Is past behavior an indication of future behavior?

If there was any question in anyone's mind about how difficult it is to raise institutional capital for real estate private equity funds my conversations with industry leaders at the PREA conference this week left no doubt.  It does appear that many institutional investors feel that they are three-quarters of the way there in dealing with legacy issues and while some investors are starting to put new money out, albeit the bulk of it to managers with which they have an existing relationship, the sentiment seemed more positive than in quite a while.  The way investors are going to underwrite managers going forward is also interesting, although not the least bit surprising.  Key will be performance, the manager's discipline during the downturn,  their communication with their LP's.  It also sounds like there will be more and more focus on what is to me the essence of the real estate industry, the people.  We all want to believe we know what type of people we're doing business with and about the organization as a whole.  I thought something that someone said on this subject was particularly poignant:  "How can you underwrite how people behave when they're backed into a corner?"   

I personally experienced this when I was running a large RTC contractor office in the early 1990's and we were dealing with a lot of defaulted borrowers (formerly known to the banks as 'customers').  While the disclaimer "Past performance is not necessarily indicative of future results" is plastered all over investment prospectuses, I wonder, given human behavior, if a person's past behavior is truly indicative of their future behavior.  People can learn from their mistakes but as we are witnessing in many ways in the U.S. now, political, economic and business it seems like there's an awful lot of people behaving in ways that got them into trouble (and caused problems for many Americans) all over again.  I guess we'll just have to watch and wait to see what happens.

Leadership:

This is an excerpt from an interview with a CEO which I found enlightening.  I hope you do too:

"At the risk of oversimplifying you find at least four personalities, and you never find all four of those personalities in a single person.

• You need to have somebody who is a strategist or visionary, who sets the goals for where the organization needs to go.
• You need to have somebody who is the classic manager — somebody who takes care of the organization, in terms of making sure that everybody knows what they need to do and making sure that tasks are broken up into manageable actions and how they’re going to be measured.
• You need a champion for the customer, because you are trying to translate your product into something that customers are going to pay for. So it’s important to have somebody who empathizes and understands how customers will see it. I’ve seen many endeavors fail because people weren’t able to connect the strategy to the way the customers would see the issue.
• Then, lastly, you need the enforcer. You need somebody who says: “We’ve stared at this issue long enough. We’re not going to stare at it anymore. We’re going to do something about it. We’re going to make a decision. We’re going to deal with whatever conflict we have.”

You very rarely find more than two of those personalities in one person. I’ve never seen it. And really great teams are where you have a group of people who provide those functions and who respect each other and, equally importantly, both know who they are and who they are not. Often, I’ve seen people get into trouble when they think they’re the strategist and they’re not, or they think they’re the decision maker and they’re not.

You need a degree of humility and self-awareness. Really great teams have team members who know who they are and who they’re not, and they know when to get out of the way and let the other team members make their contribution."

The Deal World:  RCA reported this week that they are seeing marked improvements in the availability and terms of commercial real estate mortgage credit. Other characteristics are noticeably relaxed loan-to-value targets, unsecured facilities, acquisition lines, CMBS securities and even construction financing. RCA also points out that deal activity illustrates the diversity of lenders in the market as well as the attractive rates.  These are very good signs for the industry, although as history shows us it's when commercial real estate lending gets too competitive that underwriting standards deteriorate.  Oh well, it's just another cycle in the on-going saga of commercial real estate.  Will it end up looking like the rest or will it be different? Only time will tell.  But, while discipline doesn't seem to be a very important word any longer in 'real life' maybe it will become more important in 'real estate' as we've already lived through, and are still suffering the consequences of lack of discipline.

Photo:  Moon over the Sears Tower, Chicago

A friend sent me this amazing photo essay that is of particular interest to us real estate types.  http://www.boston.com/bigpicture/2010/09/human_landscapes_in_sw_florida.html. 

On the road....

Oct. 11-21:  Gotham

Oct. 26-27:  The City So Nice, They Named It Twice (PERE New York Forum) 

Nov. 5:  The City of the Big Shoulders
Dec. 8:  Mainhattan (no typo)  (INREV Committee Meetings)

These are my views and not that of my employer.

Lessons Learned!?

