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February 2019 Monthly Letter Al CaponeIn 1929 in Chicago, gun men in the suspected employment of organized crime boss Al Capone murdered seven members of George “Bugs” Morin’s North Siders gang in a garage on North Clark Street. The so-called St. Valentines Day Massacre stirred a media storm centered on Capone and his illegal prohibition era activities and motivated Federal authorities to redouble their efforts to find evidence incriminating enough to take him off the streets. With that nugget in mind, Happy Valentine’s Day!

Back in the day the cops used to complain about the crooks getting away before they could get to the scene of the crime. Of course, that was when the cops were still on horseback and the crooks had the modern technology of a car. Thus, was born the get-away car and later, the cop car.

What about today’s electric cars. What impact will they have on our commercial real estate landscape? Gas stations? Auto repair shops? Charging stations? Hot Roders, tuners and Hobbyists? (Do you expect a dual electric distributed battery system with stick shift Corvette in your garage?) Will gas cars go the way of steam and horses? Do you still have doubts? Volvo has announced that it is going to electrify all of its cars by the end of 2019.

Besides electric cars, Artificial Intelligence (AI) is also getting a lot of hype. How will this impact our commercial real estate landscape? After the hype dies down, I see AI becoming a part of our lives just like combustion, electricity and the internet. Will we have an Alexa in the lobby to help people find a tenant’s suite instead of a directory. It could also be used to check the weather, order your lunch and call your Uber. What was once a lobby valet and only in the most luxurious of buildings can be had by all. The great concern about AI of course, is that it will lead to human unemployment and social strife. For now, AI appears to be creating more jobs than it is displacing. Manufacturing is expected to take the biggest hit – 1.8 million jobs (great we’ll bring home all of these manufacturing jobs and then automate them all and put everyone out of work!) The 2.3 million jobs expected to be created by AI are in the education, healthcare and public sector. We have seen robotic automation affecting banking (ATM and bank by phone), retail cashiers and warehouse workers but the next step is “augmenting” where technology works alongside human professionals assisting them with repetitive tasks while leaving them with the “final say.” Think Doctors, Lawyers, hmm… Real Estate Brokers (“Siri, write my monthly letter…”).

The other real estate product heading for major transition is the drug store. The new healthcare model is to become the “healthcare destination”. CVS recently acquired Aetna Insurance, Walgreens has partnered with Humana and Amazon has a joint venture with Berkshire Hathaway (Warren Buffet) and JP Morgan Chase. What can we expect? Amazon store in front and minute clinic in back? Alexa detecting that you have a cold or cough and delivering a pill pack? Will it be drug store as a C-Store or as your Doctor office? Or both? Healthcare is a $3.5 trillion industry. We must figure out how to corral the costs or our nation will go bankrupt. I am starting to see the green shoots of this now; automated blood pressure machines at the mall, Apple watches telling you that you have Afib, your dental hygienist checking your mouth and neck for early cancer signs, blood labs giving your results along with dietary guidelines to increase or decrease a particular blood count.

Agility is key to winning in the digital era. New business models and competition, extensive use of technology, and changing tenant and investor expectations are redefining the commercial real estate (CRE) industry. As investors increasingly favor newer business models and the tech-enabled ecosystem, companies in the commercial real estate industry will have to realign business priorities and adapt to new demands. The most agile will be the winners! (That would be us at CDC Commercial!)

San Diego’s economy remains solid. When the government finally figures out how to  stay open. San Diego will be one of the markets that benefit most from the latest spending bill. Two of San Diego’s key economic engines (Defense and Health Care/Biotech) look to be even stronger in 2019. San Diego was a little slow/late getting into the current recovery so hopefully we have a little more runway left than other markets.

Speaking of runways, I hope you enjoy the story.


A story of two men:

STORY NUMBER ONE

Many years ago, Al Capone virtually owned Chicago. Capone wasn’t famous for anything heroic. He was notorious for enmeshing the windy city in everything from bootlegged booze and prostitution to murder. Capone had a lawyer nicknamed “Easy Eddie.” He was his lawyer for a good reason. Eddie was very good! In fact, Eddie’s skill at legal maneuvering kept Big Al out of jail for a long time. To show his appreciation, Capone paid him very well. Not only was the money big, but Eddie got special dividends.

