One of the most famous motivational stories is that of the two shoe salesmen who are sent to Africa. The first writes back that it is a disaster – “no one here wears shoes.” The other writes back – “glorious opportunity! Nobody here wears shows!”
In the 4 ½ years since the Great Recession, we find ourselves wondering, “Is this as good as it gets?” As we enter the Chinese Year of the Horse, superstition says it will be a year of instability. What we are seeing on the ground in the market place is that we are not fighting to push the ball up the hill quite as much. Not that the ball has momentum or is going downhill but at least it is on the level and with our exertion we can get deals to happen.
I know some of you will ask then why are things not leasing or selling better or faster. First, you must realize that what we are seeing is what I call, “Expansion in place.” A two person office in 1000 sf is becoming a four person office in 1000 sf. People with a home office are having an employee come to their house 3-4 days a week to work. Fifty person offices are demolishing their offices and putting in cubes and adding 25 employees. However, the next step of expansion is out of houses and larger offices.
While on the subject of optimism, technology and adaptability I would like to share some bullet points and trends that I thought you might interesting:
- World poverty is at an all time low.
- Battle deaths from war are at an all time low.
- Death from AIDS in Africa from the peak are at an all time low.
- De-leveraging is largely over. Monetary policy has been largely ineffective while each sector of the economy is focused on reducing debt and getting spending in line with future income. This has taken us almost five years. The U.S. economy is now ready to grow again.
- The Fed has turned positive. Signaling that the economy can come off of life support, the Fed has started to reduce Quantitative Easing (QE). Now we can only watch and wonder what the escape from QE looks like. We predict the last chapter of QE is inflation. You can’t expand the money supply without incurring inflation. And history teaches us that inflation is how debt-ridden nations devalue and purge their debts.
- The energy boom continues. The U.S. energy revolution is real. U.S. crude oil and natural gas production is 40% higher than 2006 when the boom started. Closer to home, researchers at Scripps Institute of Oceanography are developing methods to create bio fuel from algae. Algae fuel may someday make San Diego the next Saudi Arabia of the energy world.
- Cap rate will remain stable with a little pressure to rise with interest rates. As cap rates and interest rates rise, more lenders will enter the market keeping downward pressure on both rates.
- Baby boomers are into retirement years. They are working later in life (keeping unemployment higher) and spending less (those 64-74 spend 23% less than younger groups).
- The Internet of Everything. All I can say is you haven’t seen anything yet. The next 10 years will be more disruptive than the last. Google glass, 3D printing, driverless cars, voice recognition, keyless (virtual) access will affect your life, your wallet and your real estate. All I can say is learn and adapt.
With all of this change ahead will be opportunity. For all of us to seize this opportunity we need to communicate. Let’s be sure we are talking about existing tenants, renewals, coming vacancies, reasons to sell or do exchanges, refinances and buying opportunities.
There is no substitute for “boots on the ground” and wearing out our shoe leather knocking on doors. We appreciate the opportunity to be your eternal optimists on the front line of the real estate market. I hope you enjoy the rest of the story…
So, in the immortal words of Paul Harvey, here comes the rest of the story:
Salesman One returned on the next steamer to London. He was an aggressive young man who had saved the company from a disastrous venture in a terrible market. His reward was to oversee the newly-formed sales territory in France, a large territory that included Paris. Salesman One went on to build a wonderful, booming business in ladies’ dress shoes. He became wealthy and comfortable. A fixture on the Parisian social circuit, he met and married a French heiress (getting rich the old fashioned way!). Salesman Two built an office and warehouse, ordered a boatload of shoes from his home office, and hired a team of hard-charging salesmen. He estimated the sale of 15,000 pairs of shoes in his first year of business. The home office was ecstatic.
The end of the first year came and Salesman Two and his team had sold less than 100 pairs of shoes. The home office ordered layoffs. Funding for payroll was cut. Threats of abandoning the market were made Aggressive, optimistic Salesman Two could but conclude one thing: He had made a serious mistake. This was, indeed, the worst market in the world for shoes.
Salesman Two had not met his first year forecast, but, after a year of intensive selling, he knew more about the market than any person alive. For example, he knew that some of his potential buyers liked the idea of shoes (protecting their feet) but felt claustrophobic in them, and did not want to have to stop and dump sand out of them all the time. So he imported a small number of sandals to test. He concluded that some large part of his market would likely never wear shoes, at least in his lifetime. But they all still hurt their feet occasionally on rocks and debris. So, he found a lotion made by a German firm that, applied to the soles at night, toughened them up. He imported cases of it.
Finally, Salesman Two discovered that most everyone, shoes or not, walked long distances during the day. All got hot and many got sunburned. So, he imported a line of wide-brimmed straw hats and walking sticks.
The hats became an immediate sensation. The sandals did less well, but gained a niche following. He could not keep enough of the lotion in stock. And, in year 2, he sold 1,000 pairs of shoes—still a small number, but much better than the 100 pair in year one. Year 2 was breakeven. Year 3 better. After seven long years of hard work, trial and error, sleepless nights and one ulcer, Salesman Two became a millionaire, buying the business from his company. In fact, he became so famous throughout his adopted country that a song was written about him. “It was called ‘Straw Hats and Walking Sticks.”
