Ernie Auerbach died 15 years ago today. Ernie conceived and built more than 15 million square feet of commercial, retail and residential properties in large stretches of Santa Monica, Brentwood and Pacific Palisades. In 1977, he purchased 1,000 acres of ranch land in Ramona where he bred racehorses. In 2001, he founded Ramona National Bank, which became the Bank of Southern California (now California Bank of Commerce). I had the good fortune of speaking and working with Ernie several times on projects in Ramona. At the time, all he would say was that he was from L.A. and owned a ranch in Ramona.
We have all watched the 24-hour news cycle and seen and heard enough. It is my hope to bring a bit of a real estate and sociological perspective.
On the real estate front, there are about 12 million square feet of commercial real estate in the evacuation zones of the Palisades and Eaton fires. This amounts to about 7,300 apartments, 7 million square feet of office space and 3 million square feet of retail space. 38,000 acres have burned and 175,000 are under evacuation orders or warnings. News reports estimate 12,000 homes and businesses have been destroyed. Economic losses are approaching $300 billion.
Now what? Most assume that, like the insurance company TV commercials, they will be there with a check, and everything will be rebuilt quickly while the insured gets their rent covered for 9-12 months. Whoa! Hey, this ain’t Hollywood baby…well maybe it is, but Dorothy, we ain’t in Kansas.
First, it takes a couple of years to get a building permit in L.A., and it takes a couple of years to build some of the custom homes that belong to the stars. Add to that, how long the line will be for the concentration of the housing being replaced. By way of example, the number of multifamily units lost in the fire zone represents roughly the total number of apartments rented over the entire past year. So, question #1: What happens in 12 months when your rent check runs out, and they tell you that you are still 4-8 years away from getting the keys to your rebuilt home?
Second, what if you are amongst the lucky ones and your house is the sole survivor? Now you must face the fact that your house survived, but your neighborhood did not —and likely won’t be back for 5-10 years!
Third, many people bought those houses in the low to mid-hundreds of thousands, but they were now worth millions —much of it in the land. So, rebuilding that little house that Ernie Auerbach built in the 50s, 60s and 70s may not make sense.
Back in the 80s, Ernie used to say the American Dream was to buy in 1946 for $10,000 and sell in 1987 for $440,000 and retire to Vacation Village. For many people, their primary wealth is in their home.
Fourth, we’ve heard about the large number of insurance cancellations just before the fires, but for many years now, many high-end homes were not able to get insurance, forcing many wealthy owners to self-insure so they could live in the right neighborhood and have multi-million-dollar views. In real terms, that may mean a net worth reduction of $10-$20 million or more. Sorry, but not every wealthy person can sustain that kind of hit.
Fifth, sure, for those who couldn’t get insurance, they turned to the state-provided FAIR plan (1 in 5 homes in Pacific Palisades). Keep in mind, these plans don’t fully cover most losses, so people will be coming out of pocket. Additionally, with these levels of loss, premiums are sure to skyrocket, or these losses will be offloaded to taxpayers.
Sixth, although I hate the concept of broken window economics (look it up), the SoCal construction industry is going to boom for years to come. This will be good for employment but will be largely inflationary.
Seventh, although Hollywood and the media will present it as a case of the phoenix rising, the Olympics in L.A. in three years will add undue pressure to the government approval process and demand for construction materials and labor.
Let me stop here and tell you we have an insurance crisis, and it needs to be addressed.
- We must allow insurance companies to price risk accurately without excessive restrictions that discourage market participation. Proposition 103 must be revised.
- We need incentives for new insurers to enter the market (tax breaks, streamlined approval and subsidies for high-risk properties).
- Promote innovation and technology – A.I, data analysis, etc.
- More transparency – full disclosure of the costs and increases.
- Support and educate consumers – educated consumers help make pricing competitive and lower costs.
Nick’s Numbers
First, my sympathy and condolences to all of you affected by the recent L.A. fires. This month, I thought I would share a breakdown of where leases were struck by sector last year. The blue represents goods and the yellow represents services.
If you would like an analysis of your properties’ value or discuss what you should be doing with regard to interest rates or inflation and their impacts on your business, tenants, or property, I’d be happy to talk. (Nick Zech, 858-232-2100, nzech@cdccommerical.com).
So, I don’t know how long it will take a movie star to get a building permit, and I don’t know what they’ll do or where they will go if it takes too long. I do know it will take both a miracle and an Olympic effort to restore the City of Angels. I also know that Ernest Auerbach owned nearly 25,000 apartments, making him among the wealthiest 0.1% of Americans. But what made him perhaps the wealthiest was his common sense, instincts and ethics. These are things that are hard to teach, but I hope they can be learned by sharing. Provided by his daughter Lorna …hope you enjoy.
Do it now…
If it’s not broken, don’t fix it…
If it is broken, fix it now…
Take good care of your car and your house…
Whatever you imagine and dream, you can realize…
You have to give back to the community that nurtured you…
Respect your mother…
She is your best friend…
Always listen to your mother…
Anything is possible…
Buy low, sell high…
You make the money when you buy, not when you sell…
Hang up your coat, put your books where they belong…
Anything is okay in moderation…
You can’t live your life in fear…
You learn when you are listening not when you are speaking…
See the world…
Have a plan…
The best things in life are free…
Finish what you start…
If you fall, pick yourself up and try again…
Keep all the friends you’ve made on your way up the ladder…
Never show your hand…
Don’t brag about your achievements, let others brag for you…
Don’t brag about your kids…
See the cup as half full…
Know when to cut your losses…
Just like a farmer, plant enough seeds, eventually you’ll have a crop…
Every day is a gift…
Look forward to challenges…
You never know, there may be a pony at the bottom of the heap…
Always think positive…
Nature is the best place to meditate…
Always have animals around…
Use your best china and silver…
Spend the Sabbath with your family…
It’s never too late to learn something new…
Early to bed early to rise…
If you don’t have it, don’t spend it…
Pay off your debts…
Don’t buy me anything, make me something instead…
Tell me what a good father I am…
Like Aesop’s fable of the Tortoise and the Hare—slow and steady wins the race…
Take a chance: gambling in moderation is okay, especially at the track…
Learn to play golf, bridge, poker, or pinochle…
Smile lines are good—laughter is better…
Surround yourself with friends who know how to kibitz!…
Have goals…
Treat everyone with respect!…
Respect people who work hard regardless of their acquisitions…
I am proud to be an American…
America is the greatest country in the world!…
You have to keep moving!…
Last but not least: Celebrate with friends!
