Home prices in IE fall from the previous year, will commercial space follow?

From Inman News,

DataQuick reported that sales fell from 23,005 in November 2006 to 13,173 in November 2007 for the six-county Southern California region, while the median price dropped from $485,000 to $435,000.Riverside and San Bernardino counties suffered the steepest price drops among Southern California counties. The median price in Riverside County fell 16.5 percent from November 2006 to November 2007, while the median price tumbled 13.2 percent in San Bernardino. San Bernardino led Southern California counties with a 48.1 percent year-over-year sales drop in November, followed by Los Angeles County with a 46 percent drop. The other four counties in the Southern California region also experienced year-over-year price drops.

While the sub prime mess has yet to be resolved, the effects on the commercial real estate market has started to rear its ugly head.

On the short term supply side of the equation is an increase in lending standards, the so called credit-crunch that you no doubt have been hearing much about lately. Lenders face a crisis of confidence as they try to balance sub-prime "write-downs" with their existing cash flow. Since these risky assets are difficult to price, lenders are scrambling for liquidity to meet their obligations. This is the closest thing I have seen to a traditional "bank run" and a lot of respectable large banks stand to lose a lot of money. This is an eerily similar scenario akin to the S&L crisis in the 1980's although I suspect the resolution of this crisis will be different; there will be no FDIC bailout of these large banks. I do suspect that government(s) will step in to ultimately resolve the issue, but how and when is still a mystery.

Unfortunately, what this means is that funds that normally would have been allocated to real estate investments will be put into other places, since anything associated with "real estate" now inspires panic and also because commercial real estate is a very illiquid asset. Even REITS (whose primary benefit is to make commercial real estate investing much more liquid) have seen a large downturn this year; the FTSE NAREIT Index is down -8% in November and returns are a dismal -20% so far for 2007.

The long term demand side of the equation is a recession. This downturn hits homeowners in the wallet, and a decrease in consumer spending lessens the demand for imports (industrial especially) and consumer goods in general (retail especially) and could ultimately lead to job losses (all property types).

But not to worry, the FED has been cutting interest rates to stall a recession and the US government is looking at ways to step in to freeze interest rates on mortgages using voluntary measures. The department of wishful thinking has been very busy locking the gates after the horses have run off and as the curtains close on 2007, we should all move to the concession stand for that pound of cure promised to us. 2008 looks to be a very interesting year and a good opportunity to purchase long term assets, the short term shake out looks like it has some steam in it yet.

Survival Guide to the Age of Information, Part I

Hello again,

I wanted to take some time and discuss how I see changes occuring in the business world in general and the commercial real estate field in particular. In talking with some of our older sales staff members it was immediately apparent that over the last 5 - 6 years this business has been turned on its head. Many realized that the tools of the trade were shifting right under their noses and that their clients were expecting more and more value-added measures to justify the commissions that we charge.

Providing the information is no longer sufficient; clients can now have access to much of the same information commercial brokers have at low cost or even free. With the upcoming recession, clients want greater assurance that the risks they have been taking are justified and clients are seeking the old-hand of an expert to interpret all the information coming at them from all angles.

For this reason, I felt a rough guide was necessary that spells out the changes I have witnessed and

Axiom 1: Data is now readily available where it was once scarce

The technology for acquiring information, the personal computer and the Internet, has opened up a world of possibilities for market researchers like myself and others whose profession depends on the currency of this new age; information.

Keeping track of the available data sources (and all the new data sources that aggregate information from the old sources) is one of my major job functions. Colliers subscribes to 17 different commercial and government sources and I personally have access to 134 different publications including newspapers national (and international) and local, trade papers and journals as well as a multitude of real estate and economics blogs.

Axiom 2: The technology for using data is anemic; there are few procedures for turning data into knowledge.

Sorting through my mountain of data, daily, is akin to drinking from a fire-house. It takes a skilled researcher to differentiate the vital information from the noise; 95% of all that is written is absolute drivel, the remaining 5% is actually useful and will pay dividends forever.

Axiom 3: Translating knowledge into sound decision making is the only thing worth paying for.

How information is used is more important than who has it. Data collection, processing, storing and retrieving facts is easy. Most of the time it can be bought from data vendors and it can also be obtained from those that maintain their own internal data sources.

Value comes from 1) interpreting and controlling the information flow 2) knowing which facts are necessary and useful and then 3) forming action plans around this data, overcoming "paralysis by analysis".


It is no longer enough to be an information provider, a gatekeeper, those days are over. There is too much competition for that. Being a value-added information aggregator and interpreter, an information-broker, these are the skills that will be in high demand.

Colliers In The Press: Founder Bill McHarg

Bill McHarg helped found Colliers in Australia in 1968. Since then, Colliers has grown from a modest company of real estate professionals into the third largest commercial real estate brokerage company in the world.

