October 2015 Monthly Letter

The Blog
Page 6

Every banana the Dole sells west of the Rockies, from Mexico to Canada, comes through the 10th Avenue marine terminal in San Diego. The terminal handles 185 million bananas a month.

My thoughts turned to bananas because I was thinking about baby food and I was thinking about baby food because we were just blessed with our first grand baby. A bouncing baby boy. He is already growing remarkably fast – amazing what nature does when left alone. If only or politicians and bureaucrats could take a lesson from this and let our economy do the same.

For the year as a whole GDP will expand at about 2.1 percent: not a bad number, but not great. That growth rate would also mark the tenth consecutive year of subpar performance in terms of growing at less than 3% a year, the historical average growth rate. Despite the sluggishness, the job market is strengthening.

The unemployment rate has fallen to 5.2 percent, the lowest level since 2008. Not all is right with the labor market though. Low oil prices are forcing layoffs. Sadly, more people have left the labor force and stopped looking for a job (can you believe that isn’t counted as unemployed!). Moreover 4% of workers are in part-time status involuntarily compared to 2% that would be considered normal.

In San Diego, meantime, unemployment has dropped to 5.1%, down from 6.6% last year. That’s a total of 42,400 added jobs and roughly requires a million square feet of commercial space absorption.

There is a school of thought that the Federal Reserve’s easy monetary policies of the last ten years have caused asset price inflation, even a bubble. With Treasury yields a non-starter for investors for much of the past decade, they have fanned out in search of other categories, placing money in alternative assets including real estate.

It has been assumed that when Treasure yields increase many will return home to these securities. This widespread assumption is why, after all, REITs have been struggling for much of this year.

But with rates at near zero for so long, the Federal Reserve has no firepower at the ready should another crisis unfold. Sure, it could keep rates at their current level, but that would have at best a muted effect, many economists have said. This is the scenario investors should fear: The Fed keeps rates at zero but it isn’t helping. All of a sudden, the perception that the Fed will keep the economy safe and sound crumbles for investors. The crisis unfolding overseas worsens and starts to impact the U.S. economy and guess what? There are few buyers interested in these investors’ now overprices assets. The next liquidity crisis is likely not driven by a credit or funding scarcity but rather illiquid assets and collateral freezes.

As I sit and wonder why the economy is not doing better given low interest rates and relatively low employment, I heard Jack Welch, former CEO and Chairman of GE explain that it is quite simply over regulation.

I have to agree. As I look across the landscape of our deals, so many are held up or killed because of the time or money of regulation. A conditional use permit in the City of San Diego takes 12 months. Traffic impact studies take 6 months and then you pay traffic impact fees based on the traffic (read business) that you generate. ADA improvements (doors, bathrooms, ramps, etc) add 10% to 30% to the cost of TI’s. Waste water management adds more oversight and cost to deals (new drains, enclosures over dumpsters, keeping the water on your property). Most recently it is Title 24. If you aren’t already knowledgeable on this topic you need to be. Title 24 mostly focuses around your HVAC and electrical and lighting systems. Virtually any TI’s you do will trigger Title 24 and it will add 20% – 50% to the cost of your job (I recently had a $15 psf TI job and Title 24 added another $7.50 psf to the job!) Windows and HVAC need to be brought up to efficient current standards. Lights need to have switches (not switched at the circuit breaker). Lights need to be on motion sensors…

On a more positive note, for the last decade I have been telling retail owners to strive for food and service tenants, things that are hard to be beaten by the internet or by big boxes. Office owners have been advised to optimize parking and stick with as open a floor plan as possible. This advice has been spot on for owners. I am now going to add to that advice. Look at ways to optimize your space. Can you squeeze in more parking? Utilize technology to cut cost or repurpose space. Can you create a social area (bench, table, etc)? Talk with your tenants. Can they optimize their space to do more business? Can they sublease or co-brand with another tenant in their space? This may not make you money immediately but busy full buildings are what will be attractive to tenants, banks and building owners in the future. You must broaden your view of your property or your store. It is not a location, it is an experience. It may be time to bring back something that was popular 30 years – the merchant association. Get tenants on board as to the vision of what the experience at the property should be. When you can shop or work from home and everything you want can be delivered, why do you want to go out? The answer is simple, the experience of being entertained and to socialize.

I just got back from a vacation that included a visit to Pompeii which is the Italian village that was destroyed by Mount Vesuvius. It was amazing to walk amongst the ruins and realize how little we have come. The block grid system of streets, running water, public drinking fountains with names so people knew where to meet up made you comfortable. The shop keeper units (house behind store) and restaurants amongst the houses along with public theater, parks and gym with pools and spas made me think I would move in today if they rebuilt. I am reminded that what’s old is new and what’s new was old.

As we enter the election cycle it becomes increasingly important that we unfetter our economy and motivate all of us to be creative and reinvent ourselves and our economy. More importantly it is important that we don’t let our politicians tell us what to think but instead tell us what to think about. Hope you enjoy the story.

The Banana Story

Start with a cage containing five monkeys. Inside the cage, hang a banana on a string and place a set of stairs under it. Before long, a monkey will go to the stairs and start to climb towards the banana. As soon as he touches the stairs, spray all of the other monkeys with cold water. After a while, another monkey makes an attempt with the same result – all the other monkeys are sprayed with cold water. Pretty soon, when another monkey tries to climb the stairs, the other monkeys will try to prevent it.

Now, put away the cold water. Remove one monkey from the cage and replace it with a new one. The new monkey sees the banana and wants to climb the stairs. To his surprise and horror, all of the other monkeys attack him. After another attempt and attack, he knows that if he tries to climb the stairs, he will be assaulted.

Next, remove another of the original five monkeys and replace it with a new one. The newcomer goes to the stairs and is attacked. The previous newcomer takes part in the punishment with enthusiasm! Likewise, replace a third original monkey with a new one, then a fourth, then the fifth.

Every time the newest monkey takes to the stairs, he is attacked. Most of the monkeys that are beating him have no idea why they were not permitted to climb the stairs or why they are participating in the beating of the newest monkey.

After replacing all the original monkeys, none of the remaining monkeys have ever been sprayed with coldwater. Nevertheless, no monkey ever again approaches the stairs to try for the banana.

Why not?

Because as far as they know that’s the way it’s always been done around here.

