Road Under Repair

Are you also trying to figure out what the heck is going on in the real estate industry; I’ve been looking at more and more publications and talking to more and more people but then, finally, this morning, the lightbulb went off while I was walking my dogs.  While there seem to be a few property deals going on the types of deals that are most popular are of the people type:  switching jobs, leaving jobs, starting their own firms (what is the definition of a boutique anyway?) I’ve never liked the word ‘poaching’ when one firm hires people from another firm (sometimes groups of people) but that’s just a personal preference.  And most of these changes are probably personal choices of the employee as opposed to the notification from their employer that their services were no longer needed (I also never liked the term ‘redundant’ as I’ve felt that it’s a chicken-shit way of saying you’re being fired). But it looks to me like there's a lot of thinking and planning going on in many of the real estate private equity shops; looking into the crystal ball to see where the next opportunities will be and deciding when to strike.  In the case of investors, well, they're taking their time too.  Starting early this year many told me that it might not be until 2011 that they were going to put new money out into real estate and as the year moves on it looks like that just might be the case.

A Fourth of July BBQ at someone’s house.  It was a small get together at a very large house that a good friend of mine was the architect on.  I only knew a couple of the people but it was a friendly and diverse group.  The one person that got most of my attention was the 94 year old father of the woman that hosted the party.  I’ve always been interested in people but especially hearing the stories  old folks and the wonder and amazement of the young people.  In this gentleman’s case, he told me his life story which revolved around his career as a haberdasher and retailer.  His exploits, moving from city to city as he took on more and more of a challenge and risk (and debt:  he told me that to open a 16,000 sq.ft. store in the early days of enclosed malls he had to borrow $250,000 to build it out.  He moved forward bought larger and larger stores which grew at one point to him operating several what used to be called Junior Department Stores (Are they still?).  I listened intently. After all isn’t experience the best source of learning?  He told me that his wife died two years ago and that until a couple of months ago he was still living on is own (he now lives with his daughter).  He spends most of his day watching sports and CNN on TV and misses having something to be busy with.  During his story, I asked a few questions but at the end I asked him this one, “When you think back over your life is there anything you wished you had done differently.”   “I don’t regret anything I did”, he said.  “When I look back I only remember the good things in my life and that’s part of what keeps me going.”  I thought this was really good advice.  It sort of plays into some of the things that I’ve recently found that work for me:  forgive myself for things I did in the past, forgive others for things they did in the past, focus on today and don’t worry about yesterday or tomorrow. Listening to Jack I realized that the road many of us take is curved, twisted, under construction, closed or has fallen rock zones.  But that’s what makes us who we are and if we hit a “Dead End” on our road we have choices to make and as he told me about some of his decisions I realized that this man, who never made much money (in his own words) had something more than money can buy:  integrity and courage.  I hope that when I’m 94 and someone asks me to describe my life I’ll be able to keep it short and also have that person take away something that helps them, even if it’s a little thing like I took away from Jack on the Fourth of July.  

I was reading "Four Recovery Stories" on RCA's website today.  These are detailed descriptions of four actual deals involving troubled assets.  Some months back I asked you guys what you felt the difference was between the early1990's (aka RTC days) and this era and published the results.  But having been involved in workouts before they were fashionable and with the RTC and then being part of the team that worked out a large (for it's time) troubled real estate loan portfolio for a major commercial bank, our stuff was simple compared to these deals today.  I had some of the more complex deals back then and I used to put up large sheets of paper on my office walls to diagram the deal (to the amazement of my colleagues at the bank).  But fuggedaboutit, today there are so many parties, so many tranches, so much to unravel and then reconstruct, debt looking like equity and vice-versa.   Real expertise is needed for all of these sort of deals, whether they're troubled assets, troubled portfolios, troubled funds.  As some of what is going on involves what some call "rescue capital" I poked around the web and found this gem (which I've adapted to our industry):  "One of our main priorities is to be a source of rescue funding for real estate deals, portfolios and/or funds  that are in need of urgent, time critical support.  We will look at providing funding for management teams on condition that a new and clearly profitable strategy can be presented. A new business model, combining positive aspects of the previous model with evidence of changes to be made, which tackle the issues that caused the previous model to fail, would need to be presented."  No question:  the underwriting not only of the deal but of the management team is crucial when making a decision to invest new money.  And, does the strategy still make sense or have things changed enough that a new one needs to be implemented?  Lots of questions in these type deals, eh?

 

These are my views and not that of my employer.

Happy Fourth of July!

This is my photo and not that of my employer

Whoa baby! Half of 2010 Gone Already?

