Father's Day 2010

First, let me share with you some comments I received from readers of last week's column:

From the head of real estate for a corporate pension fund:  

I think we have been in a secular trend for the past 20 years starting in 1992 when we (institutions) started to foreclose on properties and forced the increased investment sophistication of service providers like LaSalle Partners, CB, Cushman & Wakefield, etc… those of us with MBA’s back then essentially created many analytical metrics that started that trend towards becoming an asset class. Remember in the 1998 NAREIT conference in NYC when Ibbotson released their first asset allocation study utilizing RE and it took about 5 years before institutions really accepted RE. I believe that trend continues and is becoming global. I have revamped our RE equity strategy completely and am now investing aggressively outside the US via both public and private vehicles. I recently awarded two $100mm non-US REITs mandates and have made several commitments to Emerging Market funds. I believe this is the wave of the future as public and private are complementary and when combined create an attractive portfolio greater than the parts.  This is concept is not revolutionary but evolutionary as we need to figure out how we, as an asset class, fit into the larger picture, especially on a global basis. 

And, from a senior guy with a leading industry information services company:

 Steve, the market has truly changed permanently.  Of course, there will be a gradual clearing of the distress bought at varying levels of return, but we are rapidly moving away from a private market to a public one.  Information access is the transformational catalyst.  Capital is global.  Information is becoming global for our market.  Even though returns will likely not be what we remember as the “good old days”, commercial real estate as an investment alternative still offers a compelling value proposition compared to other equities (buy on margin, depreciation, tax deferral domestically).  Long-term, the market will be more stabilized, and I agree with “Bob” that returns will be generally lower.  For now, every property is “distressed” until it’s priced at a re-stabilized level for the market.  Investors will act when there is enough information (internal or publicly available) to compare it to alternative investment opportunities.  Good operators will get the best returns, because they will achieve a better return over time for at any price level paid.  Meanwhile, this late recession period is a time when investment assets will revert to their “rightful” owners, those who know how to buy, operate and hold commercial investment real estate.  The key is finding the deal in the first place, having your powder dry, and your pencil sharp.

Clearly there is a lot of 'new' thinking going on in our industry and clearly this is not the RTC days.  We are a more sophisticated bunch with a lot of lessons learned at every port of call.  As we move into the third quarter (can you believe it) there is more interest in investing in real estate and the instant liquidity attraction of real estate securities seems to be attractive to both experienced and novice institutional real estate investors.  But, in terms of fund formations, one thing looks like something we've seen before:  the launching of multiple funds, with different strategies, by the same manager seeking to be all things to all investors.  If there is one thing that many have learned in the recent past it's that manager focus and ability to stay from style drift are two important factors when investors and consultants evaluate managers.  Desperately Seeking Opportunity without the experience to back it up will not be an acceptable menu option any more.  We have learned too much.

Sunday will be the first Fathers' Day for me without my father.  As many of you who shared your stories with me last fall when my Dad was dying and finally passed away told me, it takes time to get through both the actual loss and the feeling of loss.  Sometimes I still think that my Dad will answer the phone when I call him on Saturday morning but I don't think there is cell service in heaven yet (maybe when 5G is available!).  I've already experienced my Dad's first birthday where the counting no longer matters (unless you are a Mozart or similar type guy where celebrations of your birth are an annual event for the public) but on his birthday I raised my wine glass in a toast to him (whose favorite was chardonnay) and on Sunday I'll look at some old photos and take a momentary pause to close my eyes and remember the guy who, while he was not Mozart or Shakespeare or even Mickey Mantle, left his mark.  It's a mark that those of us who are fortunate enough to be a father (or parent) in their own right have the chance to leave with their children and their childrens' children and their childrens' childrens' children.  So we need to remember that actions speak louder than words and it's the actions, more than the words that are remembered, for better or worse through the ages. 

Do you remember when?

