I am announcing breaking news, there is going to be a new Federal Reserve Chair, interest rates will go up, then down and then up again. What I can’t tell you is when, how long or how much! What I can tell you is that on July 4th, this great Nation despite its issues or blemishes will turn 273 years old. Also weighing in at 273 years old is our Marine Corp who has recently announced plans to allow women in infantry positions and into the elite Navy Seals (who are based here in San Diego). This is truly an amazing country where we have been able to resolve our differences through the ballot box and democracy instead of the barrel of a gun (like so many other countries).
Let’s start with the good news (or sort of good news). The commercial market appears to be unstuck and has a positive momentum; however, it does not have much velocity. What I mean by this is that for the past four years if we called 25 people a day and they all told us maybe, the next week we had to call all 125 back and the new week’s calls making it 50 calls a day. Eventually this breaks the camel’s back (and spirit). Now we call those 25 prospects and get 20 no’s and 5 yeses with one of those 5 turning into a deal. Great progress and momentum, but still not enough closed deals to write home about.
The Fed’s and Wall Street call it tapering. It might be better served to be called weaning us off. The Fed has had the markets on training wheels and running alongside of us for the last four plus years. Now as they remove the wheels and let us go we can expect a few things. First we will find equilibrium, interest rates will slowly climb, cap rates will rise as well (lowering values), however rent growth should start because of a healthier economy and dwindling supplies. This cycle we are going to see a lot more rehabilitation and repurposing of existing properties rather than new construction (due to the lack of vacant land). The thing to keep in mind right now is how value is created in real estate;
- Cash flow
- Appreciation
- Amortization (loan pay off)
- Tax shelter
Not much else you can do right now – except peddle like crazy!
Two noteworthy things about the residential market (that parallels and leads the commercial market a little bit). First, 850,000 houses have bounced back to positive equity in the first quarter of 2013 according to Core Logic. This is largely due to improvement in home prices. An increase in equity leads to more home sales and our second noteworthy fact. The NAR shared an interesting stat that at our worst point we had an 11-month inventory. Now there is only a 4.2 month inventory.
Not to appear all rosy there are plenty of concerns on worries ahead of us:
- I expect the stock market to slide through the summer. I then expect the implementation of the Affordable Health Care Act to finally start hitting the small business owners and their employees as they come to grips with the new cost of health care. These two events will keep a damper on the market and business growth.
- The banks are back to the casinos again. They are lending long at today’s low interest rates. They are shunting off a lot of their risk to investors via derivatives and Collateralized Debt Obligations (CDOs) through hedge funds and stock brokers (sounds like a replay of 2007/2008). If GDP picks up and rates go up banks will lose lots of money on the 5-10 year loans made today. If the economy doesn’t pick up, week cash flow and questionable collateral will cause the loans to bust.
- Congress is also putting the entire commercial real estate finance system at jeopardy by delaying the renewal of the Terrorism Risk Insurance Act of 2002 (TRIA). Without TRIA, lenders will not lend for commercial real estate and owners will be vulnerable to catastrophic loss.
- Landlords and tenants are about to get hit with some big increases to their energy bills. The rate change goes into effect September 1 but is retroactive back to the first of the year. The “catch up” amount will be spread over the first 28 months. As if this is not bad enough, San Onofre power plant has announced its permanent closure. It is too early to tell but some projections say power could rise by as much as 60 percent! This will have a huge impact on Tenants, Owners and Triple Net charges.
Well, as you stand around the BBQ this 4th of July or teach your child or grandchild to ride a bike, be thankful for this great Country and the men and women who serve to give us the freedom to toil as we wish. I hope you enjoy the story.
FARM KID in the Marines
(Now at San Diego MARINE CORPS RECRUIT TRAINING)
Dear Ma and Pa,
I am well. Hope you are. Tell Brother Walt and Brother Elmer the Marine Corps beats working for old man Minch by a mile. Tell them to join up quick before all of the places are filled.
I was restless at first because you get to stay in bed till nearly 6 a.m. But I am getting so I like to sleep late. Tell Walt and Elmer all you do before breakfast is smooth your cot, and shine some things. No hogs to slop, feed to pitch, mash to mix, wood to split, fire to lay. Practically nothing to do.
Men got to shave but it’s not so bad; there’s warm water. Breakfast is strong on trimmings like fruit juice, cereal, eggs, bacon, etc., but kind of weak on chops, potatoes, ham, steak, fried eggplant, pie and other regular food, but tell Walt and Elmer you can always sit by the two city boys that live on coffee… Their food, plus yours, holds you until noon when you get fed again. It’s no wonder these city boys can’t walk much.
We go on ‘route marches,’ which the platoon sergeant says are long walks to harden us. If he thinks so, it’s not my place to tell him different. A ‘route march’ is about as far as to our mailbox at home. Then the city guys get sore feet and we all ride back in trucks.
The sergeant is like a school teacher. He nags a lot. The Captain is like the school board. Majors and colonels just ride around and frown. They don’t bother you none.
This next will kill Walt and Elmer with laughing. I keep getting medals for shooting. I don’t know why. The bulls-eye is near as big as a chipmunk head and don’t move, and it ain’t shooting at you like the Higgett boys at home. All you got to do is lie there all comfortable and hit it. You don’t even load your own cartridges. They come in boxes.
Then we have what they call hand-to-hand combat training. You got to wrestle with them city boys. I have to be real careful though; they break real easy. It ain’t like fighting with that ole bull at home. I’m about the best they got in this except for that Tug Jordan from over in Silver Lake . I only beat him once. He joined up the same time as me, but I’m only 5’6′ and 130 pounds and he’s 6’8′ and near 300 pounds dry.
Be sure to tell Walt and Elmer to hurry and join before other fellers get onto this setup and come stampeding in.
Your loving daughter
