March 1, 2009
Re: Monthly Letter
Dear Clients:
“Wars in old times were made to get slaves.
The modern implement of imposing slavery is debt.”
~ Ezra Pound 1885-1972
Ah the power of the pen! What a rush it must be to sign the largest check in the history of mankind and without a penny in your account to back it up! Now that is leverage! And now that the banks have the bail out money from you the taxpayers, we can only hope that they will be kind enough to offer it back to us as a loan…for a fee!
As the banks sail forward in uncharted water in these unprecedented times, you can be sure these times will continue to be uncertain and unpredictable. In the last 13 months, there have been 34 bank failures. Over the next 13 months, you can expect as many as 100 more to fail, merge, or be taken over. The good news is that there are over 8,000 banks in the
As I have said many times over the years of writing this letter, it is all about jobs. Keeping that in perspective, January U.S. unemployment is at 7.6%. Last January we were at 4.9%. The last time we saw 7.6% was September of 1992. The worst in recent history was 10.8% in November of 1982 (which also happens to be when I got my first job out of college!). So if you ask me when we will turn around, I will tell you, “Show me the jobs!” One thing over time has held true. Creativity and aggressive innovation — in the face of hardship and layoffs and seriously tough choices — will fuel a turnaround. Right now with unemployment rising, it is hard to remember that capitalism is a creator of jobs, companies, and industries — as well as a destroyer. But I see signs of growth to come. Signs of promise that this recession will some day give way to a time of new investment and new jobs.
History shows us that between some of our worst financial panics,
I recently attended a conference, and one of the speakers noted that the real estate cycle is like the five stages of grief: Denial, Anger, Bargaining, Depression, and Acceptance. While I agree with wholeheartedly, I think these four quotes sum up the cycle even better.
Stage 1: “You’re wrong about the market. My property’s worth more than you’re telling me it’s worth.”
Stage 2: “OK, I agree that the market has changed. But I still won’t sell my property unless you can get me more for it than what other people have already offered me for it.”
Stage 3: “We need to sell this property. Where do we need to price it in order to unload it?”
Stage 4: “I don’t think we’re ever going to see another great real estate market again.”
And Stage 4, of course, represents when we’ve probably hit the bottom of the market, and it’s the best time to begin buying properties again.
Being as this is my third downturn, let me give you my first piece of advice. If you color your hair, stop it. We need all of that grey hair experience now! In an attempt to benefit from the collective whole of the over 1,000 readers of my monthly letter, I would like to ask you to e-mail me your ideas and past experience and successful strategies in these kind of times. Help add to my list (10 things smart people did in the last downturn).
- Buy with positive leverage (cap rate higher than interest rate).
- Buy A+ properties at distressed prices.
- Buy notes from lenders and foreclose and obtain underlying asset.
- Buy freeway visible sites
- Give me your experiences
I will compile these and e-mail them back out. Remember, Together Everyone Achieves More (TEAM). The rally cry now is to survive, to thrive!
Once again as you read the story that follows this letter, I ask you to remember the power of the “pen.” (a different kind of “pen”) Also remember that Thomas Paine said, “I love the man that can smile in trouble, that can gather strength from distress, and grow brave by reflection.” Better yet, my favorite — “Annoy your government — work, succeed, and be happy!”
Regards,
Don
Don S. Zech
CDC Commercial
Real Estate Services
Do you know how to catch wild pigs?
You catch wild pigs by finding a suitable place in the woods and putting corn on the ground. The pigs find it and begin to come every day to eat the free corn. When they are used to coming every day, you put a fence down one side of the place where they are used to coming. When they get used to the fence, they begin to eat the corn again, and you put up another side of the fence. They get used to that and start to eat again. You continue until you have all four sides of the fence up with a gate in the last side. The pigs, which are used to the free corn, start to come through the gate to eat that free corn again. You then slam the gate on them and catch the whole herd. Suddenly the wild pigs have lost their freedom. They run around and around inside the fence, but they are caught. Soon they go back to eating the free corn. They are so used to it that they have forgotten how to forage in the woods for themselves, so they accept their captivity.
