Monthly Letter

February 1, 2007

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RE: Monthly Letter and 2007 Gold Report

Dear «GreetingLine»

Happy New Year! So what is my forecast for 2007 you might ask? I think John Kenneth Galbreth said it best:

“There are two types of forecasters: Those who don’t know

and those that don’t know that they don’t know”.

Attached you will find the 2007 Gold Report – Intelligence in Real Estate (do you like the play on words?). This is our 11^th edition and as in the past we give an overview of the economy then work our way down to the specifics of property types and suggestions to help you in the year ahead (The report is also on the website www.cdccommercial.com ).

Markets are mixed; the USD San Diego index is down; the CEO index of small firms is up for 2007. Another great economist said, “If you are going to be in the business of forecasting, do it often!” – the idea being the more often you do it the more often you can revise! (Lynford). With that in mind we will do our best to keep you updated throughout the year with our monthly letter.

For now, the housing slowdown is spilling over a little (as predicted) with housing related tenants (mortgage, realty, etc…) closing, vacating or subleasing their spaces. Landlords and property managers, please keep us posted even of your weak tenants. Often we can target a replacement before they go out of business and stop paying rent. As you do your common area maintenance (CAM or NNN) budgets for the new year, please be sure to send us the new estimate so we are quoting good numbers.

Phase I environmental reports just got more expensive due to higher licensing requirements. They also have to be current within 6 months.

I hope that you enjoy the Gold Report as much as I do putting it together for you. If you or your organization is interested, I have a short presentation that I can give along with a primer on commercial real estate (the talk can be tailored from 10 to 30 minutes and is good for Rotary, Kiwani’s or trade groups).

Although many are looking at this year as the cup half empty and equally as many as the cup half full, we at CDC Commercial like to see it as simply a glass that is twice as large as it needs to be!

May our 2007 be mutually prosperous!

Regards,

Don Zech

CDC Commercial

Real Estate Services

August 1, 2007

RE: MONTHLY LETTER

Dear

According to the UN, livestock is more responsible for global warming than all the cars in the world combined. Methane gas from cows causes 20 times more global warming than carbon dioxide. “That’s why my next cow is going to be a hybrid.” – Jay Leno

You know it seems if it weren’t for the housing and construction sectors, the economy would be looking pretty damn good! Remember last month I said things weren’t as bad as they appeared? I noticed that JP Morgan Chase upped its second quarter forecast from 2.5% to 4% (how are they off by nearly double?) The bad news to this is that we are unlikely to see a rate cut from the Fed anytime soon. Although you read about tame inflation numbers, food and energy inflation world wide is at 7%!

On June 26^th the yield on 10 year treasuries registered at 5.1% up nearly 50 basis points since February. Time to say goodbye to the lowest commercial mortgage rates in 40 years! This is slowing sales volume a bit and will force cap rates higher through the rest of the year. Bottom line, more deals will fall apart because investors won’t be able to get the financing they once could. It’s not just interest rates; it is tighter underwriting guidelines and higher debt service coverage ratios (DSCR). From our end we are prequalifying harder and requiring letters of prequalification from the buyer’s lender. (We prefer to get everybody educated early in the deal and not waste time!)

There is no doubt the housing market is going through a correction. How this correction unfolds will influence the course of our economy in the coming quarters. The stages of a housing correction are as follows:

1. Residential investment declines.
2. Construction employment is reduced.
3. Consumer spending weakens.

The reality is that all housing corrections have lead to a recession except 1951 (Korean War) and 1967 (Vietnam War) according to Edward Leamer of UCLA. Will the War on Terror make us the third exception?

I have always said pay attention to the unemployment numbers. (If people are working they are spending.) The County’s unemployment rate in June was 4.6% which is up from 4.2% for last June. The bigger concern is that job growth has ground to a halt. Looks like we’re treading water at this point.

The question now is not whether the glass is half empty or half full; it’s about whether it’s filling up or emptying out! On that front, I was thrilled to see that venture capital funding is up 40% in San Diego. Understand this is the core of job creation. For every one of these “core” or “driver” jobs 7 other jobs are created (services, construction, retail, etc……).

