Calling the Bottom and Looking Forward to 2010
If there is only one thing for sure, it is that everybody in the commercial real estate industry in the US is looking forward to 2010. Although the industry and the overall economy still face an array of hurdles ahead and no one is giddy with optimism, the year is starting with more clarity and a lot less fear than 2009. Some very positive events just in the past 60 days have helped bolster the spirits of many industry players:
Transaction activity is increasing
REITs have been able to de-lever quickly and enjoy unique access to capital
Foreign buyers are hungry for US assets, particularly since prices in Asia and Europe are already rising
A reported $75b or more of equity has been raised by opportunistic funds and very little of that has been deployed
The credit crunch is starting to ease and financing for quality assets and larger properties is becoming more available
The CMBS market is starting to thaw, with several successful single-borrower issues completed since mid-November
Fundamentals remain poor and are expected to stay that way in 2010, but the market, expecting the worst, has already priced in the poor operating outlook.
Bank regulators announced new guidance that could greatly reduce mass defaults and asset sales previously anticipated by the tsunami of upcoming loan maturities
Taken together, these factors point to a 2010 investment market that moves decisively forward. Operating fundamentals, banking uncertainties and political realities in the US and around the globe will all play a hand in keeping the trajectory of the improving market from being too steep over the near term. Farther out, the overhang of so many extended and restructured mortgages also clouds the future. But for now, broad investor sentiment in the US is clearly turning an important corner as the new year approaches.
Lessons Learned from Ted Leary, Crosswater Realty Advisors
( in no particular order)
1. Co-investment by a manager does NOT necessarily produce better performance
2. When you underwrite an Allocator, you need to understand their ability to underwrite & manage Operators.
3. Alignments of interest structures often dissolve and even reverse when markets go bad.
4. Bigger is often “Badder” when AUM reaches the tipping point where AUM revenue is more important to the Manager than performance based revenue.
5. Investors need to keep a close and continual watch on their investments – even in discretionary funds. “Trust, but Verify!”
6. Investors need to have a “Voice and even a Vote” in higher yield/risk strategies
7. If a Manager can’t readily & easily describe its “risk management” process, it doesn’t have one.
8. Beware of Managers who want to go “outside their box”.
9. Leverage doesn’t make an investment a better investment – it simply increases the potential rewards and risks of that investment.
10. “Global real estate expertise” is an oxymoron.
Bonus Lesson: If you want to discover whether a Manager is a “fiduciary” you need to look into their corporate “soul”, not just their numbers.
I've met with a number of people in the past year. Some who are experienced but out of work and others who are coming out of an MBA program and are looking to get into or back into the real estate industry. And on the subject of careers, last week I Googled Nori Gerardo Lietz of Partners Group to find her phone number. What I found in addition was a commencement address she gave to the Fall 2005 graduating class of the MIT Center for Real Estate. I found some of her comments particularly poignant as they resembled some of the things I have both believed in for myself and have counseled others on as well. I'd like to share these passages with you:
"As you evaluate career opportunities think about risk. Don’t accept the conventional wisdom of what are the “safe” jobs. The seemingly safest position today may actually far riskier than might be perceived by the “herd” mentality. What may be perceived as a “safe” job today, may not even exist in 10 years. Think of all the people who went to work for large financial institutions thinking they had a great career path in front of them and were merged out of a job. I’m not trying to be a pessimist, I’m suggesting that you try to identify ALL the potential risk factors and assign probabilities to them occurring.......
Don’t underestimate the importance of serendipity. Seemingly unimportant or random events can have profound impacts so you need to be open to them. I truly believe you have to be open to those serendipitous moments and go with your gut instincts just at that moment. These serendipitous moments can occur in a conversation, a chance meeting or the exchange of ideas that may at the time seem unimportant.......
Lastly, and I think most importantly, expect the unexpected from yourselves. Take risks. Risk is not a bad thing if you understand the risks you’re taking. Take the job opportunity in a place you never dreamed you go. Go to India. Go to Brazil. Go to China. Do something scary: take the assignment that you know absolutely nothing about, and neither does anyone else, and master it. Figure out how to become indispensable in the company for which you work. That’s the ultimate job security and risk mitigation. Become an entrepreneur. I started PCA when I was 31. I asked myself at the time, what’s the worst thing that could happen? The company might fail. That didn’t that mean I’d be a failure. I’d find another job. So can you. Push yourself to a place farther than you ever thought you could go.
Expect the unexpected from yourself and you never know what might happen."
So with that, I wish you all a Merry Christmas and Happy and Healthy New Year. We've all been through a tough year and it's likely that things are not going to change from gray to blue overnight as the we turn the calendar to January 1. But we can change our attitude about things and "Push ourselves to a place farther than we ever thought we could go". And, as always, I appreciate your support of this weekly column. Thanks a lot.
These are my views and not that of my employer.