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.
Faucher’s economic outlook included several reasons for hope:
- Fourth-quarter 2009 gross domestic product growth of 6 percent—2 percent directly attributable to the federal stimulus package;
- A positive employment report for March and the likelihood of continuously improving job growth, with education, medical, and professional business service providers offering the most promising prospects for employment; and
- The likelihood that the Federal Reserve will act aggressively to keep interest rates low.
One drawback, he said, is the certainty of significantly more home foreclosures; 7 percent of all primary residential mortgages are in foreclosure or are delinquent. Faucher provided a timeline to track the progress from recovery to recession: home sales bottoming out in early 2009, the banking system stabilizing in mid-2009, and the economy on a sustainable growth pattern by the fourth quarter of this year.
Both Zell and Linneman took a cautious view of the recovery, noting that while the economy in general may be rebounding, a real estate rally could be impeded by uncertainty over federal intervention affecting the financial community and other business sectors. Such unknowns are hampering private investment, Zell said.
The event featured a new format for programming, which included instant member polling in many of the sessions and highly interactive, all-day roundtables for those not serving on ULI councils. The new approach engaged members in a wide range of forward-looking presentations, including trends in housing, demographics, green technology, and employment drivers.
Among the takeaways from the summit were the following:
- In the years ahead, changes in demographics and consumer behavior will drive new real estate development patterns that reflect a trend toward more urban suburbs. Most of the growth in U.S. urban regions—more than 100 million will be added to the population by 2050—will occur not in downtown cores, but in the suburbs. The winners: close-in suburbs with an urban feel—featuring town centers as a focal point, with ample recreational, shopping, and entertainment opportunities—and located near employment centers. The losers: big houses on big lots in isolated suburbs on the edge. The reason: two major demographic groups—baby boomers and generation Y—place high value on time and convenience, and neither wants long commutes or long trips for errands.
- Job growth has begun, but it will be uneven across industries and cities over the coming years. Sectors that are leading the recovery include energy, which benefits Dallas, Denver, Houston, Pittsburgh, and Silicon Valley; education and medical facilities, which benefit many places, but notably Boston, Dallas, Pittsburgh, Raleigh/Durham, and Washington, D.C.; biotechnology and technology, which benefit Austin, Boston, Phoenix, San Diego, and the San Francisco Bay Area; and the federal government, which benefits Baltimore, Denver, Kansas City, San Antonio, and Washington, D.C.
- Net effective rents have stabilized in major markets after significant declines over the past two years. While it is a tenant’s market, the window of opportunity for tenants is thinning. Markets that are leading the recovery include Denver, Raleigh/Durham, San Francisco, Texas, and Washington, D.C.
- Though there are not a lot of sellers in today’s market because values are uncertain and—in most views—at the bottom of the market, opportunities for buying do exist. They include purchasing through the Federal Deposit Insurance Corporation structured sales program, working directly with financial institutions, exploring new public/private mortgage vehicles now available, purchasing institutional-grade real estate, and focusing on niche opportunities.
- The future of real estate holds opportunities for large and small real estate firms, leaving medium-sized players vulnerable to being shut out of growth opportunities. Larger players, especially real estate investment trusts (REITs), are getting stronger and more specialized, and have deep pockets to tackle international opportunities and hire specialists for fast-changing areas such as regulatory compliance. Consolidations will cause the big firms to keep getting bigger. Small firms can grab local opportunities, leveraging their relationships to get smaller deals that the top firms cannot tackle profitably.
- Among the business strategy tips: Plan for development where the population is growing and focus on the community features attractive to diverse segments of the population. Look for areas with job growth, identifying the companies and the employment profile of those who work there. Develop a product clearly targeted at this market. If planning to trade up product in a master-planned community, ensure that the area has very limited supply or that the product is superior and can command a higher share of a smaller market. Consumer willingness to pay for green features is slim—mainly limited to those with both high educational attainment and high income. However, wider opportunities exist to use green features as selling points, such as communities with access to open space, or features that produce demonstrated savings in energy costs.
The final day’s wrap-up event, moderated and organized by Arthur Segal, Poorvu Family Professor of Management Practice at Harvard University Business School, featured closing thoughts from Alan M. Leventhal, chairman and CEO of Beacon Capital Partners LLC; Nicolas P. Retsinas, director, Harvard University’s Joint Center for Housing Studies; David Moss, John G. McLean Professor of Business Administration, Harvard University Business School; and ULI Chairman Jeremy Newsum, executive trustee of the Grosvenor Trusts. Among the topics covered were the following:
- Industry leadership. What is most important to remember going forward, Newsum said, is the need to be original—to avoid copying strategies of others as a path to success. “Copying what others were doing is what got us into this recession to start with,” he noted. One takeaway—that CEOs need to seek advice from a wide, diverse group of employees and from people outside their own firms—is a practice that top executives should always follow, regardless of the economic booms and busts, he said.
- Financial reform. The United States needs to be the world frontrunner in reforming the financial industry; if it leads, other countries will follow, said Moss. His best-case scenario for reform is “to achieve broad stability within the institutions without killing innovation.” This can be achieved, he said, through legislation that aggressively regulates the largest institutions—those that pose systemic threats—yet uses a lighter touch on smaller institutions that pose less risk to the system. If a financial reform bill is enacted by Congress, the credit markets in general will stabilize, Moss predicted; if a bill does not pass, “the market will be much more volatile,” resulting in another boom/bust pattern of credit availability.
- Housing finance. Despite a “staggering” amount of intervention by the federal government, recovery in the nation’s housing market remains fragile and could easily falter with any upheaval in the current federal housing finance system, said Retsinas. As a result, the Obama administration is taking a prudent, cautious approach to restructuring home mortgage suppliers Fannie Mae and Freddie Mac—government-sponsored enterprises now controlled by the government—and is not likely to pursue reform measures this year. While the federal government’s role in housing credit delivery will diminish as part of housing finance reform, the government “cannot be a spectator in housing; the industry is too important for that,” Retsinas said.
- Homeownership. With home foreclosures continuing to rise, some industry analysts believe that many consumers—particularly those just entering the housing market— have become disillusioned with the notion of homeownership as the American Dream and will shun buying, resulting in a decline in the nation’s homeownership rate to as low as 62 percent; it exceeded 67 percent at the peak of the boom. Retsinas, however, believes differently. “We will see a return to higher downpayments and stiffer credit requirements, but people will still buy and own homes,” he said. “Homeownership is not a four-letter word. There will be more renters, but owning is still an important priority in this country.” The nation’s homeownership rate will stabilize at about 66 percent, he predicted.
- Economic recovery. Trust the numbers, not sentiment, in gauging the recovery, said Leventhal. “The numbers are telling us that jobs are growing, not just in health care, education, and technology, but in the financial sector and others. . . . These numbers are encouraging,” he said. Although the next two years are likely to remain shaky in terms of economic growth gaining strong momentum, he noted that there is “not as much [growth] to regain to get back to the same position as 2007” as is widely assumed. “I am encouraged; the indicators are more positive than any I have seen in the past 18 months.”
While the signs are encouraging, Newsum cautioned against being overly optimistic, saying it is best to temper optimism with reality. “If you are in real estate and you are investing for the long term, there is no reason to expect that real estate is going to perform differently than the overall economy; rather, you should expect it to do just that,” he said. As for advice to industry newcomers recovering from their first recession, “You will not spot the next one coming, and there will be another,” Newsum said. “It’s best to record what you learned during this one to help you prepare for the next one.” Added Leventhal, “If you buy high-quality real estate and you have staying power, you will weather the storm.”