And that, my friends, is how we breed and train creativity and entrepreneurship out of the next generation.


Picture this scenario: You go to the refrigerator to get a jug of milk. Should be simple, right? What could go wrong? The refrigerator is packed. The milk is right there in front on the top shelf, wedged in between a pint of cottage cheese and some bottles of apple juice. You’re holding a glass in one hand and you reach up with the other to grab the milk. It’s wedged in tight. You jiggle it a little bit and realize that you really need to put down the glass and use both hands to unpack things.

You reach to put the glass down and … one of the juice bottles pops off the shelf. You make a mad grab for it. It slips away from you. You try again. It bounces off the vegetable bin. You try again. It smashes onto the tile floor. Glass and juice puddle all over the floor and now you’ve got a mess that must be cleaned up right away.

What went wrong here? You got careless. It’s probably appropriate to yell at yourself for being careless. But your carelessness mattered because you were trying to do a task with no margin for error. Had there been a little margin in the packing on the shelf, your small error wouldn’t have caused a major mess.

Margins matter. Books have a margin that makes them more readable and nice to look at. And the outer margin of a printed book helps protect against errors in cutting the paper. Another word for margins is whitespace. Your books need whitespace.

So does your life.

A little whitespace on the refrigerator shelf makes it much easier to take things out. It also makes it easier to find things in the back of the shelf. When you think about whitespace in your life, you can see all kinds of places where it’s crucial. Not just your physical space, but also your time, your money, and your energy.

When your schedule is so packed that you have absolutely no extra time in your life, an unplanned trip to the mechanic can have ripple effects that wreck your day, then your week, and then your month. Your schedule needs whitespace.

When your financial situation is so precarious that you’ve maxed out your credit cards, that unplanned trip to the mechanic can leave you without a car and without a way to pay for repairs. Your finances need whitespace. When you’re so exhausted that you can barely drag out of bed in the morning or do your duties, an unplanned bout with a cold virus can knock you out. Your energy level needs whitespace.

Your life needs whitespace. So does mine. So does everybody’s.

Knowing that you need whitespace won’t magically make it appear. There isn’t any whitespace

wand you can wave. The concept of whitespace is just a mirror you can use to help you see when you have a potential problem that could come crashing down on you. The first step in solving a problem is knowing it’s there.

Right now, my life needs some whitespace. The stack of stuff on my desk table and chairs keeps growing. It doesn’t keep me from closing the door. Not yet, anyway. But it’s a warning signal. By admitting to myself that my life needs whitespace, I have a real chance at solving the problem.

As you read this, I hope to be floating across the Mediterranean in search of white space in my life.

Korn Ferry recently published a survey of over 400 executives about their vacation plans and while the results were not startling, they were telling. 67% of the respondents indicated that they had either postponed or cancelled their vacations due to the demands at work and the majority (57%) did not expect to use all of their available vacation days. In today’s business environment, it is a badge of courage to announce that you are cancelling or deferring a planned vacation or day off for the sake of work.

Another not so surprising factlet was that 88% of the executives indicated that while on vacation, they maintain connectivity to their office either by email or text messaging. The bottom line is that American business is not unplugging sufficiently to recover and recharge. Alas, today’s executives are under immense pressure to drive performance and growth, however according to Kevin Cashman, a Senior Partner and organizational consultant with Korn Ferry, “Individuals who take time off are proven to be more productive, have higher morale, and are less likely to make critical mistakes.”

While I have no plans to cancel my vacation, I will be the first to admit that I will be monitoring voicemail and email while gone.

In an effort to create some white space before I leave, I am going to give you some charts to look at (to offset all those stock charts we have been seeing). After all, a picture is worth a thousand words so these charts make up for the words I didn’t have to write!

Housing starts are coming back. We aren’t back to 2006 but a nice steady incline; california housing stats

This is equally reflected in existing home sales;

california existing home sales

Just as housing continues to improve so does the job recovery. The number of jobs has finally caught up and continues to rise steadily, wages have not increased at the same pace.

california payroll employment

The inverse of Employment is Unemployment and as you can see, it also continues to decline (the grey bars show the recessions).

california unemployment

GDP and personal consumption have recovered from 2009 but have just bumped along.

GDP versus personal consumption

With recent events in the stock market, the Fed is in a box, not a coffin, but a box. They need to raise rates in September or December to prove our economy is strong but not hurt the emerging economies anymore than they are with a strong dollar Then we will enter an election year, where the Fed historically tries to be uninvolved.

Finally, I am both pleased and sad to announce that Nancy Murphy will be retiring over the next two months. I am so happy to see her and Brian find more white space in their life. At the same time it is like losing an arm because of our nearly 30 years working together and 20 years at CDC Commercial.

I hope you enjoy the story…


The Black Dot

One day, a professor entered the classroom and asked his students to prepare for a surprise test. They all waited anxiously at their desks for the exam to begin.

The professor handed out the exams with the text facing down, as usual. Once he handed them all out, he asked the students to turn over the papers.

To everyone’s surprise, there were no questions – just a black dot in the center of the sheet of paper.

The professor, seeing the expression on everyone’s faces, told them the following:

“I want you to write about what you see there”. The students, confused, got started on the inexplicable task.

At the end of the class, the professor took all the exams, and started reading each one of them out loud, in front of all the students.

All of them, with no exception, defined the black dot, trying to explain its position in the center of the sheet.

After all had been read, the classroom silent, the professor started to explain:

“I’m not going to grade you on this, I just wanted to give you something to think about. No one wrote about the white part of the paper. Everyone focused on the black dot – and the same happens in our lives.

We have a white piece of paper to observe and enjoy, but we always focus on the dark spots.

Our life is a gift given to us by God, and we always have reasons to celebrate – nature renewing itself every day, our friends around us, the job that provides our livelihood, the miracles we see every day…

However, we insist on focusing only on the dark spot – the health issues that bother us, the lack of money, the complicated relationship with a family member, the disappointment with a friend.

The dark spots are very small when compared to everything we have in our lives, but they’re the one that pollute our mind.

Take your eyes away from the black dots in your life. Enjoy each one of your blessings, each moment that life gives you. Be happy and live a life filled with love!


As I flipped through the channels the other day I watched the debate as to whether interest rates should be tightened. On the next news channel, I saw business titan Donald Trump promising voters to make America great. It was at that “ah-ha” moment that I realized the current American conundrum – Tighten vs. Titan.