I work at Colliers, but I first learned about Bill McHarg from an NPR article I heard yesterday, the article is available here.

The point of the article isn't to highlight Bill's prowess in the commercial real estate field but rather to demonstrate the fervor in which Bill attacked Prime Minister John Howard on the basis of Mr. Howards failings in the green movement.

You can see Bill's commercial here.

For his efforts, Bill has lost his job at Colliers International, the company where I work.

For what its worth, I feel that it is really the company's loss and being fired will prove to be a huge positive for Bill. Being fired means that you are at odds with the company and the job isn't right for you.

Hopefully, one day the attitudes of this company will shift as the environmental movement gains traction and passes the tipping point into the mainstream. At that time all this confrontation will look silly and the marketing department will manage to spin Bill's fervor into a positive and all will be forgiven. Provided Bill hasn't started a rival commercial real estate company, a green commercial real estate company.

In my limited work experience here on this planet, it seems that nothing is more dangerous than people on a mission. Such people have ambition, which is more harmful than talent.

Talent can be squandered, or replicated, or out-sourced, but ambition carries with you and it is hard to break. Everyone wants to be good and good is easily attainable for those who can follow directions and be mediocre. But few are willing to make the sacrifices necessary to be great, it takes great ambition and a reckless spirit to try new ideas, your ideas, and to run with these ideas as if the devil himself is chasing you.

For most, making nice in order to be liked is more important than being great and great people are notoriously hard to work with. For one thing, great people are single-minded, reluctant to compromise and are driven by inner forces greater than what average people could ever comprehend.

This pursuit to do something well comes at great cost, but the benefits of working with and learning from someone great will outweigh these. You do not want to work for Mr. Average Nice Guy, not if you want to be great, not at any cost.

Since learning about the fate of Bill McHarg, I am proud to be working at the company that he founded, since this company was founded by great men.

At some point in the future, one where I am standing at my moral crossroads, I hope I will be able to follow my conscience.

Google Earth: San Gabriel Valley Population Projections

You can find a Google Earth mashup I created here. (The picture on the left is a screen shot). The height and color represents the population of each submarket and the different layers correspond to census data from 1990, 2000, as well as current population estimates (2006) as well as 5 year projections (2011 & 2016).

This information would normally be contained in a table or a chart but I feel that actually moving around and being immersed in the information has merit. If your presentation is digital vs. printed, interactive vs. single perspective, responsive vs. static and acts as a stepping stone rather than an end in itself, then you have stepped into the realm of "new media" (Which is the point of this blog).

All new products begin with false hopes (I.E. Segway) as well as a lot of unrealized potential. I think Google Earth will fall into the later category. It has not hit its stride yet, most people acknowledge its existence but don't know what it is for or how to bring it into their everyday lives. It is a visual curio and it seems that Google has created it just for the sake of creating it.

Until it hits the mainstream where everybody has Google Earth installed on their computer, and .kml files are as common as .doc or .xls, it will reside for the exclusive use of information hobbyists and technology geeks. It will happen though, I don't think this product will go the way of the Betamax.

Define: Real Estate Market Analysis

Hello again,

When explaining my profession to those outside of the commercial real estate industry, the most common responses tend to elicit the inevitable "mmm...hmmm" or "How interesting,...". Eyes dance nervously this way and that, scanning the horizon for familiar faces, searching for any excuse to jump ship gracefully.

It is either that the average person is disinterested in commercial real estate markets or it could be that the average person lacks the vocabulary necessary for basic communication in the commercial real estate field.

It is this second downfall that I wish to address in this post, but first let me direct you to those who have already accomplished this task, the good people at the CCIM Institute. A powerful demonstration of real estate terminology can be found here.

Below are a few definitions that I hope will help you break the ice at social events.

1. Vacancy Rate: Vacancy Rate = Vacant Space / Total Space

It is important to understand that a vacancy rate is not a bad thing. Commercial vacancy rates are analogous to the civilian unemployment rate, in that a "natural" vacancy rate is assumed to exist in all healthy markets and movement to the extremes of either above or below this rate are disastrous. An exceptionally low vacancy rate is harmful in that it raises the costs associated with finding new space for growing businesses and these high transaction costs can impose friction causing growing pains for firms in the area, as well as acting as a barrier for firms that wish to move into the market. A high vacancy rate is undesirable as well, since it means that available resources are underutilized.

The vacancy rate is of interest in that under normal circumstances it moves in the opposite direction as market rents. When the vacancy rate is above the natural rate, rates tend to fall and when the vacancy rate is below the natural rate, rents will tend to increase.

2. Market Rent: Quoted in dollars per foot leased per month. It is also common to quote rents in dollars per foot leased per year, a practice that is popular in markets outside of California.

There is a significant difference between asking rents and effective rents.

