04 Jun / 2018
Well I am going to keep this month’s letter short since I am writing it from my balcony over-looking the blue green waters of the Pacific Ocean and Maui coastline. First it never ceases to amaze me how technology allows me to stay in touch with calls, emails, electronic files, etc…. (on the other hand, I know what you’re thinking “Geez get a life, you’re on vacation!). So, this is the conundrum of modern life (or what is now being termed “the gig economy” – after the idea of getting paid one deal at a time – or “one gig at a time” or what’s your next “gig”). Although, this might be a new concept, that is how I have been getting paid for the last 33 years! Of course, by the time you are reading this I will already be home working like a dog again.
Speaking of dogs, it never gets easier but one of our two family dogs passed after 14 years. It is never fun, but a replacement goes a long way to filling the void (pictured at top). While still on the subject of pets, you may want to give some consideration to your rules, leases, employee handbooks, etc. with regards to pets. The service animals have been around for a long time but there has been an explosion of “support animals” (from Dogs to Peacocks). In addition, dogs have grown to almost human standards in terms of their access to planes, trains and automobiles, not to mention stores, offices, hotels and theaters. Don’t get me wrong, I love my dogs, but I recently toured a space where a tenant wouldn’t lease because she has allergies and the suite next door had two dogs in their office. On the other hand, my daughter works at Petco Corporate and they have nearly as many dogs as they do employees wandering the halls (complete with two dogs parks!) Linked below is a great article by Brian Adkins at KTS Law on pets in the workplace. If you haven’t already, this is a good time to address this growing issue.
Regardless of which side of the fence (sorry for the pun) you are politically, finding contractors (Gig workers) has gotten tougher – everyone is busy. Finding workers in the Trades (plumbing, painting, electrical etc… has gotten difficult and more expensive. At the global level, economists are saying there is slower global growth rate and higher rates are leading to stagnation. However, at the street level what I see is Goldilocks on steroids – not too hot, not too cold and plenty of activity to go around. However, it does make my head turn a bit when I start hearing the old phrase, “but it’s different this time.” One thing I think is different is that rate increases are felt much quicker and therefore won’t travel as high or as quickly as say in the ’70s’. Back then you had a fixed rate home loan and you paid cash for your car. Today, a simple rate bump affects millions of businesses and tens of millions of consumers right away because we have so much financed. That leads me to my greatest concern – High debt companies. These companies have been living at the trough of government sponsored low interest rates and when the uptick is felt they will cut jobs, space and overhead quickly. I think in the meantime, we are looking pretty good until 2019 or 2020.
One other early warning sign that has just come onto my radar in the last month. Appraisals seem to be coming in higher than I expect. Now consider that I am an optimist and want to value a property at the highest price I can get it sold for. But in the last month, I have seen 3 – 4 appraisals that were much higher than I would value the property for. In all of the cases they had used poor comps or had projected rents higher than the market for the subject building. I don’t know if this was because they were busy, incompetent or overly optimistic, but it is of concern.
Well I was going to write about artificial intelligence and its future effect on commercial real estate… but I think it is time to go play in the surf and curl up like a dog in the sun. BTW in dog beers… I only had one!
A Dogs Purpose (from a 6-year-old)
Being a veterinarian, I have been called to examine a 10-year-old Irish wolfhound name Belker. The dog’s owners, Ron, his wife, Lisa, and their little boy, Shane, were all very attached to Belker.
I examined Belker and found he was dying of cancer.
I told the family we couldn’t do anything for Belker and offered to perform the euthanasia procedure for the old dog in their home.
As we made arrangements, Ron and Lisa told me they thought it would be good for six-year-old Shane to observe the procedure. They felt as though Shane might learn something from the experience.
The next day, I felt the familiar catching my throat as Belker’s family surrounded him. Shane seemed so calm, petting the old dog for the last time, that, I wondered if he understood what was going on.
Within a few minutes, Belker slipped peacefully away.
The little boys seem to except Belker’s transition without any difficulty or confusion. We sat together for a while after Belker’s death, wondering aloud about the sad fact that animal lives are shorter than human lives. Shane, who had been listening quietly, piped up, “I know why.”
Startled, we all turn to him. What came out of his mouth next stunned me. I’d never heard a more comforting explanation.
He said, “People are born so that they can learn how to live a good life — like loving everybody all the time and being nice, right?”
The six-year-old continued, “Well, dogs already know how to do that, so they don’t have to stay as long.”
Remember, if a dog was the teacher, you would learn things like:
- When loved ones come home, always run to greet them
- Never pass up the opportunity to go for a joyride
- Allow the experience of fresh air and the wind in your face to be pure ecstasy
- Take naps
- Stretch before rising
- Run, romp, and play daily
- Thrive on attention and let people touch you
- Avoid biting when a simple growl will do
- On warm days, stop to lie on your back on the grass
- On hot days, drink lots of water and lie under a shady tree
- When you’re happy, dance around and wag your entire body
- Delight in the simple joy of a long walk
- Eat with gusto and enthusiasm
- Stop when you have had enough
- Never pretend to be something you’re not
- If what you want lies buried, dig until you find it
- When someone is having a bad day, be silent, sit close by and nuzzle them gently
- Be always grateful for each new day
Enjoy Every Moment of Every Day!
01 May / 2018
“Brokers, who having no stock of their own, set up and trade with that of other men , buying here, and selling there, and commonly abusing both sides to make out a little paltry gain.”
~From Samuel Johnson’s “a Dictionary of the English Language”, 1755.