The most popular phrase in the investment world today seems to be “Lessons Learned.”  It’s a good one.  It’s a humble one.  It suggests that those on both sides of the fence, investors and investment managers have realized that there are lessons to have been learned from the events, decisions and behaviors of post-Lehmann era (or error).  What will be interesting to observe is if these lessons learned guide investment decisions going forward.  It seems to be universally accepted that we will not see a real estate investment environment that resembles the last ‘boom time” for many, many, many years.  So there shouldn’t be the same temptations or will there?

But, I guess some people don’t ever learn lessons.  I’m talking about the recently revealed scandal involving the home foreclosure process in America.  If what is being written in the press is proven to be true then it is a sad, sad commentary on those running some very large and well known mortgage companies, some of them parts of big banking institutions who should know better by now.  Once again, it’s the general public who have been shafted by large institutions in their quest for swift resolution to defaults on mortgage payments which in part had been precipitated by bad things that big institutions did.  And those who have had their homes taken from them, those who are unable to pay their mortgages because they’ve lost their jobs, those people and their families should get some type of restitution if it’s proven that the process by which their foreclosure was handled and their life was turned upside down, was tainted.  Isn’t anyone watching the store anywhere anymore? Why can’t people try a little harder to work thing out?

We all couldn’t wait for 2009 to end so that things would improve.  Well, as we head into the fourth and final quarter of 2010, I lot of folks I talk to are saying the same thing about this year.  Things are sluggish in the investment real estate world and as general optimists we all believe that things will improve with the dropping of the Waterford crystal ball in Times Square.  A lot of investors are still sitting on the sidelines.  Many investment committees and boards are still not sure whether the time is right to start investing again and if so, what to invest in.  Those that are contrarians have been investing, realizing that there is opportunity out there.  But going along with the crowd is much easier in most things in life and, as with Umphrey McGee’s album, there is “Safety in Numbers.”  Maybe what people seek are some signs of stability before they start writing checks again.  I hesitate to use the word ‘normal’ because I don’t know what that is anymore.  Does anyone?

 Photo. From his look, I think Sean knows something that we don't know (Photo by Patricia McMahon).

On the road....

Oct. 4-7:  The City By The Bay (PREA Conference)
Oct. 12-15:  City of Magnificant Distances (ULI Fall Conference)
Oct. 18-21:  Gotham

Oct. 26-27:  The City So Nice, They Named It Twice (PERE New York Forum) 

Nov. 5:  The City of the Big Shoulders
Dec. 8:  Mainhattan (no typo)  (INREV Committee Meetings)

These are my thoughts and not that of my employer.

"Core assets generate good, stable income together with potential appreciation"

What's going on in commercial real estate investment sales?  Here's a snapshot taken from RCA's recently released U.S. Capital Trends reports:

• Core Assets in Major Markets Dominate Sales
• Across all property types, an overwhelming majority of transactions are occurring in select primary markets. 
• Capital has become extremely concentrated to a handful of “major” markets.
• In addition to these strong geographic preferences, there is also a focus on core/stabilized properties. 
• Investors continue to avoid market risk by pursuing high-quality properties with strong occupancy and long-term leases. 
• Consequently, bidding for core properties in these “major” markets is highly competitive and the assets enjoy a significant premium in price. 
• On the flip side, a value-added situation in a tertiary market will trade at a significant discount, if it is even lucky enough to find a buyer. Valuing a property that falls in between these two extremes can be a random walk. 

Has the law of supply and demand that many of us studied in school actually returned to real life?  The answer is a resounding and simple, "YES."  There are only a certain number of properties whose personality includes major market, high quality and stabilized....the definition the industry has adopted as 'core.'  And, thus, prices are being driven up.  But wait a minute:  if you're looking to make a 'safe' investment and if we all agree that the money in real estate is made on the buy, then if you pay a lot for an asset, assuming that just because it meets certain criteria today that you'll make money when you sell it in, I don't know, three, five or seven years then I guess, duh, that you're simply paying up for reliable cash flow.  And, that my friends, is the simple story of our industry today.  Cash flow is king but cash flow can be found in other ways; it's up to those who are creative to unearth the potential.  And that is where future kings of the real estate industry are found.

