Gillespie: It depends on which sector in commercial real estate you’re sitting in right now because 2009 was kind of a year where everybody was gritting their teeth and holding on and trying not to lose properties. Commercial brokers were dying because transactions were so slow because people wanted higher prices to sell and the buyers weren’t willing to pay it. Companies were having a tough time and they didn’t want to lease and expand, but this year, as we’re getting into it right now, economically it’s going to be a very tough year from the perspective of owners holding on to properties, it’s going to be difficult. They’re going to have tenants that are going out of business; I don’t think they’re going to be pleased with what’s going to happen with their property values throughout the year. On the other side of the coin, we’re going to see more investment opportunities loosen up, for investors. Banks are finally going to recognize as they’re starting to right now, we can’t hold on to these properties and not foreclose like we have been; they’re going to have to start foreclosing at sometime throughout the year. From the broker’s perspective, there’s going to be a bit more of an opening up in the sale transactions as lenders are foreclosing and have to get properties off the books.

Mosca: Why do you think that energy is a main concern for us right now in the real estate industry?

Gillespie: It’s massive because the availability of cheap and abundant energy is such a huge component of the quality of everyone’s lives and the profitability of businesses, and financial institutions, and how companies are doing with respect to their profits in the stock market. The rise up in the price of energy and the beginning of a lack of the abundant supply of it is what’s underlying this whole economic collapse because when less energy is available, and prices are higher, households have more difficulty making their payments. My electric bills are going way up; I just got notice that there’s a special meeting here that they’re going to start jacking up the water rates right now because it’s more expensive for them to get us water. I know there’s going to be a massive outpouring of people going to this meeting, because they’re going to go from a straight, flat level to a multi-tiered level with higher and higher prices on them, basically. Let’s face it: everybody needs water here. It’s such an underlying huge fundamental that since the Industrial Revolution, we’ve always had cheap and abundant energy and we’ve never had to think about it. As we’ve talked about before, we can get into more detail if you want to on this, everything around alternative energy that you hear basically is not the panacea that a lot of people are selling to us because most of the time, these alternative energies require more energy put into them than you actually get out in the form of burnable energy. I’ve mentioned before, hydrogen, for example takes the energy of about 6 gallons of gasoline to create one gallon of burnable hydrogen as a motor fuel, and the same thing happens with all these others, like ethanol, and other fuels across the board. So we’ve got a big problem in that if energy prices are high, profitability is more difficult, people are going to lose jobs, businesses are going to close, and the average homeowner and person living in their house or apartment is going to have more difficulty making ends meet.

Mosca: You said that multiunit apartment buildings, closer to the central business district, are your best investment bet. Let’s look at the flipside. What is the property type that you think is going to be hurting the most, and if an investor is listening to us right now that owns that property type, what do you suggest is the next move?

Gillespie: There’s two parts to that answer: there’s property type and there’s location. The property type that is going to get hammered the hardest in the beginning is retail. Consumers are having a more difficult time spending like they used to, and consumer spending is 70% of our gross domestic product. So where do consumers spend? Retail, basically, primarily, whether it’s in stores, on the Internet, whatever, so anything around retail I think is going to have a difficult time. As an example of this, I just read an article that in Sacramento, California, one out of every six retail stores is dark with no businesses. They’ve got 9,500 vacant stores right now, and this just shows exactly what we’re talking about. Now the second part of that answer, in terms of investors owning what type of property, is location because the areas that I feel are going to get hammered the worst because of this energy problem are areas that are suburbs that require people to drive great distances for the majority of their jobs to the big city, and suburbs where you’re talking about anywhere from lower income to middle income, because the tougher things get, and the higher the price of energy gets, the more these people are going to get squeezed and the less they’re going to be able to afford things close to where they live because of their income bracket. Again, they’re going to want to try and find a way to live closer to the city because the commute will be just too expensive for them. Hotel/motel is a really interesting situation because airline travel was down 18% in 2009, so there’s a direct correlation between airline travel and hotel/motel, and I think hotel/motel is going to get hammered also. That’s a very different type of asset class to own because generally speaking, when you go to a lender for a loan for a hotel/motel, they look upon it as a business loan rather than a real estate loan because if you’re not a good business operator and the place goes out of business, you can only sell it as a business; you can’t sell it as a place for individual families to move into.

Mosca: Are there other property types or emerging investment opportunities?

Gillespie: With respect to owners making moves, we touched upon the importance of location in the central business districts doing better, so in terms of doing exchanges from properties in the outlying suburbs to more of the ones in the central business district because people are going to gravitate there. They are going to have to because of the cost of energy. With respect to multiunit, people can close their business, companies can lay people off, but as long as people are living, they need a place to live. So you may see situations where Cousin Bob moves into an apartment with somebody to help everybody with the rent, so they’re still going to have to live in a unit of an apartment building. Let me mention something else, okay. In the industrial sector for people who own industrial buildings that are not rail served, I strongly recommend that you take a look at exchanging into a building – could even be in the same area if it’s a well located area – that is rail served because with the price of energy rising, it’s becoming more economical to ship by rail where as before, a lot of companies were moving away from rail because the price of energy was so cheap. Warren Buffet, who’s somebody we all know that’s sharper than almost anybody we can imagine when it comes to investing, Warren Buffet not too long ago bought Burlington Northern Santa Fe Railroad for $34 billion. I personally believe he bought it because he sees this trend emerging, that there’s going to be more of a demand for shipping by rail and less shipping by truck because as energy prices rise, shipping by rail will become even more economical relative to shipping by truck.

