May 1, 2008
Re: Monthly Letter
Dear Clients:
Golf is like taxes, you drive as hard as you can to get to the green; only to end up in the hole.
“Wall Street does panic better than anybody I know. The same guys that were saying nothing can go wrong [before the credit crunch] are now saying nothing can go right.”
– John Levy, President of John Levy & Co.
John Stossel writes”Politicians love a ‘crisis.’ John McCain, Hillary Clinton and Barack Obama all think that the government should bail out homeowners who can’t pay their mortgages. When they say the government should do this, they mean the taxpayers, including those who are paying their mortgages. They also think the government should regulate the lending and investment industries further. Why? Because ‘crisis’ justifies making big government bigger. It’s why we now have a global warming ‘crisis’ and in previous years we had ‘crises’ over avian flu, the Y2K threat to computers, imaginary cancer spikes caused by pesticides, killer bees flying up from Mexico, and uncontrolled population growth leading to a ‘Population Bomb’ that will bring ‘riots and mass starvation’ by the year 2000. This is not to say that lots of homebuyers aren’t having a hard time. But the rapid rise and fall in housing values in some parts of the country – and the rippling consequences at each stage – do not justify scrapping what we know about economic success and turning to government control. Prosperity and stability come from people being free to innovate and produce – and yes, fail…The best regulator of economic activity and source of knowledge is free competition. Of course, government inhibits that in many ways. If we want to avoid disruptions like the current one, let’s undertake a wholesale examination of government intervention in the economy. Freedom, not control, is the ticket to success.”
As many of you know amongst all the panic we at CDC Commercial try to stay focused on the ball. One of those balls is jobs and unemployment. Unfortunately, for the first time in 15 years, San Diego County suffered a year to year decline in jobs last month. Unemployment in the county moved above 5% (from 4.2% last year at this time). With costs rising and unemployment over 5% our position on rent increases and pushing rents on options has changed to neutral. Work harder to retain existing tenants and make concessions to keep them. Keep rent concessions and lease terms short though because the bounce back will be big when we see it over the next couple of years.
Despite what you might read about commercial delinquencies rising, it really isn’t true yet. Banks report residential land development and multi-family both as commercial. These areas are all up, however, delinquency of retail and office buildings amounts to less than one percent.
In the meantime, interest rate indices are down from the end of last year (Treasury, Labor, Prime), however, lender spreads have gone up more than index rates have gone down! The net effect is slightly higher rates but historically they are still very low (6% – 7 % for 10 year fixed).
So now where do we go from here? Stay in the game till 2010 (I still remember the cry, “Stay alive till ’95) and protect your assets. It will take the next 12 to 24 months to fully restore confidence to the credit markets, squeeze the excessiveness out of the last 24 months and get through the election process.
A lesson here (much more in the residential market), when the prices of real estate exceeds its replacement cost plus the rate of inflation, a correction is inevitable. Now this raises a very interesting point as to why I see a quicker bounce than most to the market. Replacement costs continue to rise and inflation continues to climb creating a base for value. This is creating a great buying opportunity for savvy investors (and will for several years ahead.). Prices are falling well behind replacement plus inflation!
Remember, real estate investors make money in down markets. The last two down turns had high interest rates – so far not so this time. Buy as the market over-corrects. Opportunity isn’t just knocking, it has a baseball bat and it is knocking your door down.
Remember the adage, “Some make it happen, some let it happen, and others wonder what the hell happened.” Remember too, that we at CDC Commercial wake up every morning unemployed (a salesman’s destiny) and we hustle through the day to make deals that employ others, keep your income up and our tables with food on them.
I watched Charlie Wilson’s War this weekend and had to chuckle when Tom Hanks’ character was asked, “Why is it, that politician’s rant and rave, but get so little done?” And he politely replies; “Tradition I suppose.” I hope, in this political season, you enjoy my political humor story below.
Regards,
Don
Don Zech
CDC Commercial
Real Estate Services
A little boy goes to his dad and asks, ‘What is Politics?’
Dad says, ‘Well son, let me try to explain it this way:
I am the head of the family, so call me The President.
Your mother is the administrator of the money, so we call her the Government.
We are here to take care of your needs, so we will call you the People.
The nanny, we will consider her the Working Class.
And your baby brother, we will call him the Future.
Now think about that and see if it makes sense.’
So the little boy goes off to bed thinking about what Dad has said.
Later that night, he hears his baby brother crying, so he gets up to check on him. He finds that the baby has severely soiled his diaper.
So the little boy goes to his parent’s room and finds his mother asleep. Not wanting to wake her, he goes to the nanny’s room. Finding the door locked, he peeks in the keyhole and sees his father in bed with the nanny. He gives up and goes back to bed…
The next morning, the little boy says to his father, ‘Dad, I think I understand the concept of politics now. ‘
The father says, ‘Good, son, tell me in your own words what you think politics is all about.’
The little boy replies, ‘The President is screwing the Working Class while the Government is sound asleep. The People are being ignored and the Future is in deep shit.’
