The Harvard Graduate School of Design won the 2010 MIT Boston Open, a real estate competition hosted by the Massachusetts Institute of Technology’s Center for Real Estate Alumni Association and held this year at the Prudential Center during the ULI Real Estate Summit at the Spring Council Forum in the city. The competition, a case-based competition open to all U.S. real estate graduate programs, sought redevelopment schemes for a historic and challenging site in Boston. Finalists were invited to the city to compete and pitch their highest and best-use argument to a live audience and judging panel.
Taking second place in the competition was the New York University Schack Institute of Real Estate, and the University of California at Berkeley Haas School of Business placed third. The teams were judged by industry practitioners Phil Bakalchuk of Water Street Investments, Jeff Cushman of Cushman & Wakefield, Kathleen MacNeil of Millennium Partners, and Eric Nelson of the Bulfinch Companies.
An allegory for the financial industry’s present condition might be that of a red-tailed hawk soaring above the Manhattan skyline, flying at full speed toward the sheer wall of a glass-enclosed skyscraper—and relying on the transparency of the glass for protection from undue risk. The crisis occurs, and the bird falls fluttering to the ground with a broken wing.
Is this the bird’s fault? Is it a law of nature? Should the glass have etching or cross ribs to alert the bird to the danger? Can the bird recover? Can it recover by itself, without outside help? Will it ever soar again? Will it ever fly again with uninhibited grace? What resources should be applied to its recovery? Is it too rare a bird to fail?
Sheridan “Schecky” Schechner is a managing director and U.S. head of real estate investment banking at Barclays Capital, based in New York. Schechner is a trustee of the Urban Land Institute and a member of the Real Estate Roundtable.
Two weeks after the last U.S. presidential election, Obama’s chief of staff, Rahm Emanuel, told a group of business executives, “You never want a serious crisis to go to waste.” He later clarified this comment with the following: “It’s an opportunity to do things you could not do before.” Thus far, in a perusal of the real estate industry after the current economic crisis, it appears that we are letting a good crisis go to waste. So far, except for the enormous downsizing that has taken place, it seems all too much like “business as usual.”
A developer friend of mine asks, “Where do you go if you have no money and no credit?” He responds with the surprising answer that a lot of folks—the fund guys—have lots of money if you have deals in Boston, California, or Washington, D.C. He initially thought this would be like 1991, but the big difference is this: there are no good deals. “There are no bargains out there, at least in those areas favored by the funds,” says Ted Raymond, president of Raymond Property Company in Boston. But there is plenty of money for experienced developers, even those with lots of scars—as long as one can deliver a 20 percent internal rate of return (IRR).
The retail real estate market currently suffers from an oversupply of space—the result of overbuilding before the financial crisis struck in 2008—plus a dearth of retailers now willing and able to fill space. Consumer spending is down for the foreseeable future as the buying public remains wary of returning to the days of large credit-card debt. While welllocated retail destinations may continue to thrive and maintain national retailers, plenty of others are going to keep losing tenants. In this environment, town centers and mixed-use centers may have an edge over their mall counterparts.
The primary conversation in the commercial real estate market today revolves around the substantial amount of equity capital chasing high-quality core investments as prospective buyers exhibit a high level of interest in the stability of income and an overall lower risk level. For reasons that have yet to be fully explored, there is comparatively little discussion of value-add and opportunistic space.
Value-add and opportunistic investments traditionally have been considered higher-risk strategies that use significant degrees of leverage to maximize the total return of an investment. Value-add opportunities generally involve Class B or C assets in high-quality locations that can be significantly improved operationally or rehabilitated to increase cash flow. Leverage approaching 65 percent can be used both to enhance returns and to finance part of the renovation capital.
The prevailing mood at ULI’s recent Real Estate Summit at the Spring Council Forum in Boston ranged from cautiously optimistic to outright optimistic. The overriding message was that despite some persistently weak spots, the economy in general and the real estate industry in particular have weathered the worst of the recession and are poised for a gradual recovery.
The event, open for the first time to all ULI members, drew more than 3,100 people and featured keynote presentations by Gus Faucher, economist with Moody’s Economy.com; Sam Zell, chairman of Equity Group Investments; and Peter Linneman, professor of real estate, finance, and public policy at the University of Pennsylvania.
Institutional investors will not be abandoning real estate as an asset class in 2010. Instead, they will be retrenching, rethinking, and carefully dipping their toes back into the water.
Participation in the 63-20 bonding process offers ample incentives for developers.
Yields are stabilizing in certain european office markets, but investor caution continues, particularly in eastern europe.