An Evening with = Alfred Gobar

An=20 Evening with Alfred Gobar
Real Estate Economist Addresses the = $65,000=20 Question =

April 4,=20 2006

In=20 This Issue=20

The Key Variable in = Real=20 Estate=20

Governmental = Decisions=20

Macroeconomic = Outlook=20

Evaluating Retail

A Bubble?=20 =

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The $65,000 question. A bubble? Irrational=20 exuberance? Where is the economy taking us, = especially=20 with regard to real estate. I recently attended = a talk=20 by Alfred Gobar, the renowned real estate = economist and=20 founder of AGA (Alfred Gobar Associates), a real = estate=20 market research firm that investigates market=20 feasibility for a wide range of land use = development=20 ventures.=20

The Key Variable in Real Estate=20

Employment =

The key variable in assessing the = strength or=20 weakness of the real estate market, = according to=20 Dr. Gobar, is employment. Moreover, the = factor=20 which correlates best with the housing = market is=20 employment (not population). In the early = 1990s,=20 prices plummeted when Southern California = lost=20 hundreds of thousands of aerospace jobs. = However,=20 those jobs have already been lost and the = region=20 is not as vulnerable to an industry = downturn as it=20 was at that time. While he sees the = housing market=20 softening, he does not see a dramatic = downturn in=20 prices like we experienced fifteen years = ago.

Governmental Decisions =

Beating the Law = of Supply and=20 Demand?

Dr. Gobar also discussed the effects of = government decisions on housing prices. = For=20 example, he noted that local zoning = policies=20 created an inversion in land value. In = order to=20 try to collect more in taxes, = municipalities have=20 over-zoned for commercial uses but not = enough for=20 residential. The zoning allocations create = an=20 artificial market. Now, zoning decisions, = such as=20 smaller lots and higher density, are = changing that=20 market. With regard to governmental = subsidies for=20 =E2=80=9Caffordable housing,=E2=80=9D he = noted that the influx of=20 government money skews the market and = drives up=20 prices. Although they think they can, the=20 politicians cannot beat the laws of supply = and=20 demand. These subsidies do not achieve = what they=20 set out to do.

Macroeconomic Outlook =

Rising Interest = Rates=20

In a macroeconomic sense, Dr. Gobar = noted two=20 negative trends: the negative balance of = trade and=20 the declining value of the dollar. = However, both=20 the federal debt and the federal deficit = did not=20 concern him as much. The debt has, in the = past,=20 been higher as a percentage of Gross = Domestic=20 Product. The deficit is not high in = comparison to=20 other countries nor as high as it has been = historically. He does foresee interest = rates=20 continuing to rise.

Evaluating Retail =

Supermarket = Struggles=20

Dr. Gobar addressed some of the rules = he uses=20 in evaluating retail properties. For = example, his=20 rule of thumb when looking at strip = centers is=20 that anything over 30,000 square feet of = floor=20 space is too big for the center=E2=80=99s = trade area and=20 he would not own it. For neighborhood = shopping=20 centers, he avoids drug store anchored = centers=20 since they do not generate the repetitive = traffic=20 that a supermarket does. However, he also = believes=20 that a lot of supermarkets will close in = the face=20 of competition from Wal-Mart and larger = power=20 centers.

A Bubble?

Low Cap Rates: = The New High=20 P/Es?

Overall, Dr. Gobar feels we are in a = =E2=80=9Cbubble=E2=80=9D=20 based on the low capitalization rates for = property=20 right now. In the housing market, he noted = that=20 speculators are putting up deposits for = properties=20 and watching the prices while the property = is=20 constructed. Although developers try to = stem=20 speculation by requiring written = agreements by=20 purchasers that they intend to live in the = property, these agreements are not = stopping the=20 speculators. He believes that prices may = dip as=20 speculators get out of the market. = However, he=20 notes that he does not see the same = decline in=20 commercial properties because most = mortgages are=20 at fixed rates and buyers are more likely = to hold=20 these properties than sell them at the = same or=20 lower price.

Laine T. Wagenseller is the founder of = Wagenseller Law=20 Firm, a full service business and real estate law firm = in=20 downtown Los Angeles. The firm represents real estate=20 developers, businesses, property owners, and = investors. For=20 more information visit www.wagensellerlaw.com or = contact Mr.=20 Wagenseller at (213) 996-8338.

Sincerely,

Laine=20 Wagenseller=20
Wagenseller Law Firm

Email: ltw@wagensellerlaw.com =

Web: http://www.wagensellerlaw.com/=20