The real estate industry must accept its “proper share of the blame” in the series of missteps leading to the global economic recession and the housing and commercial property decline, according to Urban Land Institute (ULI) Chairman Jeremy Newsum.
“There were many keys to this bomb and we held one,” said Newsum, executive trustee of U.K.-based Grosvenor Estate. The role of real estate in the downturn, and the repositioning necessary for companies to survive the remainder of the fallout and be poised for growth were discussed by Newsum at a media briefing at ULI’s 2010 Fall Meeting in Washington.
“The fact is, we (real estate industry professionals) lost control of the agenda. Real estate is about buildings and the people who occupy them, collectively forming an urban community,” he said. “Real estate is not primarily about money, and we should not have allowed real estate to become just another playground for financial engineers.”
According to Newsum, the “new normal” for the industry is one that is focused on the operators – the creators and owners of real estate who view their businesses as a long-term investment. The “old abnormal” was real estate being the “puppet of finance,” he said, with real estate viewed more as an investment opportunity than a building for occupation.
During the boom leading to the bust, it became increasingly common for large financial institutions to hold direct portfolios of real estate – a mistake, Newsum said, because those managing the portfolios are, by the nature of their business, more apt to give far greater priority to “collecting the rent checks” than analyzing real estate fundamentals or ensuring the well-being of building users. “All those involved in restructuring portfolios – holders of equity and debt, plus the managers – must use the real estate business model as the right long-term structure for the industry.”
Newsum pointed to closed-ended real estate funds (generally unlisted private real estate funds with a fixed fund size and a limited term, typically 5-10 years) as being “inherently unstable,” in that they “blithely ignore” the long-term nature of the underlying assets. For the industry to restabilize, such opportunity funds should “always be a sideshow, rather than the main event,” and not become the industry norm for how and when properties are bought and sold, he said. “The era when funds predominated is over. I want to see many more new property companies,” Newsum said.
He pointed to the Hong Kong real estate industry – which is now dominated by companies focused on the long term – as an example of what the industry should strive for in the United States and Europe.
A company-specific example: Almacantar in London, an investment and development firm formed by two executives from the Almacantar fund. “They have spotted the future,” Newsum said. Another example: New York City-based Vornado Realty Trust, a company Newsum said “saw the light and came over to the operating side,” and which now owns and manages more than 100 million square feet of commercial real estate in the United States. “Vornado is not a ‘vehicle.’ It’s a business with a mission,” Newsum said. (For related articles, see, “Vornado’s Fascitelli Sees Capital Markets Coming Back,””Real Estate Markets Will Recover, But More Pain to Come in Short Term, Says Vornado’s Fascitelli,” and “Leading in Uncertain Times.”)
To attract the best and brightest to the real estate industry, Newsum suggested that seasoned professionals must put more effort into “selling the slow buck” and emphasizing the value of long-term thinking to the next generation of younger practitioners, whose penchant for instant gratification will not serve them well in real estate.
The Grosvenor Estate includes Grosvenor, an international property group of privately owned property development, investment and fund management businesses. From 1989 through June 2008, Newsum served as group chief executive of Grosvenor, which, with property assets under management of $20 billion, has interests in Central London, other areas of the UK, continental Europe, Southeast Asia, Australia and North America. The entire organization was founded more than 330 years ago, a model of longevity that has guided Newsum’s approach to real estate throughout his career.
“No matter how badly you want to do something, and you think you have only one chance to do it, that is rarely true. So, being patient and having the ability to stay focused on the long term are very important,” he said. “Understanding timing and time scales is absolutely critical (to being successful) in land use. The business of community building is a business that spans decades. Each of us is adding something to what is ultimately a continuous process.”
One of the most important real estate lessons from the recession, Newsum said, is the near-certain formula for failure caused by over-extension. “In the future, real estate business leaders and shareholders must take more responsibility for the way their businesses are financed. The bust will come again, and just as before, those fixated by the short term will have too much leverage and will fail.”
Newsum’s message reinforced the theme of the “era of less” in the 2011 Emerging Trends in Real Estate: The Americas report, released at ULI’s 2010 Fall Meeting by ULI and PricewaterhouseCoopers. The report discusses how the industry is now defined by lower real estate returns, limited new development prospects, reduced credit availability and curbed profits. It notes that conditions in the commercial sector are expected to improve moderately over the next year, which will position real estate as offering attractive, but not double-digit investment potential. According to the report, “this reconstituted marketplace should reposition real estate as an attractive yield-producing asset class for those investors who recalibrate investment expectations on a long-term horizon.”