Monthly Letter for April 2007

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April 1, 2007

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RE: Monthly Letter

Dear «GreetingLine»

The ancient Greeks taught that all communications involved three ingredients: Ethos, or the character of the speaker; Pathos, or connecting with the emotions; and Logos, which is the factual content of the message. For any of you who read our Gold Report (www.cdccommercial.com ) you will of course know that we try to incorporate all three of these methods in our selling and way of doing business. Ultimately, we like to call it “Relationship”.

Speaking of the Gold Report, I was very excited that the San Diego Daily Transcript picked it up and wrote a whole story based around it (www.cdccommercial.com/RetailStrong )

I am also pleased to announce I have joined the “hip” crowd and now have my own BLOG (www.cdccommercial.com/myblog ). You can view it on the website and you can even add your own comments or opinions. If you want updates emailed to you when they come out, you can subscribe on the blog page beneath any of the posts (my goal is to update three times a month on a timely subject). Browse the posts and see what you think (It is a single subject mini of my monthly letter.).

As I continue to move CDC Commercial more and more digital, the world seems to accelerate right on up to me. Or as my mom would say, “The hurrier I go, the behinder I get”. I read recently that, “The economic food chain is fast becoming wired”. A couple of tools I’d suggest if you haven’t already – try two monitors (I heard Bill Gates uses 3) – wow, talk about more real estate to work with! Second, download Google Desktop and try out some Google Gadgets. The desktop allows you to search all your hard drive and email just like a Google internet search (plus you don’t have to buy Vista to do the same thing!). Lastly, buy PaperPort by Nuance. It allows you to PDF, sort, organize, scan and fax all of your documents.

Ok, back to real estate. Did you know California law requires all new and replacement water heaters to be braced and anchored? When you sell you have to certify compliance so you might want to just take care of it now.

So the days of buy, paint and sell may be past us. I believe we have returned to a “normal” market. This is a time when true professionals thrive and take market share from those who were just order takers.

Why is this becoming a buying opportunity?

1. Bubble trouble has diminished.

2. Bidding wars are over.

3. Real estate is an investment you live with. It is an investment that builds equity while you benefit from tax breaks.

4. The Fed is taking a breather. Rates will remain stable while the Fed micro manages regulation (such as sub prime lending).

5. Lenders want business – we are awash in capital and liquidity. Never been a better time to borrow.

6. Rehab and re-rent – with replacement cost high, renovation makes sense. Low vacancy allows room for much higher rents.

7. A little more product coming on the market. Some highly leveraged owners starting to feel pressure.

8. Get in the game. If you don’t join, you can’t play. It’s a long term investment. The longer you’re in, the better you’ll do.

As always we look forward to a long and mutually prosperous relationship. We hope you enjoy the April 1st moral to the attached story.

Regards,

Don Zech

CDC Commercial

Real Estate Services

The Donkey Story

One day a farmer’s donkey fell down into a well. The animal cried piteously for hours as the farmer tried to figure out what to do. Finally he decided the animal was old, and the well needed to be covered up anyway; it just wasn’t worth it to retrieve the donkey. He invited all his neighbors to come over and help him. They each grabbed a shovel and began to shovel dirt into the well.

At first, the donkey realized what was happening and cried horribly. Then, to everyone’s amazement, he quieted down. A few shovel loads later, the farmer looked down the well, and was astonished at what he saw.

As every shovel of dirt hit his back, the donkey did something amazing. He would shake it off and take a step up. As the farmer’s neighbors continued to shovel dirt on top of the animal, he would shake it off and take a step up. Pretty soon, everyone was amazed, as the donkey stepped up over the edge of the well and trotted off.

The Moral:

Life is going to shovel dirt on you; all kinds of dirt. The trick to getting out of the well is to shake it off and take a step up. Each of our troubles is a stepping stone. We can get out of the deepest wells just by not stopping, never giving up! Shake it off and take a step up!

