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Monthly Letter

November 2007

October 29th, 2007 6:17 PM

October 30, 2007

RE: Monthly Letter

Dear Don;

I hope and pray that this letter finds you and your family safe and your property unharmed. We have all been witness to some of the worst ravages that mother nature can dole out and some of the best acts that human nature can offer. I am glad to report that although the fire got within 400 yards of my house, we sustained no damage. Nancy and Rob were also left unscathed. I wish I could say the same for some of our friends, neighbors and clients. What amazed me was the relative order and organization that government and media took. I loved how well the technology of reverse 911 worked (even though I didn't get a call). My heart warmed by the emails, calls and offers for shelter that we received from people and relatives that we only exchange Christmas cards with. I have to tell you it was surreal to drive through my neighborhood (yes I was one of those idiots with a hose in my hand that did not evacuate) and see smoldering fires, Nationa l Guardsmen carrying M-16's, see fire trucks parked in friends driveways and gardeners blowing debris from abandoned houses as the mailman delivered mail!

In a strange turn of events, our devastating fire may come to the rescue of the F.I.R.E. industry (Finance, Insurance and Real Estate). Over the last quarter our regions unemployment rose to 4.8% eclipsing the nations 4.6% rate. This is really bad news and I was going to issue a warning this month that we may have reached a tipping point. HOWEVER, in the aftermath of the fire, the construction industry in San Diego will be getting the boost needed to get it stabilized until the housing market comes back in a year or two. Fire victims will be replenishing households, helping retailers. The great news is that the money for all of this is coming from outside of the area (insurance companies and government).

Insurance premiums are likely to rise in the years to come. Material costs (cement, asphalt, copper, dry wall) are going to rise. World demand is keeping raw materials high and locally public projects (education, healthcare and transportation) are keeping demand high. We have already seen building materials jump 50% - 200% over the last couple of years. Prior to the fires, the projections were for 6% - 8% increases in coming years. Now in the post-fire environment, expect material costs to jump dramatically. Over the next few years this is going to keep new commercial construction restrained and continue to fuel the increase in value and rents in existing projects.

In short, as markets cool and inflation continues we will continue in the state of "stagflation" through all of the next year. Part of this is orchestrated by Mr. Bernanke and by the International Monetary Fund (IMF). They want the U.S. to cool and stop spending and have China depend less on selling and have its population start buying. Just as it will be the rest of the U.S. that will pull San Diego out of its morose, it may have to be the rest of the world that pulls the U.S. out of the mud this time. Finally, given that next year is an election year, don't expect any leadership from Washington. Everybody will be posturing and positioning and the rest of us will have to lay our bets as to what the impacts of the elections will have on our assets and wallets. All in all count on a sluggish 2008 (Lots of rhetoric not much action).

Basically under most any scenario I can paint (inflation, stagflation, falling dollar), real estate continues to hold the prize as the best cash flowing, inflation protected, hard asset with tax advantages and the benefits of leverage.

This is actually a solid time to be a buyer. CAP rates have risen ½% to 1% in response to rate increases. With less buyers, intelligent buyers have the time to select amongst properties, accomplish due diligence, avoid bidding wars and actually negotiate on price, terms and repairs.

Obviously the week of the fires the phones were dead. We are in hope that the weeks leading up to Thanksgiving pick back up before the traditional slow down that occurs between Thanksgiving and the end of the year. I can tell you that up to the fire things seemed slower, but incoming call volume and deals completed (solid signs of activity) are ahead of last year (both monthly and year to date). Nationally, more commercial deals closed year to date than in 2006!

As some of you know, I am on the board of directors for Interfaith Services, which is an organization backed by over 400 churches in North County that help the homeless in our community. The recent fire has obviously left many without shelter, jobless and with many needs. Interfaith is already on the ground and has been for over 20 years. The organization has less than 12% overheard cost (an amazing number for any business or charity). To learn more about their Fire Relief efforts and services provided and their needs, please visit their website www.interfaithservices.org (click on the Fire Relief 2007 tab). As part of CDC Commercial's efforts to help, we will match any checks you send us (make payable to Interfaith Services) by 12% so that you know 100% of your contribution goes to someone in need.

Below where I often include a story, I have attached a photo of a friend's house just down the road from me - in this case a picture is worth 1000 words.

Regards,

Don

Don Zech

CDC Commercial

Real Estate Services

Posted by Don Zech on October 29th, 2007 6:17 PMPost a Comment (0)

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October 2007

October 1st, 2007 11:08 AM

October 1, 2007

RE: MONTHLY LETTER

Dear Clients;

As I sit writing this letter I am enjoying the cooling weather of fall, the kids back to school and football on TV. I also had to laugh at yet another, “mother of all storms” that was set to hit our region but turned into a cloudy day and light rain. Again a reminder to be careful what we forecast and what we believe!

