From the Inside, Looking Out

bust_unknown.gifI was invited by the moderators of this blog to join in the discussions as a participant-at-large. My name is Fred Adler. I am NOT a Realtor, real estate investor or builder (except for some commercial real estate stocks in my portfolio), or anyone that directly makes any money on the buying and selling of real estate. I am just another average person who deals with real estate issues for my personal home and for my business. Oh, I forgot. I am also the owner of a small biotech company in San Diego with 18 employess. And finally, no, I am not “rich” enough to move downtown for an ocean view.

I would like to start into this blog trying to stimulate some discussion on the San Diego real estate markets from the perspective of a business person that has to engage the realities of them as a “user” and not from the perspective of a “provider”. While it has been delightful to sit and watch the “net worth” line on my Quicken go up the last few years due to appreciation of my San Diego home, one needs to step back and consider the “downsides” and the “realities” of the situation. I will start with one perspective which is as a small business owner.

As an employer in San Diego of modestly paid “biological production workers”, I will tell you that the skyrocketing home prices are a definite deterrent to company growth. My production employees cannot afford to buy homes here even on two incomes. The most recent San Diego Employers Association Salary Survey indicates a weighted average wage for manufacturing non-exempt (supervised) employees of $26,189 per year. So my first conclusion : San Diego will NEVER be a large manufacturing site for biotech since it is just too expensive to live here for the workers. They want homes just like you and me.

We also research and develop diagnostic test kits (you know “science stuff'”) that we get approved through the FDA, the European Union and individual countries like China. My employees are again paid above the weighted averages but the weighted average for a laboratory technician is $43,295 in the 2006 survey. Again, it is pretty difficult to buy anything in San Diego on that salary. Think twice before you encourage your kids to get a “biology” bachelor degree. It doesn’t pay that much.

You might at this point say why don’t you just pay them more? Well, that is pretty darn impossible also. Governments around the world dictate our prices in their reimbursement schedules. We don’t get to charge what we would like to in order to pay our employees more. We can only charge what governments allow us to charge. Diagnostics consume about 4-5% of total medical costs. It is a relatively small business in medicine. We pay above the local averages and it just is not enough for homes for our employees. Think about what it costs you for your mortgage and back into the numbers. The averages for less educated and less trained people are even lower. I have those averages also. What do these people do? They rent.

The next deterrent to business growth is the obvious. If the prices of property go up, so do operating costs for things like rent and property taxes. Our “property costs” for the business go up 4 to 5% each year. When the markets in San Diego were depressed last time (remember 1989 to 1994?), our company could file for lower property taxes through our landlord. We had more cash. Cash is king. Cash flow is everything. A line on Quicken is just feel good stuff. As the Fed Chair says, “a wealth effect”…………. not cash.

I plan to scratch at another “irritation” next time…… Is it really more net worth if the replacement costs rise at the same rate as your house and you have to live somewhere? House value only enters cash flow if your living expenses decrease (move to Iowa or North Carolina) or if you check in at the Soylent Green factory.

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