Monthly Letter

April 1, 2008

Re: Monthly Letter

Dear Clients:

Ok folks, time to shift gears. We warned about this slow down in our monthly letters last year and this years’ Gold Report (www.cdccommercial.com/GoldReport2008 ). We laid out strategies. No reruns today, we’re looking ahead. Let’s explore what’ll really make you happy in the weeks and years ahead (besides being 100% leased, abundant capital, low cap rates if you’re selling, and high cap rates if you’re buying!). Warren Buffet probably sums it up best when he says; “Success is getting what you want and happiness is wanting what you get”.

Happiness? Why bring “that” up in this insane market? Because most of you are like me with a secret split personality; sometimes happy, sometimes not – sometimes happier. The signals are out there: Bear market and recession ahead, national politics and world jihad adding fuel to the fire.

According to a recent report by the UN; Americans are the most productive workers in the world, thanks mainly to technology. With that thought in mind, some of you have been receiving this monthly letter by email and in writing. With this writing you will only receive it by email, unless you don’t have email or have requested otherwise.

Employment picked up slightly in San Diego in February adding 4100 jobs and bringing the county unemployment rate down to 5% from 5.2%. That’s above last February’s 4.3%, but when I took Econ 101 – 5% was considered equilibrium!

What went little noticed is that Craig Venter moved back to town. Venter is the world renowned gene discoverer and founder of Synthetic Genomics. The company, based in La Jolla, is now hiring all kinds of “knowledge workers”. This is like having Irwin Jacobs moving Quallcom here before the world carried cell phones. This is just another example of how San Diego will continue to evolve as a knowledge based economy (do you think it’s because smart people like good weather?).

Speaking of deep thinking; you have heard the Zen question about the tree falling in the forest, but if no one is there did it make a sound? In today’s market I would re-ask it to you; “If a seller doesn’t want to sell or a buyer doesn’t buy and there is no deal, then is there a price decline?

I don’t know the answer to that for sure, but I do know that we can be thankful that the federal government reauthorized the terrorism risk insurance program in the end of December. This should provide stability and health in the insurance and property markets and the economy as a whole.

Bismark said that people never lie so much as after a hunt, during a war or before an election year. So while all the liars line up this election year let me tell you a couple of facts. 1) The surplus of receipts to expenditures for social security will begin its decline in 2009 and by 2017 will become a deficit. 2) In 2011 the Bush tax cuts will expire unless extended (that’s a big tax increase without the tax increase that the politicians are talking about).

Most importantly let’s get out and tell the Feds, everyone in Congress and whoever sits in the White House come 2009, that we want an end to the bubble and bust cycle in financial markets. Encouraging reckless gambling and then bailing out the worst and biggest gamblers is no way to run an economy!

Again from Mr. Buffet, “I may have more money than you, but money doesn’t make the difference…I would rather have a cheeseburger from Dairy Queen than a $100 meal…the difference between you and me is that I get up everyday and have a chance to do what I love to do”.

I think I may have found happiness!

Regards,

Don

Don Zech

CDC Commercial
Real Estate Services

March 3, 2008

Re: Monthly Letter

Dear Clients:

A superior sailor uses his superior knowledge so as not to have to use his superior skills!

I recently attended a seminar to overcome a mental disorder many of us are being troubled by. The seminar was entiltled; Overcoming Recession Obsession Anxiety. Having been in “the business” almost 25 years now, I find that experience is a marvelous thing. It enables us to recognize a mistake whenever you make it again! Well the risk with our Recession Obsession Anxiety is that eventually consumer and business sentiment succumb to the anxiety and you do in fact become sick. These days on Wall Street an optimist is hard to find!

As we have pointed out in this years Gold Report ( www.cdccommercial.com/goldreport2008 ), the US economy is in a position to be ravaged by the two headed monster of inflation and stagnant growth, otherwise called stagflation. Unfortunately, the Fed and our Congress have embarked on the quick fix methods and are preparing to feed the boom to bust cycle that has been our economy for the last ten years. Unfortunately, if the Fed’s policy of massive interest rate cuts succeeds in reviving the economy by years end, won’t we also see a spurt in inflation? The argument to date has been that with a slowing economy comes slower growth and less upward pressure on prices. However, a one year 17% increase in energy costs and 5% increase in food costs are not likely to recede, because the pressure is caused from outside of our borders (Global demand). I think we are likely to see more rate cuts. Bill Gross at PIMCO says the Fed will have to go to 2.5% or less to save the housing market. Doesn’t all of that – higher economic growth, a flood of cash into the economy, slashes in interest rates – create a massive inflationary push.

Mainstream advice during a recession is to buy bonds and wait for the rate cuts. However, bonds may not be the haven this time. If the cost of living rises unabated, that will depress bond prices. A traditional refuge in inflationary times is gold and we have certainly seen its price rise. Unfortunately, gold is highly volatile and it doesn’t pay out any income. So how do you buffer yourself from the ravages of inflation and a possible stagnant economy? You need to find an investment that combines income and price and rises with inflation expectations. Better yet, it should be a real commodity (not a paper asset or loan) and if you can borrow to buy it you can pay back the debt with cheaper dollars in the future. What is this magic investment you ask? Well it sits beneath your nose, it is off course commercial real estate.

Net operating Income (NOI) often continues to improve through a mild recession due to the lease terms that average three to five years. Even if a landlord had to lower the asking rent, tenants renewing a lease will still end up paying more over the lease term given the annual increases. Falling interest rates will give investors a better spread until the economy gets better and then rents will rise again. Plus cap rates may rise with fewer investors in the market and some sellers believing the “sky is falling” causing a buying opportunity.

The fundamental metrics of the commercial real estate market – vacancy rates, net operating income and capital available for investment – remain strong. But the erosion of the credit market and consumer confidence are starting to hurt properties. If nothing else we as agents are facing tenants and buyers who have adjusted their expectations. Despite low vacancy factors and still high TI costs, tenants believe they should get a bargain basement deal. The gap between “asking rent” and “offered rent” is growing. Although we are in “sales” an inordinate amount of our time is spent educating our prospects as to the real (instead of perceived) conditions of the market. We are hoping this is translating into more deals done while most of our competitors are on the sidelines bemoaning a slow market. If you don’t already know the CDC story and my approach to life and “the business” you might enjoy a recent profile that the Dan Diego Transcript ran (www.cdccommercial.com/theCDCCommercialStory ).

Business Week recently reported that the signs that we have turned the corner are likely to be;

1. Fading stagflation fears

2. Stable credit and housing markets

3. Especially low interest rates

4. Improved corporate earnings

5. “Blood Curling Screams” – which they report as Wall Street investors throwing in the towel.

Recent affirmative votes for school construction and casino expansion will couple with the fire storm rebuilding efforts to lift the construction industry by Summer and into the Fall.

My favorite tag lines of the New Year – 2008 is going to be Great! Surviving to Thriving! Get ready to inflate in 2008! So many of you enjoyed my link last year to Sam Zell’s (the legendary real estate investor) annual Year End Gift (YEG) that I have attached a link to this years creation. This years is entitled “Confusion” and once again hits the nail on the head.

http://yegsz.com/Confusion/index.html

ENJOY!

Regards,

Don

Don Zech

CDC Commercial