Over 160 board members, faculty, students, and guests gathered for the Graaskamp Center Spring Board Conference on April 14th and 15th at the Four Seasons Hotel in Chicago to discuss the current industry outlook and how long the current momentum will last. As the real estate industry continues its upward trend after the economic recovery, the focus on examining the industry’s propensity to over-lend, over-build, and over-invest in times of prolonged optimism was both relevant and timely.
Session 1: The CEO Outlook
The CEO panel gave attendees a high-level overview of the opportunities and challenges facing real estate investors today, including real estate capital markets and operational issues as well as domestic and international geopolitical risks. Panelists offered their insights on how long they expected the current business cycle to last and what attendees should be doing now to prepare for the changing cycle. The panel was moderated by David Rubin, Senior Managing Director of Capital Markets at MB Financial Bank, and included Benjamin Butcher, CEO, President, and Chairman of the Board at STAG Industrial, and Eugene Gorab, CEO and President at Greenfield Partners.
The panel began with a discussion of the “structural revolution” of real estate over the past 25 years since a large number of private REIT’s went public. The panelists shared their thoughts on the increase in inter-connectedness of real estate and the increasing disassociation between capital markets and real estate fundamentals. They also touched on the increasing share of capital held by large sovereign wealth and pension funds (including international funds, such as the Chinese, German, and Norwegian ones) and the consequences of their weight, in particular because they tend to move in packs.
Looking forward, both panelists believed that the diversification of the real estate industry is a good thing. Gorab emphasized that domestic oil and gas are here to stay and that office space is evolving, for example, with a decrease in the number of square feet required per employee. Butcher pointed to currency-warfare caused by international monetary policy as his concern for the next shock to real estate.
Session 2: Finding Opportunities in Unpredictable Times
The second panel focused on the question of how to determine when pricing levels are nearing their peak. As prices and transaction volumes surpass their pre-crisis peaks, and cap rate exceed their pre-crisis lows, moderator Robert Karner, Managing Director of Annaly Commercial Real Estate Group, led panelists in a discussion about which sectors or geographic areas they believed still contained value. Panelist Sujan Patel, Managing Directory of Northstar Realty Finance gave his insights on healthcare and select-service hotels as areas where less-compressed cap-rates can still be found. Panelists John Bucksbaum, Founder and CEO of Bucksbaum Retail Properties, and Jeff Friedman, Co-Founder of Mesa West Capital, joined Patel in discussing how to see opportunities where “flight to safety” investors don’t. They also discussed how the spread between the risk-free rate and cap-rates was almost zero in 2007, but because of near-zero interest rates today, there is currently still a positive spread. For this reason, the panelists were not convinced we had reached peak prices yet. Friedman added to this that banks are currently active, but not aggressive – another difference from 2007.
Session 3: Navigating Macro Risks: Oil Prices, the Strong Dollar, and Slowing Growth Abroad
The final panel took a slightly broader look at the industry from the point of view of macro risks. Moderator Erwan Quintin, Associate Professor of Real Estate and Urban Economics at the Wisconsin School of Business, led a lively discussion with panelists Eileen Fahey, Chief Credit Officer at Fitch Ratings, and Antonio Mello, Professor and Frank Graner Chair in Finance for the Nicholas Center for Corporate Finance and Investment Banking at the Wisconsin School of Business, on problems in Europe and China and the effects they may have on the United States.
Quintin began by offering a “state of the world” overview of the path to gradual recovery, the positive recent state of the United States, and the boosting effect that lower oil prices were expected to have on global demand. He then discussed the current macroeconomic risks, including geo-political risks, the possibility of interest rates rising, and currency volatility.
Fahey then dove deeper into the interest rate risk the effects of quantitative easing. She discussed how the market can accelerate its own liquidity when the Fed eases, and how employment issues and low wage increases in the US indicate that there is probably still some time before interest rates rise. She continued by touching on her opinion of each of the major property sectors – office is stabilizing (but there is concern about Houston, Dallas, and Washington DC), hotels are also stable but may have peaked, retail is stabilizing but slower than the other sectors, and multi-family is stabilized and possibly overbuilt in hot cities such as Austin and Charlotte.
Mello wrapped up the panel by discussing more Europe more deeply. He discussed the intra-eurozone imbalances that persist in prices, labor markets, and liquidity. He also commented on the difficulties that Spain, Portugal, Italy, and Greece have in economic adjustment, especially because their lack of growth has made it near impossible for them to deleverage, and thus any growth they do have is fueled by debt.
Afternoon Keynote: The Global Economic Outlook and Investment Trends
The meeting concluded with a keynote by Jacque Gordon. He began by asking the question “where are we in the cycle?” and then continued to try and answer it. He commented on how cycles tend to be eight to ten years, with short, sharp downturns and more gradual upturns. He directed attendees to look at ten-year bond yields and five-year rates in order to see the effects of oil reduction and the inflationary rate. He touched on China and effect on the US hotel industry as the largest source of international tourism. Gordon then moved on to one of the questions that’s been asked frequently lately – whether or not the trend of millennials renting rather than buying is a long-term trend change or just a “blip” as they are unable to afford housing until later than previous generations. Gordon wrapped up his keynote by pointing out big markets he saw as emerging, including Columbus, San Diego, Nashville, and Salt Lake City.
A very special thank-you to our sponsors:
Annaly Commercial Real Estate Group
Brennan Investment Group
Draper and Kramer, Inc.
Keeley Construction, Inc.
MB Financial Bank
Prudential Mortgage Capital Co.
Please visit the conference site for additional information and to view speaker presentations.
Photo credit to Steve Becker Photography.