Global Viewpoints

Experts Say "Buy REITs Now"

The smartest minds in the commercial real estate business are telling people to buy REIT stocks now. For example, Richard Wollack, co-CEO Premier Pacific Vineyards, the largest developer of high-end vineyards in the U.S., and former founder /CEO of Global Real Analytics, recently wrote a note called "Buy REITs Now... You Can't Fall Off the Floor".

Here's Wollack's note:

The savviest and most successful real estate person I know is Sam Zell. For 35+ years he’s been hitting property deals out of the park. (Maybe that’s what propelled him to buy the Chicago Cubs!) And if there is one core principle that allowed him to achieve his extraordinary real estate performance, it was this: Always, always buy below replacement cost…the lower the better.   

The point is simple. If you buy below replacement cost (i.e., the cost to build the same property new, net of any actual depreciation) you have built-in downside protection. You can charge going rate for space (yet still make a fair return). Moreover, you are assured that no one is going to build competitive space until rents again rise to justify a fair ROI for that higher construction cost. As the market gets stronger you increase rents and, in turn, reap huge profits by selling when values again rise to replacement cost (and sometimes exceed them.)

So, if you can buy an office building for $250/sf when new construction of the same quality is, say $350-$400/sf then you are hard pressed to ever lose money, if you have just a bit of capital and patience. As another successful real estate friend characterized this strategy: “You can’t fall off the floor.”

And that is where publicly traded REITs are now—selling at bargain basement prices relative to replacement cost. Because of the dramatic downtick in REIT prices over the last 14 months, the average U.S. REIT’s share price is as much as 30-35 percent below the replacement cost of the assets they hold and perhaps 10-15 percent below what the properties are currently trading at in the private market. 

Notwithstanding that cushion of value, some people are betting REIT prices may fall further and they’’ get to buy them even cheaper. Well sure, they could fall a bit. Then again, the share prices are not likely to fall much at all since the replacement cost discount acts as like a brake. Then one day when no one is looking, REITs will shoot up when the market finally realizes what bargains they are. Moreover, REITS should be bought for the long term, so you shouldn’t try to pick the bottom.

Thus, if you don’t buy REITs now, when you can get in on the floor—like Sam Zell did in buying Houston office buildings in 1992—you may never make the move in time. By the way, the average REIT will also pay you a dividend of about 4± percent (partially tax sheltered) while you wait. That’s a lot better than the after tax rate of a CD—and CDs can’t be bought at a discount! 

Oh yeah, Sam was about two years too early in Houston office…but at 60 percent of replacement cost he couldn’t lose…in fact, Houston office was another one of his home runs. Similarly, even if you have to wait a year or two for REITs to start climbing back to replacement values when you can then get out at huge profits, who cares? 

Well, some people will care to ask how you made such a killing in REITs. Your answer should draw upon the wisdom of Bernard Baruch, the great stock investor of the 1930s. When asked how he made his fortune in stocks, Baruch answered: “I always sold too early.”  Your answer will be a twist on his words: “I bought my REITs too early.”  Just like Sam Zell did in Houston office buildings. 

Surprising Commentary at RealShare Atlanta

By Melissa Securda

Earlier this week I attended Real Estate Media’s RealShare Atlanta conference. Prior to the first session, I glanced over the impressive list of companies participating and wondered what their representatives would have to say about the real estate market and the economy. I thought I’d share the surprising commentary with you. 

After some discussion about the current economic conditions, the panelists of the first session seemed to concur that while we are in a slowdown, it likely will turn around by first quarter 2009. This was particularly interesting to me, considering a few weeks ago more than one key economist presented to the NCREIF audience the gloomy news that a national economic recovery would not take place until 2011.Economic predictions are tough to call, but I am encouraged by the positive outlook the panel presented.