I prefer to think of the brokerage business like that of a virtuoso of the deal! Well as I write this the 10-year Treasury has touched the 3% mark for the first time since 2014. The 30-year fixed rate mortgage hit 4.46% also a high point. Consensus is that the 30-year fixed mortgage will reach 5% by the end of the year. Some perspective however, the historical average for the 30-year fixed rate mortgage is about 8%, so rates are still low by historical standards. The primary reason mortgage rates are rising is a healthy and growing economy. However, income levels must keep growing to offset rising rates (that means wages and rents).
The USD economic index set a record high for the third month in a row in March, indicating positive growth in the local economy through at least the end of 2018. The report does warn, however, we face a long run problem of shrinking employment due to improved technology. The key as always, is whether the technology changes will lead to new opportunities as it has in the past.
Computers are performing detailed image processing on x-rays, text mining of legal documents. IBM touts Watson, we all talk to Siri or Alexa, but AI is now even being used to read leases. An application called Dilligen can scan hundreds of lease and CC&R’s and tell you if there are any use conflicts or who needs to be notified in case of certain events. AI is starting to be used in locational decision making, in valuations and appraisal. You might also check out www.commonareas.com to help manage your property. It is an amazing way to track all the work and tenants at your property. In fact, we are even using an AI mining product that allows us to generate an amazing history and projection of rent, value and comparables of most properties on the market. Let us know if you would be interest in an evaluation of your property or one you might want to buy.
One area that San Diego ranks high in (not in a good way) but that might change with technology (can you say self-driving cars) is traffic. San Diego was 45th out of 1360 cities in 38 counties. According to the study, San Diegans spent 48 hours in peak traffic congestion last year. Ten percent of our driving time in 2017 was spent in traffic jams!
In the swamp also known as Washington D.C. you will be glad to know that IREM (Institute of Real Estate Management) is hard at work advocating for seven major issues affecting the industry and maybe with a developer as President we will get some traction. Their agenda is;
- ADA lawsuit reform. IREM supports legislation to create “notice and cure” provisions within ADA to allow owners of businesses and property to rectify violations before facing costly lawsuits.
- Federally Assisted Housing. Federally assisted housing puts people into homes. HUD contracts with private owners to fund the difference between rent and 30% of tenant’s income.
- Rent Control. IREM urges elected officials at all levels of government to oppose rent control as being counterproductive to all segments of society and the well-being of the nation.
- Medical and recreational marijuana. The conflict between federal, state and local law creates a complicated situation for real estate owners, users and lenders.
- Flood insurance. The National Flood Insurance Program (NFIP) provides affordable insurance for those that need it. IREM supports reform and continued funding.
- Data Security. Property owners and managers collect and maintain huge amounts of sensitive data (it’s not just Facebook!) including social security numbers, account numbers and financial records putting them at risk from cyber criminals. There is a fine line between establishing standards and creating onerous legislation on property owners and managers.
- Online sales tax. This is a hot topic in the news lately. IREM supports creating a level playing field but opposes a “federal sales tax on internet purchases.” Instead it supports states collecting sales tax at the state and local level.
So, what can we do? Gene Simmons (yes, rocker with the Band KISS) said, “whether you are left or right the bad guys still hate us.” Former Speaker of the House Newt Gingrich says, “we need a national theory of succeeding in education and the economy. An unhealthy, uneducated and unproductive America will not sustain a global national security system and may not even be able to defend itself. Specifically, to be successful over the next 20 years, we must develop national security theories for:
- Shrinking and eventually eliminating Radical Islamic supremacism as an ideology capable of recruiting soldiers willing to engage in terrorism.
- Creating an American response to the Russian model of hybrid warfare which operates with the same capabilities.
- Developing systems, strategies, and structures for sustaining continuous competition with China and Russia.
- Being prepared for constant change across every career, institution, and system brought about by emerging technologies (this includes your real estate).
- Constantly communicating with Americans and allies to help people understand that mastering the scale and pace of change will be the key to success (this also includes your real estate).
This is a daunting agenda, but we need to face the music and look for a virtuoso (we hope that’s us for your real estate)…hope you like the story.
Music and Perception
In Washington, D.C., at a Metro Station, on a cold January morning in 2007, this man with a violin played six Bach pieces for about 45 minutes. During that time, approximately 2,000 people went through the station, most of them on their way to work. After about 3 minutes, a middle-aged man noticed that there was a musician playing. He slowed his pace and stopped for a few seconds, and then he hurried on to meet his schedule.
About 4 minutes later:
At 6 minutes:
A young man leaned against the wall to listen to him, then looked at his watch and started to walk again.
After 1 hour:
He finished playing and silence took over. No one noticed, and no one applauded. There was no recognition at all.
No one knew this, but the violinist was Joshua Bell, one of the greatest musicians in the world… He played one of the most intricate pieces ever written, with a violin worth $3.5 million dollars. Two days before, Joshua Bell sold-out a theater in Boston where the seats averaged $100 each to sit and listen to him play the same music.
This is a true story. Joshua Bell, playing incognito in the D.C. Metro Station, was organized by the Washington Post as part of a social experiment about perception, taste and people’s priorities. This experiment raised several questions:
*In a common-place environment, at an inappropriate hour, do we perceive beauty?
*If so, do we stop to appreciate it?
*Do we recognize talent in an unexpected context? One possible conclusion reached from this experiment could be this:
If we do not have a moment to stop and listen to one of the best musicians in the world, playing some of the finest music ever written, with one of the most beautiful instruments ever made. How many other things are we missing as we rush through life?
Enjoy life NOW… it has an expiration date!
02 Apr / 2018
“The difference between death and taxes is death doesn’t get worse every time Congress meets.” ~ Will Rogers
Isn’t it appropriate that the month we pay taxes starts with April Fool’s day and finishes with the cries of May Day (traditional International Workers Day)! Adlai Stevenson said in a campaign speech, “I offer my opponents a bargain: if they will stop telling lies about us, I will stop telling the truth about them.” (History might not repeat itself, but it sure does rhyme). In today’s world of “Russia, Russia, Russia” and #DeleteFacebook, I think it is important to be a little reflective. Of course, we should seek to shut down Russian influence as much as possible, without losing perspective. But we aren’t divided because of Russia; we are divided because we have genuine deeply held differences. The fault, to the extent there is one, isn’t with the bots, but with ourselves.