Asking rents are easier to obtain; it is the price quoted by brokers before a building is leased. They are the sticker (asking) price of the property as it is advertised.

Effective rents are harder to obtain; it is the price actually paid once concessions such as free rent and tenant improvements are figured into the equation. The effective rents are of much more interest since it involves private information and can vary dramatically from tenant to tenant.

In my experience, these are the two numbers that most people are interested in; How much space costs and how much space is available.

For those that are interested in these all too important numbers, I direct you to the most recent editions of the Colliers Market reports. Published by yours truly on a quarterly basis, this is a good start to understanding the basics of the Inland Empire.

Distribution Center Webcast

Hello, for more information about the web cast I mentioned yesterday, you should be able to access the entire web cast here. Again I wish to thank my friends and esteemed colleges at Logistics Management. I hope one day I can return the favor.

Warehouse Vs. Distribution Center

There was a lively PowerPoint slide show today by the good people at Logistics Management, based on research conducted by Reed Business Information and Gross & Associates. It can be found here, and I hope they don't mind all the free publicity I am pushing their way.

In a nutshell, they note the difference between a traditional warehouse (where stuff is stored until it is needed) with the more modern sounding distribution center (where stuff is brought together, repackaged and then sent back out into the world).

The differences between these two types of buildings are stark and almost discomforting. The traditional warehouse represents the old and familiar low ceiling metal building in the bad part of town next to the railroad tracks where strange and bizarre items sit and collect dust. The distribution center is a little more sinister in that it represents the way the world will be, an entire secret network of information and products floating in both directions, stocking shelves and ordering products as if by a giant invisible hand.

The old saw goes that the warehouse is transportation at zero miles per hour and indeed it used to be that warehouses were a necessary evil used as a buffer against those capricious whims of human nature: demand. Since the information chain between consumer and producer is a long and tangled one and since the supply chain between producer and consumer isn't perfectly responsive and isn't perfectly reliable, producers needed a way to store their product locally to weather out these storms of unknowns.

Warehouses were born as a way for firms to jump the hurdle of what economists like myself like to call "market inefficiencies", which is just reality getting in the way of our convenient theories. Two very significant hurdles basically created the need for a warehouse in the supply chain; imperfect/ incomplete information as well as transportation costs.

If demand for a firm's product were known in advance and products could be created as needed and delivered to the point of consumption instantaneously, then there would be no need for a warehouse and the world would ultimately be a better place. Unfortunately we live in the real world and not in the future.

As Just-In-Time practices (warehouse management software, RFID tags, demand forecasting) proliferate and the rest of the world wakes up to the Wal-Mart reality of a nimble global supply chain that can react and adapt to changing demand, then the world will be ready for the modern distribution center.

The distribution center is a behemoth to be feared, of a size and scale that is beyond a rational sense of proportion; from a couple of hundred of thousand square feet to well over a couple of million, and with a height of 20 to 40 feet these buildings serve as the only physical markings of a vast and mysterious supply chain that reaches into the lives of every consumer on the planet.

The days of the warehouse are not over, but their role in modern society has been greatly downgraded, much like the horse at the dawn of the automobile.

Sample Audio-Blog

This is my first Audio-Blog post created using Gabcast. I am still in the market for free audio software to post audio-blogs so this may or may not be a permanent feature. I am not sure how many bells and whistles to add, as there seems to be a fine line between absolutely necessary and completely distracting.

Sample Movie: Building Tour

This is a sample tour of a building in Ontario. I didn't create the SketchUp file (SketchUp is a program where you can build anything and import it directly into Google Earth). This building is the Ontario office of HMC Architects.

In order to import SketchUp files into Google Earth, files have to be downloaded into Google's 3-D warehouse, which stores SketchUp projects others have created which can be seen in Google Earth.

Sample Movie of Inland Empire

This movie was created in Google Earth (trial version for now) and shows the submarkets that have industrial and office properties that I track. The submarkets are based on city, and this shows the cities in Riverside County (shown in shades of blue) as well as those cities in San Bernardino County (shown in shades of red).

The audio was added later using Microsoft Windows Movie Maker.

Thomas Galvin - Author Profile

Hello, my name is Thomas Galvin. I have a master of arts degree in economics from the University of Nevada, Las Vegas and my thesis can be viewed here. I don't want to spoil the ending, but it includes an experiment where subjects play Rock-Paper-Scissors (which seems to be a popular sport among "famous" economists).

I also have a bachelor of science degree in psychology from California Polytechnic State University, San Luis Obispo. My thesis also involved Rock-Paper-Scissors.

I am a student of human behavior, especially in areas involving risk and uncertainty (and Rock-Paper-Scissors).

For the last three years I have been working in the commercial real estate field and recently I have been involved with industrial warehouses in the Inland Empire.

This is my blog which details the economic factors which relate to industrial and office development in the Inland Empire as well as the nation at large.