Monthly Letter for June 2007

The Blog
Page 16

“If you think nobody cares, try missing a couple of payments!”

The current meltdown in the sub prime market is a “prime” example of greed and mispricing of risk. I have been advising clients of late that we really didn’t / don’t have a real estate bubble. What we had was a “lending bubble”. If you could fog a mirror you could get a loan (maybe even two!). The reason we have not seen the ripple effect into the commercial market is because commercial underwriting did not dip into the bottom of the bucket like residential did. (The SBA market might have a few issues in a weakened economy.) Interestingly enough, commercial real estate lending showed a year over year decrease in delinquencies in California. 99.87% of commercial loans were current or less than one month behind.

Well, things are unfolding pretty much as predicted in the Gold Report ( The F.I.R.E. (Finance, Insurance and Real Estate) industry has shown the most strain. However, it appears to have stabilized and baring anything unforeseen, the worst is behind us. The stock market is showing gains (also predicted in the Gold Report). Keep in mind that although this is good for the economy it takes liquidity from the real estate market and will put pressure on CAP rates.

As I mentioned last month, we have seen an increase in tenant delinquencies (mostly in the F.I.R.E. industries referenced above. A number of you have asked how the eviction process works. Last month I posted a blog entry outlining the process (

A recent court case (thanks to Kimball Tirey, St. John for the alert) should be noted by Landlords doing evictions.

A commercial landlord is not ordinarily under a duty to inspect its premises once the tenant has taken possession. However, a new Court ruling may change all that. In Stone v. Center Trust (2007) 146 CA4th 1435, the Court of Appeal for the Second Appellate District, expanded a commercial landlord’s duty to inspect its property for dangerous conditions after a judgment for possession was entered by the Court, but before the sheriff could effectuate the lock-out of the tenant.

The case involved a commercial shopping mall where a customer was injured on a slippery dance floor. The Court found that Civil Code section 1714, which places a duty on a landlord to use reasonable care to protect people who come onto the property, and applies to the time period between an unlawful detainer judgment, but before possession is returned to the landlord. The Court predicated its ruling on several grounds, including the fact that the landlord knew that defaulting tenants sometimes neglected their property; the fact that the property involved use by the public; and the fact that the Lease Agreement explicitly gave the landlord the right to inspect if the tenant was in default.

The Court’s ruling has expanded a commercial landlord’s liability in the arena of personal injury to its property. It further increases the need for a commercial landlord to be vigilant and consider an inspection of the property at least after an unlawful detainer judgment has been awarded but before the lock-out has taken place.

I am happy to report that the drop in deals that we experienced last month was completely reversed in May and we are back on the tear of the first three months of this year. I thought I would share an internal statistic because I have found it to be highly reflective of the current and future economy. The statistic is of inbound sign calls. Although we don’t rely on sign calls, (yes, we cold call, network, advertise, mail and email) over time they are a steady indicator of business activity.

Given our resurgence of activity, I’m writing to let you know that I have recently been diagnosed with a very serious illness and there’s no hope I will ever get over it. It may be hereditary as

well. The scientific world is frantically searching for a cure. This is an ailment many of us suffer from and may not as yet be able to discuss it with your loved ones and try to explain what really happened to you all those times you tried so hard to accomplish something and didn’t. Do you by chance, share this same affliction?

“Butfirst Syndrome”

It’s like when I decide to do the laundry – I start down the hall and noticed the newspaper on the table. Okay, I’m going to do the laundry – Butfirst I’m going to read the newspaper.

Then I notice the mail on the table. Okay, I’ll just put the newspaper in the recycle stack, Butfirst I’ll look through that pile of mail and see if there are any bills to be paid.

Now where’s the checkbook? Oops! There’s the empty glass from yesterday on the coffee table. I’m going to look for that checkbook, Butfirst I need to put the glass in the sink.

I head for the kitchen, look out the window, notice my poor flowers need a drink of water. I put the glass on the sink and darn it, there’s the remote for the TV on the kitchen counter.

What’s it doing here?

I’ll just put it away, Butfirst I need to water those plants.

Head for the door and Ack! Stepped on the cat. The cat needs to be fed. Okay, I’ll put that remote away and water the plants. Butfirst I need to feed the cat.

At the end of the day: The laundry isn’t done, the newspapers are still on the floor, the glass is still not in the sink, the bills are not paid, the checkbook is still missing, and the cat whizzed on the remote control.


When I try to figure out how come nothing got done all day, I’m baffled, because I KNOW I WAS BUSY ALL DAY!