The class of 2011 entered college this fall and if you want to feel old, understand that they might say…

1. What Berlin Wall?

2. HumVee’s without artillery have always been available to the public.

3. They never “rolled down” a car window.

4. They may confuse the Keating Five with a rock group.

5. They have grown up with bottled water.

6. They never saw Peter Rose play baseball.

7. Rap music has always been mainstream.

8. Being “lame” has to do with being dumb or inarticulate, not disabled.

9. They never saw Johnny Carson on TV.

10. The World Wide Web has been an online tool since they were born.

*Thanks to the Beloit College Mindset List

The housing bust remains the dominant factor dragging down the U.S. economy today. So much so we aren’t paying enough attention to $80 a barrel oil and record gold prices! Commercial real estate is not immune to this dynamic. Retail sales are resisting a historic tendency to follow drops in home prices and sales. So much though depends on this next quarter. Retail sales have teetered but not tanked like the housing market. This is largely because we still have low unemployment. (If you’re not worried about losing your job – you keep spending.) In fact the largest detriment to growth in 2008 and beyond is the dearth of available labor. So, if in these shakier times we’re keeping close to full employment, what happens in recovery and good times? (Can you say inflation?)

Don’t expect oil prices to come down anytime soon. You read about world wide demand (U.S., China, India) which is only on the increase but even the Middle East is growing in demand for its own oil. Finally Iran and Venezuela desperately need high oil prices so they can afford to subsidize gasoline (Iranians pay only 40 cents per gallon!) and cheap food and health care, all of which keep their inept leadership in power.

The Fed cutting rates by a ½ point on September 18^th is a good thing for the economy and a great thing for real estate investors for the short term. I believe we are in a great buying window. Lenders are having a tough time pricing risk (spreads on loans) and less buyers are in the market which is creating some pricing softness and for a qualified buyer an opportunity to get low historical loan rates to buy more attractive cap rate properties.

The Feds job is to keep lenders lending and borrowers borrowing. Once they achieve that objective (through lower rates) they will be back fighting inflation (through higher rates) which is their primary battle and as I pointed out earlier inflation is still very real.

The press reports that investors are holding back on closing deals because they believe prices will fall. If enough people believe that, it becomes a self-fulfilling prophecy (see the Hot Dog story below). We don’t see it as anything more than a buying opportunity. Keep in mind that prices will always rise to meet replacement cost and with replacement cost high (neither materials or labor appear to be dropping) values will keep rising.

Tenant activity remains spotty and skittish. We continue to see fall out from mortgage and real estate companies vacating space. We see new tenant activity but they are having a tough time with commitment because they can’t see the future clearly. Because some of you have, are or will face a tenant in bankruptcy, I have posted an article on our website which I think you will find most educational and hopefully help you to protect yourself in this situation; www.cdccommercial.com/TenantBankruptcy.

Popular Science and ISCS both reported this month that “replicators” (yes, like Star Trek) have arrived. It may not be long and you will be “printing” your own clothing at home! What impact will that have on retail tenants?

In the meantime, in my efforts to stimulate the retail market and join the e-commerce market, I have launched an Amazon Store with my favorite reading book list, www.cdccommercial.com/Don’sReadingList. It is very eclectic and I have posted my reviews. In the future I’ll let you know when I post a must read. Who knows maybe I’ll be the next Oprah book list!

I think you will find this month’s story to be very appropriate for our times (I know I sent it a year or two ago but it is especially appropriate now!). Feel free to pass it on. Tell your friends they can subscribe on the website or drop me an email.

Regards,

Don Zech
CDC Commercial
Real Estate Services

A man lived by the side of the road…

And sold hot dogs.

He was hard of hearing, so he had no radio.

He had trouble with his eyes, so he had no newspaper,

but he sold good hot dogs.

He put up a sign on the highway, telling how good they were.

He stood by the side of the road and cried, “Buy a hot dog, mister!”

And people bought.

He increased his meat and bun order, and bought a bigger

stove to take care of his trade.

He got his son home from college to help him. But then

something happened.

His son said, “Father, haven’t you been listening to the radio?

There’s a big depression on. The international situation

is terrible, and the domestic situation is even worse.”

Whereupon his father thought, “Well, my son has gone to college.

He listens to the radio and reads the newspaper,

so he ought to know.”

So, the father cut down on his bun orders, took down his

advertising signs, and no longer bothered to stand on the

highway to sell hot dogs.

His hot dog sales fell almost overnight!

“You were right son,” the father said to the boy.

“We are in the middle of a great depression.”

Posted by Don Zech on October 1st, 2007 11:08 AMPost a Comment (0)

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