Lastly, my inbox, reading and several recent conferences have been dominated by the Green Building buzz and lowering ones carbon footprint. I have to be honest with you, I have pretty much turned the page or changed the channel on the subject. I just figured it is a big media/Al Gore production. However, I think it is now safe to say it is here to stay. I think now it is being driven more by economics than idealism. This is about more than growing grass on your roof. Some of it is simple. Direct your rain gutters to your landscape not the storm drain system.

In July, BOMA (Building Owners and Managers Association) has challenged its members to improve its energy efficiency. These efforts not only have environmental benefits but financial ones as well. Remember 15 years ago handicap accessibility wasn’t on construction drawings now it is part of the building code.

I’d really recommend attending a conference / seminar or reading up on the subject. It is here to stay and we’ll be dealing with it for many years to come.

Thank God for our country, for the freedom we have. May you be touched by the sun and the beautiful environment in which we live and work.

Have a Sun Diego day!.

Regard,

Don Zech

CDC Commercial

July 1, 2007

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RE: Monthly Letter

Dear «GreetingLine»

In July of 1776 the number of people living in the colonies was 2.5 million. This 4^th of July we will have surpassed the 300 million mark – now that is demographic growth!

As we hit the mid point of 2007, we continue to see a healthy yet funky market and economy. The University of San Diego (USD) index of leading indicators for San Diego is predicting a weakened San Diego economy through the end of the year, lead by slower job growth, higher unemployment and a continued slump in housing sales. Dr. Gin is predicting 8-9000 jobs but other economists are predicting 14-15,000 new jobs. Now here is the deal we gained 11,000 jobs since last May but construction and real estate lost 6900 jobs. So two steps forward, one step back – but we are still moving forward! The economy may be slowing but we should miss a recession. In fact based on my business activity (which has been a safe indicator of future up ticks) we are in for a strong 2^nd half despite what the economists say! If we are slowing, the pressure on interest rates will ease as inflation pressures ease. I’m betting the other way but hoping the Fed doesn’t have to raise rates any more to prove its point The fed held firm in June and I think will continue to do so through the end of the year unless forced otherwise by the bond market (see notes below).

There still should be much concern about the trickle down effect of the subprime fall out. It is not that the subprime market problem can’t be fixed, it is the potential that it could be a crack in the dam of the whole collateralized debt obligations (CDO) market that is the issue. The problem is that the subprime debacle is causing hedge funds to re-price their debt at the same time as interest rate rises are causing a re-pricing and these funds are reevaluating their secured assets. Suddenly, the emperor may discover he has no clothes (or at least not as many as he had). This could lead to a spike in rates and much tougher underwriting guidelines.

Demand for the purchase of commercial real estate remains very strong. However, the gap between buyer and seller expectations has lead to a 20% decline in sales velocity. The return, however, to more normalized conditions is good for the health of the overall market.

The tenant market is continuing to be squeezed. Vacancy factors remain at all time lows mostly below 5%. Rents are rising because of this and driven by owners who bought at low cap rates and now must raise rents to increase yields. In the meantime, tenants unable to cope with higher energy costs, higher labor costs and higher rents are struggling with raising prices or calling it quits.

Deal junkie that I am, I am glad to report we are 25% ahead of last year’s volumes (# of transactions done) but about equal on income (Good that we still making as much as last year – bad that we are working 25% harder to do it!). It still troubles me that with that activity we still have many spaces that don’t or haven’t moved. This goes back to the healthy yet funky market I have described. Suffice it to say our whole team is working long and hard on a daily basis to lease and/or sell your property. I like to say we are working 24 hours a day – just not in a row! The economy looks bright but bumpy.

I hope you enjoy the story this month as much as your 4^th of July holiday. We live in the best nation in the world and America’s Finest City.

Have a Sun Diego Day!

Regards,

Don Zech

CDC Commercial

Real Estate Services

Charles Plumb was a U.S. Navy jet pilot in Vietnam. After 75 combat missions, his plane was destroyed by a surface-to-air missile. Plumb ejected and parachuted into enemy hands. He was captured and spent 6 years in a communist Vietnamese prison. He survived the ordeal and now lectures on lessons learned from that experience!

One day, when Plumb and his wife were sitting in a restaurant, a man at another table came up and said, “You’re Plumb! You flew jet fighters in Vietnam from the aircraft carrier Kitty Hawk. You were shot down!”

