I hope and pray that this letter finds you and your family safe and your property unharmed. We have all been witness to some of the worst ravages that mother nature can dole out and some of the best acts that human nature can offer. I am glad to report that although the fire got within 400 yards of my house, we sustained no damage. Nancy and Rob were also left unscathed. I wish I could say the same for some of our friends, neighbors and clients. What amazed me was the relative order and organization that government and media took. I loved how well the technology of reverse 911 worked (even though I didn’t get a call). My heart warmed by the emails, calls and offers for shelter that we received from people and relatives that we only exchange Christmas cards with. I have to tell you it was surreal to drive through my neighborhood (yes I was one of those idiots with a hose in my hand that did not evacuate) and see smoldering fires, National Guardsmen carrying M-16’s, see fire trucks parked in friends driveways and gardeners blowing debris from abandoned houses as the mailman delivered mail!
In a strange turn of events, our devastating fire may come to the rescue of the F.I.R.E. industry (Finance, Insurance and Real Estate). Over the last quarter our regions unemployment rose to 4.8% eclipsing the nations 4.6% rate. This is really bad news and I was going to issue a warning this month that we may have reached a tipping point. HOWEVER, in the aftermath of the fire, the construction industry in San Diego will be getting the boost needed to get it stabilized until the housing market comes back in a year or two. Fire victims will be replenishing households, helping retailers. The great news is that the money for all of this is coming from outside of the area (insurance companies and government).
Insurance premiums are likely to rise in the years to come. Material costs (cement, asphalt, copper, dry wall) are going to rise. World demand is keeping raw materials high and locally public projects (education, healthcare and transportation) are keeping demand high. We have already seen building materials jump 50% – 200% over the last couple of years. Prior to the fires, the projections were for 6% – 8% increases in coming years. Now in the post-fire environment, expect material costs to jump dramatically. Over the next few years this is going to keep new commercial construction restrained and continue to fuel the increase in value and rents in existing projects.
In short, as markets cool and inflation continues we will continue in the state of “stagflation” through all of the next year. Part of this is orchestrated by Mr. Bernanke and by the International Monetary Fund (IMF). They want the U.S. to cool and stop spending and have China depend less on selling and have its population start buying. Just as it will be the rest of the U.S. that will pull San Diego out of its morose, it may have to be the rest of the world that pulls the U.S. out of the mud this time. Finally, given that next year is an election year, don’t expect any leadership from Washington. Everybody will be posturing and positioning and the rest of us will have to lay our bets as to what the impacts of the elections will have on our assets and wallets. All in all count on a sluggish 2008 (Lots of rhetoric not much action).
Basically under most any scenario I can paint (inflation, stagflation, falling dollar), real estate continues to hold the prize as the best cash flowing, inflation protected, hard asset with tax advantages and the benefits of leverage.
This is actually a solid time to be a buyer. CAP rates have risen ½% to 1% in response to rate increases. With less buyers, intelligent buyers have the time to select amongst properties, accomplish due diligence, avoid bidding wars and actually negotiate on price, terms and repairs.
Obviously the week of the fires the phones were dead. We are in hope that the weeks leading up to Thanksgiving pick back up before the traditional slow down that occurs between Thanksgiving and the end of the year. I can tell you that up to the fire things seemed slower, but incoming call volume and deals completed (solid signs of activity) are ahead of last year (both monthly and year to date). Nationally, more commercial deals closed year to date than in 2006!
As some of you know, I am on the board of directors for Interfaith Services, which is an organization backed by over 400 churches in North County that help the homeless in our community. The recent fire has obviously left many without shelter, jobless and with many needs. Interfaith is already on the ground and has been for over 20 years. The organization has less than 12% overheard cost (an amazing number for any business or charity). To learn more about their Fire Relief efforts and services provided and their needs, please visit their website www.interfaithservices.org (click on the Fire Relief 2007 tab). As part of CDC Commercial’s efforts to help, we will match any checks you send us (make payable to Interfaith Services) by 12% so that you know 100% of your contribution goes to someone in need.
Below where I often include a story, I have attached a photo of a friend’s house just down the road from me – in this case a picture is worth 1000 words.
