Back in the day they cooked in the kitchen with a big pot that hung over the fire. Sometimes they would obtain pork, which made them feel special. When visitors came over, they would hang up their bacon to show off. It was a sign of wealth that a man could, “bring home the bacon.” They would cut off a little to share with guests and would sit around and “chew the fat.”
Well gang, it’s going to be a short letter this month. We are busy, busy but it is taking extraordinary effort to get deals closed in this environment. So, let’s just chew the fat on a couple of things
First, if someone tells you what a piece of real estate is worth today, you can be pretty sure they aren’t giving you the full picture or they are just naïve. We appear to be at a crossroads, and I don’t expect it to normalize for at least a year (after the elections). There is not a lot of transaction volume, fluctuations in interest rates, uncertain economy and both global and domestic politics cast a heavy shadow.
I read a recent article that said that Gen Z drinks less alcohol than Millennials (thank God they didn’t poll Boomers!). They also prioritize sleep and health and wellness over other generations. The thoughtful question I ask is “what impact will that have on our commercial real estate? Note cartoon below.
Government spending in 2024 is projected to reach $6.5 trillion (about 23% of GDP!). Revenues of about $4.9 trillion leaves about a $1.6 trillion deficit. That is 5.3% of GDP and expected to reach 6.1% over the next 10 years. Over the last 50 years deficits have average 3.7% of GDP and have never been higher than 5.2% for five consecutive years since 1930!
It has been fascinating to watch the Truth Social Stock (DJT). Have we finally monetized the presidency?
Inflation (don’t get me started) I feel like I am watching the frog in boiling water, except that I am the frog! We hear about and experience food inflation up close and personally as we go out to eat or shop at the grocery store. What I found interesting is that in the last 12 months (ending March), “food at home” is only up 1.2% and “food away from home” is up 4.2%.
If I might diverge on the food topic for a minute. As you know I like to stay fit and eat right. But I am sure, like you, we are hammered with labels that read “low fat” “no bad this” and “no bad that”. You read the ingredient labels, but they look like a foreign language. I have found an app that has changed my life! Check out Yuka. Your phone scans the bar code and it gives you a 0-100 rating and an alternative product if yours ranks to low. It also tells you what is bad and why. They don’t take any sponsor money and you can donate $15 if you would like. Careful, it is addicting – I found myself in the pantry for the night! And browsing store shelves for hours.
In the meantime, gold is up 13% all of last year and 13% so far this year. Although slower to follow, commercial real estate typically tracks with inflation and is a good hedge. This is typically because rents rise with everything else. This might not seem so right now if you are sitting on a slow to fill vacancy, but new construction costs are higher making new building rents higher and new building rents drag up old building rents. The other magic in commercial real estate is leveraging rent increases. If you have $5000 a month in rent ($60K a year) at a 6% cap the property is worth $1 mil. After a 5% bump in rent ($5250) your net operating income (NOI) goes to $63,000. At the same 6% cap the value is now $1,050,000.
California real estate has withstood the acid test over the decades and I think it will continue to do so. BTW did you know the term “acid test” comes from the California Gold Rush days when prospectors and dealers used acid to distinguish gold from “fool’s gold” – fool’s gold dissolved in a mixture of hydrochloric acid and nitric acid. I think lots of different markets will be experiencing acid tests in the times ahead.
Interest rates. Yes, I can tell you that they are going to go up. Then they are going go back down again and then they will go up again. What I can’t tell you is when and how much! Nick will give you an interesting historical perspective on rates in Nick’s Numbers below.
Nick’s Numbers
This chart was to good not to share. It only goes through 2010 but we can all remember what rates have been for the last 10-15 years – but 3000 BC – wow!
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 just finished a fantastic read (or in my case listen). The title is a bit intimidating, but it is a fact packed history and explanation of how our world does commerce and how we got to where we are and might be going.
The End of the World is Just the Beginning: Mapping the Collapse of Globalization.
Enough chewing the fat for now, its time to go back to work and bring home the bacon!. To all my crack pot friends, I hope you enjoy the story…
An elderly Chinese woman had two large pots, each hung on the ends of a pole which she carried across her neck.
One of the pots had a crack in it while the other pot was perfect and always delivered a full portion of water.
At the end of the long walks from the stream to the house, the cracked pot arrived only half full.
For a full two years this went on daily, with the woman bringing home only one and a half pots of water.
Of course, the perfect pot was proud of its accomplishments.
But the poor cracked pot was ashamed of its own imperfection, and miserable that it could only do half of what it had been made to do.
After two years of what it perceived to be bitter failure, it spoke to the woman one day by the stream.
I am ashamed of myself, because this crack in my side causes water to leak out all the way back to your house.
The old woman smiled, “Did you notice that there are flowers on your side of the path, but not on the other pot’s side?”
That’s because I have always known about your flaw, so I planted flower seeds on your side of the path, and every day while we walk back you water them.
For two years I have been able to pick these beautiful flowers to decorate the table.
Without you being just the way you are, there would not be this beauty to grace the house.
Each of us has our own unique flaw. But it’s the cracks and flaws we each have that make our lives together so very interesting and rewarding.
You’ve just got to take each person for what they are and look for the good in them.
SO, to all of my crackpot friends, have a great day and remember to smell the flowers on your side of the path!