“How in the world did you know that?” asked Plumb.

“I packed your parachute,” the man replied. Plumb gasped in surprise and gratitude. The man pumped his hand and said, “I guess it worked!” Plumb assured him, “It sure did. If your chute hadn’t worked, I wouldn’t be here today.”

Plumb couldn’t sleep that night, thinking about that man. Plumb says, “I kept wondering what he had looked like in a Navy uniform: a white hat; a bib in the back; and bell-bottom trousers. I wonder how many times I might have seen him and not even said ‘Good morning, how are you?’ or anything because you see, I was a fighter pilot and he was just a sailor.” Plumb thought of the many hours the sailor spent at a

long wooden table in the bowels of the ship, carefully weaving the shrouds and folding the silks of each chute, holding in his hands each time the fate of someone he didn’t know.

Now, Plumb asks his audience, “Who is packing your parachute?” Everyone has someone who provides what they need to make it through the day. He also points out that he needed many kinds of parachutes when his plane was shot down over enemy territory – he needed his physical parachute, his mental parachute, his emotional parachute, and his spiritual parachute. He called on all these supports before reaching safety.

Sometimes in the daily challenges that life gives us, we miss what is really important. We may fail to say hello, please, or thank you, congratulate someone on something wonderful that has happened to them, give a compliment, or just do something nice for no reason. As you go through this week, this month, this year, recognize people who pack your parachutes.

As we enter the back half of the year, I am sending you this as my way of thanking you for your part in helping to pack our parachute.

Happy 4^th of July!

CDC Commercial

Don Nancy Rob Jana Lisa

June 1, 2007

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RE: Monthly Letter

Dear «GreetingLine»

“If you think nobody cares, try missing a couple of payments!”

The current meltdown in the sub prime market is a “prime” example of greed and mispricing of risk. I have been advising clients of late that we really didn’t / don’t have a real estate bubble. What we had was a “lending bubble”. If you could fog a mirror you could get a loan (maybe even two!). The reason we have not seen the ripple effect into the commercial market is because commercial underwriting did not dip into the bottom of the bucket like residential did. (The SBA market might have a few issues in a weakened economy.) Interestingly enough, commercial real estate lending showed a year over year decrease in delinquencies in California. 99.87% of commercial loans were current or less than one month behind.

Well, things are unfolding pretty much as predicted in the Gold Report (www.cdccommercial.com/GoldReport). The F.I.R.E. (Finance, Insurance and Real Estate) industry has shown the most strain. However, it appears to have stabilized and baring anything unforeseen, the worst is behind us. The stock market is showing gains (also predicted in the Gold Report). Keep in mind that although this is good for the economy it takes liquidity from the real estate market and will put pressure on CAP rates.

As I mentioned last month, we have seen an increase in tenant delinquencies (mostly in the F.I.R.E. industries referenced above. A number of you have asked how the eviction process works. Last month I posted a blog entry outlining the process (www.cdccommercial.com/myblog).

A recent court case (thanks to Kimball Tirey, St. John for the alert) should be noted by Landlords doing evictions.

A commercial landlord is not ordinarily under a duty to inspect its premises once the tenant has taken possession. However, a new Court ruling may change all that. In Stone v. Center Trust (2007) 146 CA4th 1435, the Court of Appeal for the Second Appellate District, expanded a commercial landlord’s duty to inspect its property for dangerous conditions after a judgment for possession was entered by the Court, but before the sheriff could effectuate the lock-out of the tenant.

The case involved a commercial shopping mall where a customer was injured on a slippery dance floor. The Court found that Civil Code section 1714, which places a duty on a landlord to use reasonable care to protect people who come onto the property, and applies to the time period between an unlawful detainer judgment, but before possession is returned to the landlord. The Court predicated its ruling on several grounds, including the fact that the landlord knew that defaulting tenants sometimes neglected their property; the fact that the property involved use by the public; and the fact that the Lease Agreement explicitly gave the landlord the right to inspect if the tenant was in default.

The Court’s ruling has expanded a commercial landlord’s liability in the arena of personal injury to its property. It further increases the need for a commercial landlord to be vigilant and consider an inspection of the property at least after an unlawful detainer judgment has been awarded but before the lock-out has taken place.