My day seems to be filled with contrary headlines; “Hagen Grocery to cut 700 workers” followed by “Discount Grocer Aldi to open 45 stores in Southland. “Net U.S. commercial space absorption up 39.3%”, “China’s stock market collapsing”.

So where are we? It is difficult to tell in today’s market where there is so much meddling and intervention. So let’s look top down. GDP – at its current anemic 2% growth rate you would think recession. Caterpillar’s CEO recently said at the current 2% U.S. growth rates you can’t hire. Interest rates are at historic lows indicating we should be booming. The Fed sits poised to tighten but can’t because the “Titans” have not given the economy the lift off we need to make America great again. Now surely the stock market would seem to be up but not really unless you own one of the titans of the “FANG Four” – Facebook, Apple, Netflix or Google. Banks which have historically been the stalworht of society are now touting bank closure plans as part of their business model. More transactions online, less branches, smaller branches and more in-retail locations like grocery stores will be the banking mantra for the decade ahead.

Unemployment is always my favorite gauge as to where we are at (though I worry as to how this number is manipulated). National unemployment is at 5.5% and San Diego at 5% would indicate a healthy economy. I saw an interesting statistic about North San Diego County this month. There are 27,183 businesses in North County and 419,754 workers. Eight percent of these businesses have only one location and 60% employee only 1-4 employees. Wow… Lots and lots of little titans!

Auto sales are usually a good indicator of future home sales and home sales are a sign of a strong economy. Because a car is less expensive than a house, auto sales volume tends to rise earlier and fall later than home sales. If that hypothesis is true and the chart below is accurate then we are overdue for a housing boom.

monthly letter for august 2015

While on the subject of auto sales, titans and making America great, you might find this video of a Tesla factory at work. Automated factories making America great – robots increasing unemployment (the conundrum again).

monthly letter for august 2015

Closer to home in our real estate market, the team at CDC has found ourselves busier than we have ever been. Interestingly, our inbound call volume has been flat, our sales and leasing volume has almost doubled but our margins have shrunk. At the end of the day we are ahead. Surprisingly, talking to other broker they are not all feeling the increased activity. What we are seeing right now is largely a domino effect. A sale leads to an exchange leads to another purchase. A tenant buys their building and kicks out the other tenants so they can expand. The other tenants fill an under occupied building which can now sell and do an exchange. Maybe it is not so much dominoes as it is us creative brokers putting together a jigsaw puzzle of transactions.

Well whether you are a titan of business, an entrepreneurial real estate broker or a hot dog stand operator trying to figure out the economy’s numbers, I hope you enjoy the story.


The Hot Dog Story

Once there was a man who had a stand on one of the busy streets downtown and he sold hot dogs. He sold good hot dogs and folks bought from him on a consistent basis. He put signs up advertising his hot dogs, he placed ads in the newspaper, and he told everyone in his community how good his hot dogs were. And he sold a lot of hot dogs!

So he increased his inventory. He bought more buns, more hot dogs, more wrappers, and more condiments. He built a new stand and made it larger, added signs advertising his good hot dogs, and he kept his sales area neat and clean. He made sure his hot dogs were always hot and that his customers always walked away with a smile. And his sales continued to increase!

He was so successful that he was able to send his son to Harvard University. After graduating with a Masters Degree in business, the son returned home to join his father in business. At the end of his first day on the job, the son said: “Dad, I know you’re not educated in Economics and you have not had the opportunity to read and study the latest journals on business and economic forecasts. But the overall economy is in terrible shape. The huge federal deficit, the trade deficit, oil prices, and the unemployment rates are undoubtedly going to plunge this nation into a horrible recession. I think you should consider these things for future planning.”

The man scratched his head and thought: “Well, my son has the finest university education from the most acclaimed business college in the country. He must know what he is talking about.”

So the man reduced his inventory by half. He stopped advertising in the newspapers and took down his signs to save money. He quit telling everyone in his community about how good his hot dogs were and he even went back to using the old cart from years ago. And his hot dog sales went down the tubes almost overnight!

“Son”, the man said to his Harvard-educated offspring, “You sure were right. Damnedest recession I’ve ever seen.”

The moral of the story: Keep on selling your products, your services, and yourself. No one can stop you from succeeding but yourself!!


On the 4th of July 1826, former Presidents Thomas Jefferson and John Adams, who were once fellow Patriots and then adversaries both died within five hours of each other. Jefferson and Adams were the last surviving members of the original American Revolutionaries who stood up to the British Empire and forged a new political system in the former colonies. However, while they both believed in democracy and life, liberty and the pursuit of happiness, their opinions on how to achieve these ideals diverged over time… My how some things never change!

As we gather around our barbecues this weekend and watch Greece melt down (note I said Greece and not grease). I think it is important to realize that our Founding Fathers fought for our Freedom not Freedumb – which is a society that thinks everything should be free – that is just dumb. I heard earlier this week that there are more people working for the Greek railways then ride on them!

Well I am happy to report that Capitalism it is alive and well… in India. What was even more humorous to me was that during the TV special about India’s economy I saw a TV commercial for Emirates Air (the largest airline in the Middle East) with the slogan; “Choice, it’s a wonderful thing”. It just seemed ironic to me given the current battles in the Middle East with ISIS.

Closer to home and our economy, we prepare for “lift off”. At no time in history has an economy raised rates off of zero. I read that for every one point down in rates there was a 12% increase in house prices. However, don’t forget that blade cuts both ways as we prepare for potential rate hikes. May’s unemployment report was good with 280,000 jobs added Nationally. The unemployment rate climbed from 5.4% to 5.5% percent but that is actually good as it is a sign of more people beginning to look for work. I think the big thing that is perplexing the Fed is wage growth versus wage inflation. A sudden jump in hourly wages suggest inflation-hence the need to pull the trigger on rates (wage inflation) and probably the start of a recession. Wage increases accompanied by productivity gains means a growing economy and sustainable increase in rates.

Speaking of sustainable growth, CONNECT reported that 446 ” innovative company” (read “tech”) startups were formed in San Diego in 2014. The report said 147,900 people were employed in an innovative economy company at an average of $109,600 – more than twice the average San Diego wage. That’s what I call wage growth!