Mosca: Jim, there was talk of a railroad being put up to connect Southern and Northern California. Is that still something that’s happening? And if that were the case, and you were to be able to find out where those stops were going to be along the way, would that make for a good land opportunity?

Gillespie: Most likely. I know investors who I’ve talked to over the years who’ve done things like that. Back when the freeways being built out here in California in the ’50’s, they found out where the off ramps were going to be put and they bought things up, so most likely it would probably be a good thing; however, my understanding of that train that’s going to be put up is it’s going to be primarily for passengers, as opposed to freight. So with respect to the stops, I don’t know what that’s going to mean in terms of business at the local stops or anything that’s around there versus just passengers going in transit to different locations and things like that.

Mosca: In terms of other emerging investment opportunities, what does your crystal ball say right now?

Gillespie: I’ve got a great short story to tell about a recent transaction. Lenders are realizing what’s coming and the Day of Reckoning is coming even though they’ve been forestalling, foreclosing, and letting people still pay them on their notes that are upside down even though they’re past the due dates, and they’re extending them, they’re realizing they’re going to have to deal with this at some point. They’re going, “This is going to be one major headache.” Lenders are beginning to sell their notes and their portfolio of notes. Let me give you a perfect example: a broker that I know out in Los Angeles was just involved in a transaction where a lender had a portfolio of $200 million in non-performing notes. The broker brought in an investor and bought the entire portfolio for $1.4 million, immediately flipped it over to another buyer for $2.8 million, along with the original investor providing all the servicing to chase the borrowers on the $200 million in notes through the original investor’s own loan servicing company, so this was a relief of a tremendous headache from the lender saying, “We’re going to have to chase all these people and foreclose eventually. Wait a second; you’ll take this headache right off of our shoulders right now? Let’s talk. Let’s get this headache away. We’ll save tens of bottles of aspirin in the process, and everybody wins.” So this is an opportunity that I see just emerging right now for investors.

Mosca: I would think on the flipside of that Jim, for your commercial real estate clients, brokers and agents that you deal with on a regular basis, this is an excellent opportunity to expand your business, isn’t it?

Gillespie: Absolutely. Years ago I was telling brokers, “Look. It’s time for you to start to talk to the people who are the head of REOs and foreclosures. They got nothing going on right now.” This is years ago, but start to build relationships with them because I know there’s going to be this floodgate coming when the economy is about to turn. Now the brokers are saying, “Oh, they won’t take our calls,” “Nobody will return our phone calls,” but because the brokers are calling all wanting to list REO properties. Now if you call with a different scenario, it’s wait a second. I’ve got this investor that would be interested in buying a portfolio of your loans even if they’re non-performing. Do you have any interest in unloading any of these and getting these off your books? Now all of a sudden, you’ve got a different angle, and it’s wait a second. You can take me out of this massive problem with your investor? Maybe I should speak with you now. People with money on the sidelines right now are going, “Wow, this is looking like a good time to buy”, but they just need that one trigger point to say “we’re all in now and we’re buying.”

Mosca: If I said, “Jim, I’m putting you in charge. You are the President right now and I’m putting you in charge of commercial real estate. What are the steps that you would implement to help move commercial real estate forward?

Gillespie: First of all, the whole underlying problem that has to be solved as we have talked about is the energy problem. Without solving that, we are going to have little peaks and valleys but more difficulty over the long run. So, we need to solve that energy problem. Financing needs to open up to basically bring us to liquidity to have more transactions flowing. We’ve been hammered here with prospective transactions happening because prices have been going down, tenants have been having a difficult time with some of them going out of business, and then when you add to that the fact that there has been no financing, now when you combine lower prices that owners have to take and buyers demanding further lower prices because they can’t get the leverage with financing anymore, it’s no surprise that we’ve been at this massive stalemate with transactions. We need to have that open up and ideally, once investors start coming in and showing that they are buying, that’s a major signal to the rest of everybody else that we should be getting back in too. I think once that starts to happen, then you are going to see more transactions going down.

Mosca: Will that help pump money into the marketplace?

Gillespie: Let’s put it this way, it will at least start transactions. Then it’s a question of how quickly or if at all the lenders come back to the dance with traditional financing but at the same time, without the available financing, the people who are sitting in massive cash positions that can buy for all cash are in the catbird’s seat because other people can’t compete with all cash. Those all cash buyers are going to command some great investment prices.

Mosca: Do you think that the government is going to get more involved?

Gillespie: The government is throwing so much money into the residential real estate sector. They’ve still got the guaranteed loans with Fannie Mae and Freddie Mac. They’ve got the incentives for people to buy first homes, incentives to buy second homes. The residential agents are having it much easier because of all of these incentives and the available financing and on the commercial side of the business, what the heck do you have as an incentive with financing having dried up? It seems that the government’s number one priority around this is protecting the lenders and insuring their losses and outside of that, all bets are off. Anything that the government does, I don’t know if their first priority is going to be to take care of the average real estate investor on the street or more likely I think protect the lenders and Wall Street first and if there is any trickle down that happens as a result of that maybe that’s the way it’s going to happen to us. The key is having people in Washington who care about what’s best for the people and what’s best for this country above and beyond the special interest groups that are continually lobbying them all the time.

Mosca: What is your golden nugget?

Gillespie: My golden nugget would basically be my version of something I heard a top stock market analyst say about 20 years ago when somebody asked him what advice do you have for the average investor and his response was, “stop being an average investor.” Make sure you are getting the information you need to from around the world to be able to spot the emerging trends instead of just getting the normal media information that’s all being fed to us. You need to be above and beyond the average investor and get your information and study it and make decisions that will make you money because of it

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