Graaskamp board members, faculty, students, and guests gathered for the Graaskamp Center Spring Board Conference on March 31 and April 1 at the Four Seasons Hotel in Chicago to discuss the real estate markets current outlook and debate how much of a run remains on the current cycle. As the real estate industry continues its upward trend after the economic recovery, the focus on core assets in gateway cities that offer solid (safe) returns and offer liquidity was on full display throughout.
Spring Board Dinner Honors Professor Stephen Malpezzi and Features Cornerstone CEO Scott Brown
Michael Brennan, Irgens Executive Director of the James Graaskamp Center for Real Estate, kicked off the spring board dinner with opening remarks which highlighted the recent successes of the center - namely enrollment increasing to nearly 300 real estate students and the expansion of the “Graaskamp on the Road” speaker series to five national cities this year.
Tim Riddiough, Academic Director of the Graaskamp Center for Real Estate, gave heartfelt remarks in recognition of Professor Stephen Malpezzi, Professor of Real Estate and Urban Land Economics, University of Wisconsin-Madison. Professor Malpezzi has served as a faculty member for 26 years and a leader in the field of housing and urban development research. Formerly of the World Bank and research associate at the Urban Institute, Malpezzi is a distinguished scholar who has worked in Egypt, Ghana, India, Indonesia, Jamaica, Kenya, Korea, Malaysia, Mexico, and the United Kingdom. Professor Malpezzi often joked that “he loves students because they will soon become alumni.” Malpezzi not only leaves behind his prized work: “The Wisconsin Program in Real Estate and Urban Land Economics: A Century of Tradition and Innovation” but also a treasure chest full of memories.
To wrap up the night, Scott Brown, Global President and CEO of Cornerstone Real Estate Advisers, gave an insightful market outlook of the industry. Brown’s main themes included interest rates, geo-political risk and urbanization. Specifically, Brown predicted that interest rates will continue to rise and the impact of those changes are still yet to be determined. He highlighted the political risk of the future U.S. Presidential election, the slowdown in China, uncertainty in Europe and on-going terrorist attacks sweeping the globe. Brown mentioned each of these factors are forcing investors to be cautious and measured in their investment strategy. Lastly, Brown stressed focusing on demographic changes in emerging markets particularly in global cities which he predicted will see the lions-share of future real estate investments. Overall, the dinner was a wonderful kick-off to the dynamic and informative panels and speakers throughout the rest of the conference.
Session 1: The C.E.O. Outlook
The conference began with an all-star CEO panel comprised of Debra Cafaro, Chairman and CEO, Ventas, Inc., David Neithercut, Graaskamp board member and President and CEO of Equity Residential; Randall Rowe, Chairman & Founder, Green Courte Partners; and moderated by our own Timothy Riddiough, Professor and Academic Director of the Graaskamp Center for Real Estate, University of Wisconsin-Madison School of Business.
The CEO panelists were first asked to discuss the current macroeconomic climate from the perspective of their business. The group presented a generally positive outlook of the current economy in terms of their businesses, with some strong negative caveats. Representing his multifamily interests, Neithercut indicated that “things are very good for us right now” and that he expects slow and steady demand growth for multifamily housing going forward. Cafaro agreed with his optimism, saying that she expects continued growth in the senior housing and healthcare niches due to changing demographics. Both also agreed that asset valuations will continue to grow as Central Banks continue to utilize Quantitative Easing, and global investors search for yield in a few popular asset classes.
Rowe, however, pessimistically explained that he sees a much more negative outlook for the economy at large. Expressing concern for the impacts of currency and interest rate battles as well as the global thirst for yield, Rowe explained that “we are in a situation where we have bubbles developing”. Elaborating further, he explained “I see smart people selling assets and new people with a lot of capital buying the assets.” Reflecting the truth in that observation, Neithercut jumped in to mention how Equity Residential is currently one of the biggest net sellers on the market, recently unloading $7 billion worth of multifamily assets. Cafaro summed up the CEOs’ general sentiment on the current economy, recommending that we enjoy the current climate but protect ourselves from future risk, and offering wise words: “never confuse brains with a bull market”.