In looking at some recently published manager search results, the vast majority of those completed are for 'core' investment strategies with established managers.  As the pendulum swings, and as we've all read in various publications and reports from data providers, core is in right now.  But while these latest searches lean to the side of core, at the same time, there are always investors who want more bang for their buck and are allocating money to opportunistic strategies in debt, secondaries and recapitalizations.  Given the instability of underlying real estate principles, one can understand why value-add strategies seem to be taking a backseat today.  But if the economy does really improve, as opposed to the propaganda of it improving, value-add will become a viable strategy as well. 

Here's an interesting comment from an OTR reader who has been through a number of cycles in response to something I wrote recently (Thanks Bob):

I don’t think what we learned in the last few cycles will impact future opportunities; At least as it relates to commercial office buildings.  I believe commercial real estate has gone through a fundamental change that will make profits on any grand scale very hard to achieve. The idea of being able to assemble thirty properties that produce returns in excess of 15% on a levered basis over a 7 year period and deliver a 2 multiple are near term history.  The business is too efficient (there is too much money chasing product) and there is too much data is available.  Owner returns always decline when an industry goes from a private market model (with limited information and transparency) to a public model (with transparency).  Capital generally  moves rather efficiently. There will always be the unique, one-off transaction that requires a skill (or luck) to execute and achieve an extraordinary return, those are really few and far between.  If you look closely, the majority of the money made during the last cycle was really cap rate compression and low interest rates.  Very little came from operations.  This time around, we are paying too much on the buy side because there is too much money. Maybe after the private equity investing declines by 75%, pricing inefficiency will return.  Until there are far less of us, returns will be tempered.  

So...what do you think?

Do you remember when your grandpa taught you to swim in the Atlantic Ocean?  Do you remember when you cried on your first day in first grade because you were the only boy wearing short pants and your mother took you home to change?  Do you remember when you used to climb over the fence at the schoolyard to play stickball?  Do you remember when you and your friends used to go to Yankee Stadium and sit in the right field stands when the Yankees played the Tigers just so you could watch Al Kaline close-up?  Do you remember when your Aunt Florence died and you looked at her in the casket because you wanted to see what a dead person looked like?  Do you remember how you felt when your first goldfish died and your mother flushed it down the toilet?  Do you remember when you and your friends rode your bikes all the way to JFK and then had to call your father to pick you up because you were too tired (and frightened) to ride all the way home?  Do you remember riding your bikes to LaGuardia Airport and sneaking through the fence so you could watch the planes take off and land?  Do you remember when that kid hit a hard single to left and you threw him out at first base during a playoff game at the Fleet Street fields in Forest Hills?  Do you remember how it felt when your family moved from New York to New Jersey when you were in the middle of high school?  Do you remember your first year at Camp Walden when you were a jerk and some of the guys beat you up just to put you in your place?  Do you remember when you and your friends used to play "Spin the Bottle" and "Post Office" and how advanced the girls were compared to the boys?  Do you remember bowling at Foxey's Lanes where when you got a strike if the red pin was the head pin you'd get a free game?  Do you remember when you met the love of your life and it took almost two years to ask her out on a date?  Do you remember all the crazy things you did and that you actually survived them?  Do you remember when had your first article published, wrote your first song and played your first gig at the CYO in Livingston, NJ?  Do you remember when you decided that you needed to start documenting things about your life, for future generations, before you forget them?  Do you remember when you realized what was really important in life......and started to do something about it?

Photo:  My son Brian and his son (my grandson) yesterday on Sean's first birthday.

These are my views and not that of my employer.

A road paved with roses?

I had breakfast this morning with a long-time industry friend who is one of the top industrial brokers in New Jersey.  His market update included the following story:  He's seen more interest from tenants in the past few weeks (which is a good thing).  Recently he showed a building to a prospective tenant who was accompanied by their own broker.  One of the first things the tenant and their broker asked was:  "Does the landlord have the money to complete the T/I?"  Also, the tenant's broker wanted the full commission for themselves leaving the landlord's broker (my friend) in a position to have to go back to the landlord and tell him that if he wanted a real shot at landing this tenant, he'd need to pay and additional 50% commission.  In sharing this story with some colleagues, I learned that this is not too different from the period we fondly refer to as the "Tech Wreck" when tenants roamed the land and controlled the deals.  But to me, the focus on landlord financial wherewithall and the fact that the tables have turned more to a tenant wanting to know more about the financial stability of the landlord, rather than vice versa, really paints a picture of how things are today.  If leasing activity is gaining momentum it's a good sign for the investment sales part of our industry as occupancy will be up and values can be somewhat stabilized and more deals can start getting closed.  But, this appears to be just the start of what many hope will be continuous positive progress in the broad commercial real estate industry.

