“America seeks to be a free people. But if they lack common sense, they shall get what they deserve.” ~ Benjamin Franklin
First, let me wish you all a happy 4th of July! May it not just be filled with beer and hot dogs, but also thought and gratitude for our great but scarred country. I have to say, I just finished “Franklin” on Apple TV+ and it was quite good. It makes you realize that if it weren’t for greedy folks trying to make money through land development, agriculture, manufacturing, and trade, we would probably be under the rule of one crown or another. . . and that our liberty hung by a very small thread.
For those of you who watched the series, you might be interested to know that Franklin’s grandson, Temple, accompanied Franklin back to the United States in 1785. Benjamin Franklin advised Temple to try and develop as a major landowner since the country was growing rapidly in the postwar era. He did try his hand but became disillusioned (though the New York town of Franklinville is named after him). He said the United States was driven by factions and that if a foreign power were to attempt to conquer the country, it would certainly be successful and with that moved to France.
So, what is the cost of democracy? Undeterminable. However, in California if we calculate it based on March’s official voter guide sent to 22 million voters, it had a price of $13.2 million. That’s $117,880 per page for printing translations, audio, mailing and postage.
It may not be the Revolutionary War, but mark my words, we are at war, and it is and will affect commercial real estate. Last month, hackers took down phones, patient portals, and patient records of Palomar Health Medical Group. Many of you saw this as just another headline, but if you had an appointment or needed a prescription filled, or more importantly surgery, it was problematic. What if they (or a tenant like them) were your tenant? Did their rent get interrupted? Could hackers get access to building systems? I recently went online to make an appointment to have my car serviced at the dealership. The web scheduler told me it was unavailable and to call the dealership. It wasn’t until later that I read that CDK Global, a leading provider of software for car dealerships was hit by cyberattack, causing a disruption at over 15,000 dealerships across the United States. These dealerships are each losing $20-$50k per day! It looks likely that the hackers are in Eastern Europe and will get paid tens of millions of dollars in ransom. Lastly, I saw where a Tesla had auto-locked a kid in the car – they had to cut her out of it! Is your business or building or car next? Have you given thought to a plan? Do you have an old-fashioned paper and pencil backup plan? I had to go into my doctor to get a prescription refill and they had a hand scratched form photocopied for me to fill out (no typewriters or non-networked laptop connected to a printer!). I was in a grocery store once and the power went out. The doors automatically closed, and everyone was asked to leave the store without merchandise while they manually inspected and let everyone out one at a time. Good for the grocery store, not so good for me leaving without food.
Meanwhile, Fed Chair Jerome Powell said, “It is likely that gaining such confidence (that inflation is moving substantially toward 2%) will take longer than previously expected.” Hmmm…so not transitory? It is ironic that the Fed is “coming to the rescue” to control inflation when it is complicit in creating it! The Fed is truly between a rock and a hard place. Raising interest rates increases government interest costs to an intolerable level, leading to increased taxes or bankruptcy. So, they have two choices: let inflation run out of control (i.e., let your currency collapse) or protect your currency and bankrupt your government (and us).
Of course, these interest rate developments have a huge impact on real estate. Simplistically, higher interest rates lower (or should) real estate values, if not at least stagnate transaction volume. Higher rates for longer are going to weigh heavily on the banking industry. Sixty-seven banks with more than $10 billion in assets have exposure to commercial real estate greater than 300% of their total equity. Any ratio over 300% is viewed as excessive exposure and could put banks at risk for failure. Back to the rock and a hard spot. If the Fed cuts rates too quickly, it reignites inflation. If it delays rate cuts, it could postpone or prevent a soft landing and prolong financial difficulties for rate-sensitive sectors like commercial real estate.
On the other side of the balance sheet, net operating income (NOI) growth across all property types has slowed and turned southward. This was expected during COVID when many businesses were closed/not paying rent. According to Nareit’s Same Store NOI index, property income peaked at 8.4% in the first quarter of 2022. But has tumbled to 3.6% in the first quarter of 2024. That pretty much breaks even with the 3.4% inflation rate of April 2024. Can you say – stagflation.
First, let me wish you all a happy 4th of July! May it not just be filled with beer and hot dogs, but also thought and gratitude for our great but scarred country. I have to say, I just finished “Franklin” on Apple TV+ and it was quite good. It makes you realize that if it weren’t for greedy folks trying to make money through land development, agriculture, manufacturing, and trade, we would probably be under the rule of one crown or another. . . and that our liberty hung by a very small thread.
Nick’s Numbers
The chart below illustrates Don’s point above. Basically, interest rates have risen and rents have started down – dragged by office rents.