So I've been going to this Japanese style restaurant for the better part of four years (yes, Mabel,  this does have something to do with real estate).  I hesitate to call it a Japanese restaurant as it is owned, operated and staffed with Chinese.  But it's your basic sushi/Japanese menu type place that serves decent raw fish at decent prices.  I've been a very regular customer and have spent a fair amount of money there.  But I won't be going there anymore.  Why?  Well, earlier this year, they fired one of my two favorite servers and replaced her with an obnoxious, pushy person (I actually had to tell the owner that I didn't want her serving me...first time I've ever done that).  But the straw that broke this camel's back was the other night when the service I received was not bad...I was basically ignored.  I don't really ask for any kind of special service although it is nice to go to a place where everybody knows your name.  But the reason I bring this up relates to Customer Service/Client Service/Investor Relations.  We've all read about how much more expensive it is to gain a new customer/client/investor than it is to keep an existing one. It is very true.  And, as I've suggested, in a consultative way over the years, the most important time to visit your clients is when you're not trying to sell them something.  Don't forget your good customers. Don't take your good customers for granted. In the case of the restaurant, it's not my job to solve their problems and when they don't see me for a while, they may (or may not) wonder where I've been.  But I'm not going to tell them why they lost me.  Your clients may not tell you either and, as an aside,  you can be sure that one of your competitors is paying a lot of attention to them, right now.

I realized how out of touch I am with the latest and greatest technology yesterday when I was walking to work and passed the flagship Apple store on Fifth Avenue in New York and saw hundreds of people lined up.  I asked a cop, "What are they giving away?"  "Well, I got a free bottle of water", he said.   Then told me that those people lined up had ordered something new in advance and they were here to pick it up.  So that was my wake-up call to Apples new iPhone.  I'm still operating off a traditional Blackberry but have watched (and read a little) about the fun people are having with all the Apps.  So other than reading about all the dropped calls with these new phones I'm thinking how in a hurry everybody is....to create the next 'must have' thing, to have the next 'must have' thing and to share what they do, every minute of every day with that next 'must have' thing.  However, I wouldn't mind having one of those things myself as when I watch people using them, they sure look like a lot of fun (but I promise I will not share every with you every important event in every day of my life).  

Seeing that Carole King and James Taylor are touring together got me thinking of 1970 in the cafeteria of FDU Teaneck when we bought tickets to see James Taylor, who had recently broken through, and there was a stage if you could call it that actually a series of eight inch high risers shoved together and the seating (were there any chairs?) was on the floor and as I usually try to do I'm sitting on the side of the stage where the grand piano was set up (I wasn't too interested in James Taylor as he was more of a heartthrob and after a while a woman walks out and takes a seat at the piano, without any fanfare or introduction and proceeds to bang out a set of recognizable songs as you can imagine they would be when it's Carole King! She stayed on stage and became part of Taylor's band. It was an extremely special evening with an unexpected truly guest 'star.'  (On music:  A good friend of mine and sent me a link to a beautiful song.  When I looked at it on Youtube, I loved the song but liked this version better.  I hope you like it).

Just a sidebar about a corporate culture.  I was on a Southwest flight recently and the flight attendant was having trouble getting one of the overhead bins to lock.  Now this wasn't a case of the bin being overstuffed, it just wouldn't stay closed.  So this flight attendant tried and tried and tried his best only a few times resorting to the 'if I slam this it will stay closed' approach a couple of times.  But then, exasperated, he went up front, I believed to call a mechanic (which is what would have happened on many, or most, other airlines) and in doing so he would have announced, "Ladies and Gentlemen, we have a little mechanical problem and have called our maintenance people.  They are on their way but right now but we will experience a delay in our departure as we don't know where they are.  We apologize for this inconvenience and appreciate your patience."  But that's exactly not what happened.  In a flash, the pilot of the plane came back and started fiddling with the bin door.  He looked like a mechanical type (aren't all pilots?) and he analyzed the situation, carefully looking at the brackets that hold the door in and in about two minutes the door was closed and locked and he was back in the cockpit and we were on our way.  I mention this in the spirit of a corporate culture that works.  One where everyone is on the same team and where the internal customer (your co-workers) come first and then your external customers.  I have been impressed with Southwest's management style for a number of years (btw, this has nothing to do with the fact that one of my daughters-in-law works for Southwest).  They embody teamwork.  They encourage their employees to do what's right, even if it's outside of their actual job, if it's something that will help one of their customers. There's a great book about Southwest called, "Nuts."  Southwest hires for attitude, not aptitude and while some aptitude is required in certain jobs, a great attitude can not only overcome some aptitude deficiency but also make a big difference in the success of a group of people. And, after all, aren't we all in this thing together?  

Congratulations to Michael Morgenroth who has been named Chairman of INREV.















These are my views and not that of my employer.

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.