I like to watch where the job growth is because that points to where the real estate occupancy will occur. For May 2014 to May 2015 we saw 42,400 jobs added. Here is the breakdown of the largest gains.

Agriculture – 700
Professional & Business – 11,000 (scientific + Tech – 8500)
Admin & Support – 1900
Leisure & Hospitality – 8500
Education & Heath Services – 6800
Construction – 4500
Trade, Transport, Utilities – 4100

As a side note, I was at a roundtable with some lenders and across the board their volume of making loans was up 10% plus over last year.

We live in a time of blurring lines. Are we worried about inflation or deflation? Where do I put my money to keep it safe and or provide a reasonable rate of return? Should Bruce Jenner be on a Wheaties box or on the cover of the Vanity Fair as Kaitlin? Wage growth? Wage inflation? Dreams or fears? Jefferson or Adams? One thing that is constant is cash flow. Keep your eye on the prize. Well located real estate with sustainable rent .

In any given group or industry, the highest paid and most highly recognized people are those that consistently outperform their peers. To those victors go the lion’s share of the reward. This phenomenon is known as the Law of the Vital Few or the Pareto principal. But what really makes these vital few so successful while the rest of the group can barely achieve mediocrity? The thing that truly separates these people from the crowd is an unwavering dedication to achieve the maximum results for the amount of time and effort invested into their endeavors. This is recognized as a commitment to excellence. This is the principal our great nation was founded upon and what those of us that CDC Commercial strives for every day. Happy 4th of July… Hope you enjoy the story…

Thomas Jefferson was a very remarkable man who started learning very early in life and never stopped.

  • At 5, began studying under his cousin’s tutor.
  • At 9, studied Latin, Greek and French.
  • At 14, studied classical literature and additional languages.
  • At 16, entered the College of William and Mary.
  • At 19, studied Law for 5 years starting under George Wythe.
  • At 23, started his own law practice.
  • At 25, was elected to the Virginia House of Burgesses.
  • At 31, wrote the widely circulated “Summary View of the Rights of British America ” and retired from his law practice.
  • At 32, was a Delegate to the Second Continental Congress.
  • At 33, wrote the Declaration of Independence .
  • At 33, took three years to revise Virginia’s legal code and wrote a Public Education bill and a statute for Religious Freedom.
  • At 36, was elected the second Governor of Virginia succeeding Patrick Henry.
  • At 40, served in Congress for two years.
  • At 41, was the American minister to France and negotiated commercial treaties with European nations along with Ben Franklin and John Adams.
  • At 46, served as the first Secretary of State under George Washington.
  • At 53, served as Vice President and was elected president of the American Philosophical Society.
  • At 55, drafted the Kentucky Resolutions and became the active head of Republican Party.
  • At 57, was elected the third president of the United States.
  • At 60, obtained the Louisiana Purchase doubling the nation’s size.
  • At 61, was elected to a second term as President.
  • At 65, retired to Monticello.
  • At 80, helped President Monroe shape the Monroe Doctrine.
  • At 81, almost single-handedly created the University of Virginia and served as its first president.
  • At 83, died on the 50th anniversary of the Signing of the Declaration of Independence along with John Adams

John F. Kennedy held a dinner in the White House for a group of the brightest minds in the nation at that time. He made this statement: “This is perhaps the assembly of the most intelligence ever to gather at one time in the White House with the exception of when Thomas Jefferson dined alone.”

When we get piled upon one another in large cities, as in Europe, we shall become as corrupt as Europe.” — Thomas Jefferson

The democracy will cease to exist when you take away from those who are willing to work and give to those who would not.” — Thomas Jefferson

It is incumbent on every generation to pay its own debts as it goes. A principle which if acted on would save one-half the wars of the world.” — Thomas Jefferson

I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them.” — Thomas Jefferson

My reading of history convinces me that most bad government results from too much government.” — Thomas Jefferson

No free man shall ever be debarred the use of arms.” — Thomas Jefferson

The strongest reason for the people to retain the right to keep and bear arms is, as a last resort, to protect themselves against tyranny in government.” — Thomas Jefferson

The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants.” — Thomas Jefferson

To compel a man to subsidize with his taxes the propagation of ideas which he disbelieves and abhors is sinful and tyrannical.” — Thomas Jefferson

Thomas Jefferson said in 1802:

I believe that banking institutions are more dangerous to our liberties than standing armies.

If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property – until their children wake-up homeless on the continent their fathers conquered.


“The sidelines are not where you want to live your life. The world needs you in the arena. There are problems that need to be solved. Injustices that need to be ended. Diseases still in need of cure. No matter what you do next, the world needs your energy, your passion, your impatience for progress.”

                                                                – Tim Cook, CEO Apple to class of 2015 George Washington University

Well I have to tell you, if you haven’t made the move to the iPhone 6, it is worth it. I did the first of the year and it was worth every penny. The bigger screen helps my aging eyes, apps all work better and Siri is even smarter. By the way, hold the button down and say “set timer for 10 minutes” – done, the alarm goes off in 10 minutes. When texting or emailing tap the microphone or the keyboard and just dictate your message. I know many of you already are doing this but I am amazed to watch people endlessly taping out a paragraph.

Now the jury is still out on the iWatch. The technology is cool but I have enjoyed not wearing a watch for the last 15 years and don’t know if I want to start again. Besides in 25 years I am hoping I can give my Rolex to my Grandson (yes I will be a grandpa come September) and it will continue to be an heirloom. I am not sure we will be able to say that about a 25 year old iWatch!

No matter where you stand with technology, the “iconomy” has affected all of us. Whether it is the way you receive your news, keep in touch with the grandkids or track your health. It is amazing what $84.00’s worth of parts has done to change the world and our real estate market.

It appears that our “Obamanomics economy” is filled with makers and breakers. We appear to be on the threshold of some of the greatest innovations of all time and at the same time that ISIS, China, Russia and Korea threaten world peace and all the while social unrest tears at our own countries fabric.

What does all of this and impending rising rates portend for the real estate market? First real estate needs to be looked at for the long term when you invest. You want to buy based on the income and understand how the income can and will grow over time. This in short is job growth and job growth comes from innovation (see where my Apple theme came from?). If and when rates rise and or cap rates rise, your income must go up faster. This is a tough bill to fill but needs to be heeded.