More positive news can be found in the health care and multifamily sector. Healthcare development and leasing is performing well throughout Metro Atlanta and multi-family is experiencing strong fundamentals. Additionally, mixed-use developments are thriving in Tampa, Austin, and in suburban Atlanta submarkets. 

The panel agreed that we can look for signs to indicate economic conditions have returned to normal including: the end of the foreclosure debacle, the return of the CMBS market, job and rent growth, banks building up their liquidity, and the debt spread normalizing. Perhaps we will begin to see these events taking place in a year’s time, as the panel indicated. But Hal Barry, chairman of Barry Real Estate, cited overbuilt residential as the root cause, and due to all its related problems, complete recovery will take three years, he said.

Some Bullish Thinking

By Barry Tuman

A recent survey of corporate leaders in Germany and France reported that the majority of respondents were optimistic about the next two years from an economic expansion perspective.

The Ifo survey of German business conditions found growing optimism about the outlook, with current conditions far more favourable than they had been for most of this decade. French business confidence also improved in recent surveys. The contrasts with surveys of U.S. sentiment, which suggest executives are about to head for the hills, is stark.

If that wisdom is right, reality is taking a long time to dawn. Mr. Jean-Claude Trichet, the European Central Bank chief, told the EU parliament that he was solidly optimistic about the Eurozone economy. He said rate cuts would only encourage risk-taking; and he even called himself “vigilant” for the first time since the credit crisis took hold last August. In the past, that has been his codeword to promise rate rises.

This is not something done if weakness is on the horizon. Mr. Trichet rejected repeated calls for an interest-rate cut after the previously mentioned surprise rise in German business confidence this month, insisting that fighting inflation is his priority. The French survey results obviously bolstered his view.

Faced with a vigilant central banker in Europe, the U.S. dollar sunk close to its all-time low against the Euro. Meanwhile, yields on German bonds, short or long term, are higher than Treasuries.

None of this applies to the banking system however. The equity and credit of European and U.S. banks have suffered identically through the crisis. There is no trust in banks on either side of the Atlantic. But for now, the market and the Eurozone business leaders seem to think that will harm the U.S. while leaving the Eurozone economy intact.

Diversity Needs a Place on the Commercial Real Estate Agenda (Part 2)

By Pius Leung

Some progress in diversity has been made in recent years. Leading players have hired executives to nurture diversity and stress their commitments via website notices. But there’s definitely room to do more.

Here are three suggestions that should be considered by industry decision makers:

1.      Develop Mentoring Programs – It’s tough for anyone to be successful in this business without a network of support. For people of color, the task may be all the more challenging.  That’s why it’s essential for companies and associations large and small to establish formal programs where seasoned executives nurture newcomers on a one-to-one, mentor-to-protégé basis. A less structured “mentoring pool” would be less effective because there would be less continuity between the participants.

Commitment from top management is essential for mentoring to succeed. Start with a mission statement that includes an overall goal of increasing diversity among those in brokerage, management and related positions. Reaching that goal will take time, so establish realistic objectives and incorporate a process to effectively measure accomplishments.

2.      Launch an Awareness Campaign – Spread the word! Your audience will be relatively large, and should include potential participants – minority real estate professionals – as well as these individuals, departments and outside organizations: seasoned staff to serve as mentors; the human resources department; the management team or board of directors; colleges and universities, which can be sources of program candidates; and local or national industry associations that can be enlisted as partners to help promote the program.

3.      Use a variety of sources to promote the launch of the diversity program and its progress.  Mass communication vehicles like the company web site and display advertisements are great to reach a broad audience, but also include messages to more targeted prospects like mentoring candidates, key staff and university officials. Have the public relations department communicate with the media to help generate exposure.

TIAA-CREF Pursues Energy Efficiency

It looks like TIAA-CREF, one of America’s largest institutional real estate investors, is following in the footsteps of CalPERS. It has announced a goal to improve the energy efficiency of its real estate portfolio by 10 percent by 2010.