The shuffling among new technologies and potential business responses (and yes that includes commercial real estate) is what sets the page for social change. No one believed that self-driving cars would ever be viable, let alone at the verge of commercialization. Computers will soon be able to perform detailed image processing on x-rays, text mine legal materials and turn out fault-free analysis of tax forms by breaking these dauntingly complex cognitive tasks into smaller and smaller task units. Whether it is the #metoo movement or an episode of House of Cards, your taxes or the future of AI it is all about “Control.” So how do you “control” your commercial real estate (especially in the event of an inevitable real estate downturn)? Times are good, but they won’t last forever. Now is the time to take advantage of what’s left of the good times. Money is still relatively cheap, vacancies are low, and rents are rising. For some, it is time to offload assets that are not strong enough to weather the storm. For others who are confident their properties will hold up long term, here are some beneficial tips:
- Negotiate Long-Term Leases. During downturns when vacancies are up, having long term tenants and steady cash flow is important.
- Pursue Rehabs and Upgrades. Be sure your property is in tip-top condition. When times are slower you want to remain the most attractive spot on the block. Doing this while capital is available and cheap is the best approach.
- Embrace Technology. Look at Tech solutions to make your property more efficient and nimble. New sprinkler box timers connect to WiFi, so they turn off automatically when rain is in the forecast plus you can control your system from your cell phone.
Speaking of technology, I recently read about a new technology that may soon make WiFi obsolete. It is called LiFi and it uses LED lightbulbs to transfer data. It boasts speeds up to 1000 times faster than WiFi. Now that is light speed!
For you to remain in control of your real estate and be light years ahead, it is important to know the fundamentals of how you make money – and optimize it.
- Cash Flow – Income after expenses and depreciation shelter.
- Loan Paydown – it doesn’t look like much, but it adds up to a lot over time.
- Appreciation – appreciation come from rent increases or cap rates going down (buyers accepting less return). Leverage (loan) super charges that appreciation. A 3% rent increase on a $100,000 property that you own for cash is 3% but if you have a 50% loan that is $3000 on a $50,000 investment or a 6% return., on an 80% loan that is 15%! – just remember it cuts both ways when things go south.
Whether we own a skyscraper on Wall Street or a duplex on Main Street, the basic principle of income property remains essentially unchanged. We expect to collect money, mainly in the form of rent, and we expect to spend money to pay for the operating expenses and the loans against the property. When we’re done for the year, we hope to have a surplus and to keep the tax collector from getting too large a chunk of it. Perhaps someday our prudent management and careful upkeep will combine with a healthy real estate market to allow us to sell the property at a profit and wise tax advice will keep some of that profit in our bank account.
So Happy Tax month, may the tax man taketh less, and you have more in all ways of your life. Hope you enjoy the story…
The local bar was so sure that its bartender was the strongest man around that they offered a standing $1,000 bet. The bartender would squeeze a lemon until all the juice ran into a glass and hand the lemon to a patron. Anyone who could squeeze one more drop of juice out would win the money.
Many people had tried…over time: weightlifters, longshoremen, etc., but nobody could do it.
One day, this scrawny little fellow came into the bar, wearing thick glasses and a polyester suit, and said in a small voice, “I’d like to try the bet.”
After the laughter had died down the bartender said “OK”; grabbed the lemon; and squeezed away. Then he handed the wrinkled remains of the rind to the little fellow. But the crowd’s laughter turned to total silence…as the man clenched his little fist around the lemon…and six drops fell into the glass.
As the crowd cheered, the bartender paid the $1,000 and ask the little man, “What do you do for a living? Are you a lumberjack, a weightlifter, or what?”
The little fellow quietly replied, “I work for the IRS.”
02 Mar / 2018
Well, things have picked up speed and we are running fast (sometimes like a hamster on a wheel, other times like the Antelope on the open plains).
The USD Burnham-Moores Center for Real Estate’s Index of Leading Economic Indicators for San Diego County rose 0.6 percent in November, 1.4% in December and another 1.4% in January. December’s sharp rise was fueled by a huge gain in building permits, along with strong gains for online help wanted advertising, and the outlook for the national economy.
January’s gain was the second straight strong increase in the USD Index and the 15th month in a row where it had not fallen. The gain pushed the USD Index to an all-time high of 151.1, surpassing the previous high of 150.8 which was reached in May and June of 2000. Given the strong performance of the USD Index, particularly in the last two months, the outlook for the local economy is positive at least through the end of 2018.
If you are interested in reading perhaps the best 2018 Forecast Report, you will want to read, Emerging Trends in Real Estate by PWC and the Urban Land Institute.
I have mentioned in the past about storm water run off and the clamping down by state and local officials on tenants and owners. There is a free workshop being offered on March 7th from 8:30 to 4:45 of San Marcos City Hall. For more info email; email@example.com .
Another free tip is the Escondido Report It App (you can download from the App store) or Google it online. On the app (or website) you can report (take a picture) the problem (pothole, shopping cart or code violation) and the city will be on it (Sorry Escondido Only so far).
Well as things pick up speed in the market, it is important to stay focused on the fundamentals. The first lesson is actually an African proverb that explains that every morning the Antelope wakes up knowing that it must be faster than the fastest Lion and every morning the Lion wakes up knowing it must be faster than the slowest Antelope Honest to God, I tell people all the time that I am a salesman and I am unemployed every morning when I wake up. And I know that I have to run fast if I am going to eat or at least not be eaten.
