In July of 1776 the number of people living in the colonies was 2.5 million. This 4th of July we will have surpassed the 300 million mark – now that is demographic growth!
As we hit the mid point of 2007, we continue to see a healthy yet funky market and economy. The University of San Diego (USD) index of leading indicators for San Diego is predicting a weakened San Diego economy through the end of the year, lead by slower job growth, higher unemployment and a continued slump in housing sales. Dr. Gin is predicting 8-9000 jobs but other economists are predicting 14-15,000 new jobs. Now here is the deal we gained 11,000 jobs since last May but construction and real estate lost 6900 jobs. So two steps forward, one step back – but we are still moving forward! The economy may be slowing but we should miss a recession. In fact based on my business activity (which has been a safe indicator of future up ticks) we are in for a strong 2nd half despite what the economists say! If we are slowing, the pressure on interest rates will ease as inflation pressures ease. I’m betting the other way but hoping the Fed doesn’t have to raise rates any more to prove its point The fed held firm in June and I think will continue to do so through the end of the year unless forced otherwise by the bond market (see notes below).
There still should be much concern about the trickle down effect of the subprime fall out. It is not that the subprime market problem can’t be fixed, it is the potential that it could be a crack in the dam of the whole collateralized debt obligations (CDO) market that is the issue. The problem is that the subprime debacle is causing hedge funds to re-price their debt at the same time as interest rate rises are causing a re-pricing and these funds are reevaluating their secured assets. Suddenly, the emperor may discover he has no clothes (or at least not as many as he had). This could lead to a spike in rates and much tougher underwriting guidelines.
Demand for the purchase of commercial real estate remains very strong. However, the gap between buyer and seller expectations has lead to a 20% decline in sales velocity. The return, however, to more normalized conditions is good for the health of the overall market.
The tenant market is continuing to be squeezed. Vacancy factors remain at all time lows mostly below 5%. Rents are rising because of this and driven by owners who bought at low cap rates and now must raise rents to increase yields. In the meantime, tenants unable to cope with higher energy costs, higher labor costs and higher rents are struggling with raising prices or calling it quits.
Deal junkie that I am, I am glad to report we are 25% ahead of last year’s volumes (# of transactions done) but about equal on income (Good that we still making as much as last year – bad that we are working 25% harder to do it!). It still troubles me that with that activity we still have many spaces that don’t or haven’t moved. This goes back to the healthy yet funky market I have described. Suffice it to say our whole team is working long and hard on a daily basis to lease and/or sell your property. I like to say we are working 24 hours a day – just not in a row! The economy looks bright but bumpy.
I hope you enjoy the story this month as much as your 4th of July holiday. We live in the best nation in the world and America’s Finest City.
Have a Sun Diego Day!
Regards,
Don Zech
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Charles Plumb was a U.S. Navy jet pilot in Vietnam. After 75 combat missions, his plane was destroyed by a surface-to-air missile. Plumb ejected and parachuted into enemy hands. He was captured and spent 6 years in a communist Vietnamese prison. He survived the ordeal and now lectures on lessons learned from that experience!
One day, when Plumb and his wife were sitting in a restaurant, a man at another table came up and said, “You’re Plumb! You flew jet fighters in Vietnam from the aircraft carrier Kitty Hawk. You were shot down!”
“How in the world did you know that?” asked Plumb.
“I packed your parachute,” the man replied. Plumb gasped in surprise and gratitude. The man pumped his hand and said, “I guess it worked!” Plumb assured him, “It sure did. If your chute hadn’t worked, I wouldn’t be here today.”
Plumb couldn’t sleep that night, thinking about that man. Plumb says, “I kept wondering what he had looked like in a Navy uniform: a white hat; a bib in the back; and bell-bottom trousers. I wonder how many times I might have seen him and not even said ‘Good morning, how are you?’ or anything because you see, I was a fighter pilot and he was just a sailor.” Plumb thought of the many hours the sailor spent at a
long wooden table in the bowels of the ship, carefully weaving the shrouds and folding the silks of each chute, holding in his hands each time the fate of someone he didn’t know.
Now, Plumb asks his audience, “Who is packing your parachute?” Everyone has someone who provides what they need to make it through the day. He also points out that he needed many kinds of parachutes when his plane was shot down over enemy territory – he needed his physical parachute, his mental parachute, his emotional parachute, and his spiritual parachute. He called on all these supports before reaching safety.
Sometimes in the daily challenges that life gives us, we miss what is really important. We may fail to say hello, please, or thank you, congratulate someone on something wonderful that has happened to them, give a compliment, or just do something nice for no reason. As you go through this week, this month, this year, recognize people who pack your parachutes.
As we enter the back half of the year, I am sending you this as my way of thanking you for your part in helping to pack our parachute.
Happy 4th of July!
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