S.E.C. Real Estate Observer

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“If you don’t know where you are going, you are certain to end up someplace else.”
– Phil Corso, a famous S.E.C. President

“If you don’t reinvent yourself every 3-4 years, someone else will.”
– anonymous business school professor

The S.E.C. is not a political group. Obviously, our members have political views and some of our members are very involved in local, state and national politics. However, our organization is not political. The S.E.C. has neither political agendas nor views. That being said, in order to advise our clients and partners while protecting our own economic well being, we must watch what is changing in the marketplace. This certainly includes Washington, DC; our state and local political subdivisions; and all the way down to our townships and cities. Today in the flat world, we must also be aware of what is happening in other countries like India, China, and Indonesia – all around the world.

We must take notice of where the politicians are taking us – where we are going. Meanwhile, we must note what changes we need to make to our own business models – adjustments. Please ponder these questions. Remember, these are not political. I am not asking what you WANT to happen – just what you think is GOING to happen.

THE ELECTIONS

• Do you think the Democrats will lose one or both bodies of Congress in November 2008?
• Do you think that the Democrats will take the White House in the next election?
• Does this represent huge change? Is this uncertainty?

CAPITAL GAINS TAXES

• Do you remember 70% capital gains taxes? So, preferential treatment for capital gains can be much higher than 15%. (That was a trick question to see if you will admit your age.)
• Do you think capital gains treatment will be lower than the 15% we have today? Could the capital gains tax rate go up in the next 18 – 24 months? How about 20%, 28%, 35% or higher?
• Could preferential treatment for capital gains go away completely?

CAP RATES

• What are CAP rates in your local market? NNN Retail like Walgreen’s? Multi-tenant industrial? Class A multi-family?
• What determines your local CAP rates?
  • Demand for deals – the amount of money chasing deals
  • Perceived risk – tenant, local, geo-political, etc.
  • Alternate investments, especially 10 Year Treasury rates
  • Other factors
• Are CAP rates increasing in your local market?
• Are CAP rates increasing in the national market?
• Has there been an unnatural decoupling of CAP rates, short Treasury and long rates over the last few quarters? I think so. We have been borrowing long for less for several quarters.

CONSUMER CONFIDENCE

One of my favorite indicators is the Consumer Confidence Indicator prepared by the Conference Board. Take a look at the last report.

(Taken from the Conference Board website)

What does this mean to us? I believe that the standard assumption is that 70% of our economy is consumer driven.
But even with all the scandals, melt-downs, 9-11, etc, our economy remains resilient.

EMPLOYMENT LEVELS

• Over the last 10 years we have gone from approximately 127 million employed to over 145 million.
• The number of unemployed in the same time period has ranged from just under 6 million to 9 million and is back to about 7 million presently.
• The resultant unemployment rate has been from just under 4% up to 6.25% and stands at about 4.5% now.
• Compare our numbers to European countries at 10% – 20% and higher.
• If you are the one without a job, you don’t care. BUT IF THESE PEOPLE ARE NOT REINVENTING THEMSELVES, THEY WILL REMAIN UNEMPLOYED OR UNDER-EMPLOYED.

HOUSING INDUSTRY

Home prices are falling across the nation. What does it mean to the average person when he or she perceives that the largest asset they own, their home, is worth less?

THE SUBPRIME MESS

I have a Stonaker-ism: Anytime we start seeing too many acronyms, we are in trouble. Remember the FDIC, FSLIC, RTC, etc. Now we have all these acronyms relating to Wall Street and the sub-prime lenders. What is the current situation? Frankly, we have had too many dollars chasing too few assets. I think the entire sub-prime mess was caused by investors with too many dollars chasing yield.

And it is international too. The current situation with China and the middle east and their huge trade surpluses is reminiscent of the Japanese in the 1980s when they came over to the US and bought up a huge amount of our Class A office product.

Wall Street is doing what it does best. It is filling the void. My wife shops to fill corners and Wall Street will always fill any hole in the market. Many of the recent investors have been wiped out.

WHAT HAPPENS IF CHINA AND THE MIDDLE EAST STOPS FILLING OUR VOID?

Is the market placing an additional premium on risk? Spreads went up as much as 100 basis points in late September and early October and then settled down again, but at a somewhat higher rate.

Deals are falling apart completely as large institutional investors pull out of major transactions.

So, what is happening in your marketplace and what do you do?

How does each of us advise our clients and investors when the market is making major swings almost on a daily basis?

How are you going to protect your own capital?

Where are we going and how are you changing your model to meet the changing market?

THIS IS EXACTLY WHAT THE SOCIETY OF COUNSELORS IS ABOUT. THIS IS WHERE WE SHINE.

THE MARKET MOVED AWAY FROM SOME OF OUR BEST ATTRIBUTES OVER THE LAST FEW YEARS. IS THIS CASH MARKET COMING TO A CLOSE?

IT IS TIME FOR EACH OF US TO REINVENT OURSELVES AND GET BACK TO WORK!

SOCIETY OF EXCHANGE COUNSELORS

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DO YOU KNOW WHERE YOU ARE GOING? IF NOT, YOU ARE CERTAIN TO END UP SOMEPLACE ELSE!