As I sit writing this letter I am enjoying the cooling weather of fall, the kids back to school and football on TV. I also had to laugh at yet another, “mother of all storms” that was set to hit our region but turned into a cloudy day and light rain. Again a reminder to be careful what we forecast and what we believe!
The class of 2011 entered college this fall and if you want to feel old, understand that they might say…
1. What Berlin Wall?
2. HumVee’s without artillery have always been available to the public.
3. They never “rolled down” a car window.
4. They may confuse the Keating Five with a rock group.
5. They have grown up with bottled water.
6. They never saw Peter Rose play baseball.
7. Rap music has always been mainstream.
8. Being “lame” has to do with being dumb or inarticulate, not disabled.
9. They never saw Johnny Carson on TV.
10. The World Wide Web has been an online tool since they were born.
*Thanks to the Beloit College Mindset List
The housing bust remains the dominant factor dragging down the U.S. economy today. So much so we aren’t paying enough attention to $80 a barrel oil and record gold prices! Commercial real estate is not immune to this dynamic. Retail sales are resisting a historic tendency to follow drops in home prices and sales. So much though depends on this next quarter. Retail sales have teetered but not tanked like the housing market. This is largely because we still have low unemployment. (If you’re not worried about losing your job – you keep spending.) In fact the largest detriment to growth in 2008 and beyond is the dearth of available labor. So, if in these shakier times we’re keeping close to full employment, what happens in recovery and good times? (Can you say inflation?)
Don’t expect oil prices to come down anytime soon. You read about world wide demand (U.S., China, India) which is only on the increase but even the Middle East is growing in demand for its own oil. Finally Iran and Venezuela desperately need high oil prices so they can afford to subsidize gasoline (Iranians pay only 40 cents per gallon!) and cheap food and health care, all of which keep their inept leadership in power.
The Fed cutting rates by a ½ point on September 18th is a good thing for the economy and a great thing for real estate investors for the short term. I believe we are in a great buying window. Lenders are having a tough time pricing risk (spreads on loans) and less buyers are in the market which is creating some pricing softness and for a qualified buyer an opportunity to get low historical loan rates to buy more attractive cap rate properties.
The Feds job is to keep lenders lending and borrowers borrowing. Once they achieve that objective (through lower rates) they will be back fighting inflation (through higher rates) which is their primary battle and as I pointed out earlier inflation is still very real.
The press reports that investors are holding back on closing deals because they believe prices will fall. If enough people believe that, it becomes a self-fulfilling prophecy (see the Hot Dog story below). We don’t see it as anything more than a buying opportunity. Keep in mind that prices will always rise to meet replacement cost and with replacement cost high (neither materials or labor appear to be dropping) values will keep rising.
Tenant activity remains spotty and skittish. We continue to see fall out from mortgage and real estate companies vacating space. We see new tenant activity but they are having a tough time with commitment because they can’t see the future clearly. Because some of you have, are or will face a tenant in bankruptcy, I have posted an article on our website which I think you will find most educational and hopefully help you to protect yourself in this situation; www.cdccommercial.com/TenantBankruptcy.
Popular Science and ISCS both reported this month that “replicators” (yes, like Star Trek) have arrived. It may not be long and you will be “printing” your own clothing at home! What impact will that have on retail tenants?
In the meantime, in my efforts to stimulate the retail market and join the e-commerce market, I have launched an Amazon Store with my favorite reading book list, www.cdccommercial.com/Don’sReadingList. It is very eclectic and I have posted my reviews. In the future I’ll let you know when I post a must read. Who knows maybe I’ll be the next Oprah book list!
I think you will find this month’s story to be very appropriate for our times (I know I sent it a year or two ago but it is especially appropriate now!). Feel free to pass it on. Tell your friends they can subscribe on the website or drop me an email.
A man lived by the side of the road…
And sold hot dogs.
He was hard of hearing, so he had no radio.
He had trouble with his eyes, so he had no newspaper,
but he sold good hot dogs.
He put up a sign on the highway, telling how good they were.
He stood by the side of the road and cried, “Buy a hot dog, mister!”
And people bought.
He increased his meat and bun order, and bought a bigger
stove to take care of his trade.
He got his son home from college to help him. But then
something happened.
His son said, “Father, haven’t you been listening to the radio?
There’s a big depression on. The international situation
is terrible, and the domestic situation is even worse.”
Whereupon his father thought, “Well, my son has gone to college.
He listens to the radio and reads the newspaper,
so he ought to know.”
So, the father cut down on his bun orders, took down his
advertising signs, and no longer bothered to stand on the
highway to sell hot dogs.
His hot dog sales fell almost overnight!
“You were right son,” the father said to the boy.
“We are in the middle of a great depression.”
