As I approach my 60th Birthday this month, I was encouraged by a recent study in Evolutionary Psychology Magazine that reports that bullshitting is actually a sign of intelligence. However, reading further I learned that people who were more willing to bullshit were more receptive to pseudo-profound bullshit. Which means I am probably more susceptible to fake news – who would have thought.
Epistemology is a branch of philosophy that tries to explain what it means to know things, and we know that we know what we know. I like to say everyone believes in their own reality. I also like to say that nobody uses their web browser to look things up to support them being wrong. Thus, we have an internet that supports everyone’s version of reality.
Today I am worried that people and markets are flush with cash but short on understanding value. It seems that people are willing to spend whatever it takes to have whatever they want – houses, cars, gas, toilet paper, eating out. When do people say, “enough, its not worth it?” We continue to see cap rates compress into the 4%’s and we are seeing asks in the 3%’s. The problem is that as inflation rises, so will cap rates and with rising cap rates values drop. A move from 4% to a 5% cap is a 20% drop in value! Another way that inflation erodes is through increased costs of materials. The recent rise in lumber adds about .10¢ – .15¢ psf in increased rent just to breakeven. The other sign is getting less for your dollar. Have you noticed how small an ice cream container is or how many less ounces of chips or cereal you are getting? I call this “shrinkflation!” With regards to leasing, it is probably time to go back to CPI increases instead of fixed 3% increases. Also, important to make sure future lease options are at market rate.
Another observation I have had is that it is not just work from home or work from office anymore. Lots of people are choosing alternative work environments. Starbucks and McDonald’s are stalwarts, but breweries, parks and hotel lobbies are growing in popularity. I recently saw a fancy dinner house open from 8am to 4pm with Wi-Fi and coffee for $25 a day. Also, big power cities are losing workers to new creative centers that are popping up all over the place. The suburbs are getting cool again.
With 1031 exchanges possibly being on the block with Congress, many people are looking to do exchanges while they still can. Many are moving from more management intensive properties to NNN Credit Tenant properties. If this is of interest to you let us know and we’d be happy to do an evaluation for you. Did you know that approximately 10-20% of CRE transactions use 1031 Exchanges to defer taxes on gains?
NICK’S NUMBERS
The chart below shows the rise in inflation (blue) but also the gigantic belief of over 70% of respondents that inflation is going higher not lower in the coming year.
Please give me a call or email me if you would like an analysis of your properties’ value or to discuss what you should be doing with regards to the Coronavirus pandemic and its impacts on your business, tenants, or property (Nick Zech, 858-232-2100, nzech@cdccommercial.com).
Many of you know I like to golf, but work gets in the way to often. However, in August I am attending a fundraiser that saves me all the time spent on a round. You get 20 golf balls and shoot at 15” holes spread around the driving range for cash money prizes all the while partaking in food and drink. On top of that the cause is getting combat-injured vets out and golfing. If you are interested in going or donating, here is a link: Operation Game On.
While considering my birth year of 1961, I came across a dime from that year (which were still 90% silver). I checked and the dime is still worth a dime but the silver in it would be worth $1.50 today (15x). Another example of inflation. The story this month is a look back over 100 years to see how things have changed since 1915…hope you enjoy the story…
