Monthly Letter

August 1, 2008

Re: Monthly Letter

Dear Clients:

“Opportunity is missed by most people because it is dressed in overalls and looks like work.” – Thomas Edison

While the subprime mess of last summer largely caused turbulence on Wall Street, the ongoing credit crunch exacerbated by oil inflation has spread to Main Street. Higher oil prices and the difficulty of getting people and properties qualified is having the same effect as if the Fed has jacked up interest rates.

The scary thing right now is that despite oil inflation and a slowing economy (remember our Gold Report predicted “Stagflation” as the most likely event in 2008) interest rates have no where to go but up. The Feds interbank rate is 2%. When you take inflation into account the interest rate on Fed funds is negative (1% - 2.5%)! Yes, they are giving away money! Two things you should realize, 1) If you can qualify you should be buying, borrowing or refinancing. 2) The longer they hold rates down the worse inflation will be and the higher they will have to raise rates. Remember that if you have been waiting the last two years for commercial properties to go down they have – by at least 10% (prices have been flat but 5% per year inflation has quietly raised prices).

It is time to be long and strong. We’re nearing the end of the lowest rates we’ve seen in 45 years. Time to lock in to 10 year “no brainer” rates. We are in or will be in a recession along with inflation. Rates will have to rise to stop the inflation. When the recession is over and values go back up you’ll be happy with your fixed rate low interest rate loan. If inflation stays you will at least keep pace with it so long as you have expense pass throughs and CPI increases. It’s not just the throw back clothes my kids are wearing, we’re re-entering the ‘70’s, but this time we’re on steroids!

To give you some mid-year perspective, I thought I would share this summary of current conditions.

Retail – High gas and food costs are eliminating much of peoples’ discretionary income which is directly impacting sales. Previously we had warned to be watchful of your real estate & furniture tenants. It is now spilling into food & restaurant uses. Energy costs are driving more sales to the internet. Talk to your tenants about increasing their internet presence. Higher operating costs are impacting bottom lines and will affect your net operating income (NOI).

Office – Slower economic times are having the usual impact on office space demand. Higher operating costs are squeezing NOI’s. Be sure your leases have expense pass through protection and CPI increases. The silver lining of high gas prices is that more tenants are looking to locate in North County, closer to home and a shorter drive. However, it is killing tertiary new home markets (south Riverside County, El Centro, etc…) where people used to “drive until you qualify”. As more people use the internet to telecommute and collaborate online this impact will be lessened.

Industrial – The weak dollar is driving export growth and transportation costs are causing a rethinking of distribution networks, keeping industrial property fairly healthy.

Despite all the bad news you should know that San Diego is tied for 8^th place for top markets to grow in population according to Claritas. It is also the #2 retail market in the nation according to Shopping Center Business Magazine. On the bad side we are the #9 market for housing foreclosures (1 in every 74 houses). However, to put it in perspective, I saw the June report of REO’s (bank owned) for San Diego and it was 110 pages long (3 per page). The commercial REO’s for San Diego was one page with 2 properties.

I have to say I hate the new Bluetooth law. I have had more close calls this month than in my entire life as I use both hands to mate my two devices, or search for the devise while the phone is ringing or worse yet, try to drive with my head below the dashboard on the days I forgot the Bluetooth in the office. The good news is once I get it all down I’ll have two hands free so I’ll be able to do more when I drive like shave, eat or look at stuff on my laptop!

My hats off to the City of Lake Elsinore who took away the credit cards for all of their elected officials. They replaced them with debit cards pre-loaded with their spending limits. Maybe this trend will spread to Washington and our Nations budget!

As we all try to save gas by sending more emails, we are ever increasingly using the PDF format. Many of you are using old versions back to Adobe 5 or 6. The current version is Adobe 9. It is available for a free download/upgrade on our website www.cdccommerical.com (on lower left corner)

As I prepare for my second to go off to college and my youngest to enter high school I am very pleased with the way my life has been blessed. However, next time I might consider doing it backwards as expressed below.

Regards,

Don

CDC Commercial
Real Estate Services

Next Time…I want to live my life backwards:

You start out dead and get that out of the way. Then you wake up in an old age home feeling better every day. Then you get kicked out for being too healthy. Enjoy your retirement and collect your pension. Then when you start work, you get a gold watch on your first day. You work 40 years until you’re too young to work. You get ready for High School: drink alcohol, party, and you’re generally promiscuous. Then you go to primary school, you become a kid, you play, you have no responsibilities. Then you become a baby, and then…you spend your last 9 months floating peacefully in luxury, in spa-like conditions – central heating, room service on tap, and then…you finish off with a climax.