I realize this condition is serious…and I should get help…Butfirst I think I’ll read all my e-mail!


Making a deal come together is like landing a 747 on a blade of grass.

This past month was one of the most interesting I’ve witnessed in some time. As I have told you, last year was our best on record. Well the first quarter of this year beats all quarters ever. We did 25 deals in 3 months! But…maybe it is just a lull, but April activity started off gangbusters and we had perhaps one of the largest number of deal failures in some time (deals falling apart but all for various, different reasons) – unusual – and we hope is just an aberration. Additionally, we have witnessed a continued increase in tenant delinquencies, failures and/or subleasing. As I have said before, this is not all bad as long as vacancy stays low, i.e. as long as we’re able to re-lease the space at higher rent. So for now, we’re going to call it “April showers bringing May flowers”.

Speaking of flowers and green things you may be interested in my mid-month blog (www.cdccommercial/ If you do nothing else you should watch the video about Dynamic Architecture ( ) and see the future of green buildings and moving skyscrapers. announced its annual list of the top 100 places to live in the United States and San Diego was 21st followed by Temecula at 22nd. Now this leads to the subject of population. I have long said that location-location-location is common cocktail party advice about real estate but the real trick is to buy real estate where there are more people moving in than moving out (duh…supply & demand). Thus it is a great concern to me when I read headlines about San Diego’s population “leaving in droves”. I have read and looked at the numbers and here is some reality to consider.

1. Yes, people are moving out but the population continues to grow because of birth over death rates.

2. Yes, people are moving out but they are moving to Temecula and driving back to San Diego for their jobs (this phenomenon has been going on in L.A. for years – how do you

think Orange County got started? A 2002 survey showed 30,000 commuters came into San Diego from Temecula daily.

3. SANDAG estimates that 40,000 people travel across the Mexican border to jobs in San Diego daily.

4. Between July 2005 and July 2006, 42,000 more people moved out of San Diego than moved in. Although it sounds bad, it is tempered by 1-3 above.

5. Now here’s the kicker. Between 2000 and 2006 we created 106,000 jobs in S.D. but only built 78,000 houses (mostly condos or $1,000,000 + homes).

Ok I learned a new term this month. A house is no longer foreclosed upon it is “de-financed”!

Although we continue to remain bullish long term on real estate ownership, we are seeing some clients “taking their chips off the table”. In some cases it is age and in others the belief that a correction is coming or tax rates are as low as they are going to be.

In my efforts to create those May flowers I would like to offer you a $500 cash referral for any property you list with us or you refer to us to list for sale (Surely, you have friends or family or someone from one of those cocktail parties you can wow with your new found real estate knowledge!). You’ll receive the $500 cash at close of escrow.

Well we started and stayed on a “green” theme this month (whether it is flower’s buildings or cash). May the sun shine and hills (and your bank account) be filled with green!


OK so I missed Earth Day on Friday – sorry!

Sustainability and Green Buildings have long been kept in the corner by the real estate industry along with tree huggers and indian sand flys and such. The press and politicians have raised our environmental awareness, however, I believe that soaring energy prices and tax incentives have finally made us pay attention.

Look at what happened with regard to handicap accessibility. Only 15 years ago accessibility wasn’t on any construction drawings and now it is part of the building code!

If you want a very cool look at the future of skyscraper building, click the Dynamic Architecture link below and click on the “Big Resolution Animation” box to watch an amazing video. What is mind numbing to me is that they will be building this in Dubai. I especially liked the wind turbines between floors and the shortening of the construction period by using modular units!

Moving Skyscrapers

Oprah recently promoted Green Dimes on her show. Basically it is $36 per year to stop or control the postal junk mail you receive and they plant a tree in your name each month. Pretty cool – a spam filter for you mail box!

Finally, while I am still on saving the earth. The US Navy announce last week that the USS Carl Vinson will make San Diego its home port in 2010. It will join the USS Reagan and USS Nimitz. This will be a big boost to our economy not just from the infux of more residents but also the associated support jobs created. Remember every “hard job” creates 7 more jobs!

Thank God and our Country for the freedom we have and may you be touched by the sun and the beautiful environment in which we live, work and play!

Regards, Don (858.486.9999)


April 1, 2007


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 ( ) 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 ( )

I am also pleased to announce I have joined the “hip” crowd and now have my own BLOG ( ). 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.


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.


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


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 ; Sarah Thompson in London at

Last Updated: March 2, 2007 11:49 EST

Regards, Don (858.486.9999)


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)


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)


‘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!).



“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 ( 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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