Panelists also were also asked to elaborate on the current state of technology in Real Estate, offering sometimes surprising examples of technology they considered to be disrupting and affecting the field. Cafaro indicated that “Real Estate is technologically immature, especially senior housing,” and mentioned innovations in electronic medical records which have yet to truly influence Real Estate. Airbnb was constantly mentioned as a technology that is becoming increasingly relevant but is not yet fully understood by the industry, and Cafaro mentioned the potential of using an Airbnb model with senior housing. Changes in the quantity of goods ordered online and the issue of increased package delivery are serious issues to Neithercut, who explained that apartment buildings are having trouble handling the increased package volume and that for his tenants, “the expectation in a luxury building is that we will manage this for them”. Finally Rowe piqued everyone’s imagination by discussing the potential impact of autonomous cars of the parking industry, as well as highlighting the changing trends in retail favoring restaurants and other “experiential” shopping.
Lastly, the panel was asked their opinion on changing demographic trends. Cafaro was especially optimistic about aging trends, explaining that “our whole business is built on demographics…right now 10,000 people per day become Medicare eligible.” Rowe agreed with the positive assessment, focusing on the increased number of people looking for an affordable retirement lifestyle right now and the demand this will spur for manufactured housing. Demographics are seen to be helping in the luxury market as well, with Neithercut indicating that millennials and baby boomers (who represent 15% of his tenants,) alike are interested in living downtown in high density urban environments.
The CEO panel was a fascinating start to the conference, and it was great to hear such high level analysis of the current economic, technological, and demographic climate. Though the panelists recommended caution in the case of bubbles, they indicated that other changes—particularly demographics--offer significant upside potential if one understands the change and responds accordingly. With so many changes in the air, it truly is an exciting time to be in Real Estate.
Session 2: Where are the Public Markets Headed? Insights, Picks, and Pans
Moderator and AREIT board member, David Toti, Managing Director and Senior REIT Research Analyst of BB&T Capital Markets, led a discussion on strategies for investing in the REIT sector and where to find the opportunities today with panelists and co-AREIT board members Steven Buller, Portfolio Manager at Fidelity, and Ken Statz, Managing Director at Security Capital, as well as Joseph Fisher, Portfolio Manager at RREEF/Deutsch, and Larry Raiman, Portfolio Manager at LDR Capital Management.
Most portfolio managers are waiting with anticipation for the future of interest rates and REITS. Buller highlighted that ‘portfolio managers bound by their mandate are unlikely to change their investment style but, may be willing to move up the risk spectrum’. Many of the panelists mentioned that they plan to adhere to their investment style through the future volatile markets. With the increased involvement of the Federal Reserve in the markets, REITS are become more correlated to long-term interest rates than short term rates. According to Statz, ‘Abroad, Quantitative Easing in Europe is helping to accelerate real estate values as the REIT/Bond spread continues to collapse’. Statz further conveyed that the REIT markets are good at dissecting the supply risk which he strong believes is a relevant problem in urban locations. The public markets seem to be reacting to the supply concerns and determine which locations could see the largest supply shortfall/gain.
The panelist were bullish on assets types such as self-storage, industrial and hotels (despite the fact that hotels REITs dropped by nearly 25%). Some panelist believe that portfolio managers may be targeting the next lower level of REITS in order to gain yield. Buller argues “the diversity of what is considered a REIT is good for the overall REIT space to create scale”. The pending GICS classification, many believe, will increase “generalists” investment in REITS and the overall weight in the portfolio makeup.
Overall, the group agreed that the presence of public REITs will continue to grow and compete increasingly with the private markets.