The second lesson is to have vision. Now listen carefully to the definition of vision. Vision is the picture of the future that makes you passionate. Get a vision!
The third lesson is to have character. Now your whole life you have probably either been accused of being a character or told to have good character. But here is a working definition you can live by; “Character is the accumulation of all of your habits”. Have good character, it is what you are judged by.
And finally, a little about real estate. We live in an unprecedented time. We are in a time like the Renaissance or the Industrial Revolution. When Christopher Columbus discovered the New World, the fear was that the world was flat. Now with the advent of almost unlimited bandwidth, cell phones and other wireless networks, the internet and online collaboration, the new fear is that the world may indeed be flat. You get paid minimum wage to work hard and you get paid huge sums to work smart.
The next ten years will see labor costs continue to come under pressure as cheaper and smarter work forces are found In China and India. These are not reasons to panic but instead be smarter, have a vision and run faster. Let me give you an example of what I mean and a glimpse of the future. If today in the US, we have 90 smart people and 10 not so smart people. In China we have 100 smart people and 900 not so smart people. Realistically, our competition is 1 on 1 to cater to those 910 people. We just have to be smart enough to adapt and sell to them. I am reminded of the salesman who was sent to Africa to sell shoes. He wired back that there was no market, the people didn’t wear shoes and had no money. The company sent a second salesman and he wired back that the market was unlimited because the people had no shoes! The way around in a flat world is to be smart.
While on the subject of smart, let me tell you about the future of San Diego. World class weather, the beach and outdoor life style will continue to attract the best and the brightest in the world to San Diego. The high cost of land and the low cost to manufacture off shore will cause San Diego’s manufacturing to continue to dwindle. The gap has to be filled with knowledge workers. Yes, I know we are bringing jobs back home under the Trump administration, but it won’t be long until those jobs are replaced by robots and drones and artificial intelligence. (I just hope I can run fast enough to retire by then!). It is important, however, to understand how the real estate economy works;
- JOBs – Think Industrial, Research & Development buildings – for every hard-employed job (manufacturing/knowledge worker) you employ 7 support services (retail, doctor, accountant),
- Houses or Condo’s follow jobs – got to have somewhere to live,
- Retail – shopping follows rooftops (although Amazon is disrupting this),
- Office – services (financial, insurance, medical, real estate follow the houses and retail).
You probably have heard that the three most important things about real estate are; location, location, location. Well, it is not really true. Here is the fact. Buy real estate where more people are moving in than moving out. I am confident that although it may ebb and flow, the smart people of the world want to live in San Diego. You’ve got one leg up on them because you are already here, but you are going to have to stay smart to stay here.
And now for the test…
- Name the five wealthiest people in the world.
- Name the last five Heisman Trophy winners.
- Name five people who have won the Nobel or Pulitzer Prize.
How did you do?
My point is, none of us remembers all the headliners of yesterday. And these are no second-rate achievers. They were the best in their fields. But the applause dies. Awards tarnish. Achievements are forgotten. Accolades and certificates are buried with their owners.
Here is another quiz. See how you do on this one…
- Name a few teachers who aided you on your journey through school.
- Name three friends who have helped you through a difficult time.
- Think of five people you enjoy spending time with. Easier?
The people who make the difference in your life are not the ones with the most credentials, the most money, or the most awards. They are simply the ones that care about you.
God Bless you and remember when you wake up in the morning, run fast and be passionate – we’re in the field running hard for you because we care about you! (I hope you enjoy the things that go through my head before I go to sleep…)
Things that go through my head before I fall asleep.
If you attempt to rob a bank you won’t have any trouble with rent/food bills for the next 10 years, whether or not you are successful.
Do twins ever realize that one of them is unplanned?
What if my dog only brings back my ball because he thinks I like throwing it?
If poison expires, is it more poisonous or is it no longer poisonous?
Which letter is silent in the word “scent”, the s or the c?
Maybe oxygen is slowly killing you and it just takes 75-100 years to fully work.
Every time you clean something, you just make something else dirty.
The word “swims “upside-down is still “swims”.
Intentionally losing a game of rock, paper, scissors is just as hard as trying to win.
100 years ago, everyone owned a horse and only the rich had cars. Today everyone has cars and only the rich own horses.
The doctors that told Stephen Hawking he had two years to live in 1953 are probably dead.
If you replace “W” with “T” in “What, Where and When”, you get the answer to each of them.
If 2/2/22 falls on a Tuesday, we’ll just call it “2’s Day”. (It does fall on a Tuesday).
01 Feb / 2018
- The continued strong economy, which should be boosted by tax reform that was extremely kind to the president’s profession.
- Property fundamentals that generally fall between positive and robust.
- Continued strong capital flows that enhances liquidity and support record-high property values, while low acquisition yields seem immune from the slow rise in long-term interest rates.
- Perhaps most important, the uncharacteristic restraint exercised by the market this deep into a recovery.
- Cash Flow Risk – volatility in the property’s net operating income or cash flow.
- Property Value Risk – a reduction in a property’s value.
- Tenant Risk – loss or bankruptcy of a major tenant.
- Market Risk – negative changes in the local real estate market or metropolitan statistical area.
- Economic Risk – negative changes in the macro economy.
- Interest Rate Risk – an increase in interest rates.
- Inflation Risk – an increase in inflation.
- Leasing Risk – inability to lease vacant space or a drop, in lease rates.
- Management Risk – poor management policy and operations.
- Ownership Risk – loss of critical personnel of owner or sponsor.
- Legal, Tax and Title Risk – adverse legal issues and claims on title.
- Construction Risk – development delays, cessation of construction, financial distress.
- Entitlement Risk – inability or delay in obtaining project entitlements.
- Liquidity Risk – inability to sell the property or convert equity value into cash.
