August 1, 2008
Re: Monthly Letter
“Opportunity is missed by most people because it is dressed in overalls and looks like work.” – Thomas Edison
While the subprime mess of last summer largely caused turbulence on Wall Street, the ongoing credit crunch exacerbated by oil inflation has spread to Main Street. Higher oil prices and the difficulty of getting people and properties qualified is having the same effect as if the Fed has jacked up interest rates.
The scary thing right now is that despite oil inflation and a slowing economy (remember our Gold Report predicted “Stagflation” as the most likely event in 2008) interest rates have no where to go but up. The Feds interbank rate is 2%. When you take inflation into account the interest rate on Fed funds is negative (1% – 2.5%)! Yes, they are giving away money! Two things you should realize, 1) If you can qualify you should be buying, borrowing or refinancing. 2) The longer they hold rates down the worse inflation will be and the higher they will have to raise rates. Remember that if you have been waiting the last two years for commercial properties to go down they have – by at least 10% (prices have been flat but 5% per year inflation has quietly raised prices).
It is time to be long and strong. We’re nearing the end of the lowest rates we’ve seen in 45 years. Time to lock in to 10 year “no brainer” rates. We are in or will be in a recession along with inflation. Rates will have to rise to stop the inflation. When the recession is over and values go back up you’ll be happy with your fixed rate low interest rate loan. If inflation stays you will at least keep pace with it so long as you have expense pass throughs and CPI increases. It’s not just the throw back clothes my kids are wearing, we’re re-entering the ‘70’s, but this time we’re on steroids!
To give you some mid-year perspective, I thought I would share this summary of current conditions.
Retail – High gas and food costs are eliminating much of peoples’ discretionary income which is directly impacting sales. Previously we had warned to be watchful of your real estate & furniture tenants. It is now spilling into food & restaurant uses. Energy costs are driving more sales to the internet. Talk to your tenants about increasing their internet presence. Higher operating costs are impacting bottom lines and will affect your net operating income (NOI).
Office – Slower economic times are having the usual impact on office space demand. Higher operating costs are squeezing NOI’s. Be sure your leases have expense pass through protection and CPI increases. The silver lining of high gas prices is that more tenants are looking to locate in North County, closer to home and a shorter drive. However, it is killing tertiary new home markets (south Riverside County, El Centro, etc…) where people used to “drive until you qualify”. As more people use the internet to telecommute and collaborate online this impact will be lessened.
Industrial – The weak dollar is driving export growth and transportation costs are causing a rethinking of distribution networks, keeping industrial property fairly healthy.
Despite all the bad news you should know that San Diego is tied for 8th place for top markets to grow in population according to Claritas. It is also the #2 retail market in the nation according to Shopping Center Business Magazine. On the bad side we are the #9 market for housing foreclosures (1 in every 74 houses). However, to put it in perspective, I saw the June report of REO’s (bank owned) for San Diego and it was 110 pages long (3 per page). The commercial REO’s for San Diego was one page with 2 properties.
I have to say I hate the new Bluetooth law. I have had more close calls this month than in my entire life as I use both hands to mate my two devices, or search for the devise while the phone is ringing or worse yet, try to drive with my head below the dashboard on the days I forgot the Bluetooth in the office. The good news is once I get it all down I’ll have two hands free so I’ll be able to do more when I drive like shave, eat or look at stuff on my laptop!
My hats off to the City of Lake Elsinore who took away the credit cards for all of their elected officials. They replaced them with debit cards pre-loaded with their spending limits. Maybe this trend will spread to Washington and our Nations budget!
As we all try to save gas by sending more emails, we are ever increasingly using the PDF format. Many of you are using old versions back to Adobe 5 or 6. The current version is Adobe 9. It is available for a free download/upgrade on our website www.cdccommerical.com (on lower left corner)
As I prepare for my second to go off to college and my youngest to enter high school I am very pleased with the way my life has been blessed. However, next time I might consider doing it backwards as expressed below.
Real Estate Services
Next Time…I want to live my life backwards:
You start out dead and get that out of the way. Then you wake up in an old age home feeling better every day. Then you get kicked out for being too healthy. Enjoy your retirement and collect your pension. Then when you start work, you get a gold watch on your first day. You work 40 years until you’re too young to work. You get ready for High School: drink alcohol, party, and you’re generally promiscuous. Then you go to primary school, you become a kid, you play, you have no responsibilities. Then you become a baby, and then…you spend your last 9 months floating peacefully in luxury, in spa-like conditions – central heating, room service on tap, and then…you finish off with a climax.