Session 3: Adapt of Perish: The Changing Face of Retail
Robert Bond, Graaskamp board member and Co-founder and President of the Bond Companies moderated a panel on the factors affecting the changing retail landscape. “Millennials” and “experiential” were the key words of the panel, as young adults are driving the change of traditional shopping centers to a multi-dimensional “fun” experience. Restaurants and entertainment venues, like bowling alleys and movie theaters, are complementing shopping areas to offer a greater experience to the consumer. At some locations, these new facilities are taking the spotlight away from previous anchor tenants, like Sears, which one panelists predicts will close shop in the coming years.
Scott Ball, President and Chief Operating Officer of Starwood Retail Partners, is spending money to renovate and also convert the vacant anchor buildings to office space. The resulting mix-use building ensures customers to the shopping and dining experience, and full utilization of existing space. With regional malls across the country, Scott does not see bricks and mortar stores going out of business to Internet sales.
Marci Carl, Vice President-Leasing with Bucksbaum Retail Properties, LLC, was more optimistic about the future of shopping centers, citing the huge sales at a mall in Palo Alto, the technology capital of the world, where shoppers clearly have the ability to shop online but still choose to go to the mall. Beyond developing experiential centers, like a rock climbing wall inside an REI store, Carl spoke recent successes in bringing in foot traffic to shopping centers around sports venues, and how the center maintained profitable during the off-season.
Scott Stefanik, Principal at Midwest Commercial Realty, echoed his group’s sentiments that the demise of the shopping mall is false. Strong performing malls are getting stronger and those underperforming are being redeveloped into more functional spaces to meet that market’s demands. Retailers are confident in their future, even building new brands to appeal to wider customer set. To drive in-store sales, some retailers are preventing clients with repeated online returns from making future online purchases.
Session 4: Regional Investing in the United States: What’s Hot? What’s Not?
The final panel of the day was an excellent discussion between Kim Adams, Portfolio Manager at JP Morgan Core Real Estate Fund; Pam Boneham, Graaskamp board member and Managing Director at Cornerstone Real Estate Advisors; Maxwell Peek, Executive Vice President at Waterton Associates; and Johannson Yap, Graaskamp board member and CIO and Co-Founder of First Industrial Realty Trust. Panel moderator Brian McAuliffe, President of Capital Markets/Institutional Properties at CBRE, kicked off the panel with a brief discussion on regional investing in the US where our respective panel members were concentrating capital and then moved onto a discussion of the overall market.
Boneham mentioned the growth in the south and western parts of the country is being driven by positive demographics and strong fundamentals such as economic and job growth. Peek added to this thought, by discussing a few areas where Waterton held positive views such as Atlanta, South Florida, California and Dallas and more pessimistic views of Houston and New York. Obviously the Houston market is hurt by the recent uncertainty and volatility in the oil markets and some believe valuations are peaking in Manhattan. At that point, the initial discussion moved towards the commenting on the overall health of the CRE market and specific property types. A theme here was the volatility of other markets and global economic uncertainty have had on CRE.
Equity markets have had a big impact on CRE and although the market has rebounded some on the panel don’t believe there will be double digit returns in CRE like the past few years. Shile discussing valuations for gateway cities like San Francisco and NYC, Adams brought up a very interesting point that although properties are trading at high levels the bidding pools in these deals have thinned considerably. So it seems valuations and fundamentals are still strong but things could be changing in the next 12 months or so and we will most likely will see single digit returns. Yap discussed possible repercussions if there is a slowdown in the near future and believes there will be flight to quality in his sector of expertise, industrial. The panel agreed that industrial is still an attractive sector in the U.S. and that large core funds are under allocated industrial in the sector because of the difficulty in added substantial nominal values to their portfolios in the property type rather than having a pessimistic view.
Overall, it was a very interesting discussion with many keen observations from real estate professionals who work across the industry in a wide array of capacities.
We once again would like to thank our sponsors for another successful event: Brennan Investment Group, CBRE, Ridge Development, MB Financial Bank, Draper and Kramer, CIBC, RealFoundations, Bond Companies, Bank of America Merrill Lynch, and JLL, as well as our board members, students, and guests.