“TIAA-CREF is committed to lowering the carbon footprint of the buildings that comprise our commercial real estate portfolio,” said Tom Garbutt, managing director and head of TIAA-CREF Global Real Estate. “Our goal is to enhance our portfolio’s long-term value, which we achieve, in part, through prudent property management. We believe the best management practices today are defined, in part, by energy efficiency.”

TIAA-CREF’s Global Real Estate group has embarked on an energy benchmarking initiative across the 43 million square feet of office buildings and other properties within the company’s real estate portfolio, with the goal of identifying opportunities to reduce energy consumption. Thus far, the buildings that comprise the office portfolio have reduced energy use by 125 million Kilo British Thermal Units, which is equivalent to an estimated 37 million pounds of carbon dioxide emissions.

The next step in TIAA-CREF’s benchmarking initiative will target the 12,000-unit multifamily portfolio and will include collecting information on energy and water consumption, trash production and other areas for potential improvement. The program also will include purchasing ENERGY STAR-qualified appliances, replacing incandescent bulbs with ENERGY STAR qualified compact fluorescent lamps, and increasing heating, ventilating and air conditioning efficiency, with the goal of identifying additional actions as the program progresses.

TIAA-CREF Global Real Estate also is seeking the U.S. Green Building Council’s Leadership in Energy and Environmental Design (LEED) certification for two new properties being developed this year in Minneapolis and Miami.

CREW Fills Important Role in CRE Industry

By Melissa Securda

The Commercial Real Estate Women Network, also known as CREW Network, aims to advance the success of women in all aspects of the commercial real estate industry. With chapters in 66 markets across North America, the organization is promoting the success of women by facilitating networking opportunities, offering leadership development opportunities, and connecting with the community.

What sets CREW apart form other industry-related organizations is their commitment to developing leaders and fostering long lasting relationships. CREW’s initiatives include reaching out to girls in school and educating them on the different types of careers available to them in commercial real estate. CREW also connects with women in college through the network’s CREW University program to explore different paths in the industry. 

CREW is also involved in research initiatives to better understand challenges facing women today.  The organization recently published Minding the Gap, “which outlines successful strategies that both individual women and companies in commercial real estate should adopt to ensure a more diverse workplace in which women play greater leadership roles.”

I am a proud member of CREW Atlanta, the network’s local chapter, and am constantly amazed by the opportunities the chapter provides for its members to become better citizens and professionals. 

Are CMBS default expectations overstated?

The credit markets have overreacted to the likely increase in commercial mortgage defaults and losses, perhaps overestimating future default rates by as much as three times, according to a CBRE Torto Wheaton Research (TWR) analysis.

While prices have been slow to change in the commercial real estate equity market, the commercial real estate debt markets have been driven by increasing spreads, and decreased availability, of mortgage capital, largely due to the withdrawal of conduit lenders.

One of the causes of these trends has been the movement of a set of derivatives that provides insurance against defaults, the CMBX. In recent weeks, the prices on these derivatives as well as prices in the Commercial Mortgage Backed Securities (CMBS) market have reflected levels that are far out of line with what any likely future income stream of the underlying mortgages would suggest.

Using CBRE TWR’s commercial real estate market forecasts and Moody’s Commercial Mortgage Metrics (CMM), we find that current CMBX (CMBS) spreads have substantially overestimated potential default and loss rates, exceeding the realistic forecasts by as much as three times. CMBX tranches rated “A” and above are particularly undervalued from a credit performance perspective.

In other words, looking at real estate market fundamentals, the widening of CMBX/CMBS spreads is unjustified. Capital market participants are strongly encouraged to carefully consider both the challenges and opportunities in today’s turbulent marketplace before jumping to the conclusion that a commercial real estate market meltdown is inevitable.

A View from Europe

By Barry Tuman

The European Property Market seems to be moving along relatively unscathed by the U.S.-based liquidity crunch that has slowed global real estate and finance markets. Unlike the UK market, which seems to be feeling some of the affect of the mortgage based upheaval, cautious optimism seems to be the buzzword for the European markets.

