June 2, 2008
Re: Monthly Letter
Dear Clients:
I did it! Those of you who were reading my letter two years ago will remember when I turned 45 I promised to run a marathon. Well, 3 foot surgeries, a couple of 10 pound weight swings (off/on/off again), no more caffeine and two kids off to college (2 still to go), and I can finally say I have reached a life long goal of running a full marathon – 26.2 miles (The San Diego marathon was yesterday, June 1)!
Well the current market is starting to wear on us like a marathon. We’re continuing to see tenants throw in the towel or hang on by the skin of their teeth. The high cost of oil/fuel and its impact through the supply chain is having far more impact than sub prime mortgages, interest rates or the overall economy. Average occupancy costs for retail tenants run about 10% of sales. A recent survey showed that 50% of retailers exceeded that benchmark. Ten percent of retailers report their occupancy costs are running 15% of sales. The solution? Lower occupancy costs (rents & expenses) or raise sales or prices. Only the future knows how we are going to bridge the gap. If I have to bet, it will be higher prices.
If you think prices are insane now, you’re right. However, insanity is becoming the new “normal”. We are entering a “scarcity economy”. In normal supply and demand markets you raise prices, demand falls off and prices plateau. Unfortunately, when demand does not fall off with higher prices, buyers fear that there won’t be enough supply at any price and this is what causes hoarding, price spikes and wage/price spirals.
While we’re talking about zooming ahead, The U.S. Senate approved $45 million of funding for a proposed levitating train between Disneyland and Las Vegas. Eventual cost is projected at $12 billion but imagine a 2 hour train ride between SoCal and Vegas!
Closer to home, all owners should be aware that all the cities/municipalities have been mandated to reduce storm water runoff. What that means to you is that on every Tenant Improvement job you will be “held hostage” to make some improvements toward reducing storm water runoff (this is much like how the ADA improvements are extracted now). Some of the most common upgrades required are; covering dumpsters with roofed enclosures, re-directing drainage into planter beds, re-doing roof or drainage lines.
What we are observing now in the market is an uncomfortable equilibrium; not much demand and not much supply. During this challenging environment we are finding the value of our services to be rising. Our clients are benefiting from our knowledge and experience as they navigate their path. Interestingly enough, our numbers through April at or better than the last two record years!
I will be out of town the last week and a half of June re-charging my batteries on a Caribbean cruise with my family. During that time I am confident that the rest of my team will hold down the fort and take good care of you and your property.
If you are looking for some summer reading for your vacation feel free to view and order from my reading list at: www.cdccommercial.com/Don’sReadingList
Despite being tired of drudging forward and fearful of the insanity around us, you should already know that worrying about it will solve nothing. That’s why I think you will enjoy the quote below.
Regards,
Don
Don S. Zech
CDC Commercial
Real Estate Services
Why Worry?
In life there are only two things to worry about:
Either you are well, or you are sick.
If you are well,
there is nothing to worry about:
If you are sick,
there are only two things to worry about:
Either you will get well, or you will die.
If you get well,
there is nothing to worry about.
If you die,
there are only two things to worry about:
Either you will go to Heaven, or you will go to Hell.
If you go to Heaven,
there is nothing to worry about.
If you go to Hell,
You’ll be so damn busy shaking hands with your friends, you won’t have TIME to worry!
