March 1, 2010
RE: Monthly Letter
Do you ever have those days when you would prefer to stay snuggled in bed and not face the uncertainties of business or life? When things are going well, it is only natural to feel certain they will continue. And the same goes for when things are going badly. But in either case, there is no certainty, just constant change.
Besides being a short month, I have to tell you it has been one with a great deal of mixed signals and data. A recent Congressional Oversight Panel stated:
“The withdrawal of small business loans because of disproportionate exposure to commercial real estate capital creates a negative feedback loop that suppresses economic recovery,” the COP report stated. “Fewer loans to small businesses hamper employment growth, which could prolong commercial real estate problems by contributing to higher vacancy rates and lower cash flows.”
I attended the recent USD Commercial Real Estate Conference and had the pleasure of listening to Sam Zell the famous real estate mogul and billionaire. A couple of highlights that weren’t covered in the news but I thought were worth sharing:
- If LIBOR stays below 3%, commercial real estate will avoid a collapse.
- We are in a demand recession.
- Residential has bottomed except in a few excess inventory areas (Vegas, So. Cal, S. Fla).
- The low velocity of money is why we haven’t seen inflation yet.
Interestingly, he also touched on the fact that he is buying in Olay Mesa and working to develop a dedicated airplane border crossing with
Normally I like to report things that are looking up. Here are a few things that are looking up but argue against short-term job growth and a sustainable economy.
- Interest rates will rise.
- The more competition there is for money (private and government), the more it will cost to borrow.
- Energy prices will rise.
- Recent storms, low reserves, and manipulation will drag prices higher.
- Food prices will rise.
- Higher energy, higher interest equals higher food prices.
- Inflation will rise.
- Increases in the cost of money, energy, and food will result in the dollar buying less.
- Taxes will rise.
- The only way to pick up the tab for our bloated government and pay back what we borrowed to cover the gap between what we spend and what we can afford.
- Litigation will rise.
- Investors, insiders, lenders, borrowers, agents, title companies, accountants, and attorneys. We live in a “not my fault” society.
- Commercial defaults, bankruptcies, and foreclosures will rise.
- Banks will bring in partners as they do work outs and joint ventures.
Okay, so I am not considered a total downer, let me throw in a few more positive items.
- In December, more than one-third (35%) of executives surveyed predicted the worst of the economic crisis is behind us.
- The University of San Diego (USD) local index of leading economic indicators rose .7 percent in December and again in January. The first time since April 2004, all six components of the index were positive.
Recently, Governor Arnold Schwarzenegger announced the California Building Standards Commission unanimously adopted the first-in-the-nation mandatory Green Building Standards Code (CALGREEN) requiring all new buildings in the state be more energy efficient and environmentally responsible. CALGREEN will take effect on January 1, 2011. These comprehensive regulations are designed to achieve major reductions in greenhouse gas emissions, energy consumption, and water.
CALGREEN requires all new buildings constructed in California to reduce water consumption by 20%, to divert 50% of construction waste from landfills, and to install low pollutant-emitting materials.
The new code will also require separate water meters for nonresidential buildings’ indoor and outdoor water use, with a requirement for moisture-sensing irrigation systems for larger landscape projects and mandatory inspections of energy systems (e.g., heat furnace, air conditioner, and mechanical equipment) for nonresidential buildings over 10,000 square feet to ensure that all are working at their maximum capacity and according to their design efficiencies. The California Air Resources Board estimates that the mandatory provisions will reduce greenhouse gas emissions by 3 million metric tons equivalent in 2020.
The commercial real estate market depends critically on employment. We need meaningful, sustained gains in employment before we can expect a stabilization of trends in real estate fundamentals. I think that is still a ways off. The week from now through May will be very volatile as we ping pong from one crisis and uncertainty to another. But the real danger is relatively low. China is not going to kill its growth. The Fed is not going to raise rates by 2 percentage points. The real danger remains in the second half of the year when we could see the dreaded double dip.
In the meantime, I hope you can get a laugh from someone else’s distress…
Don S. Zech
CDC Commercial, Inc.
Real Estate Services
Tenant Distress Calls
The toilet is blocked, and we cannot bathe the children until it is cleared.
I want some repairs done to my stove as it has backfired and burnt my knob off.
This is to let you know that there is a smell coming from the man next door.
The toilet seat is cracked: where do I stand?
I am writing on behalf of my sink which is running away from the wall.
I request your permission to remove my drawers in the kitchen.
Our lavatory seat is broken in half and is now in three pieces.
The person next door has a large erection in his back garden which is unsightly and dangerous.
Will you please send someone to mend our cracked sidewalk? Yesterday my wife tripped on it and is now pregnant.
Our kitchen floor is very damp, we have two children and would like a third, so would you please send someone to do something about it.
Will you please send a man to look at my water; it is a funny color and not fit to drink.
Would you please send a man to repair my downspout? I am an old age pensioner and need it straight away.
Could you please send someone to fix our bath tap? My wife got her toe stuck in it, and it is very uncomfortable for us.
When the workmen were here, they put their tools in my wife’s new drawers and made a mess. Please send men with clean tools to finish the job and keep my wife happy.