In the 1500’s, houses had thatched roofs – thick straw, with no wood underneath. It was the only place for animals to get warm, so all the cats and dogs lived in the roof. When it rained, it became slippery and sometimes the animals would slip off the roof, resulting in the idiom, “It’s raining cats and dogs.”
While on the subject of animals, we wish you a Happy Thanksgiving. Just remember if you burn the turkey this year, just tell everyone you were experimenting with a Cajun blackened recipe!
Since today is October 31st, besides being Halloween (plenty of scary news to follow), it is 10-31 which is a section in the Internal Revenue Code (IRC-1031) that allows you to buy and sell income property on a tax deferred basis. We do 1031 exchanges regularly and they are a great way to build wealth. However, you should engage us early to avoid many of the mistakes that could disqualify the deal. Here’s just a few nightmares.
- Miss the 45-day Identification period – once you close on the relinquished property, you have 45 days to identify in writing what you intend to acquire in exchange.
- Fail to clearly identify what you are going to buy – you must identify unambiguously (i.e., street address, APN, legal description).
- Miss the 180-day deadline – you must close on replacement property(ies) within 180 days of closing on the relinquished property.
- Close before you sign exchange documents – you must sign exchange documents before you close on the relinquished property.
- Take possession of your exchange funds – you cannot have possession or control of the proceeds from the sale of the relinquished property.
Now for a little treat, San Diego’s unemployment rate dropped to 3.1% in September from 3.4% the previous month. So, despite all the doom and gloom, unemployment dropped a little bit. I tell people to focus on jobs because that has the single biggest impact on commercial real estate (more people moving in than out / supply and demand / higher sales-higher rent).
An additional treat is that GDP growth returned in the third quarter with a 2.6% annualized rate. This rise was driven predominantly by increased exports.
Now for the scary, Halloween prognostication. Here are the top five signs we are either in or heading into a recession.
- Declining monetary base – Fed creates money out of thin air creating lower interest rates leading to economic booms. Eventually, money supply slows, interest rates rise. That leads to an economic bust. The money supply has slowed from 40% last year to 4.9% this year.
- Inverted yield curve – two-year treasuries are yielding more than ten-year treasuries. This has preceded every recession in recent decades.
- Tightening bank standards – banks are tightening their standards (not just raising their rates). The number of banks tightening their standards has risen to levels seen in prior recessions.
- Housing market – mortgage rates have more than doubled over the past year. The housing supply is now 11 months. Every time the housing supply has risen above ten months, there has been a recession – 100% of the time.
- Declining real manufacturing and trade sales – real manufacturing and trade sales only decline in a recession. They are already down 1.5% year over year.
So, what are we seeing in the field? Maybe surprisingly, we are staying really busy. So, either we’re helping the last people out of the burning theater or we’re doing what we have always done – give good advice and help people navigate change.
We were speaking with one of our contractors this month and they had some interesting insights.
Are prices on materials coming down at all? The short answer: Not yet. The reason for this is fewer raw materials; fewer production sites and logistical challenges keep prices on the rise.
How have lead times changed on items and services? With the shortage of many materials, lead times have increased considerably. We are experiencing a shortage of lumber, cement, steel, drywall, electrical products, and HVAC units (to name a few).
How is the current permit process and timing Different cities give different estimates for permit timing. The City of San Diego clearly states six months and up to one year! Of course, many of us are experiencing even longer permit processing times. And as you know, time kills all deals!
Despite being busy, we are hearing from other brokers that their deal activity is slowing. Sales volume for all property types in the U.S. has declined over the past 12 months ending September 30, both in terms of volume and number of deals. At the moment, investors seem to have plenty of capital to deploy but are waiting to see how things settle out with inflation and recession. The amount of available capital is reportedly 20% higher than in 2019.
Nick’s Numbers
Here’s a chart that shows the dramatic drop in deal volume going on.
Please give me a call or email me 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 (Nick Zech, 858-232-2100, nzech@cdccommerical.com).
Again, Happy Halloween! Happy Thanksgiving! Just remember anybody can face a crisis. It is the idiots that wear you out! Hope you enjoy the story…road runner was as close as I could come to a turkey story this month!
Dear Landlord: I cannot be held responsible for the Coyote-shaped hole in the wall. And look out for the sticks of dynamite in the supply room. by Ross Murray
Dear Landlord,
I am responding to the notice you slipped under the door of my office yesterday morning detailing amounts owed for damages and repairs, this following your unannounced visit to my premises the previous afternoon.
As I explained then, the coyote-shaped hole in the wall is not my fault. It was caused by an erratic and impulsive predator (carnivorius iwodimemium) that has been persistently entering my office thanks to lax building security as well as a seeming ability to punch in alarm codes and turn doorknobs.
In this instance, the coyote was blasted through said wall following a violent explosion of his own devising, a subject I will return to presently. Note that, though it is of significant size and indeed coyote-shaped, it is a clean hole with no otherwise structural damage and should not be difficult to repair, though again I must insist I am not responsible.
Yes, I own a roadrunner (aparlmentpelicus imbecilicius), but when I signed the lease, I specifically asked you if I could keep a bird, and you assured me that this would be acceptable as long as it was clean and quiet. Except for the occasional, care-free “beep-beep” and a whooshing sound as it races fleet-footed from room to room, I believe my roadrunner has been an ideal pet.
Perhaps I should be seeking reparations from you, for at no time prior to signing the lease did you lead me to understand that I would be beset by an overly tenacious coyote with an insatiable lust for bird flesh and surprisingly refined engineering skills. Which leads me to your second item: I have not, as you claim, extended the balcony and transformed it into an entirely new room. Despite the fact that you were somehow able to walk into this “room” during your surprise inspection, I assure you it was merely a drawing of a room
placed at the edge of the balcony by the devious coyote, a fact I discovered following your departure when I too attempted to enter the space, only to burst through the canvas. There was a second when I was suspended midair that I must say was thrilling, though the feeling was fleeting as I plummeted three floors to the parking lot below, terrifying Mrs. Bembaum and her Bichon Frise. Luckily, I was not seriously harmed by the fall nor by the impact of the subsequent anvil, the provenance of which remains a mystery.
Returning to the subject of explosions, you, unfortunately, did not escape unscathed from the apartment after you casually approached my upright piano and began picking out the tune of “Believe Me If All Those Endearing Young Charms,” only, upon striking treble C, to be blown to what must be described as “smithereenies.” I assure you I had no idea the piano was loaded. I have been playing that song regularly without mishap. Or perhaps I was playing it wrong.
Again, I am sure it is that cunning coyote who is to blame for this destruction of property and injury to your person. But, as you are undoubtedly now aware, the damage is temporary, and your scorched face has returned to its usual shade of puce and piano keys no longer dangle melodiously from your mouth.
I am sorry you stepped in the quick-drying cement by the front door on your way to the hospital.
I had no idea it was there. Again: coyote. I was able to recover your shoes and will return them to you at your convenience.
Also: the giant slingshot at the entrance to the bedroom is not mine.