For instance, he and his family occupied a fenced-in mansion with live-in help and all of the conveniences of the day. The estate was so large that it filled an entire Chicago City block. Eddie lived the high life of the Chicago mob and gave little consideration to the atrocity that went on around him. Eddie did have one soft spot, however. He had a son that he loved dearly. Eddie saw to it that his young son had the best of everything: clothes, cars and a good education. Nothing was withheld. Price was no object. And, despite his involvement with organized crime, Eddie even tried to teach him right from wrong.

Eddie wanted his son to be a better man than he was. Yet, with all his wealth and influence, there were two things he couldn’t give his son; that he couldn’t pass on a good name and a good example. One day, Easy Eddie reached a difficult decision. Easy Eddie wanted to rectify wrongs he had done. He decided he would go to the authorities and tell the truth about Al “Scarface” Capone, clean up his tarnished name and offer his son some semblance of integrity. To do this, he would have to testify against The Mob, and he knew that the cost would be great. So, he testified. Within the year, Easy Eddie’s life ended in a blaze of gunfire on a lonely Chicago Street. But in his eyes, he had given his son the greatest gift he had to offer, at the greatest price he would ever pay.

STORY NUMBER TWO

World War II produced many heroes. One such man was Lieutenant Commander Butch O’Hare. He was a fighter pilot assigned to the aircraft carrier Lexington in the South Pacific. Butch O’Hare demonstrated in real life, and when it counted most, the fighting skills he had mastered. The carrier Lexington had been assigned the dangerous task of penetrating enemy-held waters north of New Ireland. From there her planes were to make a strike at Japanese shipping in the harbor at Rabaul. Nine Japanese bombers were reported on the way to the Lexington. Six Wildcats, one of them piloted by Butch O’Hare, roared off the Lexington’s deck to stop them. O’Hare and his wingman spotted the V formation of bombers first and dived to try to head them off. The other F4F pilots were too far away to reach most of the enemy planes before they released their bombs. As if this weren’t bad enough, O’Hare’s wingman discovered his guns were jammed. He was forced to turn away. Butch O’Hare stood alone between the Lexington and the bombers. O’Hare didn’t hesitate. Full throttle, he roared into the enemy formation. While tracers from the concentrated fire of the nine bombers streaked around him, he took careful aim at the starboard engine of the last plane in the V and squeezed his trigger. Slugs from the Wildcats six .50-caliber guns ripped into the Japanese bomber’s wing and the engine literally jumped out of its mountings. The bomber spun crazily toward the sea as O’Hare’s guns tore up another enemy plane. Then he ducked to the other side of the formation and smashed the port engine of the last Japanese plane there. One by one he attacked the oncoming bombers until five had been downed. Commander Thach later reported that at one point he saw three of the bombers falling in flames at the same time. By now Thach and the other pilots had joined the fight. This was lucky because O’Hare was out of ammunition. The Wildcats took care of several more bombers and Lexington managed to evade the few bombs that were released. It was an amazing example of daring and shooting skill. Afterward Thach figured out that Butch O’Hare had used only sixty rounds of ammunition for each plane he destroyed. He had probably saved his ship.

This took place on February 20, 1942, and for that action Butch became the Navy’s first Ace of W.W.II, and the first Naval Aviator to win the Congressional Medal of Honor. A year later Butch was killed in aerial combat at the age of 29. His home town would not allow the memory of this WW II hero to fade, and today, O’Hare Airport in Chicago is named in tribute to the courage of this great man. So the next time you find yourself at O’Hare International, give some thought to visiting Butch’s memorial displaying his statue and his Medal of Honor. It’s located between Terminals 1 and 2.

SO, WHAT DO THESE TWO STORIES HAVE TO DO WITH EACH OTHER?

Butch O’Hare was Easy Eddie’s son.

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It seems that Jeff Bezos has experienced the same problem as many Amazon customers with having Echo ordering inappropriately:

Scene: Amazon’s Jeff Bezos’ trendy home earlier this month. He’s talking to his Echo.
Bezos: “Find me something to buy at Whole Foods.”
Echo: “Okay, buying Whole Foods.”

Bezos: “Oops.”

