October 1, 2009
RE: Monthly Letter
Dear Clients:
Well, folks, this has been an interesting month. My “baby” daughter turned sweet 16, my mom had her knee replaced, the kids all went back to school (tuition numbers continue to stagger me), and it appears that the economy has started to resurface. Even an occasional Charger loss can be taken in stride (so long as they choose to relocate to Escondido!).
Hip, hip, hooray you say? That’s what I thought. However, several very smart people I read or listen to say the other shoe is going to drop and there is nothing we (or Washington) are going to be able to do about it.
- Christopher Thornberg with Beacon Economics says that there is “more economic trouble on the horizon with rising unemployment and additional waves of foreclosures. The second half of 2010 will be very weak, and 2011 will be very grim.”
- Mid month I attended a talk by John Cushman, the chairman of Cushman Wakefield. He highlighted the concern that I have had and that is the commercial real estate’s version of “mark to market.” It is called “Maturity Default.” This is when your loan comes due, and you can’t qualify for a refinance because the price has dropped and the loan terms have gotten tougher. Cushman talked about 1 trillion dollars of debt coming due between now and the end of 2010 and a billion a year every year thereafter until 2020.
NOTE: Did you know that if you subtracted a trillion seconds from today you would return to a time before we invented language? Now multiply that by 9 to get our deficit this year – I’m speechless!
- Gary London, a San Diego real estate economist and consultant, reports that commercial markets are in a “free fall.” He cites lack of demand for space, rising cap rates, and loan defaults all leading to a long-term over supply and/or under demand era.
- On the bright front, Alan Gin and the University of San Diego’s index of leading economic indicators surged forward in August lead by consumer confidence.
Two phrases have entered my recent vocabulary: “Pretend and extend” and “A rolling loan gathers no loss.” Well it looks like we are about to enter the era of “admit and unload.” Banks will need to take the tough steps of realizing losses and off loading billions of dollars of mortgages sitting on their balance sheets. Once these losses have been accepted, rents will be reset by new buyers forcing neighboring properties to do the same to avoid losing tenants. This process will take us through 2011 or 2012.
I know that you already know that government is here to help. A study by the state was just completed (it was due in 2007) entitled “Cost of State Regulations on California’s Small Businesses.” The study finds the total cost of regulation to the state of California (not the small businesses) is $493 billion which is 5 times the state’s general fund budget and almost a third of the state’s GDP. The regulations cost 3.8 million jobs which is a tenth of the state’s population (last time I looked we had 10% unemployment — hmm, let me see…).
Split-roll tax is back on the front burner. This is where they repeal Prop 13 tax protection for commercial property and reassess property every year or two. If you have NNN leases, let your tenants know. If you have gross leases, hang on to your wallet as your taxes go up.
Samuel Clemens (Mark Twain) once described the 1880s as a “bad mood era.” However, Henry Ford would later say, “Whether you believe you can or you can’t, either way you’re right.”
Fred Schnaubelt, a loan broker, investor, and guest writer for the San Diego Transcript hits the nail on the head:
What causes real estate booms and crashes?
“If nothing else, note, mark, and remember this basic premise. Increases in money and credit cause booms. Contractions in money and credit cause recessions. Booms are impossible without an expansion in money and credit to pay for across-the-board price increases — impossible without government interventions. Presently the Federal Reserve (our central bank) is trying to reinflate the economy by flooding the banks with oceans of money. Banks, in a panic, are not loaning out the money as they prepare for $200 billion or more in commercial loan defaults expected in 2010 and 2011. Those loans booked in 2000 and 2001 coming due. Today, economists predicting deflation before inflation are the most persuasive. Inflation is not on the horizon. Ultimately, the choices will not be between a Lady or a Tiger, but a savage tiger and a roaring lion. Forewarned is forearmed. No illusions, just least bad options ahead. Knowing what to expect alleviates anxiety, lets us sleep at night, and gives us an inner peace in the midst of calamity.”
Finally, John Cushman also said in his talk that more wealth will be created over the next several years than ever in history. This will likely be the greatest real estate buying opportunity in our lifetimes. Keep your head about you — we could all be rich! Hope you enjoy the story!
Regards,
Don
Don S. Zech
CDC Commercial, Inc.
Real Estate Services
Back in the old Wild West, there were two blond cowpokes, Jeff and Dave. One day, the two were enjoying a strong sarsaparilla in the local saloon when a man walked into the bar with an Indian’s head under his arm.
The barman shakes his hand and says, “I hate Indians; last week the bastards burnt my barn to the ground, assaulted my wife, and killed my children.” He then says, “If any man brings me the head of an Indian, I’ll give him one thousand dollars.”
The two blonds looked at each other and walked out of the bar to go hunting for an Indian. They were walking around for a while when suddenly they saw one. Jeff threw a rock which hit the Indian right on the head.
The Indian fell off his horse but landed seventy feet down a ravine. The two nuts made their way down the ravine where Dave pulled out a knife to claim their trophy.
Suddenly, Jeff said, “Dave, take a look at this.” Dave replied, “Not now, I’m busy.”
Jeff tugged him on the shoulder and says, “I really think you should look at this.”
Dave said, “Look, you can see I’m busy. There’s a thousand dollars in my hand.”
But Jeff was adamant. “Please Dave, take a look at this.”
So Dave looked up and saw that standing at the top of the ravine were five thousand red Indians.
Dave just shook his head and said, “Oh…my…God…we’re going to be millionaires!”
