Executive Roundtable:
Institutional Investment Market

MODERATORS


Michael G. Desiato
Editor in Chief
Real Estate Media Inc.


Dale Anne Reiss
Global Director, Real Estate
Ernst & Young


PARTICIPANTS

 

Andrew Friedman
Principal
Lend Lease

Jeffrey Johnson
EVP/CIO
Equity Office

Jeanne Myerson
President/CEO
Swig Co.

Robert Underhill
EVP, Capital Transactions Group
Shorenstein Co.

 

By Brian K. Miller


A jobless recovery, the India factor and the inner thinking of high-net worth investors. These were just some of the topics covered in a recent panel discussion co-sponsored by Real Estate Media Inc.--GlobeSt.com's parent organization--and Ernst & Young. Heavy-hitters from a variety of firms joined in the high-level San Francisco meeting and shared their thoughts on where the industry is now vis a vis the long-awaited recovery--and where we are going.

Michael Desiato : From recent GDP numbers, it looks like the economy is back. Do you see signs that the economy is improving or are there more challenges ahead for real estate owners, operators and investors ?

Jeanne Myerson: In Southern California , it's still pretty sluggish. Here in San Francisco , there is no evidence of any economic improvement. In New York City , it depends on what part of Manhattan ; there's no growth but stability in midtown and weakness in the secondary submarkets. Houston is hitting bottom with not much growth Downtown, and Dallas is weak.

Andrew Friedman: In the Bay Area, we've seen some positive net absorption for the first time in eight or nine quarters. But we're still bearish on rent growth, which we think is three-plus years out in Northern California . In Southern California , we're seeing job growth in Orange County , strong leasing in the Tri Cities. Downtown LA and Westside are soft.

Jeffrey Johnson: The economic recovery is leading on the West Coast and going east. For the most part we've seen better space leasing up faster. When there's a demand shortfall, Bs move to As. In San Francisco, all of our bay-view space--One Market and One Maritime--is filling up to where we are stopping concessions and rent givebacks; same with Boston. But the non-view space is not doing as well. We could use tenants for larger spaces in the lower floors of buildings. There is a lot more smaller- and medium-tenant demand for full-floor and below. The 200,000-sf guys aren't there, and through the second quarter we were still seeing terminations. On a macro basis, we're not seeing occupancy falling but there's also no net absorption.

Robert Underhill : There is no indication that things are improving, but we are seeing more leasing activity. In Charlotte , for example, which was comatose for a while, there is a bunch of activity. The West Loop of Chicago is really quiet. In San Francisco , there's been more activity. The economics are still very rough, but more people are saying 'things can't get much better from a tenant's perspective, so let's do something now.' So there are more people trying to take advantage of market conditions. In "view space" we see effective net increases in rent six-, nine-, 12-months out. At the same time, there's deterioration in lower floors, and a widening between As and Bs.

Desiato: We've been hearing a lot about the jobless recovery and jobs moving overseas—to India , China and other countries—in the next 15 years. Is the current lack of tenants for buildings' lower floors a part of these trends, and is this a real concern?

Dale Anne Reiss: Manufacturing has been going offshore for 40 years, but our peer group wasn't that involved because it didn't deal much in manufacturing space. But this group does have to deal with white-collar jobs going offshore and going offshore big time, and there's no sign of it diminishing. Based on Forrester's forecast, and using 200 sf per person, that's getting close to 700 million sf. Companies will continue to take the bay views, but maybe not the backside, and for sure they don't need that big block of space in the bottom of the building.

Myerson: It's one thing if a property is multi-tenanted, but if you've got big properties in Silicon Valley or East Bay that were just supposed to be call centers or back office for technology, those may be less flexible.

Underhill: There will be a bigger impact in bigger markets as well as markets like Tampa , which has an abundance of single-floor, 50,000-sf product (that typically houses the type of jobs that are going overseas).

Johnson: The problem is real and will probably have a significant impact over time. It's not a tomorrow issue, but it will have an effect on secondary locations. I would hate to own a call center in Omaha right now.

Desiato: Offshoring may be good for corporate earnings, but it doesn't bode well for the future of real estate in the US . What can government do via incentives to keep companies in business in the US ?

Reiss: It's the US that can invent the new mousetrap. When manufacturing went offshore, the service economy developed. Now with back office and tech jobs going offshore, the question is what will replace it. Is it the right thing for government to legislate away or put more dollars into supporting nanotechnology or biotechnology or the new next thing?

Underhill: You can't legislate the export of jobs. Global trade is a net positive. When two people focus on their core competencies, both groups improve. If you put on trade protection, that is really going to be bad for the US real estate industry.

Desiato: According to a survey to be released by E&Y, private equity funds will raise $21 billion in cash over the next 12 months. With all the capital searching for deals, have all the good opportunities dried up?

Reiss: There aren't as many opportunities because the way the industry is financed is different. In the past, financing was largely through recourse debt, so when one property went bad, it had a domino effect. Many players went down because one building went bad. This time around properties are more insulated.

Myerson: Behind the scenes, there is a lot of restructuring of ownership before properties get into default. Owners are bringing in new equity partners and taking advantage of low interest rates, because they don't want to let go of product.

Desiato: We're hearing a lot about high-net-worth investors. Are you seeing any more transactions from them?

Friedman: We're seeing more private equity funds backed by just a couple of people that are playing in the $80-million range, where before they were staying in the $20-million range. We're also seeing more players in general. We've seen three or four new opportunity funds pop up in the last several months. There are opportunity-fund deals where there are 20 people bidding and five of them are going to the same capital sources for 90% of the deal.

Desiato : Have corporate governance issues changed the way you do business? And has Sarbanes-Oxley added cost to investment and ownership?

Reiss : It's impacting everybody, including private companies, even though it officially applies only to public companies, law firms and investment banks. CalPers is putting its requirements onto private investors. The ripple effect is far greater than ever anticipated, and we haven't seen the end of it.

Desiato : Closing comments. What are your predictions for the real estate market in 2004? Is it stay alive 'til 2005?

Myerson : In San Francisco , I would say its 'Stay Alive 'til 2008.' Our company has low leverage; we've owned a lot of our properties for a long time. But it's going to take many years because we will have to se significant job growth for rents to improve. New York is a different situation; because they lost so much space, they're not in as dire straits.

Underhill : We're seeing things deteriorating at a less rapid pace. If there is an increase in interest rates, we may see some stress around the edges and floating-rate debt that needs to be changed over. I see nothing positive in 2004.

Friedman: I don't disagree on San Francisco , 2004 looks a lot like 2003. There's a lot of capital, and pricing continues to be aggressive. If interest rates start rising, I see some capital flowing back, but I don't see a sea change in capital leaving real estate and going back to other asset classes.

Johnson: It's a great time to buy in 2005.

Reiss: With the diversity of players we have in the marketplace, one man's problem is another's benefit. So if interest rates spike and some people have trouble, if CMBS does poorly in the hotel market, there are funds standing there with billions, waiting to invest. The industry is so mature and so complicated with so many players that it's easy to imagine that, whatever happens, someone will benefit. It just might not be core players we associate with real estate.

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