Amazon is killing a lot of businesses. In the process, it may also be killing inflation – they are squeezing prices of everything through their automation and efficiencies. Both factors that are bound to hurt commercial real estate. Although all of the focus this month has been on the Whole Foods purchase (never mind that Whole Foods has less than 3% of the grocery market), I think the breaking news was the roll out of Amazon Prime Wardrobe. Here the online retailer attacks the biggest problems of buying clothes; (1) the time it takes to shop, (2) the hassle of finding the right size, (3) returning stuff you don’t want (comes with pre-labeled return but you get a discount if you keep it all).
As we enter the second half of the year, I would like to take an assessment of where we stand and share some interesting data that I am seeing. First, I will tell you that we continue to be busy and are not experiencing any slowdown. Interest rate bumps have not affected most of our day to day investor/buyers. However, the think tanks and big data are pointing to a “slow-motion slow-down.” Low unemployment is generally good for commercial real estate (more workers – more space).
However, too low makes it tough to expand without a pool of workers. Slowing job growth may be the catalyst for the slowdown. E-commerce will continue to bring retail to its knees. Interest rates will continue to tick up which will put upward pressure on cap rates (and lower prices). With cap rates at record lows (I saw a 3.5% cap on a property in NYC!) it is hard to believe that there is much room for commercial real estate prices to run.
A couple of charts below help to illustrate my concerns.
commercial property price index
total deal volume by sector

(PRNewsfoto/Ten-X)

consumer board consumer confidence index

If you really like charts, numbers and big data then you will really enjoy the Cycle Monitor by Dividend Capital Research and Glenn Mueller, PHD.

While recessions are inevitable, it will not be anywhere near the disaster of 2008 (and we probably won’t start seeing the “slow-motion, slow-down” until 2018). Rather we will more likely see a prolonged flat period. The recession of 2007-2009 was the closest thing to the great depression. My guess is the next recession will be more modest. Commercial real estate has nowhere near the excesses that were built up in the mid 2000’s. In the meantime, low unemployment, low cap rates, low vacancy rates, head down, work hard and enjoy the ride. Hope you enjoy the story…
Jeff Bezo’s Email to Employees on Amazon’s Purchase of Whole Foods
by Ryan Garcia
Team;
Today is a significant milestone in the evolution of the Amazon brand. Our offer to purchase Whole Foods will finally consolidate the largest online and off-line retailers where consumers end up spending way more than they intended. I actually didn’t even mean to buy Whole Foods but after downing a few too many boilermakers at the Echo mixer last night, I accidentally clicked BUY IT NOW instead of just putting the grocery chain in my cart for future consideration.
Oh well, you know what they say-you can’t log off Amazon without spending $13.7 billion. So true!
Further details about the merger will be forthcoming, but I wanted to call out a few major points before we have to go silent and get this approved by regulators.
  • Our corporate cultures or perfectly aligned. The New York Times revealed that every Amazon employee has cried at their desk, and I personally made a Whole Foods employee cry when they couldn’t correctly identify their process for ensuring single-source coffee beans throughout the roasting process. It was an uncomfortable 38 minutes for both of us, but I think an experience so many of you can relate to.
  • Improved Echo functionality. Whole Foods has maintained a laser-like focus on organic foods and sustainable facilities and I’m excited to bring that same vision to Echo. Starting next week, when customers ask their Echo to order non-organic food products that receive a 12-minute lecture on the benefits of organic and local source products while our top-notch product matching software will send them the closest available organic item. Users on our website will find the “Customers Also Bought…” section replacing unhealthy items with notes such as, “Cookies That Went Straight to Their Thighs” and “Beef Produced By Clearcutting Rain Forest.” Needless to say, those products will not be available for purchase.
  • Drone changes. All Amazon drone teams will immediately switch to bio-fuels rather than battery packs.
  • Senior leadership. Once the acquisition is complete, John Mackey will take a new position as financial analyst and social media community outreach for the Washington Post. Synergy!
  • Location changes. Since Whole Foods is headquartered in Austin, Texas, I’ve asked EM to build the first hyperloop route between our offices here in Seattle and the Blue Bubble of Texas. All Amazon/Whole Foods employees Will office in Austin for the one week of good weather they have in late February, and in Seattle for the one week of sunshine we have an August (or May… or October… or whenever). The remaining 50 weeks of the year are up to you. Because I believe all Amazon employees should be free to cry at their desk no matter where that desk is located.
  • Product expansions. Amazon will soon carry all of the 365-branded products Whole Foods has developed in all Whole Foods stores we’ll be adding aisles for garden equipment, household electronics, sportswear, handbags, pet supplies, golf clubs, video games, plumbing supplies, luggage, headphones, and climbing gear. To start.
  • Cruelty free. We will be adopting Whole Foods policy of only purchasing products that are certified cruelty free. Please note this does not apply to any software we developed ourselves.
I am beyond excited by the possibilities of this merger moving forward and I hope the team feels the same. The combination of our two companies will account for over 85% of all hipster purchases in the United States. I’m looking forward to capturing the remaining 15%.
Now, I need your daily status updates and you aren’t excused for being late for reading this.
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According to her biography, Barbara Millicent Roberts grew up in the mythical town of Willows, Wisconsin. For a period of time she attended Willows High School but later moved on to Manhattan International High School in New York City. Over the years, she has had more than 40 pets including cats, dogs, various horses, a zebra, a lion cub, and a panda. She has held dozens of professional positions including doctor, pilot, astronaut, veterinarian, and flight attendant. Her taste in cars is legendary. Her favorite color is bright pink. That color has become known as Barbie Pink. On March 9th, the folks at Mattel celebrated Barbara Millicent “Barbie” Roberts’ 58th birthday. No matter what you think about this cultural icon, you have to admit that she’s looking good for her age.