A good friend of mine shared something he wrote this past week after he attended the funeral of one of his cousins this past week at Arlington National Cemetery.  His cousin was a soldier, and died at the age of 46 of pancreatic cancer.  He spent 3 years in Iraq, received a purple heart as well as a number of other decorations.  I wanted to share some of this with you:

"We read the markings on the gravestones closest to us. All military personnel: WWII, Vietnam, Korea, Operation Iraqi Freedom, Operation Enduring Freedom.  These rows of tombstones are for those that have died since 2005. Some were born in the 1920s, others in the 1980’s.  It is clear that some were 19 or 20 and died in Iraq. So sad. How can this be?"

"We pay our respects to his family. There is so little one can say.  I hope our presence there gives some comfort.  But how can it?  By tomorrow we are all back to our normal routines, they will not.  Their spirits will have to be rebuilt.  Will it be possible?  The agony from the loss of a child seems so insurmountable."

"I came home rather than stay one more day with my parents because I have an appointment that I don’t want to miss, and I’ve got important work to do tomorrow.  But isn’t there always something?  Shouldn’t I try to spend more time together with my parents at least?  The tension’s always been there – work or play? Work or family? How else could I fulfill financial obligations, etc?  I have responsibilities...In the end, I suppose it’s about balance.  I will try, probably not very successfully, to see more of my cousins. I will try to remember what counts."

Beautiful words but also words questioning what is really important in life.  Since my father died last November I have been thinking, even more than usual, about what is important in life and as my friend says, when we experience someone close to us dying, we start thinking about what we can or should do differently.  But then we get back into our routines and those ideas and feelings get pushed to the side in our struggle for the legal tender (Jackson Browne, "The Pretender").  I've heard from enough of you to know that you too think about these things and, given the demands that we put on ourselves, sometimes we're able to do things that matter to us rather than things that matter to others.  But, as my friend says, it's probably about balance and maybe we all just keep trying to remember what counts.  

On the road....

Sept. 27-29:  Tysons Corner, VA (NMS Fall Conference)

Sept. 30:  Where Sean Felix hangs out

Oct. 1:  A Great Place on a Great Lake.

Oct. 4-7:  The City By The Bay (PREA Conference)
Oct. 12-15:  City of Magnificant Distances (ULI Fall Conference)
Oct. 18-21:  Gotham

Oct. 26-27:   The City So Nice, They Named It Twice (PERE New York Forum) 

Nov. 5:  The City of the Big Shoulders
Dec. 8:  Mainhattan (no typo)  (INREV Committee Meetings)

These are my thoughts and not that of my employer.

Getting back on the road

INREV conducted structured interviews with twenty-two people recently.  This group included 13 fund managers and nine investors (of which three were fund of funds).  I found the results to be pretty poignant (something be pretty poignant or just poignant?).  Here are some of my takeaways:

1.  Both fund managers and investors agree that a failure to exercise a fiduciary duty to investors has led to a breakdown of trust between actors in the private real estate vehicle industry (at this point this relates to a minority of fund managers).

2.  Those interviewed commented on the lack of communication and transparency that pervaded as the debt crisis worsened and real estate values declined.

3.  For funds lacking a regular and established reporting procedure, investors had to force information flow.  However, investors did indicate that smaller platforms provided greater transparency of information).

4.  Investors are keen to establish more effective an participatory advisory boards.

5.  Investors want to use the shift in the balance of power to ensure the efficient removal of a non-performing manager (No-Fault Divorce provision).

Other headline topics:   

• Alignment of Interest:  Basis of Fees, Co-Investment, Retaining the Team, Compensation and Bonus Structure, Investment Committees
• Deployment of Capital
• Investor to Investor Relationships
• Investment Horizons and Liquidity
• Scale, Capability and Sophistication
• Leverage and Debt Strategy
• Cross Collateralization
• Refocus on Risk and Return

Can there be any question that (a) the balance of power has shifted and (b) it's no longer your fathers'

real estate investment management business?

Globest.com is celebrating it's 10th anniversary.  I remember when Jonathan Schein, Mike Desiato, John Salustri and their team first launched Globest.com.  They have had a significant impact on the way we get our news (and opinions).  It takes a village to operate Globest. com.  Congratulations you guys!

