CDC Commercial Inc

Monthly Letter for August 2007

According to the UN, livestock is more responsible for global warming than all the cars in the world combined. Methane gas from cows causes 20 times more global warming than carbon dioxide. “That’s why my next cow is going to be a hybrid.” – Jay Leno

You know it seems if it weren’t for the housing and construction sectors, the economy would be looking pretty damn good! Remember last month I said things weren’t as bad as they appeared? I noticed that JP Morgan Chase upped its second quarter forecast from 2.5% to 4% (how are they off by nearly double?) The bad news to this is that we are unlikely to see a rate cut from the Fed anytime soon. Although you read about tame inflation numbers, food and energy inflation world wide is at 7%!

On June 26th the yield on 10 year treasuries registered at 5.1% up nearly 50 basis points since February. Time to say goodbye to the lowest commercial mortgage rates in 40 years! This is slowing sales volume a bit and will force cap rates higher through the rest of the year. Bottom line, more deals will fall apart because investors won’t be able to get the financing they once could. It’s not just interest rates; it is tighter underwriting guidelines and higher debt service coverage ratios (DSCR). From our end we are prequalifying harder and requiring letters of prequalification from the buyer’s lender. (We prefer to get everybody educated early in the deal and not waste time!)

There is no doubt the housing market is going through a correction. How this correction unfolds will influence the course of our economy in the coming quarters. The stages of a housing correction are as follows:

1. Residential investment declines.
2. Construction employment is reduced.
3. Consumer spending weakens.

The reality is that all housing corrections have lead to a recession except 1951 (Korean War) and 1967 (Vietnam War) according to Edward Leamer of UCLA. Will the War on Terror make us the third exception?

I have always said pay attention to the unemployment numbers. (If people are working they are spending.) The County’s unemployment rate in June was 4.6% which is up from 4.2% for last June. The bigger concern is that job growth has ground to a halt. Looks like we’re treading water at this point.

The question now is not whether the glass is half empty or half full; it’s about whether it’s filling up or emptying out! On that front, I was thrilled to see that venture capital funding is up 40% in San Diego. Understand this is the core of job creation. For every one of these “core” or “driver” jobs 7 other jobs are created (services, construction, retail, etc……).

Lastly, my inbox, reading and several recent conferences have been dominated by the Green Building buzz and lowering ones carbon footprint. I have to be honest with you, I have pretty much turned the page or changed the channel on the subject. I just figured it is a big media/Al Gore production. However, I think it is now safe to say it is here to stay. I think now it is being driven more by economics than idealism. This is about more than growing grass on your roof. Some of it is simple. Direct your rain gutters to your landscape not the storm drain system.

In July, BOMA (Building Owners and Managers Association) has challenged its members to improve its energy efficiency. These efforts not only have environmental benefits but financial ones as well. Remember 15 years ago handicap accessibility wasn’t on construction drawings now it is part of the building code.

I’d really recommend attending a conference / seminar or reading up on the subject. It is here to stay and we’ll be dealing with it for many years to come.

Thank God for our country, for the freedom we have. May you be touched by the sun and the beautiful environment in which we live and work.

Have a Sun Diego day!

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