However, as Geof Dorhmann wrote in a recent editorial in The Institutional Real Estate Letter:  " Everyone seems to agree that the buying opportunity of a lifetime is approaching.  And everyone seems frustrated that that buying opportuinty hasn't yet materialized-at least, not in any meaningful way.  What we all forget is that it took almost four years during the previous time the markets really hit the wall before the financial system organized itself to efficiently disgorge its surplus real estate....To paraphrase former Treasury Secretary Larry Summers, there will be no billionaires created this time around.  But opportunities will benefit buyers and penalize holders of assets in the short term.  In the long term, at least from my perspective, everything is coming up roses."

Now, Geof has had a perch on the institutional real estate industry through a number of cycles and if you go back through the years of his editorials, he's been right more often than not.  I agree with his assessment of the current situation and while I don't think he's suggesting that it'll take four years this time, I believe that it'll clearly take at least two years for things to settle on a 'new normal' and that those that are positioned well, with the right expertise and the patience to wait for 'the right deal' will benefit the most.  In addition, when choosing firms with whom to invest, institutional investors, having learned some difficult lessons, will be that much more deliberate in making their manager selections, even to the extent of abandoning partially or completely some firms that have disappointed them, not only in performance but in the basics of client service and communications.  There are lessons to be learned by all of us and as things improve we need to remember to not forget them.

This is a very cool photo I took of the Empire State Building.  It's a pure shot taken with my Blackberry camera, unretouched, un-Photoshopped, un-anythinged.  The glow is almost heavenly and while the light is man-made, it has Mother Nature's mark all over it.  What it reminds me is of a saying I discovered recently:  "Even on a heavily overcast day, the sun is still there on the other side of the clouds."

Music of the week:  Shannon Corey. 
I bought a Yamaha digital piano from her last year and last night was the first time I've seen her perform in person.  It was a great show.  But check her out for yourself.

Thanks to those of you who wrote me about my OTR last week "In memory of Sherwood."  I have to admit that once I write one of these I rarely remember what I wrote from week to week and don't go back and look into the archives.  But last week, to my surprise, my column was picked up and published by Europe Real Estate and I opened it up and read it.  It was like I was reading it for the first time and it touched me too!




These are my views and not that of my employer.

In memory of Sherwood

My middle name is Sherwood.  It was given to me as a memorial of sorts to a second cousin that I never met.  All I know about Sherwood is that he was from Detroit, had a brother named Lincoln and died during WWII when he was probably no older than 20.  He was a bomb specialist and died when a mine he was trying to disarm blew him up.  What a way to die.  But what got me thinking about him this week was the upcoming Memorial Day weekend.  Sherwood, like many young men, enlisted in the Army after the Japanese decimated Pearl Harbor.  And, like my Dad, Sherwood and millions of other young men and women answered the call of “Uncle Sam Wants You.”  But what I was really thinking about while walking to work yesterday was how much Sherwood and so many of his generation missed.  They missed Elvis, The Beatles, a man walking on the moon, the Internet, Skype.  But they missed a lot more.  They missed a chance to grow up, to experience life, to realize their dreams.  They missed being a parent, watching your child grow up and experience their own lives and realize their own dreams.  Tens of thousands of my peers died during the Vietnam war; countless others were injured either physically or mentally (those who don’t have a holiday reminding people of their sacrifice).  So, this Monday, no matter what is going on in your life, whether it be financial stress, career related uncertainty, some pain in your shoulder that you’ve never had before and you don’t know where it could have come from, someone taking ‘your’ parking space (right in front of your very eyes), unexpected rain on a day you were planning a picnic or your flight getting delayed or cancelled.  Take a minute to think about how minor these things are in the context of the much bigger picture of life.  Appreciate all that you have rather than all you want to have and think about all the Sherwoods and others in your own family who never had a chance to kiss their child good night and have them ask, “Dad, where does the sun go at night?” or appreciate the beauty of Mother Nature on a walk through the park or to listen to  music that gets to you or watching a movie that moves you to tears.  Think about all the little things.  Those things that we all tend to take for granted because the sum of those little things is what life and dreams are all about.  