I am happy to report that the drop in deals that we experienced last month was completely reversed in May and we are back on the tear of the first three months of this year. I thought I would share an internal statistic because I have found it to be highly reflective of the current and future economy. The statistic is of inbound sign calls. Although we don’t rely on sign calls, (yes, we cold call, network, advertise, mail and email) over time they are a steady indicator of business activity.

Given our resurgence of activity, I’m writing to let you know that I have recently been diagnosed with a very serious illness and there’s no hope I will ever get over it. It may be hereditary as

well. The scientific world is frantically searching for a cure. This is an ailment many of us suffer from and may not as yet be able to discuss it with your loved ones and try to explain what really happened to you all those times you tried so hard to accomplish something and didn’t. Do you by chance, share this same affliction?

“Butfirst Syndrome”

It’s like when I decide to do the laundry – I start down the hall and noticed the newspaper on the table. Okay, I’m going to do the laundry – Butfirst I’m going to read the newspaper.

Then I notice the mail on the table. Okay, I’ll just put the newspaper in the recycle stack, Butfirst I’ll look through that pile of mail and see if there are any bills to be paid.

Now where’s the checkbook? Oops! There’s the empty glass from yesterday on the coffee table. I’m going to look for that checkbook, Butfirst I need to put the glass in the sink.

I head for the kitchen, look out the window, notice my poor flowers need a drink of water. I put the glass on the sink and darn it, there’s the remote for the TV on the kitchen counter.

What’s it doing here?

I’ll just put it away, Butfirst I need to water those plants.

Head for the door and Ack! Stepped on the cat. The cat needs to be fed. Okay, I’ll put that remote away and water the plants. Butfirst I need to feed the cat.

At the end of the day: The laundry isn’t done, the newspapers are still on the floor, the glass is still not in the sink, the bills are not paid, the checkbook is still missing, and the cat whizzed on the remote control.

AND,

When I try to figure out how come nothing got done all day, I’m baffled, because I KNOW I WAS BUSY ALL DAY!

I realize this condition is serious…and I should get help…Butfirst I think I’ll read all my e-mail!

Regards,

Don Zech

CDC Commercial

Real Estate Services

May 1, 2007

«AddressBlock»

RE: Monthly Letter

Dear «GreetingLine»

Making a deal come together is like landing a 747 on a blade of grass.

This past month was one of the most interesting I’ve witnessed in some time. As I have told you, last year was our best on record. Well the first quarter of this year beats all quarters ever. We did 25 deals in 3 months! But…maybe it is just a lull, but April activity started off gangbusters and we had perhaps one of the largest number of deal failures in some time (deals falling apart but all for various, different reasons) – unusual – and we hope is just an aberration. Additionally, we have witnessed a continued increase in tenant delinquencies, failures and/or subleasing. As I have said before, this is not all bad as long as vacancy stays low, i.e. as long as we’re able to re-lease the space at higher rent. So for now, we’re going to call it “April showers bringing May flowers”.

Speaking of flowers and green things you may be interested in my mid-month blog (www.cdccommercial/myblog.com). If you do nothing else you should watch the video about Dynamic Architecture (http://www.dynamicarchitecture.net ) and see the future of green buildings and moving skyscrapers.

Relocate-America.com announced its annual list of the top 100 places to live in the United States and San Diego was 21^st followed by Temecula at 22^nd. Now this leads to the subject of population. I have long said that location-location-location is common cocktail party advice about real estate but the real trick is to buy real estate where there are more people moving in than moving out (duh…supply & demand). Thus it is a great concern to me when I read headlines about San Diego’s population “leaving in droves”. I have read and looked at the numbers and here is some reality to consider.

1. Yes, people are moving out but the population continues to grow because of birth over death rates.

2. Yes, people are moving out but they are moving to Temecula and driving back to San Diego for their jobs (this phenomenon has been going on in L.A. for years – how do you

think Orange County got started? A 2002 survey showed 30,000 commuters came into San Diego from Temecula daily.

3. SANDAG estimates that 40,000 people travel across the Mexican border to jobs in San Diego daily.

4. Between July 2005 and July 2006, 42,000 more people moved out of San Diego than moved in. Although it sounds bad, it is tempered by 1-3 above.