The ubiquitous Barbie doll made its debut on March 9, 1959, at a toy fair in New York City. She was an instant hit. About 350,000 dolls were sold in the first year of production. Since then, it is estimated that more than a billion Barbies have been sold worldwide.

Negotiating the emotional minefield between whims and dreams is a difficult task for any parent (or consumer for that matter). The marketing machines of companies flash shiny objects in our eyes forcing us to make tough decisions, ones that don’t always leave us happy, satisfied or popular.

I once read that in a grocery store there are over 100 salad dressing choices. With so many to choose from we are never able to be satisfied since we can’t try all of them. Whereas with only 3 or 4 choices we can be sure of our favorite. Could this be the root of IN-N-OUT Burgers grand success?

I remember a bumper sticker that used to say “I want to be like Barbie…that bitch has everything.” Well before you become rich you must decide whether you want to be secure, comfortable, or rich. These are called core values, or the reasons you want to invest.

The first reason most people invest is because they want to feel more secure That’s why Social Security or a retirement plan is very popular with people whose core value is the need for security. Security is a very important aspect of investing. You don’t want to be a destitute out on the streets with nobody taking care of you.

Unfortunately, many people who are counting on government or their employer to provide for their retirement will be sorely disappointed. A person who invests to be secure or values security will always say, “Well, I have to have a roof over my head and I need to put food on my table.” Their whole orientation is security or survival.

The next level above security is to be comfortable. They say, “I just want…” They want the house, the second vacation house, or the extra car. They want to take a cruise every now and then. Their highest priority is the need to be comfortable.

The third core value that motivates people is wanting to be rich. Most people dream of becoming rich but if the dream of becoming rich disturbs any of the lower core value of security or comfort, they’ll forsake being rich.

They’ll dream of being rich but if it means giving up a safe, secure job, then being rich remains a dream. If it’s just too much trouble to become rich and they’re comfortable at the moment, then they won’t pursue becoming rich. Those are the three core emotional reasons why certain people chose certain investment paths. Money is just an idea. It’s a formulation of the mental, emotional, and spiritual ideas inside of you that determine what you ultimately become. In the end, you need to fight for the future you want.

Today Big Data is to commerce what oil was in the past. Data helps retailers interpret what consumers will buy and when and for how much. The data comes from everywhere. Indoor tracking systems like Bluetooth beacons or Philips lighting or facial recognition. From web browsing and app use. From transaction data aggregated by Visa and MasterCard. Even from Uber, who knows that riders spent 2 billion directly after getting out of an Uber. How about the father who got a call congratulating him on becoming a grandfather before his daughter told him she was pregnant – all courtesy of Big Data and browsing history!

In 1890, Samuel Warren wrote a paper called, “The Right to Privacy” and in it he cited “recent inventions and business methods” – including instant photography and tabloid gossip – “have invaded the sacred precincts of private domestic life.” In the paper, they called for the “right to be left alone” and what they called, “the right to one’s personality.”

Although technology may be making our lives more public than we want, loneliness seems to be an epidemic. The number of Americans who say they have no close friends has nearly tripled in the last decade. While technology offers us an easy way to keep in contact with friends and meet new people, technology encourages shallow conversations that can distract us from meaningful, real life interactions. Smartphones have transformed grocery lines from a chance for small talk with neighbors to an exercise in email checking. Starbucks has sealed the fate of the coffee shop as nothing more than a place of mutual isolation.

So what does this have to do with commercial real estate? Shopping centers? Office buildings? Well let me tell you. Successful real estate in the future is social real estate. Location, location, location brings new meaning in a social setting. The best location is where people will want to live, work and play. Shopping centers will be social centers.