The best news to our local economy is that the unemployment rate in San Diego County dropped to 4.8%. Professional and business services have had the greatest gain with scientific and technical services in a close 2nd.

So what are the biggest mistakes investors make when they buy commercial real estate?

  • Incomplete due diligence
  • Assuming that “new” means no problems
  • Outside comfort zone without proper advisement
  • Not focusing on rent sustainability or replacement rent
  • Focus on short term noise not long term signals
  • Not having proper contingencies
  • Choosing a bad deal at all costs
  • Stretching yield at the wrong part of the economic cycle

Locally we see continued market improvement as unemployment drops, space continues to absorb and there is little if any new construction. This all bodes well for future rental rate increases. Unfortunately, for now we are trapped in what Bank of America calls “The Twilight Zone” – the transition period between the end of QE and the first rate hike by the Fed. The economy has to be robust enough to allow for the hike otherwise the exit from zero rates will be  potentially cause a shock like it did in 1936-37.

If you are still confused, don’t forget the value a good broker brings to a deal. Among other things, the ability to understand a client’s position relative to the competition, the ability to know when to be and when not to be aggressive during a negotiation. This value added is greatest when the deal is large and complex, and technology cannot easily replicate these features because they are human in nature. So I don’t see Siri becoming a commercial real estate broker any time soon but maybe Apple could run the U.S. Government….?



In direct response to accusations made by the department of justice, Apple Inc, announced today that it will be acquiring the Federal government of the United States of America for an undisclosed sum. “It’s actually a logical extension of our planned growth”, said Apple Inc chairman Tim Cook. “It really is going to be a positive arrangement for everyone.”

Apple Inc representatives held a briefing in the oval Office of the White House with U.S. President Barak Obama, and assured members of the press that changes will be minimal. The United States will be managed as a wholly owned division of Apple Inc. An initial public offering is planned for July of next year, and the Federal government is expected to be profitable by “Q4 2016 at the latest,” according to apple CEO Tim Cook.

In a related announcement, Barak Obama stated that he had “willingly and enthusiastically” accepted a position as a vice president of Apple Inc and will continue to manage the United States government, reporting directly to Tim Cook. When he asked how it felt to give up the mantle of executive authority to Cook , Obama smiled and refer to it as “a relief.” He went on to say that Cook has a ” proven track record” and that U.S. citizens should offer Apple their “full support and confidence,” Obama will reportedly be earning several times the $200,000 annually he has earned as U.S. president, in his new role at Apple Inc. Cook dismissed the suggestion that the U.S. Capitol will be moved to Cupertino, CA as “silly,” although he did say that he would make executive decisions for the U.S. Government from his existing office at Apple Inc headquarters. Cook went on to say that the House and Senate would “of course” be abolished. “Apple Inc is not a democracy,” he observed, “and look how well we’re doing.”

When asked if the rumored attendant acquisition of Canada was proceeding, Cook said, “We do not deny that discussions are taking place.” Apple Inc representatives close the conference by stating that United States citizens will be able to expect lower taxes, increases in government services and discounts on all Apple Inc products.

About Apple

Founded in 1976, (NASDAQ: AAPL) is the world leader in software for personal computers, and democratic governments. The company offers a wide range of products and services for public, business and personal use, each designed with the mission of making it easier and more enjoyable for people to take advantage of the full power of personal computing and free society every day.

About the United States

Founded in 1789, the United States of America is the most successful nation in the history of the world, and has been a beacon of Democracy an opportunity for over 200 years. With headquarters in Washington, DC, the United States is a wholly owned subsidiary of Apple Inc .


The sign that there is intelligent life on other planets is that they haven’t visited us! On one hand, I am absolutely thrilled to see the economy and our local market picking up. I am, however, worried about the global economy and the Fed policy. The first rule of holes is that when you find yourself in one you need to stop digging. This is to say that maybe the Fed should rethink the idea of giving forward guidance about interest rates. They are starting to lose credibility. The market is very smart and it recognizes that the combination of a strong dollar and punk economic data (here and especially abroad) trumps their desire to raise interest rates and start letting air out of the bubble that they created.

Speaking of holes, figurative and literal, the States water shortage is causing all of us issues. I know that I personally tore out my grass and put in a chipping and putting green. I save water and I have dropped two strokes off my game. I am seeing many building owners using drought tolerant landscape and rocks. I have found that the real savings is not just the water but a cut back on needs for landscape labor and repairs. The water crisis is a classic example of “the government solution”. Fifty percent of rain and snow melt is lost to the environment (because government has delayed building infrastructure to collect and distribute it), 40% goes to the farms (where 3/4’s of it is used to grow feed for cows and pigs) and 10% is used by the people. However, the 10% are expected to make up for the 100% – kinda like the tax system!

In our local market, the USD economic index rose for the 9th straight month. Help wanted advertising was the most robust gaining 2.38%. That would probably explain the drop in unemployment to 5.19% (down from 7.1% a year ago). Professional and business employment added 9900 jobs over the last 12 months, the largest gains. That would probably explain the sharp increase in home sales (3467 this much versus 3056 last month versus 2541 in February. It would also explain the slow uptick we are finally seeing in the office market. Hopefully, the trend gains traction over the coming years. More importantly the slow but steady recovery is leading to office rent increases in some markets and spaces. A case in point: a consulting firm that leased space in the Aventine (UTC) in mid-2012 for $2.85 psf was offered a “market rate” renewal of $4.25 psf! Now we are not seeing those rates or jumps in most of our markets but when those tenants face those rents, many will flow to the lower rates in suburban markets thereby dropping our vacancy and correspondingly raising our rents. We are also seeing the pre-leasing of new office developments with projected rents of $2.50 – $3.25 psf. These projects and rents also bode well for eventual rent increases for existing property owners.

Health and wellness programs in the workplace are the new sustainability. Insurance giant AON says investment in health and wellness programs return $3.0 to $6.00 for every dollar spent. Perhaps you should replace your common area with a putting green too – you can save water, increase productivity and rent!