Development activity appears to be steady in the emerging/developing markets on the Continent, and at the MIPIM event held last week in France, developers seemed to be most interested in finding new and improved tools to expand their businesses. Projects that were in the works are moving along as planned and there was extensive discussion regarding new initiatives. Negativity was at a minimum.

From an existing portfolio perspective, there seems to be a back-to-the-basics philosophy regarding operations as property professionals are now discussing more detailed underwriting, due diligence and cash flow analysis for existing assets, as well as for any new items being considered for acquisitions. This back-to-the-basics approach, coupled with the move towards greater transparency for the property industry overall, will continue to add to investor confidence and therefore market expansion.

Many companies are keeping a keen eye on U.S. markets at this time because of the strength of the Euro to the U.S. dollar. With property prices dropping in the U.S. and the Euro strengthening at the same time, there is a view shared by many European investors that opportunity may be here now to buy into markets that previously had been over bought. The next few months should be interesting to watch as funds take aim across the Atlantic and to see how new partnerships develop.

Diversity Needs a Place on the Commercial Real Estate Agenda (Part I)

Access to a stream of accurate statistics is paramount to making informed decisions in the commercial real estate industry. Any successful broker, developer, property manager or appraiser will tell you that he or she relies on current data and knows where to get it.

But, there's one industry statistic that's difficult to find: the percentage of minority professionals working in commercial real estate. By most accounts, and most of those non-scientific surveys and observations, there is a very small percentage of professionals with African American, Asian and Hispanic heritage in this business.

Private companies, associations and industry organizations have undertaken research into the level of diversity in the business world, and the good news is that there has been tremendous progress in many industries.

Household names like Kodak, UPS and Hewlett Packard appeared in an online search of U.S. companies cited for outstanding programs to diversify the make up of their work force. Commercial real estate has not held its own on promoting diversity, and it’s time companies from this industry are added to the national list. 

Some progress has been made in recent years. Leading players have hired executives to nurture diversity growth and stress their commitments via website notices. But there’s definitely room to do more. Here are three suggestions that should be considered by industry decision makers:

• Develop Mentoring Programs


• Launch an Awareness Campaign


• Appropriate Necessary Funding

Pension Plans Rank Real Estate as Most Popular Alternative Asset Class

More public pension plans expect to make more investments in alternative assets classes in the future, with real estate ranking as the most popular alternative asset class, according to a survey conducted by the Bear Stearns Pension, Endowment and Foundation Services Group and the Government Finance Officers Association (GFOA), a professional group of public sector officers in the US and Canada.

The survey, which questioned approximately 150 public pension plans, showed that 52 percent of respondents said they invest or planned investments in alternative asset classes. When this group was asked to identify all likely alternative investments, real estate emerged as the most popular asset class at 85 percent. Private equity ranked second at 60 percent, venture capital placed third at 44 percent and hedge funds came in at fourth place with 42 percent. The 48 percent of respondents that do not plan investments in alternative assets said they are either not allowed to by law or investment policy, or cited other reasons, such as a conservative board of trustees.

According to the survey, consultants are widely used by public pension plans. The survey found 80 percent of the plans were advised by consultants on investment decisions and 70 percent used consultants to perform due diligence on prospective managers.

The plans also rely heavily on outside experts for risk management. When asked to identify all the multiple techniques and tools used for risk management, consultants were top-ranked at 75 percent, followed by third party risk platforms or software at 14 percent. Fifteen percent of the plans surveyed said they were not currently using any risk management tools and 5 percent said they used internal measures.

This survey clearly indicates that pension plans will increasingly compete against traditional real estate investors for real estate investments. Moreover, the increasing interest from this investor group may provide opportunities for a variety of real estate related professionals including pension fund advisors and consultants, as well as fund managers.