A friend who I've never met writes a blog on Simplicity.  This is something he posted this week:

The Starfish Story

One day a young was walking along the beach when he noticed an old man picking something up and gently throwing it into the ocean. Approaching the old man, he asked,“What are you doing?”

The old man replied, “Throwing starfish back into the ocean. The surf is up and the tide is going out. The sun is shining. If I don’t throw them back, they’ll die.”

The young man said, “Don’t you realize there are hundreds of miles of beach and thousands of starfish? - You can’t make a difference!”
 

After listening politely, the old man bent down, picked up another starfish, and threw it back into the surf.

Then, smiling at the young man, he said...

“I made a difference for that one.”

Movie of the week (tissues recommended):  As It Is in Heaven 

BTW:  That beautiful building last week is The Landmark Building in St. Paul, MN

These are my views and not that of my employer.

Bouncing along on the road

Anybody know where this beautiful building is located?

I used to think I was the last to know about many things but over the years have learned that while I'm not necessarily the first, I'm also not the last.  Case in point:  This week I was introduced to the Green Building Finance Consortium (GBFC).  It's a research and education initiative founded in 2006 by industry veteran, Scott Muldavin, to assist private sector investors underwrite sustainable property investments from a financial perspective.  In checking out their site I also learned that a few other industry friends are involved with GBFC.  I think their mission, to help fill the void of information, methods, and practices for the valuation and underwriting of sustainable properties, is not only commendable, it's important for the future of our industry.  And, admirably, given the critical importance of independence, GBFC has also chosen to not accept membership or financial support from green product or green building trade organizations, and limits the individual investments of any organization in the Consortium’s work. GBFC does accept support from a select group of governments, non-governmental organizations, and real estate industry companies actively involved in energy efficiency and sustainability investment.  Sustaining members include PREA, Principal Real Estate Investors, RealFoundations and ULI.   GBFC has recently published a book "Value Beyond Cost Savings" which can be purchased on their website.  But more than that, please take a look and see if you don't feel that GBFC is something you'd like to bring to the attention of your company (I'm doing the same).  Thanks.

My brother is visiting me in New York this weekend and even though we both grew up in Forest Hills, he moved away many years ago and hasn't been back in quite a while.  Walking around the city today, it was interesting how much he noticed about buildings, etc., things that I've just taken for granted, even as observant as I believe I am.  In wide-eyed amazement, we made our way through Times Square which was literally teeming with tourists on what may be the most beautiful day so far this spring.  Hanging out with him is reminding me that keeping your eyes open, no matter where you are, will allow you to absorb sites and experiences that will make an indelible impression on the film of your mind.


Apropos of some of the comments in the Hodes/Weill white paper I excerpted last week are these from RCA's Month in Review report which was published yesterday:  While the gap in price expectations has narrowed somewhat, there is now a misalignment of the types of properties buyers want versus what sellers have chosen – or been forced – to offer for sale. Sellers are keeping most distressed assets from the market, and few are willing to part with their better assets. So far, bank lenders have taken a similar approach.  The latest Moody's/REAL CPPI also reflects a market bouncing sideways along a pricing bottom, as well as mixed signals for each of the property types.  Even the anemic pace and pricing of distressed-asset sales continue to weigh on the market. The near-term negatives do not suggest a renewed downturn, but rather indicate that the robust pricing some trophy assets are commanding has not broken through to the broader market.

In addition to there being so much pent-up capital, yearning to make deals, we're part of an industry which has a pent-up need for good things to start happening.  And yet, things are going to move along at their own pace and not any faster.  I see positive things happening in terms of attitude of institutional investors to be more seriously considering allocating money to real estate again.  While a lot of interest is in core and debt (in all shapes and sizes), other strategies are starting to get some traction as investors and consultants recognize that windows of opportunity with some strategies will be open only for so long. 