The sharing economy is continuing to evolve. Many of you have used or heard of Airbnb or Uber, well this idea of sharing underutilized assets has spread to the restaurant business where multiple restaurants share a kitchen and serving area. Picture an Iron Chef meets Mall Food Courts. This concept allows a small business that couldn’t afford a brick-and-mortar location__ to take less risk, grow and keep profits healthier. So imagine your donut shop subleasing to a taco shop for lunch and a burger joint for dinner. The bad news is that Landlords will see more wear and tear and higher water costs. The good news is more traffic and the opportunity to raise rents and share in the success. This is the same kind of issue facing office owners and tenants as they densify the space because of the lack of paper and storage needs, putting a heavier load on the building and parking lot.

Get ready for another major worldwide credit crunch. Today, the entire global financial system resembles a colossal spiral of debt. Just about all economic activity involves the flow of credit in some way, and so the only way to have economic growth is to introduce even more debt into the system. When the system started to fail back in 2008, global authorities responded by pumping this debit spiral back up and getting it to spin even faster than ever. If you can believe it, the total amount of global debit has risen by $35 trillion since the last crisis. Unfortunately, any system based on debt is going to break down eventually, and there are signs that it is staring to happen once again. For example, just a few days ago the IMF warned regulators to prepare for a global “liquidity shock.” And on Friday, Chinese authorities announced a ban on certain types of financing for margin trades on over-the-counter stocks, and we learned that preparations are being made behind the scenes in Europe for a Greek debt default and a Greek exit from the Eurozone. On top of everything else, we just witnessed the biggest spike in credit application rejections ever recorded in the United States. All of these are signs that credit conditions are tightening, and once a liquidity squeeze begins, it can create a lot of fear.

So what is the bottom line? Make hay while the sun shines! Expect the flow of credit to slow and have emergency funds (cash) available to survive and to take advantage of deals when they come up.

In the meantime, enjoy this month’s story; it is basically a small version of the Fed and the IMF’s plan to solve the world debt crisis….

A Stimulus Story

It is the month of August, on the shores of the Black Sea. It is raining, and the little town looks totally deserted. It is tough times, everybody is in debt, and everybody lives on credit.Suddenly, a rich American tourist comes to town.He enters the only hotel, lays a 100 Euro note on the reception counter, and goes to inspect the rooms upstairs in order to pick one.

The hotel proprietor takes the 100 Euro note and runs to pay his debt to the butcher.

The Butcher takes the 100 Euro note, and runs to pay his debt to the pig grower.

The pig grower takes the 100 Euro note, and runs to pay his debt to the supplier of his feed and fuel.

The supplier of feed and fuel takes the 100 Euro note and runs to pay his debt to the town’s prostitute that in these hard times, gave her “services” on credit.

The hooker runs to the hotel, and pays off her debt with the 100 Euro note to the hotel proprietor to pay for the rooms that she rented when she brought her clients there.

The hotel proprietor then lays the 100 Euro note back on the counter so that the rich tourist will not suspect anything.

At that moment, the rich tourist comes down after inspecting the rooms, and takes his 100 Euro note, after saying that he did not like any of the rooms, and leaves town.

No one earned anything. However, the whole town is now without debt, and looks to the future with a lot of optimism.

And that, ladies and gentlemen, is how the Fed and IMF are solving the Greek Debt Crisis!


“In general, the art of government consists of taking as much money as possible from one party of citizens to give to the other.”

Voltaire (1764)

Commercial real estate values continue to climb in the first two month of the year. Some of this has to do with good fundamentals and rent growth but much has to do with ultralow interest rates and lower cap rates. Basically to much money chasing too few deals. Quantitative Easing (QE) has raised asset prices by offering low borrowing costs. However, once the Fed is done, we’re going to find out that once the student can’t go for “extra.help” anymore, we’re going to find out how bad a student he really is.

Fueled by these higher stock and real estate values, American’s net worth reached a record high by the end of 2014. Greater net worth’s should lead to greater spending and economic growth. However, this is perhaps the worst recovery ever. Although unemployment is below 6%, the economy is operating short of its full potential. The Fed should be raising rates but a less than strong economy, a worse than our economy in the rest of the world (strong dollar) and falling oil market puts the Fed in a tight box. When we see inflation the Fed will be quick to raise rates and that will trigger a dramatic market response. Or as I learned in school, “rates will go up and then they will come down and then rise again. It is how much and when and what order that we don’t know.”

As I mentioned above, asset prices are rising but that value can and will be wiped out if and when interest rates and cap rates rise. To illustrate:

  • $100,000 net income at 5% cap = $2,000,000
  • $100,000 net income at 6% cap = $1,666,666

That is a $333,333 (-16.7%) hit with one percentage point change in cap rate.

To protect against this you need to be looking at property that has “replaceable rents” and even better rent that you can see increasing because of growth in tenant’s business. This growth I talk about comes from more people moving into the area than moving out. It also comes from selling products that people use and buy. Better an Apple Store than a horseshoe store! Also businesses that benefit or are shielded from the internet and big box stores (food and personal services).

While on the topic of growth, San Diego has been forecast to grow by about 100,000 people every five years through 2060. That’s 4.1 million, almost 900,000 more than now! Although we may grapple with drought, traffic and high density development, that kind of population growth bodes well for San Diego real estate values.

According to local economist, Josh Williams, “North County was hit harder by the recession but has rebounded faster.” We have moved from a bedroom community to an export economy led by biotechnology environmental tech and active life styles industries (read Golf). “If you look at North County on its own, it would be the 43rd largest state in the country with a population of 1.2 million.”

I recently attended a Mayors address where the North County Mayors have unveiled a cooperative to attract more business to North County under the banner, “San Diego’s Upside Corridor – Innovate 78.”

Even though CDC Commercial doesn’t sell apartments, I found these numbers published by Fred Schaubelt and CoStar to be a fascinating study in the historic real estate appreciation of San Diego County;

  • 1970 – $11,428 avg per apartment unit countywide
  • 1980 – $30,714
  • 1990 – $58,000
  • 2000 – $122,135
  • 2010 – $139,025 (price after record market corrections)
  • 2014 – $186,350

Because of the pickup in sales activity and peoples aversion to pay taxes, we are finding many of our clients turning to IRC 1031 tax deferred exchanges. This tool conforms to my real estate philosophy which is to “defer until you die, refi to live” or as I recently heard, “swap til you drop!”

By using a 1031, an investor is able to defer capital gains that would ordinarily be incurred at the time of sale. As a general rule of thumb, to avoid paying taxes in an exchange, the investor should attempt to:

  1. Purchase equal or greater in value,
  2. Re-invest all of the equity in the replacement property,
  3. Obtain equal or greater debt on the replacement property.

