like the story.


Music and Perception

THE SITUATION

In Washington, D.C., at a Metro Station, on a cold January morning in 2007, this man with a violin played six Bach pieces for about 45 minutes. During that time, approximately 2,000 people went through the station, most of them on their way to work. After about 3 minutes, a middle-aged man noticed that there was a musician playing. He slowed his pace and stopped for a few seconds, and then he hurried on to meet his schedule.

About 4 minutes later:

The violinist received his first dollar. A woman threw money in the hat and, without stopping, continued to walk.

At 6 minutes:

A young man leaned against the wall to listen to him, then looked at his watch and started to walk again.

At 10 minutes:
 A 3-year old boy stopped, but his mother tugged him along hurriedly. The kid stopped to look at the violinist again, but the mother pushed hard, and the child continued to walk, turning his head the whole time. This action was repeated by several other children, but every parent – without exception – forced their children to move on quickly.
 At 45 minutes:
The musician played continuously. Only 6 people stopped and listened for a short while. About 20 gave money but continued to walk at their normal pace. The man collected a total of $32.

After 1 hour:

He finished playing and silence took over. No one noticed, and no one applauded. There was no recognition at all.

No one knew this, but the violinist was Joshua Bell, one of the greatest musicians in the world… He played one of the most intricate pieces ever written, with a violin worth $3.5 million dollars. Two days before, Joshua Bell sold-out a theater in Boston where the seats averaged $100 each to sit and listen to him play the same music.

This is a true story. Joshua Bell, playing incognito in the D.C. Metro Station, was organized by the Washington Post as part of a social experiment about perception, taste and people’s priorities. This experiment raised several questions:

*In a common-place environment, at an inappropriate hour, do we perceive beauty?

*If so, do we stop to appreciate it?

*Do we recognize talent in an unexpected context? One possible conclusion reached from this experiment could be this:

If we do not have a moment to stop and listen to one of the best musicians in the world, playing some of the finest music ever written, with one of the most beautiful instruments ever made. How many other things are we missing as we rush through life?

Enjoy life NOW… it has an expiration date!

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CDC Commercial Inc
About the Author – Don Zech, President at CDC Commercial, Inc.
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