CDC Commercial Inc

October 2015 Monthly Letter

Every banana the Dole sells west of the Rockies, from Mexico to Canada, comes through the 10th Avenue marine terminal in San Diego. The terminal handles 185 million bananas a month.

My thoughts turned to bananas because I was thinking about baby food and I was thinking about baby food because we were just blessed with our first grand baby. A bouncing baby boy. He is already growing remarkably fast – amazing what nature does when left alone. If only or politicians and bureaucrats could take a lesson from this and let our economy do the same.

For the year as a whole GDP will expand at about 2.1 percent: not a bad number, but not great. That growth rate would also mark the tenth consecutive year of subpar performance in terms of growing at less than 3% a year, the historical average growth rate. Despite the sluggishness, the job market is strengthening.

The unemployment rate has fallen to 5.2 percent, the lowest level since 2008. Not all is right with the labor market though. Low oil prices are forcing layoffs. Sadly, more people have left the labor force and stopped looking for a job (can you believe that isn’t counted as unemployed!). Moreover 4% of workers are in part-time status involuntarily compared to 2% that would be considered normal.

In San Diego, meantime, unemployment has dropped to 5.1%, down from 6.6% last year. That’s a total of 42,400 added jobs and roughly requires a million square feet of commercial space absorption.

There is a school of thought that the Federal Reserve’s easy monetary policies of the last ten years have caused asset price inflation, even a bubble. With Treasury yields a non-starter for investors for much of the past decade, they have fanned out in search of other categories, placing money in alternative assets including real estate.

It has been assumed that when Treasure yields increase many will return home to these securities. This widespread assumption is why, after all, REITs have been struggling for much of this year.

But with rates at near zero for so long, the Federal Reserve has no firepower at the ready should another crisis unfold. Sure, it could keep rates at their current level, but that would have at best a muted effect, many economists have said. This is the scenario investors should fear: The Fed keeps rates at zero but it isn’t helping. All of a sudden, the perception that the Fed will keep the economy safe and sound crumbles for investors. The crisis unfolding overseas worsens and starts to impact the U.S. economy and guess what? There are few buyers interested in these investors’ now overprices assets. The next liquidity crisis is likely not driven by a credit or funding scarcity but rather illiquid assets and collateral freezes.

As I sit and wonder why the economy is not doing better given low interest rates and relatively low employment, I heard Jack Welch, former CEO and Chairman of GE explain that it is quite simply over regulation.

I have to agree. As I look across the landscape of our deals, so many are held up or killed because of the time or money of regulation. A conditional use permit in the City of San Diego takes 12 months. Traffic impact studies take 6 months and then you pay traffic impact fees based on the traffic (read business) that you generate. ADA improvements (doors, bathrooms, ramps, etc) add 10% to 30% to the cost of TI’s. Waste water management adds more oversight and cost to deals (new drains, enclosures over dumpsters, keeping the water on your property). Most recently it is Title 24. If you aren’t already knowledgeable on this topic you need to be. Title 24 mostly focuses around your HVAC and electrical and lighting systems. Virtually any TI’s you do will trigger Title 24 and it will add 20% – 50% to the cost of your job (I recently had a $15 psf TI job and Title 24 added another $7.50 psf to the job!) Windows and HVAC need to be brought up to efficient current standards. Lights need to have switches (not switched at the circuit breaker). Lights need to be on motion sensors…

On a more positive note, for the last decade I have been telling retail owners to strive for food and service tenants, things that are hard to be beaten by the internet or by big boxes. Office owners have been advised to optimize parking and stick with as open a floor plan as possible. This advice has been spot on for owners. I am now going to add to that advice. Look at ways to optimize your space. Can you squeeze in more parking? Utilize technology to cut cost or repurpose space. Can you create a social area (bench, table, etc)? Talk with your tenants. Can they optimize their space to do more business? Can they sublease or co-brand with another tenant in their space? This may not make you money immediately but busy full buildings are what will be attractive to tenants, banks and building owners in the future. You must broaden your view of your property or your store. It is not a location, it is an experience. It may be time to bring back something that was popular 30 years – the merchant association. Get tenants on board as to the vision of what the experience at the property should be. When you can shop or work from home and everything you want can be delivered, why do you want to go out? The answer is simple, the experience of being entertained and to socialize.

I just got back from a vacation that included a visit to Pompeii which is the Italian village that was destroyed by Mount Vesuvius. It was amazing to walk amongst the ruins and realize how little we have come. The block grid system of streets, running water, public drinking fountains with names so people knew where to meet up made you comfortable. The shop keeper units (house behind store) and restaurants amongst the houses along with public theater, parks and gym with pools and spas made me think I would move in today if they rebuilt. I am reminded that what’s old is new and what’s new was old.

As we enter the election cycle it becomes increasingly important that we unfetter our economy and motivate all of us to be creative and reinvent ourselves and our economy. More importantly it is important that we don’t let our politicians tell us what to think but instead tell us what to think about. Hope you enjoy the story.


The Banana Story

Start with a cage containing five monkeys. Inside the cage, hang a banana on a string and place a set of stairs under it. Before long, a monkey will go to the stairs and start to climb towards the banana. As soon as he touches the stairs, spray all of the other monkeys with cold water. After a while, another monkey makes an attempt with the same result – all the other monkeys are sprayed with cold water. Pretty soon, when another monkey tries to climb the stairs, the other monkeys will try to prevent it.

Now, put away the cold water. Remove one monkey from the cage and replace it with a new one. The new monkey sees the banana and wants to climb the stairs. To his surprise and horror, all of the other monkeys attack him. After another attempt and attack, he knows that if he tries to climb the stairs, he will be assaulted.

Next, remove another of the original five monkeys and replace it with a new one. The newcomer goes to the stairs and is attacked. The previous newcomer takes part in the punishment with enthusiasm! Likewise, replace a third original monkey with a new one, then a fourth, then the fifth.

Every time the newest monkey takes to the stairs, he is attacked. Most of the monkeys that are beating him have no idea why they were not permitted to climb the stairs or why they are participating in the beating of the newest monkey.

After replacing all the original monkeys, none of the remaining monkeys have ever been sprayed with coldwater. Nevertheless, no monkey ever again approaches the stairs to try for the banana.

Why not?

Because as far as they know that’s the way it’s always been done around here.

And that, my friends, is how we breed and train creativity and entrepreneurship out of the next generation.

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