There are many other nuances and timing issues but then that is why we are here to help you. If you think now is the time for you to trade out and up or if you are refinancing and want to put that cash you took out to work, give me a call to discuss opportunities.

Don’t forget to file your property taxes by the 10th or your state taxes by the 15th or your Federal taxes by the 15th or ….. hope you enjoy the poem this month.


Tax his cow, tax his goat,
Tax his pants, tax his coat,

Tax his crops, tax his work,
Tax his tie, tax his shirt,

Tax his units, tax his land,
Teach him ownership’s not so grand.

Tax his chew, tax his smoke,
Teach him taxes are no joke,

Tax his tractor, tax his mule,
Teach him taxes are a rule,

Tax his oil, tax his gas,
Tax his notes, tax his cash,

Tax him good and let him know
After taxes he has no dough.

Tax his house, tax his couch
Tax him till he yells “ouch!”

 If he hollers, tax him more;
tax him ’til he’s good and sore.

Tax his coffin, tax his grave,
Tax the sod in which he lays.

Put these words upon his tomb:
“Taxes drove me to my gloom.”

And after he’s gone he can’t relax;
They’ll still be after inheritance Tax!

As you politicians smile
proposing new taxes all the
while, Beware the day of just
one more tax, Your smiles
replaced when you get the ax!



As I sit to write this letter, Janet Yellen the Federal Reserve Chair announced the Feds “continued patience” with the recovery. I read that as, conditions are sufficiently lackluster that the Federal Reserve has little choice in their bag of tricks but to stand pat and watch their previous mistakes filter through. Said another way, things are still risky but on the edge of getting better. I on the other hand am optimistic and tell people that we are five years into the worst recovery of all time.

These days, we are inundated with news of the financial and economic woes of the United States, Europe and other developed countries. Though many of the woes relate to the recent splurging of government. If we look at history, we need look no further than the currency wars of the 1920’s and 1930’s. During this time, various nations left the gold standard, devalued their currency (can you say quantitative easing) all in an effort to gain export advantages to sell more goods and prop up their economy. This all leads to extreme over-indebtedness, instability in financial markets and deflationary trends as we “race for the bottom”. On the other hand if we look to the future we must look at demographics. Countries like Japan, Germany and Italy have more than 20% of their population over the age of 65. The U.S. by comparison has only 13.5%. Youth on the other hand are the future and synonymous with consumerism. In Brazil and China more than 25% of the population if under the age of 19 (the U.S. is 28%). Think in terms of spending. If India and China double its per capita spending in the next 20 years it will be a bonanza for consumerism. This bonanza leaves the door open for the U.S. and other developed countries to fulfill these capital needs and provide scientific and business know how that will allow these countries to advance to developed world status. In our own nation, we need to look to states and areas where the youngest population are attracted and making jobs. These states include California, Texas, Colorado and Georgia.

You always hear “follow the money”, well I say, “follow the people”. Always buy real estate where more people are moving in then moving out.

San Diego’s economy in 2015 is expected to outpace that of the US and California according to the National University System Institute for Policy Research. San Diego population growth will reach a new high of 40,500 residents this year. Domestic migration has also just turned positive (yes more people moving in than out). Unemployment is projected to further decline to 5.7%. All good things for San Diego and the real estate market.

You may or may not have been aware but the State (AB1103) has mandated that owners of commercial real estate track their energy use/cost (benchmarking) and are further required to disclose this information upon sale (sometimes lease) and refinance of the property. Property owners are required to disclose their property’s energy usage to:

  • Prospective buyers, at least 24 hours before accepting or countering a written proposal to enter into a purchase agreement [20 CCR § 1681(k)];
  • Prospective and existing tenants negotiating to enter into or renew a lease for an entire building (single tenant property), at least 24 hours before accepting or countering a written proposal to enter into a lease agreement [20 CCR § 1681(1)]; and
  • Mortgage lenders at the time a loan application is submitted for financing to encumber the entire parcel. [20 CCR § 1681(m); 20 CCR § 1683(a)].

The leasing of space in multi-tenant commercial buildings does not trigger the disclosure of energy information since tenants occupy or will occupy only a portion, not all of the building. The sale of a multi-tenant commercial building does trigger the disclosures.

The energy reporting disclosures are being phased in based upon interior building size or gross floor area (GFA).

  • September 1, 2013 for buildings with a total GFA of more than 50,000 square feet;
  • January 1, 2014 for buildings with a total GFA of 10,001-50,000 square feet; and
  • July 1, 2016 for buildings with a total GFA of 5,000-10,000 square feet. [20 CCR §1682].

The original compliance date for buildings with GFAs under 10,000 square feet was July 1, 2014. However, in September 2014, the state legislature gave small commercial building owners an additional two years to prepare for the new requirements. [CDC, Amendment to 20 CCR §1682(c), August 11 2014].

As a result, energy disclosures are already available for buildings with a total GFA of 5,000-10,000 square feet. Risk management principles suggest the disclosures be made on these smaller properties, especially if a sale is involved.

Owners of commercial buildings of less than 5,000 square feet GFA are exempt from the energy benchmarking and disclosure mandates.

To learn more about this issue,  here is a link to a detailed article on the matter.

To set up your account and compliance instructions  here is a link to the state’s site.

As broker, we always find ourselves in a battle between what the developer/investor wants, the desires of the tenant and the demands of the city/government, I thought you would enjoy the designs of a shopping center as seen through each of those eyes in lieu of a story this month.

A Shopping Center as seen by….


Happy Ground Hog Day! And while I am at it Happy Chinese New Year. This year is the year of the sheep. Well, in fact, it is the year of the goat. Political correctness and spin tells us it is the year of the sheep because the sheep is one of the best loved animals and is gentle and calm and we use its fleece to keep us warm. We have all heard of the story of the wolf in sheep’s clothes – so beware. Now the Ram is also part of the goat and sheep family. So it could be the year of the ram as well. Well I think our economy and real estate market is going to be the year of the ram (hero) or the goat (not the hero). Meantime our politicians will exacerbate the problem through legislation, regulation and hyperbole as we approach the 2016 election. You might say they are putting lipstick on a pig – or in this case a goat!