These are my views and not that of my employer. 

Hodes Weill & Associates published their May 2010 Market Commentary this week. I thought there were some poignant observations which I'd like to share with you:

• The past few weeks have given rise to a discernable change in the mood. 
• Suddenly, deal flow is improving and we continue to hear that “deals are making sense.” 
• The market for stable assets with secure income is quite frothy, with anecdotes of pre-crash pricing levels and numerous competitive bidders. 
• Every day we read about assets being acquired at prices that are surprisingly high. 
• Debt is once again becoming plentiful, and unlike before, it is now available in size. 

So....

• Sounds positively rosy. So, why is there still so much uneasiness and, certainly within our shop, the sense that this renewed wave of investment and optimism defies the cold fact that most existing US portfolios held privately remain over-leveraged, undercapitalized and illiquid?
• Closer to the ground, little has improved in the real estate market.
  From the perspective of real estate pricing fundamentals, NOIs, especially in the office sector, are poised for several more years of  declines, given the overhang of space (primary or sublet) in nearly every market, and weak tenant demand. 
• While a few property types are doing better than others (multi-family, hotels) in terms of stanching the decline in revenues, even these sectors face the challenges of sluggish economic growth and reluctance by businesses and consumers to spend. And decline in NOIs is going to be met head-on by rising debt maturities over the next 12-24 months. 
• Within institutional portfolios, in particular the real estate private funds invested in the 2004-2008 time frame, we have not seen widespread improvements. 

And what about fund managers?

• As we enter the third year of this market correction, some managers may be starting to run out of steam and we believe that 2010 will be the year that these businesses will have no alternative but to evolve. 
• With little or no new capital on the horizon, human resources and other assets will have to be stretched further.  
• The overall market has not really corrected and attractive investments remain pretty scarce today. Without indications of economic growth on the horizon, the risks of investing remain very, very high. 

But....

• there are many positive steps that can be taken now to better position businesses and teams in our rapidly changing industry. 
• To the list of “R’s” that define our industry today: Re-structuring, Re-positioning and Re-capping, let’s add a few that keep with our spring theme: Rebirth and Rejuvenation. Let’s all find ways to channel our collective energy into improving our businesses and positioning for the future, and maybe worry a little less about missing deals in a highly volatile environment.

This is clearly not the entire piece and I took the liberty of extracting these items.  But what I like about this is that, firstly, it is written by some very experienced people who have been through multiple cycles and who are able to step back from the day to day challenges to take a philosophical look at the bigger picture and have a vision for the industry.  I took some time this week just to 'think' rather than to 'do'.  About how I'm doing my job, about whether we are leveraging our 'collective energy' to move our business forward and what things I might do differently.  It's been a helpful exercise for me and as the Hodes Weill paper suggests, we're in a time of Rebirth and Rejuvenation which gives us all opportunities to rethink how we're approaching business and determine the time is right to make some changes.  It's an exciting and challenging time for us all and I believe the uncertainty of things is what is making it difficult for some of us to get a good night's sleep.  But, going back to something I wrote a while back:  we can drive ourselves crazy thinking about the past; what we might have done differently, what mistakes we made, etc.  And, likewise, we can drive ourselves crazy trying to predict the future because we don't really have any control (as much as we think we do) over the future.  What we can control is what we do today, right now and this holds true for our business as well as our personal lives.  I write this to remind myself as well that this really is a very important component of life-health and when I find myself slipping, I step out of the moment and remind myself:  Even on a heavily overcast day, the sun is still there on the other side of the clouds.

Enjoy your weekend.




These are my views and not that of my employer.

The Wild Blue Yonder

This is the first OTR that I'm publishing from the great road in the sky.  Normally, I don't work on fights but rather use the time to think, to read or to write.  But today is a workday and there is a lot going on.  Hopefully, the airlines won't get even greedier and start allowing cell phone usage.  If that happens I suggest we all either take meditation classes, drugs or martial arts classes because it's going to be a war.