- Refinancing Risk – inability to refinance the property.
- Home equity hits all time high – the home ATM is back!
- Health Care is moving from being about coverage to being about affordability. CVS buys Aetna. Heel.com goes public.
- Wal-Mart Stores drops the word “stores” from their name. Bring it on Amazon.
- In 2015, Wal-Mart paid 6.4 billion in taxes and Amazon paid $1.6 billion (but had more sales). Watch out Mr. Bezos, the tax man is coming.
- Bitcoin is a window into the exuberance there is for yield and what an overheated market can look like . I thought a telephone number and social security number were unique numbers, I wouldn’t think to pay $18,000 for one!
It is the year 2018, and Noah lives in the United States. The Lord speaks to Noah and says: “In one year I am going to make it rain and cover the whole earth with water, until all is destroyed. But I want you to save the righteous people and two of every kind of living thing on the earth. Therefore, I am commanding you to build an Ark.”
03 Jan / 2018
“The reason that guru is such a popular word is because “Charlatan” is so hard to spell.”
~ William Bernstein
The word “Charlatan” is derived from the Italian word ciarlare which means “to babble”. One of the benefits of keeping ones eye on history is that you discover, more often than not, that the handwringers and doomsayers are usually wrong.
On January 1, 2018, it has become officially illegal to sell the original “bright idea” in California. The incandescent bulb, innovated by Thomas Edison more than a century ago, is banned in the Golden State and will be in the rest of the U.S. in 2020. While the light goes out you will now be able to “light up” that is, recreational pot will be legal in California as of January 1. In the meantime, the birthrate is so low in Japan and the boom of seniors so high, that adult diapers have out sold baby diapers for the last 6 years running. What is coming of this world . . .
With that random assortment of facts, here is my “charlatan” list of predictions, musings and other babble that you should keep an eye on for 2018;
- Voicification of the internet (hello Siri, Cortana, Alexa, Google home, etc.)
- North Korea – no easy happy ending.
- Continued meltdown in Hollywood.
- Interest rates – up.
- Fraternities/Sororities – crash (where else is the raunchy behavior of Hollywood, DC, media taught).
- Bitcoin – see tulip mania.
- Labor cost – biggest pressure on business & inflation.
- Inverted yield curve – watch out recession, here we come
- Pension meltdown – read the children’s book “The King has no clothes”.
- NFL players accept a tax which is used to pay for cameras on every law enforcement officer – instant replay in the hood.
- Disney buys CNN – ATT merger goes through with Time Warner.
- New network big three – Disney, Netflix, Google.
- Healthcare turmoil continues – only solution is Siri & Alexa providing .99¢ diagnosis when you lick your phone screen.
- Syria – the real U.S. – Russian showdown.
- Movie theaters offer scent, shake, wind – something you can’t get from Netflix.
- Artificial Intelligence – it is real, it is coming and will be part of your life like the internet and cell phone.
Did you know that the Federal government owns or leases 5,066 bathrooms occupying nearly 1.7 million square feet of the governments 1.9 billion feet of office space? Forty-five of them are listed as historic landmarks (really what makes a bathroom historic?). Uncle Sam owns 16,570 parking lots, 17,000 warehouses, 766 hospitals, 2427 schools. Billions are wasted on unused or unneeded Federal property. Once the government owns something it becomes costless because it is off the books. This is a huge lost opportunity cost. Many of these properties can be turned into apartments & offices. Redevelopment instead of paying for upkeep of old empty buildings. This is like the government’s ownership of the wireless spectrum which they started to auction off in 1994 – a move that added nearly $60 billion to the Treasury and gave us Wi-Fi and cell phones.
Early reports of Christmas sales were very positive with Mastercard reporting shoppers spent over $800 billion during the season, more than ever in history!
While retail sales have boomed, the material impact of the internet on the shopping center has continued to evolve what is or is not a successful tenant roster. Electronic stores, department stores and clothing stores have given way to restaurants with live music, escape rooms, urgent care facilities, gyms. The internet hasn’t killed the shopping center, but it is changing its tenant mix.
In San Diego, the unemployment rate has dropped to a low 3.7%. The USD Burnham-Moores Index of Leading Economic Indicators for San Diego rose in September and October. The outlook continues to be positive but slower growth through most of 2018. Two things of interesting note; (1) 16 to 17% of San Diego tenant businesses work from home (Inside Prospects), 2) In 2017 in California 105,000 more people moved out of CA then moved in – this is never a good sign.
Many have asked about my take on the new tax reform and its effect on commercial real estate. Well here you go…Depends;
- Depends on what the corporations do with their repatriated money.
- Depends on what the millennials do with the $1000 – $5000 less taxes they will be paying.
- Depends if the new pass through tax deduction really works in real estate LLC’s.
- Depends on how much impact the $750,000 max loan interest deduction has on housing (because the housing industry feeds commercial space needs – office – industrial – retail).
- Depends if real estate investors/developers start using carried, interest structures more since it wasn’t eliminated.
I recently read that there are three common factors in those that live to be over 100 years.
#3 – genes – but not as big a factor as you would think.
#2 – lifestyle – not smoke, not fat, exercise, preventative testing & screening.
#1 – the number of people you love in your life! – by far the single biggest factor.
We wish you a Happy New Year and a long and prosperous life and may you also find that the technology in your life makes it easier and happier… I hope you enjoy the story.
A toothpaste factory had a problem. They sometimes shipped empty boxes without the tube inside. This challenged their perceived quality with the buyers and distributors.
Understanding how important the relationship with them was, the CEO of the company assembled his top people. They decided to hire an external engineering company to solve their empty boxes problem.
