Perspective on Real Estate


January 12, 2005

January 19, 2005

The powerful of San Diego

In preparing my traditional series of New Year speeches about the economy, politics and real estate, I've reviewed all the columnists and speeches thus far.

I'll share my own opinions now: The residential scene is powerful, not just good. If it crashed it would defy logic and the law of economics, for supply is well under demand. Whether inflation continues in both rents and prices of new and used homes, it needs a resting point so that it won't become almost totally unaffordable. It began its adjustment from the stratosphere about three months ago. Remember, I said it was powerful, and underbuilt, and that should continue, but with less inflation.

Apartments are even more powerful for they have attractive cash flow even though the cap rates approach the ridiculous. However, it is the willing buyer who will determine "ridiculous" and that hasn't happened yet, nor is it inevitable unless the stock market becomes a lasting temptation instead of a temperamental spoiled brat.

The office market will become more tempting as there is all kind of money to invest in new and used buildings; office vacancies are falling due to more demand in this region, as well as funds to make new ones happen. The economy is also strong -- not on fire -- but well and strong. New job creation is better than most other regions, though certainly not as powerful as it normally has been. The price of housing hurts. In other ways, housing demand cannot be measured only by unaffordability. Why?

Consumers love to live in what most others feel is unaffordable neighborhoods. They buy prestigious products, overpaying for watches, jewelry, fashions, cars and entertainment. They will sacrifice to live in a home that is in the "right" location and do not consider it overpriced. This is the mark of the discretionary buyer; home ownership is the proof of the pudding. Not everyone will ever afford to own a home here, but prestige-searching people, who love the climate and the beauty, why wouldn't they?

In spite of the huge cutback in November's consumer spending (largest on record), they will continue to buy, especially as manufacturers keep discounting and lenders keep their mortgage interest rates down.

In other words, I see no meltdown but a continuation of the patterns of last year, with some 25,000 new jobs created. December's net new jobs were enough to allow 2004 be the best in job growth since 1999.

Let's face it, buyers pay a "cover charge" to live in this region and if they have to stretch to do it, they will continue to do so. Mortgage rates should remain in the affordable range, based upon yield on 10-year Treasury bonds.

Mixed-use will dominate the retail sector now that lenders finally are comfortable with this important sector.

"Experiential" retail, with high landscape budgets, environmental sensitivity, varied food and restaurants, movie/entertainment, with themes of localized traditional main streets, dominated by grocery/drugstore tenants, will be hot instead of the mall/department store-anchored large size congregation of stores.

Warehousing will continue to attract money with logistics becoming so important as the global economy gathers steam. Big-box discount stores, while controversial, require very large warehousing and distribution facilities.

Hospitality will be healthy, with more construction and redevelopment of existing properties, depending upon no terrorist attacks that would surely discourage travel. As businesses become healthier, business travel will fill the hotels.

I have noticed that people continue to plan out their travel and are only discouraged when some very serious event occurs, a la 9/11. This new year will be the test as to whether any Homeland Security can prevent or discourage such events; it cannot. Even with tidal waves staring on all media, vacation and secondary housing will increase as the boomer population ages, along with affluence. The danger signals of a complex Iraq War, the falling dollar, inflation and deficits remain a longer-term threat, able to raise interest rates and tighten borrowing.

Goodkin has been a business ethicist and housing analyst since 1956. He may be reached at


January 12, 2005

January 19, 2005