September 2018 Monthly Letter

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September 2018 Monthly Letter
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truthWell, my birthday came and went again, and I still can’t figure out how I got over the hill without getting to the top! But I have found a way to increase my fitness quotient without working any harder yet still impressing all my friends and family. I have officially renamed “the John” to “the Jim”. It sounds so much better when I tell people I go to the Jim every morning!

I am very concerned that our society is grappling with what is truth and what is not. It has infected our politics, our media, the stock market and I am afraid maybe the real estate market as well. If you don’t understand what the market is saying, then you are not listening closely enough.

Ten years ago, the Fed was pushing on the string trying to get rates down low enough to kick start the economy – no luck. Now, with the economy humming the Fed is again walking the tight rope pushing rates up to slow down but not stop the growth. I guess you call it Quantitative Tightening (or QT vs QE). Remember when we were saying that there was cap rate “compression” because interest rates were so low that cap rates were pushed lower. Well with rates on the rise shall we call it “decompression”? In scuba diving when you rise from lows you stop along the way to equalize the inert gases in your blood stream (otherwise your blood literally boils). Same thing happens as the economy and rates rise and we get rid of the FEDS “inert gas” also known as QE or liquidity. However, as in scuba diving if you go up to quickly, you get decompression sickness also known as “the bends.” In our economy, the bends are called a recession.

In the commercial real estate market, we have a similar problem. As rates rise, cap rates do too. This is because investors can now get higher and safer returns from CD’s, Bonds, and stocks so there becomes less demand causing cap rates to rise (you know – supply and demand). Cap rates rise, and price goes down. So, this is what it looks like as the economy gets better, but you lose value. The only way you can make up for this is increased rents (or lower expenses).

So, is it time to sell? Yes. No. Maybe. Yes, if you bought low and want to sell high, pay your taxes and do something else with your money. Yes, if you have a lot of debt and a drop-in value of 10% – 20% would wipe out most of or all of your equity. No, if you have long term stable tenants with room to raise rent over time and fixed rate financing in place. Maybe? – well there are lots of maybe reasons and that is why you need to call us to discuss.

Similarly, the housing market must see wage growth to keep up with the accelerated housing prices that have been occurring over recent years. Hourly earnings are up 2.7% but still behind the pre-2008 pace in the low 3’s. Wage pressure will come from low unemployment (down to 3.7% in San Diego from 6% in 2008) but just as importantly from the labor participation rate. We are at 82.1% but need to get over the pre-recession high at 83.2%.

In the meantime, Southern California home sales hit the brakes in June falling to the lowest reading in four years. Furthermore, pending home sales stepped back in July and have been falling for seven straight months. The biggest part of the problem is lack of availability of “affordable” housing. Sales below $500K dropped 21%, while deals over $500K only dropped 3%. This was due to lack of supply not demand. Higher rates will not make this problem any better (I’m starting to feel my blood boil).

So, this leads to my biggest worry, more people moving out than moving in – that is a recipe for commercial real estate value decreases. According to the U.S. Census Bureau, more than 42,000 San Diego residents left the area for the Inland Empire from 2000-2015, 9000 left for Phoenix.

San Diego only grew by 0.6 percent last year which is below the national average of 0.7 percent and lower than San Diego’s historic average of 1 percent. Almost all the growth was births over death. The strongest in-migration was people making over $100K (duh—they’re the only ones who can afford to live here). So, will San Diego be a castle on the hill with its work force commuting in from Riverside County and or across the Mexican border?

Another negative cloud on the horizon…the foreclosure rate rose for the first time in 36 months. On the positive front that 3.7% unemployment rate was highlighted by strength across all sectors since 10 years ago – Happy Labor Day!

  • Healthcare up 34,900 jobs
  • Tourism/Hospitality up 29,100 jobs
  • Government up 25,800 jobs
  • Science & Technology up 17,500 jobs
  • Management up 5,800 jobs

One other thing that is up in San Diego is telecommuting. Up almost 200% in the last 10 years. Carlsbad based, Global Workplace Analytics estimates that 65,000 San Diegans now work at least half of their hours from home.

I was out driving the market the other day and I couldn’t help but notice the number of church’s that have changed their names to things like, The Well, The Place, The Sanctuary, etc… I give them an “A+” for rebranding but the product is still the same as it has been for 2000+ years (which I think is a good thing). However, I look at McDonalds, Starbucks or In-N-Out and you see them adjust and refreshen but as in my opening paragraph, changing the name does not change the truth. Just look at IHOP…I mean IHOB.

At CDC Commercial, we aren’t planning on changing our name, we plan to keep telling you the truth and we try to remember that the market is ever changing, and the truth often seems illusive…hope you enjoy the story


The Cookie Thief 
by Valerie Cox

A woman was waiting at an airport one night, with several long hours before her flight. She hunted for a book in the airport shops, bought a bag of cookies and found a place to drop.

She was engrossed in her book but happened to see, that the man sitting beside her, as bold as could be. . .grabbed a cookie or two from the bag in between, which she tried to ignore to avoid a scene.

So, she munched the cookies and watched the clock, as the gutsy cookie thief diminished her stock. She was getting more irritated as the minutes ticked by, thinking, “If I wasn’t so nice, I would blacken his eye.”

With each cookie she took, he took one too, when only one was left, she wondered what he would do. With a smile on his face, and a nervous laugh, he took the last cookie and broke it in half.

He offered her half, as he ate the other, she snatched it from him and thought… oooh, brother. This guy has some nerve and he’s also rude, why he didn’t even show any gratitude!

She had never known when she had been so galled and sighed with relief when her flight was called. She gathered her belongings and headed to the gate, refusing to look back at the thieving ingrate.

She boarded the plane, and sank in her seat, then she sought her book, which was almost complete. As she reached in her baggage, she gasped with surprise, there was her bag of cookies, in front of her eyes.

If mine are here, she moaned in despair, the others were his, and he tried to share. Too late to apologize, she realized with grief, that she was the rude one, the ingrate, the thief.

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CDC Commercial Inc
About the Author – Don Zech, President at CDC Commercial, Inc.
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