The project followed the usual process: budget and project sponsor allocated, RFP, and third-parties selected. Six months (and $8 million) later they had a fantastic solution – on time, on budget, and high quality. Everyone in the project was pleased. They solved the problem by using a high-tech precision scale that would sound a bell and flash lights whenever a toothpaste box weighed less than it should. The line would stop, someone would walk over, remove the defective box, and then press another button to re-start the line. As a result of the new package monitoring process, no empty boxes were being shipped out of the factory. With no more customer complaints, the CEO felt the $8 million was well spent.
He then reviewed the line statistics report and discovered the number of empty boxes picked up by the scale in the first week was consistent with projections, however, the next three weeks were zero! The estimated rate should have been at least a dozen boxes a day. He had the engineers check the equipment, they verified the report as accurate.
Puzzled, the CEO traveled down to the factory, viewed the part of the line where the precision scale was installed, and observed just ahead of the new $8 million-dollar solution sat a $20 desk fan blowing the empty boxes off the belt and into a bin.
He asked the line supervisor what that was about.
“Oh, that,” the supervisor replied, “Bert, the kid from maintenance, put it there because he was tired of walking over every time the bell rang.”
14 Dec / 2017
The four stages of life:
- You believe in Santa Claus.
- You don’t believe in Santa Claus.
- You are Santa Claus.
- You look like Santa Claus.
As commercial real estate brokers, we are asked to wear a lot of hats and be a lot of things to a lot of people. As great salespeople it is our job to find middle ground and consensus. Unfortunately, in this digital age of 1’s and 0’s and Fox or MSNBC, the middle ground perspective has almost dissolved. As leaders and deal makers we must be among the leading few not the mediocre many.
This year we have seen more challenges than most – a surprise election, nuclear threats in Iran and North Korea, natural disasters in Houston, Florida and Northern California, a polarized people and press.
As many of you know each year I write this holiday letter to express my thanks for working with a great community of owners, tenants, and community leaders. I also like to leave you with a story of hope for the coming year. This year I would encourage all of you to soldier on, but I would like to challenge all of you to use your “salesperson toolbox” outside of the workplace to try and find more middle ground in our community. Use your skills and gifts to defuse hate, find consensus, give compliments and help others feel appreciated. At a time when we are worried about artificial intelligence and big data putting us and our clients out of business, you need to realize that technology and your relationship with it will facilitate unthinkable opportunity and growth or keep you on the wrong side of average (If you haven’t read it, I would highly recommend you read, “The Whole New Mind” by Daniel Pink – I have never dog eared a book more!).
I also learned a new lesson this year (in case you think an old dog can’t learn new tricks). I assume you are like me and open most calls or meetings with the proverbial ‘How are you doing?’ and like most of us give or receive a “good” or “fine.” I recently learned that if you move that same question to the end of the call, meeting or text message, you get an entirely different answer. People open up, you connect, people feel appreciated and you have more real friendships (It’s a hard habit to change but that is what 2018 is for!).
We at CDC Commercial want to thank all of you for the opportunity to do business with you and build our relationship.. In the meantime, let someone know how much you appreciate them. #grateful
Hope you enjoy the story….
Team CDC Commercial
Don Zech, Nick Zech, Matt Orth, Cheryl Pace
An article in National Geographic several years ago provided a penetrating picture.
After a forest fire in Yellowstone National Park, forest rangers began their trek up a mountain to assess the inferno’s damage. One ranger found a bird literally petrified in ashes, perched statuesquely on the ground at the base of a tree. Somewhat sickened by the eerie sight, he knocked over the bird with a stick. When he gently struck it, three tiny chicks scurried from under their dead mother’s wings. The loving mother, keenly aware of impending disaster, had carried her offspring to the base of the tree and had gathered them under her wings, instinctively knowing that the toxic smoke would rise.
She could have flow to safety but had refused to abandon her babies.
When the blaze had arrived, and the heat had scorched her small body, the mother had remained steadfast.
Because she had been willing to die, those under the cover of her wings would live. “He will cover you with his feathers, and under his wings you will find refuge” (Psalm 91:4).
Being loved this much should make a difference in your life.
Remember you are loved and then be different because of it.
02 Nov / 2017
- Fast Food Restaurant – 3 years (yes paying option payments monthly) and still waiting for city and one property owner approval.
- Sale of a restaurant/building as part of a larger development 4 ½ years. Waiting for city approval, land swap, lot line adjustment, buyout agreement of business.
- Charter school buying a building – 3 years. Plans, permits, CEQA, traffic study, board approval (seller & buyer), price changes, doubling of TI costs due to regulations.
- Raw land – 7 years. Rezone (4 years), marketing to find a buyer who can wait 2-3 years to get thru plans, permits, city requirements (undergrounding utilities – $1 mil, signal $250K, curbs, gutters, sidewalks – $1 mil).
- 1500 SF clothing store into a 1500 SF space – 3 ½ months. Drywall, paint, stairs to a mezzanine, 2 months in plan check, 45 days to build (inclusion of multiple inspections of the threshold being a ½ inch too high and requests for engineering redo of the stairs and storage mezzanine).
- Depreciation from 30 yr to 20 yr
- Estate tax elimination
- Eliminate interest deduction
- Reduce tax rate on pass-thru business income
29 Sep / 2017
Zen teaching: “Always remember you are unique just like everyone else.”
We seem to be living in a divided time unless you have just faced a natural disaster, then we seem to all band together regardless of color, politics or socio economics. In the past, we could escape to sports or Hollywood but alas even those have become politicized. After watching the “No Fans Left (NFL)” games last week, I was less surprised by the protests and backlash than I was by the amount of “Fake News.” One report was that the Steelers were suspended for three games. Another was that the L.A. Changers…I mean Chargers were on their way back to San Diego. So, is this Russian influence?
