November 2017 Monthly Letter
The first Thanksgiving celebration lasted three days. Today, Plymouth Rock is only the size of a car engine. It has cracked three times over the years getting smaller each time…the effects of time.
We have all heard the adage that “time heals all wounds” and many have heard it turned around to say, “time wounds all heals.” Well, I am more inclined to tell you that “time kills all deals.” Although I have been in the business a long time, I have never seen a time where we have had so many deals taking so long for a variety of reasons.
- Fast Food Restaurant – 3 years (yes paying option payments monthly) and still waiting for city and one property owner approval.
- Sale of a restaurant/building as part of a larger development 4 ½ years. Waiting for city approval, land swap, lot line adjustment, buyout agreement of business.
- Charter school buying a building – 3 years. Plans, permits, CEQA, traffic study, board approval (seller & buyer), price changes, doubling of TI costs due to regulations.
- Raw land – 7 years. Rezone (4 years), marketing to find a buyer who can wait 2-3 years to get thru plans, permits, city requirements (undergrounding utilities – $1 mil, signal $250K, curbs, gutters, sidewalks – $1 mil).
- 1500 SF clothing store into a 1500 SF space – 3 ½ months. Drywall, paint, stairs to a mezzanine, 2 months in plan check, 45 days to build (inclusion of multiple inspections of the threshold being a ½ inch too high and requests for engineering redo of the stairs and storage mezzanine).
On top of these frustrations, owners and tenants don’t understand why things aren’t going easier or faster because the economy is certainly doing better.
I saw a book last week that summed it all up for me. The title was “20-minute manager: managing time.” All I could think was that 30 years ago I read the “One Minute Manager” and it dawned on me that despite all of the technology at our disposal, managing our time is taking 20 times what it used to!
What I can tell you is that with the difficulties and delays in making deals, rents are and will rise. With rents rising we will (or need to) see wage growth and continued densification of space (more goods and people per square foot) to support increased prices and rents.
Well as we stand by and watch the swamp drain or become more muddy as the case might be, I am reminded of a quote I read many years ago from the populist movement of the 1890’s.
“If the farmer went to the capital fresh from the plow, among a crowd of lobbyists, he was as clay in the hands of the potter. If his constituents kept him there year after year, until he learned the ways of legislation, then he ceased to be a farmer and became a member of some other class, perhaps a stockholder in a great railroad, or manufacturing corporation, with interests in common with the opponents of the agricultural classes.”
Now as we face our own populist era and more specifically tax reform, we in the Commercial Real Estate field need to be wary and prepared because tax code change has always led to swings of wealth and recessions (remember 1979 windmill farms? Or 1987 crash after 1986 tax reform). I am worried about uncertainty over tax reform, uncertainty over a possible new Fed Chief, uncertainty if we do get a new Fed Chief. The biggest warning sign that I see though is the flattening of the bond yield curve (spread between 2 and 10 year bond yields). The spread predicts recessions and it hasn’t been any tighter than just before the 2007 Financial Crisis. On the other hand, the Campbell Real Estate Crash Index reports that the next 3-6 months are still friendly to the real estate market.
Here is a very good article from Costar and the Real Estate Round Table.Issues at hand:
- Depreciation from 30 yr to 20 yr
- Estate tax elimination
- Eliminate interest deduction
- Reduce tax rate on pass-thru business income
Although life may be frustrating and time consuming, the American Dream is still worthy of pursuit and something to be thankful for. I hope you enjoy the story….
One stormy night many years ago, an elderly man and his wife entered the lobby of a small hotel in Philadelphia. Trying to get out of the rain, the couple approached the front desk hoping to get some shelter for the night.
“Could you possibly give us a room here?” the husband asked. The clerk, a friendly man with a winning smile, looked at the couple and explained that there were three conventions in town.
“All of our rooms are taken,” the clerk said. “But I can’t send a nice couple like you out in the rain at one o’clock in the morning. Would you perhaps be willing to sleep in my room? It’s not exactly a suite, but it will be good enough to make you folks comfortable for the night.”
When the couple declined, the young man pressed on. “Don’t worry about me; I’ll make out just fine,” the clerk told them. So, the couple agreed.
As he paid his bill the next morning, the elderly man said to the clerk, “You are the kind of manager who should be the boss of the best hotel in the United States. Maybe someday I’ll build one for you.”
The clerk looked at the couple and smiled. The three of them had a good laugh.
As they drove away, the elderly couple agreed that the helpful clerk was indeed exceptional, as finding people who are both friendly and helpful isn’t easy.
Two years passed. The clerk had almost forgotten the incident when he received a letter from the old man. It recalled that stormy night and enclosed a round-trip ticket to New York, asking the young man to pay them a visit.
The old man met him in New York, and led him to the corner of Fifth Avenue and 34th Street. He then pointed to a great new building there, a palace of reddish stone, with turrets and watchtowers thrusting up to the sky.
“That,” said the older man, “is the hotel I have just built for you to manage.”
“You must be joking,” the young man said.
“I can assure you that I am not,” said the older man, a sly smile playing around his mouth.
The old man’s name was William Waldorf Astor, and the magnificent structure was the original Waldorf-Astoria Hotel. The young clerk who became its first manager was George C. Boldt.
This young clerk never foresaw the turn of events that would lead him to become the manager of one of the world’s most glamorous hotels.