October 1, 2008
Re: Monthly Letter
Dear Clients:
As you know, I often say that as a salesman I’m paid to be an optimist. So I tend to look for the silver lining in most clouds. It’s just hard this month to think of much good to say about this economy and I can’t see clearly enough to tell you when the carnage will end. Through all the smoke and clouds and distressed voices of the financial battlefield, I hope to give you some pause for thought.
First, what is the word for an “un-bubble”? It appears that we have a vacuum of optimism. People are irrationally depressed. Granted, we are in the midst of the greatest realignment of the US financial system ever in history. The greatest question is will they be successful in saving your street or only Wall Street?
At no time in commercial real estate has it been more difficult to nail down trends. We are seeing repricing of debt and equity. The market place is influenced more by fear and panic than by underlying fundamentals.
The precedent here is terrible. Investors got paid not based on what they owned but by who they were. Sophisticated overseas central banks and investment funds got paid back 100% because the Fed and Treasury were scared of the impact of paying them less. Freddie, Fannie and Washington had allowed foreign investors to think their investments came with a US government guarantee. As in most of life, perception becomes reality and you and I as tax payers are funding the guarantee. Now the good news: avoiding the meltdown should lead to a more rapid recovery in the real estate market, a rebound in economic growth and an eventual surge from a rebuilt banking sector.
The Fed and the Treasury have no choice but to keep interest rates low until the current liquidity problems are under control. Not to do so would result in a steep recession and a threat of a financial panic. Yet, keeping rates down risks damage to the economy from high inflation. My best guess is that once the financial markets stabilize, the Fed will have to make up for lost time by raising interest rates.
Now for my GIGANTIC prognostication! While many out there are asking, “When will the other shoe drop?” (commercial real estate crash), I am going to ask – “Is it not possible we are at the beginning of a new bull market in real estate?” How many times have you heard, “You make the big money when you buy it right.”? Most people don’t notice when a market changes until it is too late to capitalize on. John Templeton, the founder of Templeton Mutual Funds, said, “Bull Markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell.”
I saw this right after 9/11. If you go back and see when the last boom got its toe hold, it was after the dot.com bubble meltdown. Then 9/11 happened and the next thing we were on a wild ride. Why? Because the public became concerned with this world and where this country was headed. We saw firsthand how easy it was to lose a fortune. People want something tangible. It is a lot easier to understand real estate than a CDO, CMBS or derivative with risk traunches. If this is true, then maybe the recovery has begun and we have been beaten down enough by the media and other finance gurus not to notice.
Think about these numbers:
· San Diego unemployment was at 6.4% in August, down from 6.5% in July
· Housing sales for July were slightly ahead of August 2007 levels
· New building permits for San Diego increased in August to 672 units, up from 437 in July and 451 in August 2007.
· There were 13.7% less houses for sale in September 2008 than in September 2007
· CEO confidence has increased for the first time since 2nd quarter 2007 according to San Diego based Vistage
· California Employee Confidence Index increased in August for the second month in a row.
· 48% of new home buyers were able to afford an entry level home compared to 24% a year ago
In the same Vistage survey mentioned above, you can see why business and politics don’t mix. CEO’s were asked which candidates – McCain, Obama, Biden or Palin – they would select to run their company. 49% said none, 29% chose Palin, McCain got 10%, Obama 8% and Biden 4%.
I hope in this down market you realize, like we do, that you need good salespeople to gain good relationships with tenants and buyers. I hope that the Optimist Creed posted at the end of this letter reminds you of why we’re paid to be optimists.
Regards,
Don
CDC Commercial
Real Estate Services
The Optimist Creed
Promise Yourself –
· To be so strong that nothing can disturb your peace of mind.
· To talk health, happiness and prosperity to every person you meet.
· To make all your friends feel that there is something in them.
· To look at the sunny side of everything and make your optimism come true.
· To think only of the best, to work only for the best, and to expect only the best.
· To be just as enthusiastic about the success of others as you are about your own.
· To forget the mistakes of the past and press on to the greater achievements of the future.
· To wear a cheerful countenance at all times and give every living creature you meet a smile.
· To give so much time to the improvement of yourself that you have no time to criticize others.
· To be too large for worry, too noble for anger, too strong for fear, and too happy to permit the presence of trouble.
-Optimist International