September 1, 2009
RE: Monthly Letter
Dear Clients:
Deciding if Brett Favre is going to be playing football this year or not is about the same as predicting if our economy is on the road to recovery or not. This economy wants to recover just as much as I want to start watching football!
Unemployment in San Diego stands at 10.3% (12.1% for California and 9.7% for the Nation). Significant job losses have reduced demand for commercial space and lack of credit has stalled tenants’ ability to do deals, owners to refinance, or buyers to make acquisitions. It is now critical that the Federal Reserve increase liquidity by purchasing commercial mortgage backed securities. Because commercial real estate always lags in overall economic recovery, it is going to be a while until we see a recovery in commercial real estate. Interbank lending has stabilized, investor and consumer confidence levels have moved off of recent lows; the USD index of leading economic indicators has had its fourth consecutive monthly gain; home sales are rising and aggressive corporate cost cutting have resulted in better than expected profits. However, we have a long way to go before returning to “normal”, but it does appear that conditions are improving and moving in the right direction. There might be beer money for those football games yet!
I’ve long been concerned by the term “bailout”. The only time I have heard this term used was in a leaking boat or in helping someone out of jail. In both cases, before you could be successful, you had to fix the problem. (The hole in the case of the boat and the behavior in the case of the jail bird.) Before all of these government bailouts began, we had much more of a free market economy going on. Now we must be careful that the treatment doesn’t kill the patient. These bailouts have been very kind to both Wall Street and to the banking industry while leaving the commercial real estate industry to fend for itself. These bail outs have definitely been masking how the stock market would have really been performing without bailouts.
In a recent article in The Wall Street Journal, former hedge fund manager Andy Kessler may have summed it all up best when he said:
“By buying U.S. Treasuries and mortgages to increase the monetary base by $1 trillion, Fed Chairman Ben Bernanke didn’t put money directly into the stock market, but he didn’t have to. With nowhere else to go, except maybe commodities, inflows into the stock market have been on a tear. Stock and bond funds saw net inflows of close to $150 billion since January. The dollars he cranked out didn’t go into the hard economy, but instead into tradable assets. In other words, Ben Bernanke has been the market.”
In addition, stock market analysts have done the calculations and have discovered that a recent $2.7 trillion jump in the value of equities in the stock market, corresponded with only a $400 billion drop during the exact same period in money market accounts. So where did this additional $2.3 trillion rise in the value of equities come from? From the bailout money being given to the U.S. banks and financial institutions, and the reinvestment of that money by these institutions directly back into the stock market!
If you doubt me, check out these two charts from the Federal Reserve.
So why hasn’t inflation occurred yet? Although a lot of money has technically been created, much of it has not been used. Economists refer to the term “velocity” of money to describe how quickly money changes hands as it is lent time and again. Inflation is not just a function of the amount of money in the system but also it’s frequency of use. It appears that all the money is “in the bank” (banking reserves). With no banks lending we don’t have inflation – yet. Whether the pickup in money velocity leads to significantly higher inflation depends on how quickly the Fed pulls the reins back on the extra ordinary credit it is currently providing.
John Wooden, the greatest coach of all time (and who my business plan and company logo are modeled after), once said; “Be quick but don’t hurry”. I recently read an interview with John Kotter, author of a new book “A Sense of Urgency”. I thought he made a number of great points that all of us can take to heart as we try to push forward in making deals. The quotes that hit home with me were:
- “There are lots of signs of false urgency,” Kotter told Inc. “Frenetic activity. Everyone is exhausted. Working 14-hour days. One red flag is how difficult it is to schedule a meeting.”
- “A false sense of urgency,” he wrote in his book, “is pervasive and insidious because people mistake activity for productivity”
- But when people have a true sense of urgency, he wrote, “they think that action on critical issues is needed now… Now means real progress every single day. Critically important means challenges that are central to success or survival, winning or losing.
- “Underlying a true sense of urgency,” Kotter writes, “is a set of feelings: a compulsive determination to move, and win, now.”