Remember the five simple rules to be happy:

1. Free your heart from hatred.

2. Free your mind from worries.

3. Live simply

4. Give more.

5. Expect less.

O.K., that’s enough of that B.S. … The donkey later came back, caught the farmer out in the field and kicked the #@*# out of him. Then he went over to each of his neighbors farms and kicked the #@*# out of them too for helping.

The REAL Moral:

When you try to cover your ass, it always comes back to get you.

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Well at least the front page of the Real Estate section of the San Diego Daily Transcript (which is the daily legal and real estate newspaper of San Diego). For those of you who don’t subscribe, it is linked here (double click on the text);

Retail Market Strong

The press never quite quotes you like you said it but the gist of it is close enough. Of course for those of you who are already readers of my monthly letter and the Gold Report you already knew all this stuff!

I will tell you, with Day Light Savings changed and with weather like the last few days you can understand why San Diego will add a million more people over the next 20 to 30 years!

Regards, Don

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The buzz has been on the street for about 6 months that Tesco (the world’s third largest grocery store chain) is coming to town. Plans are for Southern California, Phoenix and Las Vegas. I’m working on 3 locations myself. The concept is a 14,000 sf freestanding building like a Walgreens that will look sort of like a Trader Joe’s but more of a large 7-11 with the addition of ready serve meals like many grocery stores. The news today though is that Warren Buffet has boosted his stake and that’s a big vote of confidence. News story is below;

Buffett Buys More Tesco Shares, Raising Stake to 2.9%

By Angharad Couch and Sarah Thompson

March 2 (Bloomberg) — Warren Buffett’s Berkshire Hathaway Inc. increased its stake in Tesco Plc, according to the U.S. insurance and investment firm’s annual letter to shareholders.

Berkshire Hathaway owns 229.7 million Tesco shares, or 2.9 percent of Britain’s biggest retailer, yesterday’s letter shows. That makes it Tesco’s fifth-largest shareholder, according to Bloomberg data. Omaha, Nebraska-based Berkshire had held a stake of 2 percent before today, according to the most recent filings.

Buffett, the world’s second-richest man, first bought shares in Tesco last year after the Cheshunt, England-based retailer said it would open convenience stores on the U.S. West Coast. The outlets will take on 7-Eleven Inc. and Trader Joe’s to win time-pressed shoppers in southwest U.S. cities. Prevented by planning restrictions from expanding its U.K. supermarkets, Tesco is also adding stores from China to Turkey.

“Buffett is realizing that with Tesco moving into the U.S. with a fantastic format and great management, they are the ones to back,” said Chris Gower, an analyst at Man Securities in London. “I wouldn’t be surprised if other investors start piling in. They look at Buffett as the shining light.”

Buffett’s note didn’t discuss Berkshire’s Tesco investment. The company’s shares rose 8.75 pence, or 2.1 percent, to 431.75 pence in London, giving the retailer a market value of 34.3 billion pounds ($66.7 billion).

U.S. Operations

Morgan Stanley raised its price estimate on Tesco stock to 490 pence from 380 pence today, citing the prospects for international expansion.

The retailer’s “operations are still undervalued,” Morgan Stanley analyst Nick Coulter wrote. He estimates the U.S. stores will have $1,300 in sales per square foot and profit margins before interest and taxes of 6 percent, valuing the business at 46 pence a share.

The British retailer has said it will recruit more than 2,500 U.S. staff and will open Fresh & Easy Neighborhood Market outlets later this year in Phoenix, Las Vegas, Los Angeles and San Diego. The stores will be based on the Tesco Express convenience store U.K. format, selling high-quality ready-made meals and fresh produce. Tesco plans to spend as much as 250 million pounds a year opening U.S. outlets.

Investors comb Buffett’s annual Berkshire Hathaway letters for insights into everything from investments and acquisitions to executive pay and economic policy. The letters disclose most of the company’s holdings worldwide. Buffett was labeled “the world’s greatest investor” in Robert Hagstrom’s 1994 biography.