If you would like an analysis of your properties’ value or discuss what you should be doing with regard to interest rates or inflation and their impacts on your business, tenants, or property, I’d be happy to talk. (Nick Zech, 858-232-2100, nzech@cdccommerical.com).
When I started in the business (yes, decades ago!), I was told the single most solid indicator of the health of the commercial real estate market was the unemployment rate. I believe that still holds true today. At least in San Diego, that rate has dropped from 4.1% in April to 3.6% in May. On an annual basis, San Diego’s fastest growing sectors were private education and health services adding about 11,400 jobs. It was followed by leisure, hospitality (4,700), government (4,000) and construction (2,200). Professional and business services (typically the highest paying sector) lost 10,400 jobs. Other losers were manufacturing (4,200), financial activities (1,400) and information (1,400). For now, I will consider that optimistic, however, I have developed a little distrust in the numbers being reported. If you want to go down that rabbit hole, here is some extra credit reading (and if anyone can tell me what happened in July 2022 you get bonus points!). https://www.zerohedge.com/markets/philadelphia-fed-admits-us-payrolls-overstated-least-800000
Again, I hope you have a great 4th of July. Get a dollar out and learn a little history…hope you enjoy the story…
Who was Haym Salomon?
On the back side of the one dollar bill, you will see two circles. Together, they comprise the Great Seal of the United States.
The First Continental Congress requested that Benjamin Franklin and a group of men come up with a Seal. It took them four years to accomplish this task and another two years to get it approved.
If you look at the left-hand circle, you will see a pyramid.
Notice the face is lighted, and the western side is dark. This country was just beginning. We had not begun to explore the west or decided what we could do for Western Civilization. The pyramid is uncapped, again signifying we were not even close to being finished. Inside the capstone you have the all-seeing eye, an ancient symbol for divinity. It was Franklin’s belief that one man couldn’t do it alone, but a group of men, with the help of God, could do anything.
‘IN GOD WE TRUST’ is on this currency.
The Latin above the pyramid, ANNUIT COEPTIS, means, ‘God has favored our undertaking.’ The Latin below the pyramid, NOVUS ORDO SECLORUM, means, ‘a new order has begun.’ At the base of the pyramid is the Roman Numeral representing 1776. (MDCCLXXVI)
If you look at the right-hand circle, and check it carefully, you will learn it is on every National Cemetery in the United States. It is also on the Parade of Flags Walkway at the Bushnell, Florida National Cemetery, and is the centerpiece of most hero’s monuments. Slightly modified, it is the Seal of the President of the United States, and it is always visible whenever he speaks, yet very few people know what the symbols mean.
The bald eagle was selected as a symbol for victory for two reasons: First, he is not afraid of a storm; he is strong, and he is smart enough to soar above it. Secondly, he wears no material crown. We had just broken from the King of England. Also, notice the shield is unsupported. This country can now stand on its own. At the top of that shield you have a white bar signifying congress, a unifying factor. We were coming together as one nation. In the eagle’s beak you will read, ‘E PLURIBUS UNUM’ meaning, ‘out of many, one.’ Above the eagle, you have the 13 stars, representing the 13 original colonies, and any clouds of misunderstanding rolling away. Again, we were coming together as one. Notice what the eagle holds in his talons. He holds an olive branch and arrows. This country wants peace, but we will never be afraid to fight to preserve peace. The eagle always wants to face the olive branch, but in time of war, his gaze turns toward the arrows.
They say the number 13 is an unlucky number.
This is almost a worldwide belief. You will usually never (or seldom) see a room numbered 13, or any hotels or motels with a 13th floor. But think about this:13 original colonies, 13 signers of the Declaration of Independence, 13 stripes on our flag, 13 steps on the pyramid, 13 letters in, ‘Annuit Coeptis,’ 13 letters in ‘E Pluribus Unum,’ 13 stars above the eagle, 13 bars on that shield, 13 leaves on the olive branch, 13 fruits, and if you look closely, 13 arrows
And finally, if you notice the arrangement of the 13 stars in the right-hand circle you will see they are arranged as a Star of David. This was ordered by George Washington who, when he asked Haym Salomon, a wealthy Philadelphia Jew, what he would like as a personal reward for his services to the Continental Army, Salomon said he wanted nothing for himself but that he would like something for his people. The Star of David was the result. Few people know that it was Salomon who saved the Army through his financial contributions, but died a pauper.
Why don’t we know this? Our children don’t know this, and their history teachers don’t know this. Feel free to share this story so that everyone can learn a little history from what is on the back of the United States one dollar bill, and what it stands for!