Congratulations to friends:

• Dr. Russell Chaplin who joined Aberdeen Asset Management.
• Dr. Peter Hobbs who joined IPD.
• John Klopp who was named Co-CEO/CIO at Morgan Stanley Real Estate.
• Tuba Malinowski who joined Stockbridge.
• Martina Malone who joined AMB in Europe
• Presidio Partners on their merger with Macquarie.
• Steve Walker who has joined TRECAP Partners

This is the place where I got a ticket this week.  The first one in almost 15 years.  But it won't hold up.  The ticket was for failing to stop for a pedestrian in a crosswalk (California law...which in itself causes potential accidents).  Anyway, although this view is sideways, there is no way that anyone driving (right to left as it were) can see whether someone is on the sidewalk or has stepped off into the crosswalk (due to the way the road and the sidewalk are constructed).  Some cop was sitting there, holding up a line of 12 cars with nothing better to do and was hoping that someone (me) would come by.  He made an amazing statement when I asked him why he had to write me a ticket (instead of giving me a warning):  "If I don't give you a ticket, I'm not doing my job!"  After I win this case, I may approach the Chief of Police in this one-horse-town and ask him about that statement.  Given that they've also installed a bunch of cameras at intersections to catch people doing something wrong so they can electronically issue tickets for as much as $475, this attitude doesn't surprise me.  I believe, everywhere in America, it's all about increasing cash flow these days. 

On the road....

Sept. 20-21:  New York

Sept. 27-29:  Tysons Corner, VA (NMS Fall Conference)

Sept. 30:  Where Sean Felix hangs out

Oct. 1:  A Great Place on a Great Lake.

Oct. 4-7:  The City By The Bay (PREA Conference)
Oct. 12-15:  City of Magnificant Distances (ULI Fall Conference)
Oct. 18-21:  Gotham

Oct. 26-27:   The City So Nice, They Named It Twice (PERE New York Forum) 

Nov. 5:  The City of the Big Shoulders
Dec. 8:  Mainhattan (no typo)  (INREV Committee Meetings)

   

 These are my views and not that of my employer.

Amsterdam

First let me apologize for the size of the font on last weeks column.  It was unintentional and I appreciate a few of you letting me know about it. 

Having been a journalist since college I appreciate good journalism and what you can learn from it.  But we’ve all seen how the media’s lack of responsible reporting distorts facts and events.  I’m sure you’ve seen this more than once yourself where you’ve been somewhere personally and when you read or heard what the media reported about it you said to yourself, “That’s not the way it was!”  Which simply is my introduction to why attending important industry conferences is, well, so important.   This week I attended the INREV conference in Amsterdam.  There were 150 people representing 50 institutional investors and 66 fund managers.  In addition to the general sessions there were breakout sessions which put the investors and the managers in their own rooms to discuss things openly.  There were also committee meetings (I’m a long-standing member of INREV’s membership committee) and clearly believe in the benefits of membership to anyone doing business or wanting to do business in the European institutional real estate world (Commercial announcement!). 

But the real benefit of physically being there (and I know to a large degree I’m preaching to the choir here) is the ability to chat informally with people,  perhaps over some type of beverage, about things that you wouldn’t write in an email or maybe even talk about on the phone.  There is the ability to randomly run into someone, that you’ve known before or are just meeting for the first time.  And, this week, there was some unexpected and very positive feedback that I got from an investor about the firm that I work for.  You just can't put a value on that kind of stuff.

So, with this as a lead-in, I’ve typed up some notes and quotes and present a few for you below.  If you’d like all my notes please email me and I’ll send it to you).

Notes and quotes from the INREV conference in Amsterdam this week:

1.   Solvency II will have a dramatic impact on insurance company real estate asset allocation when it’s adopted (2013).

a.  Introduce economic-risk requirements across the EU to incentivize insurers to develop suitable, adapted-risk control tools.

b.  The overriding purpose is risk management and how to protect the solvency of insurance companies (i.e. insuror is considered solvent if it has enough free capital to cover unexpected losses). 

c.  It’s like commercial bank ‘reserve for loan loss requirement’s and as it’s being discussed now, bonds will have a 0% capital set-aside requirement and real estate will have 25%!!!

