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.
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).
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.
Last year was momentous for the real estate debt and equity markets as both exhibited signs that investors are slowly beginning to return. This year should be no less interesting.
Over the past two years, world economies have become more interdependent than ever before, as shown by the unraveling of financial markets across the globe. The real estate program at the University of Wisconsin School of Business has created a new global real state master (GREM) program tailored to meeting the needs of the next generation of industry leaders.
What is looking like a jobless recovery will spell a tepid economic rebound that will not fill buildings. The shakeout period for commercial real estate is now expected to extend several years. Unlike the last crisis, in which overbuilding affected new product, this time around vacancies are affecting the entire built environment, new and old alike. Owners without long-term leases to bridge the downturn will have a hard time surviving 2010.
With the current undersupply of available joint venture equity capital, operators need to speak with the full array of potential equity investors, as well as with their existing joint venture equity partners.
Despite some initial signs of a return to stability, conditions in the U.S. commercial real estate capital markets are as severe as ever—and likely to remain that way.