Whoa!  Last week's column generated a bunch of emails from you guys about jobs.  Not only did I get a number from those of you who are looking for jobs but I learned about some job openings as well.  Here are a couple of them.  If you're interested (and qualified) please send me your resume (steve@simplicate.com) and I'll forward it on:

1.  New York Metro Area.  Top producing investment sales team is looking for associate/analyst with 3 to 5 years experience, good financial skills and the ability to write offering memorandum and proposals.

2.   New York based placement agent firm is looking to hire a sales person with 5 or more years of experience – preferably someone with institutional marketing experience with real estate private equity product who is happy to be a “road warrior

If this evolves, we can use this as a networking vehicle for everyone to collaborate in helping each other in their careers.  I've heard from a few readers who would just like to get together, either on the phone or in person and I'm totally up (or as my sons used to say 'down') with that.

Here is some very positive news from the just published Global Capital Trends from RCA:

For the first quarter in more than two years, all three global zones posted increases in transactions and declines in acquisition yields in Q1. Not only is the improvement in the property investment markets in all parts of the globe significant, but also the magnitude of the improvements over the past quarter are even more impressive. 

This is good stuff and may truly offer signs that real estate is back and headed in the direction that we all have been wishing for.   More and more investors seem focused on core, or as one of my colleagues says, 'Uber Core" type properties while many have been placing their bets on all forms of distress opportunities.  Clearly, public and corporate pension funds have different styles, appetites for real estate investing and return requirements.  And that's what makes a horse race.  Some investors are still licking their wounds and evaluating which managers to put money out to.  It seems like there's less interest in cross-border investing as investors are finding there are good opportunities closer to home.  There's a real movement towards emerging managers and I believe we'll see more and more boutique investment and advisory firms hanging out their shingle as the year progresses.  We are in the midst of a seismic shift in our industry and it's not over by a long shot.  

BTW, without attempting to recap what has been going on:  What kind of crazy world are we living in?

Special Announcement:  Clowns Without Borders is a collective of nine organizations with a universal code of conduct.  Their objective is to relieve the suffering of all persons, especially children, who live in areas of crisis including conflict zones and territories in situations of emergency.  The performers that make up the Clowns Without Borders organization are volunteers from different walks of life who give up to a month of their year to go on expeditions.  They rough it, traveling with a small per diem, and staying at local guesthouses in areas where they are going to perform.  A documentary, "Send in the Clowns", by Director/Producer Sam Lee is currently in development.  Sam is a friend of my son Kevin. The Director of Photography, Laela Kilbourn; co-producers Nancy Roth and Brooke Stevens, all have strong credentials in documentaries for, among others, A&E, PBS, The Learning Channel, ABC, NBC, CBS.  In August 2009, the team went to Haiti to follow the clowns.  Just five months later the earthquake hit!  This is a very special project.  Immediate funds are needed to support a return trip to Haiti to follow the clowns this summer. They are seeking fully tax-deductible contributions and are holding a fund-raising event in New York City on May 24 between 6:30 and 9:00pm at Le Poisson Rouge, 158 Bleeker St (Bet. Sullivan and Thompson).   There will be a silent auction and a presentation by the documentary team.  But, please remember that donations of any amount add up. You can make your donation at their website.

Last night, I had the chance to experience something for the first time that is so totally cool I wanted to share it with you:

The Grand Central Whispering Gallery

"The "whispering gallery" is located on the Grand Central Terminal dining concourse near the famous Oyster Bar Restaurant.  Here, the acoustics of the low ceramic arches can cause a whisper to sound like a shout. Sound impossible? To test it out, you and a friend will have to stand in opposite corners of the large arched entryway. Now face the corner and whisper. Your friend should be able to hear your voice as if you were right next to them, not whispering into a far-away corner.  According to experts, this happens because the whisperer’s voice follows the curve of the domed ceiling. The Whispering Gallery is a popular spot for marriage proposals – and a unique place to whisper sweet nothings to your main squeeze."

Restaurant gem of the week:  Cafe Edison; 228 W. 47th Street, Between Broadway and 8th Avenue.  It's really one of those great NYC coffee shops but has a theatre like interior.

 Photo:  Sean "Budro" Felix.  11 months.

These are my views and not that of my employer.