I am glad that we were able to survive the end of the world which was predicted for September 23rd. None the less, it has been disturbing to see the damage from hurricanes and earthquakes. God forbid what nuclear explosion or an EMP (Electromagnetic Pulse) could or would do. This is a good time in history to look at how and what your response can or would be to a cataclysmic event (can you secure your property? Tenant contracts available? Records backup? Insurance contacts available?) Think thru the scenarios and your responses to each.
Speaking of unwinding disasters. We all need to carefully watch the Fed to see how they are going to unwind its 4.5 trillion-dollar balance sheet. Or more simply said, time to pay off the credit cards. Or should we call it quantitative un-easing? Bottom line is that rates have to rise and that will cause some slowing. It isn’t the Fed raising rates as much as it is them selling the bonds the hold. The more they flood the market the higher rates have to go to attract enough investors.
The Fed says a tightening labor market has put pressure on wage costs (ie. higher wages). The Fed has hiked interest rates once this year and are expected to do so again. Yes Amazon (and others) use of automation looms as a long-term factor in restraining job and wage growth. Amazon has arguably done as much as the Chinese to kill jobs and keep a lid on inflation by enabling anyone with a cell phone to price or buy a product. Just as we are hearing about the end of the bricks and mortar mall, China’s Alibaba (their Amazon) is reported to be building its own 5-story shopping center called “more mall.” The idea is a mix of online, off-line, logistics and high tech all coming together. The new, “retail interactive store” is the wave of the future.
Commercial real estate price growth is expected to flatten in large markets but continue in smaller markets according to the latest quarterly report of the National Association of Realtors (NAR). Despite the rise in prices, investment sales volume is slowing down and the gap between ask and offer is widening (ie. people are offering less). Today, the negotiating process is tougher. Also, lender underwriting process is getting tougher and taking longer.
We are also noting on the leasing front that although vacancy continues to shrink deals are getting harder and harder. We are often in the situation where we have a square peg and a round hole. The tenant likes the building and needs 2500 SF but there is only 1300 SF. So we have to move the 1200 sf tenant next door. So, we end up doing two deals to get one. We are facing more and more situations where we have to move someone, find them temporary space while theirs is readied, sublease their old space etc.. If they want to build new, it is a 2-3-year process.. Often it seems a lot like pulling the thread on your sweater, the more you pull the worse the problem gets. This is how we try to be dealmakers not order takers. We pride ourselves on being excellent communicators and impeccably honest. We negotiate with confidence yet never forget the emotional implications of a sale or lease. We try to respond to challenges quickly, deliver disappointing news gently and never lose sight of those pesky details that can loom large if left undone. “Life stagnates without challenges…bring us your challenges.”
It was troubling that the NFL game in London last week had players standing for Hail to the Queen but taking a knee during the Star-Spangled Banner (perhaps they should have read this story or visited Lincoln’s statue in England!). Well before we tear down anymore statues or if you think you are unique or that this is a unique time in history, I hope that you enjoy the story and that you will be proud to be a red blooded American.
I haven’t told any stories from England since I got home but it seems like maybe we could all use a good story about a civil war statue, a good story about an American President, and a good story about the power of the common people against the rich and powerful, so I’m going to start with this one. It’s probably for the best that you’re reading this here because I haven’t managed to tell this story in person without crying.
I was in Manchester with a bit of time to spare on a cool, sometimes rainy morning that reminded me of home. Since I had a minute I turned on Pokémon Go on the off chance that there would be a Mr. Mime in range. As luck would have it there was one only two blocks away from my intended destination! The game led me to a small square and as I approached I could’ve sworn that it had an enormous statue of Abraham Lincoln right in the middle of it. Much to my dismay the closer I got, the more it looked like Lincoln. When I was close enough to read the inscription, I learned that it was in fact, a statue of Lincoln. What was a statue of Lincoln doing in a lonely square in Northern England?!
Then it got weirder.
There was a large blue sticker that was somewhat haphazardly stuck onto the base of the statue that said something along the lines of “talking statues of Manchester” and had a QR code with no further explanation. There was no question, I had to know what that QR code said! I immediately installed a QR scanner and no sooner had I clicked the shutter button then my phone rang. That was weird and more than a little creepy, but if they say one thing about me when I’ve gone it will be that I never passed on an adventure.
I answered the phone.
There was no preamble, no explanation, just a man’s voice saying, “to the working men of Manchester” he then continued in beautiful, archaic prose to praise the workers of Manchester and thank them for their courage and sacrifice. It seemed to be a letter and when it came to an end it was signed “Abraham Lincoln”. When he had finished uttering his name President Lincoln hung up on me. It was a tantalizing letter to a child of Lincoln’s far future standing alone in a rainy square, 4,500 miles away from home. President Lincoln did not bother to list the brave acts or to sum up the sacrifice. Why would he? The people of Manchester knew what they had done.
Luckily, after the phone call ended a screen popped up offering links to learn more. I stood in the drizzle, read an amazing story and wondered why I had never heard it before.
As you probably know during the Civil War the North imposed a Naval blockade on the South. The economic hardship that this caused was an important factor in the North’s victory. What I didn’t know was that the blockade also badly hurt the people of Lancashire, England. At that time, the mills of Northern England produced the fabric that clothed the world. Seventy five percent of all the cotton grown on Southern plantations was sent to Lancashire where it was spun, dyed, and woven.
A year into the war and the embargo found Northern England in real distress. Sixty percent of its mills were shuttered, thousands of people were without work. The desperate wealthy mill owners started lobbying the British government to send the British Navy to break the blockade and let the cotton through.
Then an amazing thing happened. The workers themselves organized a mass meeting in the Manchester Union Hall to discuss the matter and those working-class men, who had the very most to lose, chose to refuse cotton grown by enslaved hands. The blockade held and the men did indeed lose. In one town alone only five out of thirty-nine mills continued to operate. People went without fuel for heat, there was wide spread starvation, families lost their homes. And still–an ocean and a world away from a war in a place they had never seen–the people of Manchester chose to live and die by their values. They would not support slavery.