- “When it comes to affecting behavior – creating alert, fast-moving actions that are focused… relentlessly…, pushing to achieve more ambitious goals despite the obstacles, trying to achieve progress each and every day, constantly purging low-value activities so that time is available to do all this.”
Gone are the days of making a profit in real estate by buying and selling a few years later. Today you must: 1) protect and enhance the value of your assets, 2) adapt to the changing investment climate and, 3) cut costs and reallocate precious resources. In doing this I thought it would be useful for you to know tenants top complaints.
- Temperature – HVAC must be working (especially on 100 degree Augusts!)
- Cleanliness – janitorial, bathrooms, common area. Clean space is a sign of a good landlord.
- Elevator (if you have one) must be working.
- Parking – must be easy. Not too crowded but not too empty.
At the same time, you should be watching your tenants for signs of stress;
- Talk to them – know where they are at. Information is the new currency. Ask them: What are you doing right? What at the property supports your business? What can you do better?
- How many empty desks or shelves do they have? How much inventory do they have?
- Is the store or office busy?
- How full is the parking lot?
Whether you are Brett Favre or a tired commercial real estate broker or investor, I hope you can summon the passion to find that sense of urgency to do just one more deal. As you look for that passion, I hope you enjoy the story below.
Regards,
Don
Don S. Zech
CDC Commercial, Inc.
Real Estate Services
KURTIS THE STOCK BOY AND BRENDA THE CHECKOUT GIRL
In a supermarket, Kurtis the stock boy was busily working when a new voice came over the loud speaker asking for a carry out at register 4. Kurtis was almost finished, and wanted to get some fresh air, and decided to answer the call. As he approached the check-out stand a distant smile caught his eye, the new check-out girl was beautiful. She was an older woman (maybe 26 and he was only 22) and he fell in love.
Later that day, after his shift was over, he waited by the punch clock to find out her name. She came into the break room, smiled softly at him, took her card and punched out, then left. He looked at her card, BRENDA. He walked out only to see her start walking up the road. Next day, he waited outside as she left the supermarket, and offered her a ride home. He looked harmless enough, and she accepted. When he dropped her off, he asked if maybe he could see her again, outside of work. She simply said it wasn’t possible.
He pressed and she explained she had two children and she couldn’t afford a baby-sitter, so he offered to pay for the baby-sitter. Reluctantly she accepted his offer for a date for the following Saturday. That Saturday night he arrived at her door only to have her tell him that she was unable to go with him. The baby-sitter had called and canceled. To which Kurtis simply said, “Well, let’s take the kids with us.”
She tried to explain that taking the children was not an option, but again not taking no for an answer, he pressed. Finally Brenda brought him inside to meet her children. She had an older daughter Jessie, who was just as cute as a bug, Kurtis thought. Then Brenda brought out her son, Zachary, in a wheelchair. He was born a paraplegic with Down Syndrome.
Kurtis asked Brenda, “I still don’t understand why the kids can’t come with us?” Brenda was amazed. Most men would run away from a woman with two kids, especially if one had disabilities – just like her first husband and father of her children had done. Kurtis was not ordinary… he had a different mindset.
That evening Kurtis and Brenda loaded up the kids, went to dinner and the movies. When her son needed anything Kurtis would take care of him. When he needed to use the restroom, he picked him up out of his wheelchair, took him and brought him back. The kids loved Kurtis. At the end of the evening, Brenda knew this was the man she was going to marry and spend the rest of her life with.
A year later, they were married and Kurtis adopted Jessie and Zachary. Since then Brenda and Kurtis have added five children of their own: sons Elijah and Kade, daughter Jada, and twin girls Sierra Rose and Sienna Rae.
So what happened to Kurtis the stock boy and Brenda the check-out girl? Well, Mr. & Mrs. Kurt Warner now live in Arizona, where he is currently employed as the quarterback of the National Football League Arizona Cardinals as they prepare for a new season. Is this a surprise ending or could you have guessed that he was not an ordinary person.
It should be noted that he also quarterbacked the Rams in the Super Bowl XXXVI. He has also been the NFL’s Most Valuable Player twice and the Super Bowl’s Most Valuable Player.