The USD Burnham-Moores Index of leading indicators for San Diego rose again in November and December. Job growth for 2015 is expected to be equal or better than last year. Sectors expected to do well are professional, scientific, and technical services, healthcare, leisure and hospitality. American Express ranked San Diego 5th amongst meeting destinations and several local hotels were in the top 10 in the nation.

Optimism amongst small and mid-size businesses has reached levels last seen during the pre-recession years of the early 2000’s according to a new survey by San Diego based Vistage International. However, in the same survey, 40% of CEO’s said that local government is negatively impacting their business. Thirty-seven percent said healthcare reform is impacting their business.

With thanks to Integra Realty-Appraisers, below is a market snapshot of San Diego Commercial Real Estate:

Market Snapshot (courtesy of Integra Realty – Appraisers)

CAP Rent Vacancy
     CBD A 7.0% $2.45 12.1%
     CBD B 7.0% $2.04 21.3%
     Suburban A 7.0% $2.92 10.5%
     Suburban B 7.0% $2.19 13.7%
     Class A 7.0% $.69 3.2%
     Flex 7.0% $1.33 11.7%
     Region 6.5% $2.50 0.5%
     Community 6.5% $1.58 5.5%
     Neighborhood 6.5% $1.75 7.4%

You will soon see some of your local Vons and Albertsons stores changing to become Haggen’s Grocery. Haggen is a grocer from the Pacific Northwest and is taking the stores so Vons and Albertsons can complete their merger.

As we approach our rainy season (for what little that is) you should be aware that local government is cracking down on storm water runoff. Rain water that “runs off” of building roofs, property hardscapes and through uncovered dumpsters into the storm drains instead of seeping into the ground on site. It ends up in the nearest waterways and eventually drains into the ocean. New federal and county regulations impose $5000 fines on property owners who fail to address storm water runoff.

So whether you choose to be a ram or a goat this year or snuggle up in your wool blanket and wait out the ground hog, it always pays to have good advice and that is what we are here for at CDC Commercial. Perhaps some of the best advice that we have heard and have been giving out is;

“Live where you want, and invest where it makes sense with turnkey, positive cash-flow properties whose Cap Rate is higher than your long-term fixed interest rate financing.” A turnkey property is a new or like-new property you understand and is hassle-free.

I hope you enjoy the story!


It is the year 2015, 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.” In a flash of lightning, God delivered the specifications for an Ark. Fearful and trembling, Noah took the plans and agreed to build the Ark.

“Remember,” said the Lord, “You must complete the Ark and bring everything aboard in one year.” Exactly one year later, a fierce storm cloud covered the earth and all the seas of the earth went into a tumult. The Lord saw Noah sitting in his front yard weeping. “Noah.” He shouted, “Where is the Ark?” – “Lord please forgive me!” cried Noah. “I did my best but there were big problems. First, I had to get a permit for construction and your plans did not comply with the building codes. I had to hire an engineer and lawyer to file an environmental impact statement on your proposed flood, over the entire Earth.

They didn’t take very kindly to the idea that they had no jurisdiction over the conduct of the Creator of the universe.

Then the Army Corps of Engineers demanded a map of the proposed new flood plain. I sent them a globe. Right now, I am trying to resolve a complaint filed both with the ACLU and the Equal Employment Opportunity Commission that I am practicing discrimination by not taking godless, unbelieving people aboard! The IRS has seized all my assets, claiming that I’m building the Ark in preparation to flee the country, to avoid paying taxes. I just got notice from the state that I own some kind of user tax and failed to register the Ark as a recreational water craft. Finally, the ACLU got the courts to issue an injunction against further construction of the Ark, saying that since God is flooding the earth, it is a religious event and therefore unconstitutional.”


Happy New Year! As many of my long term readers remember, I put out the annual Gold Report each year with our forecast of the year ahead. As with many businesses, the internet with big data and instant access has kind of made the annual Gold Report forecast outdated.

However, as 2015 takes off, real estate leaders and experts are publishing their forecasts and expectations for the coming 12 months. So rather than reinvent the wheel, I thought it better to give you a link to two of the better reports to give you a big picture of the real estate market as a whole;

As in my past Gold Reports, after looking at the national market, we look at California. Perhaps one of the best articles to help you understand our “Golden State” is Jobs Move Real Estate (California). If you don’t have time to digest the whole article – California is getting better. Jobs exceed past recession levels but population growth of almost a million keeps us behind the curve still.

Finally, San Diego. Our economy is poised to add 30,000 jobs in 2015. According to USD Economist Alan Gin, the recent plunge in gas prices should add an extra $1 million a month in cash, to place in use in our economy.

The latest index of leading indicators from the University of San Diego shows continued gains by the region’s economy, with prospects for solid growth through 2015. The University’s Burnham-Moores Center for Real Estate reported that the index rose 0.6 percent in October. October’s gain was the fifth consecutive one for the index and “signals continued solid growth in the local economy at least through the end of 2015. Strong gains in initial claims for unemployment insurance and the outlook for the national economy offset a sharp drop in building permits,” the center said in its report. “Consumer confidence and help wanted advertising were up moderately while there was only a slight increase in local stock prices.

To read more about San Diego’s housing and employment, here is a link that I think gives the best charts and insight;  San Diego Housing Indicators.

If you want to create your own charts and learn about specific market asking rents, sale prices, market supply and such, I recommend going to our website and clicking on either of the market trend boxes, on the home page, and change the variables to receive the desired info; www.CDCCommercial.com.

Lastly, I thought you might enjoy this outlook on the National Retail market published by CoStar and yes that is yours truly quoted in the article!

CoStar Retail Outlook

I have to tell you, I can’t see how interest rates will stay this low forever. If you have a loan you should evaluate a refi. If you have cash, despite low cap rates, we are in a situation of positive leverage This is where cap rates (rate of return) can be found higher than loan rates. The only warning I have is that in buying, you want something that rents can grow or be increased over time as rates increase (and caps rise). Otherwise your appreciation will be wiped out by rising cap rates.

Since I have given you so much to read and digest this month, I thought I would leave you with an appropriate cartoon instead of a story. .

Don Zech (license #00885909)
CDC Commercial, Inc
Real Estate Services
Phone: 858.486.9999
Email: dzech@cdccommercial.com




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