When the war ended, that letter came from President Lincoln and it was followed shortly after by ships loaded with food and supplies for the people of Lancashire from the people of America, in gratitude.
And that is how I ended up crying in the rain 4,500 miles from home, in a square named for Lincoln in a country that he never set foot in.
I also caught my Mr. Mime.
If you are interested in reading the letter you can do so here:
If you want to read more about the history you can do so here:
01 Sep / 2017
As many of you know or remember, I had a bit of a health scare last year at this time. I’m thrilled to report that a year later, the doctors have given me a clean bill of health, we’ve closed more deals than the previous year, my golf handicap is down 5 strokes and I have run 4 half marathons. I even had the honor to visit the Navy Seal Obstacle Course. The first thing I realized was that “America’s Finest” are stunningly gifted. They are world class athletes and I am proud to have them defending us. The second thing I realized was their success on the O-course is based on speed, force, strength (some bruises) but most of all a 100% commitment (That’s easy to give lip service to but you just try to jump at a rope from three stories with no net!).
Speaking of being proud and fit. I was excited to see Los Angeles announced as the host of the 2028 Summer Olympic Games. As in 1984, this will have a spillover effect into San Diego with many events actually being hosted here, not to mention tourism. In the immediate future, preparation to host the Olympics will proliferate and hasten the influx of funding for commercial real estate and infrastructure. Los Angeles (and Southern California) will finally be catapulted to being a world city (also called a global city or world center).
Speaking of visiting San Diego, passenger traffic at San Diego International Airport rose 5.3% from a year ago for the January-to-June period. For the month of July year over year, the passenger count was up 11.1%. Passenger traffic is a strong indicator of a healthy economy.
So Charles Schwab recently asked how much does it take to be wealthy in San Diego? The answer – $2.7 million.
The top five definitions of wealth among 500 San Diegans surveyed are:
- Having a lot of money (30 percent)
- Enjoying life’s experiences (25 percent)
- Being able to afford anything they want (24 percent)
- Living stress-free and having peace of mind (19 percent)
- Having loving relationships with family and friends (13 percent)
While 36 percent of those surveyed say they are already millionaires or believe they can reach that level, the majority (64 percent) say they don’t have any hope.
When asked to compare two opposing ideas of wealth at a more personal level, San Diego residents lean into things that money can’t buy:
- Fifty-seven percent say wealth is about having gratitude vs. having money (43 percent)
- Sixty-six percent equate wealth with having good physical health vs. having lots of money (34 percent)
- Seventy-four percent believe wealth is about spending time with family now vs. leaving an inheritance for them (26 percent)
Well the first step to becoming wealthy is to have a job and the economy is certainly helping that by adding another 209,000 in July. Locally, however, even though there was job growth, the restaurant industry had its first drop since 2010. This is largely due to the minimum wage increase to $11.50 an hour and influx of more efficient menu ordering (iPads, robots no table service etc…).
Speaking of jobs – Steve Jobs that is – it is hard to believe that he brought us the first iPhone just 10 years ago and the galactic shift it has caused in our lives over that period. Having just read his biography I was struck by how much of a pot smoking, persistent, charming jerk he was. Those around him used a term that came from Star Trek to describe him – they said he had a Reality Distortion Field (RDF). In Star Trek, the menagerie episode, the aliens created their own new world through mental force. In Job’s case he used it to distort peoples sense of proportion and scale of difficulty and make them believe that the task at hand was possible. He would also use RDF to appropriate other’s ideas and repurpose it as his own weeks later.
Now Apple is on to the iPhone 8 and driver-less cars. Projections are 54 million on the road by 2035. While countless companies are trying to prove that cars can drive themselves, I am more interested in what we’ll actually do while the car is driving us around. Self-driving cars will allow you to eat, talk on the phone and do your make up (or shave). Actually, people do that now so why wouldn’t we want help. Geez, I still remember my dad telling me a car radio was a distraction.
For those of you who like more number and details you should really enjoy the UCLA Anderson school/Allen Matkins, California Commercial Real Estate Survey and Index – The Turn of the Cycle. For those who want a simple graphic of where we stand you need to go no further than the San Diego Housing Inventory and Price Index Charts below.
Let me be the first to tell you that trees don’t grow to the sky and markets walk upstairs and jump out of windows.
Speaking of trees, we have a big problem in San Diego and you need to watch for it at your house and commercial properties. Insect and disease are hitting sycamores and willows throughout Southern California. I am talking about 100,000 willows in just the SD County Tijuana River Valley that have died. The shot hole borer beetle could kill could kill as many as 27 million trees in SoCal. That’s 8% of the regions trees. This starts having an effect on weather, property values, HVAC costs and wildlife. The replacement cost alone could be 36 billion. Watch for Oak Borer Beetle, Asian Citrus Psyllid, Glassy Winged Sharpshooter (oleanders), South American Palm Weevil. If you have trees – watch them, treat them and replace them if they die.
Now the “other green,” Pot. Despite Steve Jobs smoking lots of it and it becoming legal in California, owners need to take note. First, if you have a pot use on your property, it probably voids your loan and certainly makes you unable to finance or refinance one. Second, the San Diego appellate court recently affirmed a $175K judgement against a Landlord for allowing a dispensary on his property. The city attorney stated, “Landlords who rent to operators of illegal dispensaries have committed a crime and will be held accountable.”
I have come to the pinnacle of success in business.
In the eyes of others, my life has been the symbol of success.
However, apart from work, I have little joy. Finally, my wealth is simply a fact to which I am accustomed.