5. Now here’s the kicker. Between 2000 and 2006 we created 106,000 jobs in S.D. but only built 78,000 houses (mostly condos or $1,000,000 + homes).

Ok I learned a new term this month. A house is no longer foreclosed upon it is “de-financed”!

Although we continue to remain bullish long term on real estate ownership, we are seeing some clients “taking their chips off the table”. In some cases it is age and in others the belief that a correction is coming or tax rates are as low as they are going to be.

In my efforts to create those May flowers I would like to offer you a $500 cash referral for any property you list with us or you refer to us to list for sale (Surely, you have friends or family or someone from one of those cocktail parties you can wow with your new found real estate knowledge!). You’ll receive the $500 cash at close of escrow.

Well we started and stayed on a “green” theme this month (whether it is flower’s buildings or cash). May the sun shine and hills (and your bank account) be filled with green!

Regards,

Don Zech

CDC Commercial

Real Estate Services

April 1, 2007

«AddressBlock»

RE: Monthly Letter

Dear «GreetingLine»

The ancient Greeks taught that all communications involved three ingredients: Ethos, or the character of the speaker; Pathos, or connecting with the emotions; and Logos, which is the factual content of the message. For any of you who read our Gold Report (www.cdccommercial.com ) you will of course know that we try to incorporate all three of these methods in our selling and way of doing business. Ultimately, we like to call it “Relationship”.

Speaking of the Gold Report, I was very excited that the San Diego Daily Transcript picked it up and wrote a whole story based around it (www.cdccommercial.com/RetailStrong )

I am also pleased to announce I have joined the “hip” crowd and now have my own BLOG (www.cdccommercial.com/myblog ). You can view it on the website and you can even add your own comments or opinions. If you want updates emailed to you when they come out, you can subscribe on the blog page beneath any of the posts (my goal is to update three times a month on a timely subject). Browse the posts and see what you think (It is a single subject mini of my monthly letter.).

As I continue to move CDC Commercial more and more digital, the world seems to accelerate right on up to me. Or as my mom would say, “The hurrier I go, the behinder I get”. I read recently that, “The economic food chain is fast becoming wired”. A couple of tools I’d suggest if you haven’t already – try two monitors (I heard Bill Gates uses 3) – wow, talk about more real estate to work with! Second, download Google Desktop and try out some Google Gadgets. The desktop allows you to search all your hard drive and email just like a Google internet search (plus you don’t have to buy Vista to do the same thing!). Lastly, buy PaperPort by Nuance. It allows you to PDF, sort, organize, scan and fax all of your documents.

Ok, back to real estate. Did you know California law requires all new and replacement water heaters to be braced and anchored? When you sell you have to certify compliance so you might want to just take care of it now.

So the days of buy, paint and sell may be past us. I believe we have returned to a “normal” market. This is a time when true professionals thrive and take market share from those who were just order takers.

Why is this becoming a buying opportunity?

1. Bubble trouble has diminished.

2. Bidding wars are over.

3. Real estate is an investment you live with. It is an investment that builds equity while you benefit from tax breaks.

4. The Fed is taking a breather. Rates will remain stable while the Fed micro manages regulation (such as sub prime lending).

5. Lenders want business – we are awash in capital and liquidity. Never been a better time to borrow.

6. Rehab and re-rent – with replacement cost high, renovation makes sense. Low vacancy allows room for much higher rents.

7. A little more product coming on the market. Some highly leveraged owners starting to feel pressure.

8. Get in the game. If you don’t join, you can’t play. It’s a long term investment. The longer you’re in, the better you’ll do.

As always we look forward to a long and mutually prosperous relationship. We hope you enjoy the April 1^st moral to the attached story.

Regards,

Don Zech

CDC Commercial

Real Estate Services

The Donkey Story

One day a farmer’s donkey fell down into a well. The animal cried piteously for hours as the farmer tried to figure out what to do. Finally he decided the animal was old, and the well needed to be covered up anyway; it just wasn’t worth it to retrieve the donkey. He invited all his neighbors to come over and help him. They each grabbed a shovel and began to shovel dirt into the well.