To contact the reporters on this story: Angharad Couch in London at acouch2@bloomberg.net ; Sarah Thompson in London at sthompson17@bloomberg.net

Last Updated: March 2, 2007 11:49 EST

Regards, Don (858.486.9999)

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I had the pleasure of attending the Univesity of San Diego annual Commercial Real Estate forecast event last month. Sam Zell the real estate mogul and billionaire was the keynote speaker. I learned two things and thought I would pass them on to you.

1. Sam noted that rents rise to meet construction or replacement costs. I agree 100%. Given the high cost of construction right now we have a lot of room for rents to go up. I believe this creates a “protected” investment opportunity right now. It is not if but when will rents rise.

2. Sam apparently does an annual video (usually to music) that gives his view of some economic issue. They are very insightful and educational. I have posted the web link below (double click on it). He showed the 2005 one on liquidity (wow is that one spot on). I particularly like the 2003 “Wired Exports” one. I hope you enjoy them as much as I did. Good economics lessons to music!

Sam Zell Year End Gifts

Regards, Don (858.486.9999)

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I had the pleasure of attending the Univesity of San Diego annual Commercial Real Estate forecast event last month. Sam Zell the real estate mogul and billionaire was the keynote speaker. I learned two things and thought I would pass them on to you.

1. Sam noted that rents rise to meet construction or replacement costs. I agree 100%. Given the high cost of construction right now we have a lot of room for rents to go up. I believe this creates a “protected” investment opportunity right now. It is not if but when will rents rise.

2. Sam apparently does an annual video (usually to music) that gives his view of some economic issue. They are very insightful and educational. I have posted the web link below (double click on it). He showed the 2005 one on liquidity (wow is that one spot on). I particularly like the 2003 “Wired Exports” one. I hope you enjoy them as much as I did. Good economics lessons to music!

Sam Zell Year End Gifts

Regards, Don (858.486.9999)

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‘m still not sure about this. It is easy to type and rant but who really cares to read it. I already write my monthly letter and many read and enjoy that. I live on the phone and by email. I even use instant messaging with my co workers and my kids. I think my goal as a blogger (if I am going to even become one) is to give my clients (and maybe the world!) a little better visibility as to what is going on in the market, little snippets of trends or things I see happening. I guess if you take a top down look at this, it starts with our business plan and model (Our Pyramid which is part of our Logo and has all of our personal and business philosophy posted on it – see “Our Mission Statement” on our Web Page) and annually you get a look at the past year and our forecast of the next year (See “Gold Report” on our Web Site), this is of course is supplemented by our Monthly Letter (See “Monthly Letter” on our Web Site). Now you’ll get my near minute be minute look at market activity, breaking news and it’s affect on things, deals done or being done, case studies and more links or useful attachments that might help you, the owners and users of commercial real estate.

So, all in all this might be fun. One more thing to keep me busy though … hmm. These days I feel like I am going so fast I am being physically separated from my shadow (I even had to hold the elevator for it the other day!).

Don

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“Before Google, who answered all the questions?

Well, I don’t know the answer to that question. But I do know that it has been a fast short month and I have lots of short pieces of news for you, so I am just going to throw them out as bullets and hope it all comes together.