2.     “The building industry should do something with governments rather than having governments do it to us.” (Sustainable development).

3.     The sustainability discussion in corporate board room seems to center on this:

a.  Have to?

b.  Want to?

c.  Ought to?

4.     “Be careful of the ‘green-only grand gesture’-it’s not necessarily right, economically or environmentally.”

5.     “Investors who moved away from diversification in their real estate portfolios will move back to it.”

6.     “We are looking for managers who have great ideas-we need choice.” (Fund of funds manager)

I had a great time as I saw a lot of industry friends that I’ve gotten to know over the past five or six years starting when I launched Institutional Real Estate’s business in Europe.  As I’ve said before, even on a global scale, our industry is a small world.

The other morning, after turning on the shower, I noticed a tiny spider trying desperately to make it’s way up the side of the tub to get out of harms way.  We live in the country and have more than our fair share of spiders (and especially spider webs) and many times a tiny spider seems expendable.  I don’t know what was different that morning but I reached down with a tissue and saved that little guy and put him down on the floor of the bathroom and watched him, well, scamper would be too poetic of a word, more appropriate if it were a dog, move pretty quickly away from the scene of the crime to safety.  How long he’ll survive is a mystery but that day, I gave him another chance at life.  I’m not bragging about this, just relating what may have crossed my mind in that instant, the moment we have to choose one thing or another (Malcolm Gladwell’s “Blink”).  But what this whole thing is about is our opportunity to change a life.  And it doesn’t have to be something dramatic or extreme; it could just be a ‘random act of kindness.’  It could be as simple as saying to someone who just joined your firm “Let me know if I can be of any help.”  You know what it’s like when you start a new job, right?  It’s like your first day in a new school and you don’t know anyone and they don’t know you.  Was there someone who reached out to you, to break through the fear of the newness?  And if there was, haven’t you appreciated what that person did and remembered him/her for the rest of your life?

On the road....

Sept. 13-17:  San Francisco Bay Area

Sept. 20-21:  New York

Sept. 27-29:  Tysons Corner, VA (NMS Fall Conference)

Oct. 4-7:  The City By The Bay (PREA Conference)
Oct. 12-15:  City of Magnificant Distances (ULI Fall Conference)Sept. 30:  The City That Works

Oct. 1:  A Great Place on a Great Lake.
Oct. 26-27:   The City So Nice, They Named It Twice (PERE New York Forum) 

Nov. 5:  The City of the Big Shoulders

A beautiful walk between the Amsterdam Hilton and the INREV office

Restaurant of the week:  Roberto's, inside the Amsterdam Hilton.  I was so tired last night that I just went downstairs in my hotel to their restaurant not knowing what to expect.  I had one of the best, truly, meals ever with service that was on a par with almost anywhere I've even been (and if you ask most Dutch they will admit that their country is not well-known for customer service).  

These are my views and not that of my employer.

Early Adopters?

Is the term early adopter used anymore?  Maybe, I guess, in terms of adopting iPhone type aps but probably no longer in the original sense.  I was talking with a friend the other day about the early adopters in the commercial real estate industry.  There is no doubt in my mind that the first one to realize the power of the Internet and use it is an old friend of mine, the late Ted Kraus.  Ted was truly an early adopter who had a vision to create a commercial real estate community that was both information and deal oriented.  Dealmakers is still thriving and the archive of Ted's "My Way" column are a great read, even today.  He was as outspoken an individual as our industry has ever known but he could back that up with real experience in the shopping center and retail real estate world.  He started blogging in 2005 and his last post is in March 2007, shortly before the bottom fell out.  Boy, he would have had a field day with everything that has transpired since the day the real estate music died.

I know a number of parts of the country have already started school but growing up, the tuesday(or wednesday) after Labor Day was always the start of public school.  One of my favorite things was going to buy my new looseleaf binder, see-through plastic pencil case (three-hole punch of course) and creating the tabs with the subjects (Math, Science, English, History, what am I forgetting?)  It was always a fresh start, not unlike the beginning of a new year and actually it was identical as it was the beginning of the next 'school' year.  So I know many of you, like me, have been getting your fall conference schedule together.  The interesting thing about the institutional real estate niche is how few actual investors attend most of the conferences.  When I look at the names of the panelists, they're either someone from a firm who is a conference sponsor (i.e. a lot of lawyers) or they're people on the the non-investor (i.e. pension fund, endowment, foundation, family office) types.  And I guess a lot of what I see resembles people "preaching to the choir."  But I know that there is some industry prestige that comes with being on a panel or moderating a panel (I've moderated my share of panels in my career and really like it, not so much for the prestige, but for the interaction you can create amongst the panelists and between the panel and the audience).  But like in many things in life, what you get out of conferences and trade associations is a result of what you put into them.  I look forward to seeing many of you 'on the road' this fall.

