June 2019 Monthly Letter
Hard to believe but 10 years ago, Walter Cronkite, Paul Harvey and Michael Jackson all died. Equally hard to believe, 10 years ago Nick Zech joined CDC Commercial – Happy Anniversary Nick!
Who would have thought back 23 years ago with four kids under the age of seven and naming the company after Candy, Don, and Children that one would grow up and be willing to work for me (far less do it for the last 10 years!)!
Well, one thing that has grown over that time is San Diego’s population. The Census Bureau reports that 2010 to 2018 San Diego County grew nearly 250,000 people! That’s 3,343,364 people in the County making us the fifth most populous county in the nation. As I always say, the key to rising real estate values is more people moving in than moving out.
One downside to all the people moving in is gridlock… Gridlock is when vehicles block a network of intersecting streets, bringing traffic in all directions to a complete standstill. I am very concerned that we might be entering this phase in the real estate market, the stock market, interest rates, and the political landscape.
First, the real estate market. We are experiencing buyers and tenants who are unwilling to pay higher and higher prices and owners unwilling to sell properties because “there is nowhere to go with the money.” Market vacancies are very slim so many tenants are finding no space in their size requirement or space is not in the location they desire. Furthermore, they are shocked at the cost to build new and the reality that it could take 18-24 months to be ready. Gridlock.
Interest rates recently were raised, and the Fed signaled more to come. The markets skidded and careened about until the Fed took their foot off the brake and announced no foreseeable plan to raise them again in the near future… Hmm…like a game of chicken – or Gridlock. With the election machine gearing up you can expect the Fed to try to stay on the sideline as best as they can!
The trade war has the market in a knot. Tariffs affect markets more than Main Street. But eventually, bad markets lead to bad economies. Tariffs is a war we need to win but we appear to be shaking in our boots (after all, 75% of our shoes do come from China.).
The political world is in gridlock and will only get worse through the upcoming election season. It used to be you could tune in to Walter Cronkite and get an idea of what was happening. Today, it depends on which network you tune in – to learn your truth.
Back to San Diego real estate for a minute. The restaurant business is in a big squeeze. Rents are rising, insurance is up, wages have skyrocketed, and the cost of goods has gone up. To a degree, we are all seeing it on the pass-thru – $16 to $20 for a sandwich, drink, and chips! Although San Diego is still giving out more food & beverage licenses each year, the rate of increase has dropped dramatically (from increases in the 1,000’s annually to only 300 or so yearly over the last 3 years).
Housing starts are a good gauge of the future of the real estate market. Every recession since 1960 has been prefaced by a double-digit decline in housing starts – March 2019 – down 16.99% YOY! Robert Campbell’s real estate timing letter flashed a sell signal January of this year for San Diego.
Breaking news – GDP was up 3.1% this last quarter. That is .1% higher than expected and .1% less than the previous quarter . . . Hmmm . . . is that bad news, good news or gridlock?
In case you are confused by all of the political jargon, geopolitics and big business on all the networks and social media, perhaps, as Paul Harvey would say, you will enjoy “the rest of the story” …
Cows and Geopolitics
Feudalism: You have two cows. The lord of the manor takes some of the milk. And all the cream.
Pure Socialism: You have two cows. The government takes them and puts them in a barn with everyone else’s cows. You must take care of all the cows. The government gives you as much milk as you need.
Socialism: You have two cows. The government takes one of your cows and gives it to your neighbor. You’re both forced to join a cooperative where you must teach your neighbor how to take care of his cow.
Bureaucratic Socialism: You have two cows. The government takes them and puts them in a barn with everyone else’s cows. They are cared for by ex-chicken farmers. You must take care of the chickens the government took from the chicken farmers. The government gives you as much milk and as many eggs as its regulations say you should need.
Fascism: You have two cows. The government takes both, hires you to take care of them, and sells you the milk.
Pure Communism: You have two cows. Your neighbors help you take care of them, and you all share the milk.
Russian Communism: You have two cows. You must take care of them, but the government takes all the milk.
Communism: You have two cows. The government seizes both and provides you with milk. You wait in line for your share of the milk, but it’s so long that the milk is sour by the time you get it.
Dictatorship: You have two cows. The government takes both and shoots you.
Militarism: You have two cows. The government takes both and drafts you.
Pure Democracy: You have two cows. Your neighbors decide who gets the milk.
Representative Democracy: You have two cows. Your neighbors pick someone to tell you who gets the milk.
American Democracy: The government promises to give you two cows if you vote for it. After the election, the president is impeached for speculating in cow futures. The press dubs the affair “Cowgate.” The cows are set free.
Democracy, Democrat-style: You have two cows. Your neighbor has none. You feel guilty for being so successful. You vote politicians into office who tax your cows, which forces you to sell one to pay the tax. The politicians use the tax money to buy a cow for your neighbor. You feel good. Barbra Streisand sings for you.
Democracy, Republican-style: You have two cows. Your neighbor has none. You move to a better neighborhood.
Indian Democracy: You have two cows. You worship them.
British Democracy: You have two cows. You feed them sheep brains and they go mad. The government gives you compensation for your diseased cows, compensation for your lost income, and a grant not to use your fields for anything else. And tells the public not to worry.
Bureaucracy: You have two cows. At first, the government regulates what you can feed them and when you can milk them. Then it pays you not to milk them. After that, it takes both, shoots one, milks the other, and pours the milk down the drain. Then it requires you to fill out forms accounting for the missing cows.
Anarchy: You have two cows. Either you sell the milk at a fair price or your neighbors try to kill you and take the cows.
Capitalism: You have two cows. You lay one off and force the other to produce the milk of four cows. You are surprised when she drops dead.
Hong Kong Capitalism (alias Enron Capitalism): You have two cows. You sell three of them to your publicly-listed company, using letters of credit opened by your brother-in-law at the bank, then execute a debt/equity swap with an associated general offer so that you get all four cows back, with a tax deduction for keeping five cows.
The milk rights of six cows are transferred via a Panamanian intermediary to a Cayman Islands company secretly owned by the majority shareholder, who sells the rights to all seven cows’ milk back to the listed company.
The annual report says that the company owns eight cows, with an option on one more. Meanwhile, you kill the two cows because the Feng Shui is bad.
Totalitarianism: You have two cows. The government takes them and denies they ever existed. Milk is banned.
Counterculturalism: Wow, dude, there’s like . . . these two cows, man. You have got to have some of this milk.
Surrealism: You have two giraffes. The government requires you to take harmonica lessons.