  • The Urban Land Institute (ULI) reported in The Wall Street Journal and at the University of San Diego Trends Conference that; “Commercial real estate is beginning a return to its normal as an income-producing investment rather than the wildly appreciating asset class it has been this decade.” Investors are going to have to turn to operating performance to raise returns – what a concept!.
  • Rent bumps on expiring leases in 2007 (ie. market rate options) will continue to raise income and values. Most leases signed 3 to 5 years ago were done during the tech bubble burst so at much lower rates than today.
  • Taxable retail sales in San Diego rose an estimated 5.0 percent in 2006 and are expected to rise 4.3 percent in 2007.
  • The service industry accounts for 80% of the nation’s economic activity. January marked the 46th consecutive month of business activity increase for this sector.
  • The Bush Budget proposal includes a 40% increase to SBA loans, as well as a reduction to their fees. More capital, less cost is going to equal more owner user opportunities.
  • Commercial construction costs have skyrocketed and they won’t stop in 2007. Expectations are for 6% to 8% increases despite a slowdown in residential construction (If it weren’t for the housing slowdown, they would rise 10%!).
  • A penny almost costs a nickel to make. Talk is that the penny may be short for this world. Don’t tell me we don’t have inflation!
  • Speaking of construction costs and metals prices, you may want to look at the exposed metal on your buildings (particularly backflow preventers and electric panels). There is an epidemic of stealing going on for the value of the scrap metal. Think about locks or cages to protect them.
  • Speaking of security, remote surveillance is becoming common place. Imagine having a remote camera to look at your property via the internet. (Maybe you’ll want a remote camera to watch your commercial real estate broker work!)
  • Interesting how numbers get thrown around. One forecast event said San Diego will grow by 1 million residents in 30 years (33,000+ per year). At another industry event, data was cited that only 900 people moved to San Diego over the last two years and 28,500 people moved out. Just goes to show figures don’t lie, but liars sure can figure!

For those of you who are inclined, I have posted the sales comparables for the year 2006 (office industrial and retail sold in 2006) on the website (www.cdccommercial.com). I hope you find them useful and enlightening.

The National Association of Realtors (NAR) has launched a campaign aimed at promoting this as the best time to buy a house (Got Real Estate…?). Whether you believe this is the right time to buy or not is your own call. Our opinion is that although rapid price gains may be past, real estate is still a good commodity to own in inflationary times and because there is still a lot of room for rent to grown in most properties. Additionally, over time there are some “comfort factors” that come with owning real estate (besides not worrying about 400 point down days!):

1. Tax Benefits

2. Cash Flow

3. Risk management and control

4. Leverage and appreciation

5. Mortgage payoff

These factors aren’t so affected by the cycles and a big reason that people who own real estate over long periods are happy people!

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Happy New Year! So what is my forecast for 2007 you might ask? I think John Kenneth Galbreth said it best:

“There are two types of forecasters: Those who don’t know

and those that don’t know that they don’t know”.

Attached you will find the 2007 Gold Report – Intelligence in Real Estate (do you like the play on words?). This is our 11th edition and as in the past we give an overview of the economy then work our way down to the specifics of property types and suggestions to help you in the year ahead (The report is also on the website www.cdccommercial.com ).

Markets are mixed; the USD San Diego index is down; the CEO index of small firms is up for 2007. Another great economist said, “If you are going to be in the business of forecasting, do it often!” – the idea being the more often you do it the more often you can revise! (Lynford). With that in mind we will do our best to keep you updated throughout the year with our monthly letter.

For now, the housing slowdown is spilling over a little (as predicted) with housing related tenants (mortgage, realty, etc…) closing, vacating or subleasing their spaces. Landlords and property managers, please keep us posted even of your weak tenants. Often we can target a replacement before they go out of business and stop paying rent. As you do your common area maintenance (CAM or NNN) budgets for the new year, please be sure to send us the new estimate so we are quoting good numbers.

Phase I environmental reports just got more expensive due to higher licensing requirements. They also have to be current within 6 months.

I hope that you enjoy the Gold Report as much as I do putting it together for you. If you or your organization is interested, I have a short presentation that I can give along with a primer on commercial real estate (the talk can be tailored from 10 to 30 minutes and is good for Rotary, Kiwani’s or trade groups).

Although many are looking at this year as the cup half empty and equally as many as the cup half full, we at CDC Commercial like to see it as simply a glass that is twice as large as it needs to be!

May our 2007 be mutually prosperous!

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