Thanks to those of you who wrote to me about Nick Tyrrell last week.  His death has obviously touched a lot of folks in the industry.  

Sean Felix-almost 15 months

On the road....
Sept. 8-10:  IAmsterdam (INREV Meeting)
Sept. 27-29:  Tysons Corner, VA (NMS Fall Conference)
Oct. 4-7:  The City By The Bay (PREA Conference)
Oct. 12-15:  City of Magnificant Distances (ULI Fall Conference)Sept. 30:  The City That Works

Oct. 1:  A Great Place on a Great Lake.
Oct. 26-27:   The City So Nice, They Named It Twice (PERE New York Forum) 

Nov. 5:  The City of the Big Shoulders


Restaurants of the week:
1.  La Mangeoire.  1008 2nd Avenue, New York (bet. 53rd and 54th street).  Excellent food.  Sit on the sidewalk or just inside on a nice night.  It's a happening area. 


2.  Midi, 185 Suter St, San Francisco.  California Brasserie menu in a cool spot inside the Galleria Park Hotel, a joie de vivre property.















These are my views and not that of my employer.

Nick Tyrrell

Some very sad news came out this week.  Nick Tyrrell, formerly Head of Real Estate Strategy for JPMorgan Asset Management in London has died.  Nick had been battling something for quite a while and now his battle is over.  But his passing was not expected and is a shock to his family and friends.  Nick and I met when I started roaming around Europe in 2004/5, working on launching The Institutional Real Estate Letter in Europe.  We'd continue to see each other over the years at various conferences in Europe and the U.S.  Nick was passionate about the real estate industry.  He was considered one of the brightest of the bright and was never at a loss for an opinion.  One of the connections that Nick and I (and his wife Joanne) had was love of music.  Don't tell anyone but we used to spend time at business conferences talking about this concert or that concert that we had seen!  Nick was full of life and energy.  He was a great ambassador for his employer and for the industry.  Nick was always available for advice and to share his knowledge.  He was very active in INREV, the European Association for Investors in Non-listed Real Estate Vehicles from the start.  People reacted to Nick.....as he pushed you to think; he was a deep thinker.  It was fun to be around he and Joanne and there was a lot of laughing:  Nick had a great sense of humor.  I was very, very sad to read the news about Nick this week.  But in addition to these memories I can picture him, on his motorcycle, riding into work in London or somewhere out in the countryside.  Something I just learned about Nick was that he was an avid Motorcycle Madness and Car Madness player on Facebook.  He was a renaissance man and I am privileged to be able to call him my friend.  My sincerest condolences to his family.   Our industry has lost a good man. 

I'm pretty sure that all of us, in one way, shape or form, has had some anxiety about public speaking.  My long-time friend, Ivy Naistadt's book "Speak Without Fear", originally published in 2004, has just been released as an audio book, read by the author herself.  The public speaking tools that she provides can help us with situations ranging from a job interview, to a small meeting, to giving a keynote speech.  When I first read it I got some great takeaways but, like a lot of things I read, I need to remind myself of what I learned so I'll be listening to Ivy the first chance I get. 





On the road....
Aug. 30- Sept. 7:  California Wine Country
Sept. 8-10:  IAmsterdam (INREV Meeting)
Sept. 27-29:  Tysons Corner, VA (NMS Fall Conference)
Oct. 4-7:  The City By The Bay (PREA Conference)
Oct. 12-15:  City of Magnificant Distances (ULI Fall Conference)
Oct. 19-21:  Lost Wages (IREI's Dealmaker's Conference)
Oct. 26-27:   The City So Nice, They Named It Twice (PERE New York Forum)















These are my views and not that of my employer.