Did you ever notice that bees and hummingbirds move very fast to stay still? I get asked all the time how the commercial real estate market is. Frankly, I have two answers that I am giving. One is that the market is a bit paralyzed or frozen due to war uncertainty, inflation, and higher interest rates. I’m calling it the hummingbird economy – that is where we are moving quickly but seemingly staying still. The second answer I like to give is that we are problem solvers, so while markets freeze up with indecision, we are getting busier solving problems.
When we started the year, expectations were that interest rates would show a slow, steady decline. After February 28th, everything based on oil has accelerated in price and destabilized the marketplace. Shocked, buyers en masse have become unwilling to acquire property. We will not see a recovery to this undeclared real estate recession (I’d like to call it a pause) until we see an end to ongoing trade and military wars. The big thing to keep our eyes on now is the number of people employed (not the unemployment numbers). Real estate retains its value solely based on its ability to be occupied by individuals – living or working there, or both. So far, so good. California has added about 103,000 non-farm jobs from May 2025 to May 2026 with about 18.17 million people employed.
Nick’s Numbers
As Don says, employment is the key right now. From 2016 to 2019, we added roughly a million jobs. COVID crushed us, with more than a million jobs lost, but we recovered most of those by 2023. Growth has slowed over the last two years, but employment has continued to reach new highs. The chart below illustrates my point.
If you would like an analysis of your property’s 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).
I know I have said it many times in my letters before, but a savvy real estate investor should never sell. Instead, you should defer (1031) until you die and refi to live. This is all based on the fact that if you follow this strategy, you will not pay any taxes, and when you die, your heirs will inherit the property with a step-up in basis and therefore pay no taxes.
The mechanics of a 1031 tax-deferred exchange are simple: from the day you close escrow, you have 45 days to identify a replacement property, and you must close escrow on that property within 180 days from the day you sold the relinquished property. Yes, there are a few other details like using a qualified intermediary and how many properties you can identify, but again, this is pretty mechanical, and we can deal with it at the time.
The point I want to make today, though, is that your 1031 exchange shouldn’t start at the closing of escrow. It should begin long before the sale of your property. Starting early doesn’t just help ensure compliance – it shapes the range of option available, the structure of the exchange, and ultimately, how well the strategy aligns with your long-term goals.
Beginning the process before the sale creates several advantages.
- You can identify replacement options in advance:
- Different markets (we have helped clients buy in AZ, NV and TX)
- Different property types (we see clients move out of rental houses and apartments into triple-net commercial properties to get away from all of the management.)
- Passive vs. active opportunities (some people like to buy an opportunity and add value and then exchange to the next value-add opportunity without paying taxes.)
- Evaluate ownership structures:
- Is it time to split from partners in the deal?
- Is it time to exchange into fractional ownership structures like a Delaware Statutory Trust?
- Is it time to partner with someone else to buy something bigger by using a tenants-in-common ownership structure?
- Coordinating with your advisors:
- Family – What is the long-range plan? If you defer until you die and you’re the one that fixes the broken sprinklers, are your heirs ready to do it when you are in a care facility?
- Tax advisors – Talk to your accountant and lawyers about your estate plan, cash flow needs, and risk tolerance. Talk to us to help align your next piece of real estate ownership with the plan.
If you wait too long, you limit your replacement opportunities. You increase the pressure during the 45-day identification period, and you may miss ways to structure your exchange more strategically. A 1031 exchange doesn’t begin when the property sells – it begins when the planning starts. Let’s start talking now. Call or email us to discuss.
In conclusion, I’ll leave you with some advice from Mahatma Gandhi. “Live like you are going to die tomorrow and learn like you are going to live forever.” Happy 4th of July! And can anyone tell me why hot dogs come in a pack of 10 and buns come in a pack of 8?
In our hummingbird economy, maybe the Red Queen can explain why we are running faster to stay in the same place. Hope you enjoy the story…
The Red Queen Effect
In Through the Looking-Glass, Alice, a young girl, gets schooled by the Red Queen in an important life lesson that many of us fail to heed. Alice finds herself running faster and faster but staying in the same place.
Alice never could quite make out, in thinking it over afterwards, how it was that they began: all she remembers is that they were running hand in hand, and the Queen kept crying, “Faster! Faster!” But Alice felt she could not go faster, though she had not the breath left to say so.
The most curious part of the thing was that the trees and the other things around them never changed their places at all: however fast they went, they never seemed to pass anything. “I wonder if all the things move along with us?” thought poor, puzzled Alice. And the Queen seemed to guess her thoughts, for she cried, “Faster! Don’t try to talk!”
Alice looked around her in great surprise. “Why, I do believe we’ve been under this tree the whole time! Everything’s just as it was!”
“Of course it is,” said the Queen, “What would you have it?”
“Well, in our country,” said Alice, still panting a little, “you’d generally get to somewhere else if you ran very fast for a long time, as we’ve been doing.”
“A slow sort of country!” said the Queen. “Now, here, you see, it takes all the running you can do, to keep in the same place.
If you want to get somewhere else, you must run at least twice as fast as that!”
Smarter, Not Harder
The Red Queen Effect means that staying in the same place is falling behind. Surviving another day means we have to co-evolve with the systems we interact with.
If all animals evolved at the same rate, there would be no change in the relative interactions between species. However, not all animals evolve at the same rate. As Darwin observed, some are more “responsive to change” than others.
It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change. ~ Charles Darwin
Species that are more responsive to change can gain a relative advantage over the ones they compete with and increase the odds of survival. In the short run, these small gains don’t make much of a difference, but as generations pass, the advantages compound.
Everyone from entrepreneurs and Fortune 500 CEOs to best-selling authors and middle managers are embedded with their own Red Queen. Rather than run harder, wouldn’t it be nice to run smarter?