Although you may buy your Barbie dolls now on Amazon, most of you still go to the grocery store to buy your groceries. The grocery store has been largely immune to the ravages of online shopping. But a war is coming. Beside the current intense competition of Vons, Ralphs, Wal-Mart, Target and Costco, you have the growth of niche players like Trader Joe’s, Whole Foods, and Sprouts. Soon you will see the growth of ALDI, LIDL and Grocery Outlet. Not to be outdone, Amazon is stepping up its grocery delivery business and is now rolling out stores that will just deduct your purchase from your credit card as your walk out the door – no cashier needed. To make things harder, struggling brick and mortar retailers such as dollar stores and pharmacies have increased their inventory of grocery items (can you image Amazon buying Rite-Aid or CVS? Amazon delivering your drugs and an Amazon store on every corner.)

Like the grocery business, our activity has increased but business has gotten harder to close. Although we are working hard to get rich we are trying to be happy being satisfied. We have ventured into the Big Data market and done a Barbie analysis of the San Diego market (I apologize ahead if you or your neighborhood is insulted).

San Diego Barbie from KGB Bob and Coe Show

La Costa Barbie – this princess Barbie is only sold at the brand new La Costa Forum. She comes with an assortment of Kate Spade handbags, a Lexus SUV, a long-haired dog named Honey, and a cookie-cutter house. Available with or without tummy tuck and face lift. Workaholic Ken sold only in conjunction with “augmented” version.

Rancho Bernardo Barbie – this modern-day homemaker Barbie is available with Ford Windstar minivan and matching gym outfit. She gets lost easily and has no full-time occupation or secondary education. Traffic-jamming cell phone included, headset sold separately.

Escondido Barbie – this recently paroled tattooed and nose pierced Barbie comes with a 9mm handgun, a desert/river ready lifted Chevy truck with dark tinted windows, and a methlab kit. This model is only available after dark and can only be paid for in cash, preferable in small, untraceable bills. Unless you are a cop, then we don’t know what you’re talking about.

Del Mar Barbie – this yuppie Barbie comes with your choice of BMW convertible or Hummer H2. Included are her own Starbucks cup, credit card, and a country club membership. Also available for this set are Shallow Ken and Private School Skipper. You won’t be able to afford any of them.

Santee Barbie – this pale model comes dressed in her own Wrangler Jeans, two sizes too small, a NASCAR shirt, and Tweety Bird tattoo on her shoulder. She has a six-pack of Coors Light and a Hank Williams, Jr CD set. She can spit over 5 feet and kick mullet-haired Ken’s ass when she is drunk. Purchase her pickup truck separately and get a confederate flag bumper sticker absolutely free.

La Jolla Barbie – this collagen injected, rhinoplastic Barbie wears a leopard-print bikini outfit and drinks cosmopolitans while entertaining friends at the beach house. Percocet prescription available.

Lakeside Barbie – this tobacco-chewing, brassy-haired Barbie has a pair of her own high-heeled sandals with one broken heel from the time she chased Beer-Gut Ken out of Lemon Grove Barbie’s house. Her ensemble includes low-rise acid-washed jeans, fake fingernails, and a see-through halter top. Also available with a mobile home.

Leucadia Barbie – this doll is made of actual tofu. She has long, straight, brown hair, archless feet, hairy armpits, no makeup, and Birkenstocks with white socks. She smokes good sinsemilla buds and prefers that you call her “Willow.” She does not want or need a Ken doll, but if you purchase two Leucadia Barbies and the optional Volvo wagon, you get a coupon for a free wheat-grass smoothie at any Whole Foods Market.

National City Barbie – this Barbie now comes with a stroller and infant doll. Optional accessories include a GED and bus and trolley pass. Gangsta Ken and his ’79 Caddy were available, but are now very difficult to find since the addition of the infant.

Chula Vista Barbie – this Spanish-speaking-only Barbie comes with a 1984 Toyota with expired temporary plates and three baby Barbies in the back seat, but no car seats. The optional Ken doll comes with a pickup truck loaded 10-feet high with mattresses. Green cards are not available for Chula Vista Barbie or Ken.

Hillcrest Barbie/Ken – this versatile doll can be easily converted from Barbie to Ken by simply adding or subtracting the multiple “snap-on” parts. Bonus: free rainbow flag with proof of purchase sticker.

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