At first, the donkey realized what was happening and cried horribly. Then, to everyone’s amazement, he quieted down. A few shovel loads later, the farmer looked down the well, and was astonished at what he saw.

As every shovel of dirt hit his back, the donkey did something amazing. He would shake it off and take a step up. As the farmer’s neighbors continued to shovel dirt on top of the animal, he would shake it off and take a step up. Pretty soon, everyone was amazed, as the donkey stepped up over the edge of the well and trotted off.

The Moral:

Life is going to shovel dirt on you; all kinds of dirt. The trick to getting out of the well is to shake it off and take a step up. Each of our troubles is a stepping stone. We can get out of the deepest wells just by not stopping, never giving up! Shake it off and take a step up!

Remember the five simple rules to be happy:

1. Free your heart from hatred.

2. Free your mind from worries.

3. Live simply

4. Give more.

5. Expect less.

O.K., that’s enough of that B.S. … The donkey later came back, caught the farmer out in the field and kicked the #@*# out of him. Then he went over to each of his neighbors farms and kicked the #@*# out of them too for helping.

The REAL Moral:

March 1, 2007

«AddressBlock»

RE: Monthly Letter

Dear «GreetingLine»

“Before Google, who answered all the questions?

Well, I don’t know the answer to that question. But I do know that it has been a fast short month and I have lots of short pieces of news for you, so I am just going to throw them out as bullets and hope it all comes together.

• The Urban Land Institute (ULI) reported in The Wall Street Journal and at the University of San Diego Trends Conference that; “Commercial real estate is beginning a return to its normal as an income-producing investment rather than the wildly appreciating asset class it has been this decade.” Investors are going to have to turn to operating performance to raise returns – what a concept!.

• Rent bumps on expiring leases in 2007 (ie. market rate options) will continue to raise income and values. Most leases signed 3 to 5 years ago were done during the tech bubble burst so at much lower rates than today.

• Taxable retail sales in San Diego rose an estimated 5.0 percent in 2006 and are expected to rise 4.3 percent in 2007.

• The service industry accounts for 80% of the nation’s economic activity. January marked the 46^th consecutive month of business activity increase for this sector.

• The Bush Budget proposal includes a 40% increase to SBA loans, as well as a reduction to their fees. More capital, less cost is going to equal more owner user opportunities.

• Commercial construction costs have skyrocketed and they won’t stop in 2007. Expectations are for 6% to 8% increases despite a slowdown in residential construction (If it weren’t for the housing slowdown, they would rise 10%!).

• A penny almost costs a nickel to make. Talk is that the penny may be short for this world. Don’t tell me we don’t have inflation!

• Speaking of construction costs and metals prices, you may want to look at the exposed metal on your buildings (particularly backflow preventers and electric panels). There is an epidemic of stealing going on for the value of the scrap metal. Think about locks or cages to protect them.

• Speaking of security, remote surveillance is becoming common place. Imagine having a remote camera to look at your property via the internet. (Maybe you’ll want a remote camera to watch your commercial real estate broker work!)

• Interesting how numbers get thrown around. One forecast event said San Diego will grow by 1 million residents in 30 years (33,000+ per year). At another industry event, data was cited that only 900 people moved to San Diego over the last two years and 28,500 people moved out. Just goes to show figures don’t lie, but liars sure can figure!

For those of you who are inclined, I have posted the sales comparables for the year 2006 (office industrial and retail sold in 2006) on the website (www.cdccommercial.com). I hope you find them useful and enlightening.

The National Association of Realtors (NAR) has launched a campaign aimed at promoting this as the best time to buy a house (Got Real Estate…?). Whether you believe this is the right time to buy or not is your own call. Our opinion is that although rapid price gains may be past, real estate is still a good commodity to own in inflationary times and because there is still a lot of room for rent to grown in most properties. Additionally, over time there are some “comfort factors” that come with owning real estate (besides not worrying about 400 point down days!):

1. Tax Benefits

2. Cash Flow

3. Risk management and control

4. Leverage and appreciation

5. Mortgage payoff

These factors aren’t so affected by the cycles and a big reason that people who own real estate over long periods are happy people!

Regards,

Don Zech

CDC Commercial

Real Estate Services