July 1, 2008

Re: Monthly Letter

Dear Clients:

Happy 4^th of July. I hope you are one of those consumers of the 150 million hot dogs that will be eaten over this weekend.

Having just come off a 10 day vacation, I have to say I don’t have a lot to report, but I certainly have a lot to get caught up on!

After having traveled both inside and outside of the country, I do think Sam Zell (real estate tycoon & billionaire) has it right not only when he says that “real estate markets are slowly recovering” but also when he speaks about International investors. “After they get through bashing George Bush, the very next question is, “Where’s my Visa?”. There is not another environment in the world that matches the US in terms of opportunity, creativity, acceptance of change, acceptance of failure”.

UCLA, Anderson Forecast reports that despite housing price drops, foreclosures will taper by early 2009. However, the office market is expected to add 2.4 million square feet with as much as 3.2 million proposed. Unfortunately San Diego is only expected to absorb 1 million square feet a year in the foreseeable future.

Grocery store sales have dropped 20% over the last 12 months. However, sales should strengthen in a slower economy and higher prices as consumers prepare more meals at home. McDonald’s is jumping on the coffee bandwagon by adding coffee bars in all of its restaurants.

On the investment side transaction volumes have dropped but pricing remained relatively stable, with about a 3 – 5 % price reduction. Where things go from here will be dependent on credit markets over the next few quarters.

I believe Fed Chairman Berninke’s strategy continues to be to cause enough confusion and regulation to cause markets to slow down, yet not require him to do as much with rates. This is why we face low rates with big spreads and stricter underwriting.

As I said in last month’s letter, tough markets make tough agents and we are finding our skills in great demand. As Floyd Whickman puts it, adversity can be an anchor or a rocket booster, depending on your attitude and your actions.

No matter where you stand on the Presidential election you have to appreciate the attached Pledge of Allegiance by Senator and former POW John McCain. Happy 4^th!

Regards,

Don

CDC Commercial
Real Estate Services

"The Pledge of Allegiance" - by Senator John McCain

As you may know, I spent five and one half years as a prisoner of war during the Vietnam War. In the early years of our imprisonment, the NVA kept us in solitary confinement or two or three to a cell. In 1971 the NVA moved us from these conditions of isolation into large rooms with as many as 30 to 40 men to a room.

This was, as you can imagine, a wonderful change and was a direct result of the efforts of millions of Americans on behalf of a few hundred POWs 10,000 miles from home.

One of the men who moved into my room was a young man named Mike Christian.

Mike came from a small town near Selma, Alabama He didn't wear a pair of shoes until he was 13 years old. At 17, he enlisted in the US Navy. He later earned a commission by going to Officer Training School Then he became a Naval Flight Officer and was shot down and captured in 1967. Mike had a keen and deep appreciation of the opportunities this country and our military provide for people who want to work and want to succeed.

As part of the change in treatment, the Vietnamese allowed some prisoners to receive packages from home. In some of these packages were handkerchiefs, scarves and other items of clothing.

Mike got himself a bamboo needle. Over a period of a couple of months, he created an American flag and sewed it on the inside of his shirt.

Every afternoon, before we had a bowl of soup, we would hang Mike's shirt on the wall of the cell and say the Pledge of Allegiance.

I know the Pledge of Allegiance may not seem the most important part of our day now, but I can assure you that in that stark cell it was indeed the most important and meaningful event.

One day the Vietnamese searched our cell, as they did periodically, and discovered Mike's shirt with the flag sewn inside, and removed it.

That evening they returned, opened the door of the cell, and for the benefit of all of us, beat Mike Christian severely for the next couple of hours, and then they opened the door of the cell and threw him in. We cleaned him up as well as we could.

The cell in which we lived had a concrete slab in the middle on which we slept, four naked light bulbs hung in each corner of the room.

As I said, we tried to clean up Mike as well as we could. After the excitement died down, I looked in the corner of the room, and sitting there beneath that dim light bulb with a piece of red cloth, another shirt and his bamboo needle, was my friend, Mike Christian. He was sitting there with his eyes almost shut from the beating he had received, making another American flag. He was not making the flag because it made Mike Christian feel better. He was making that flag because he knew how important it was to us to be able to Pledge our allegiance to our flag and country.

So the next time you say the Pledge of Allegiance, you must never forget the sacrifice and courage that thousands of Americans have made to build our nation and promote freedom around the world.

You must remember our duty, our honor, and our country

"I pledge allegiance to the flag of the United States of America and to the republic for which it stands, one nation under God, indivisible, with liberty and justice for all."