LOS ANGELES—It’s a good time to be a seller, but we still need to embrace and adapt to technology in order to remain on top, said speakers at RealShare Los Angeles‘ “The View from the Top” panel here last week. The panelists said the US commercial real estate market needs leading-edge technology in order to maintain our competitiveness on a global scale.
Before the panel began, Hessam Nadji, SVP and chief strategy officer for Marcus & Millichap, gave a “State of the Market” address in which he said the fundamentals of the economy look strong, particularly in terms of jobs added and consumer spending. CRE fundamentals are also improving, and overbuilding will not be a problem for the next two to three years. He also said the average loan-to-value is about 60%, so there’s no lending time bomb ticking away, and high demand and search for yield is pushing capital to secondary and tertiary markets. Then he joined the panel.
During the panel, moderated by Jim Kruse, senior managing director of CBRE, Mike Lowe, co-president and chief investment officer of Lowe Enterprises, said it’s a good time to be a seller, and his firm is looking for locations that are in a positive trend. Mark Rose, chairman and CEO of Avison Young, cautioned, “Can we keep this going? What about when things go bad? We need to be prepared.”
Ethan Penner, chairman of Mosaic Real Estate Partners, was more optimistic, adding, “I think we are in a situation of prolonged low interest rates—not even Putin can stop it. We will see low rates for a long time, so we need to hunt for yield. We are on the precipice of seeing yields like we never could have imagined.”
Jeffrey DeBoer, president and CEO of the Real Estate Roundtable, said, “It’s a great time for real estate—a golden age.” He added that the policymakers are “a bit behind the curve on the state of the economy.”
Penner said he doesn’t foresee any headwinds to stop the industry’s growth due to long-term low interest rates. “The reasons why we’re doing so well have only been getting stronger.”
On the contrary, Rose said it’s a good bet that interest rates will rise this year and that the Fed will increase short-term interest rates by this time next year. Penner took that bet, adding, “We cannot survive if the US dollar doesn’t correct itself. The Feds won’t kill that. I bet rates will stay where they are now.”
Lowe asked rhetorically, “What kind of lending behavior will the continued low-interest-rate environment encourage? Recklessness? And what will stop it?”
Nadji said, “The better the dollar does, the less pressure on inflation.” He predicted net-net a status quo for interest rates over the coming year.
DeBoer wondered aloud if the pending election will impact the industry at all, noting that after September Congress could shut down with EB-5 expiring September 30. “Congress will only work 60 days between now and then, which is a tremendous burden on policymaking.” He added that he is not optimistic about big legislation like Dodd-Frank getting done.
Regarding FIRPTA, the Foreign Investment on Real Property Tax, Penner commented on how shocked he is at how we treat capital that wants to come into the US, saying FIRPTA is discriminatory against our country. DeBoer agreed. “These rules are unfair.” He noted that infrastructure improvement comes under real property in FIRPTA, so these monies could fund infrastructure improvements if used properly.
Kruse asked panelists about the impact of technology in the near term. Rose said, “There will be changes you have to adapt to—it has to happen because you need to promote the kind of change we want. Office space runs at 40% utilization—that’s not efficient, and it needs to change.”
Lowe said we need to use technology to maintain our competitiveness on a global scale, and Nadji commented that it’s a “survival of the fittest” mentality—retail profits from sales are at an all-time high because this sector got hit so hard during the recession and with Internet sales that it regrouped and rallied. “We’ve had very little absorption of office space since the end of the recession because of technology—change is inevitable.”
Penner said there will be a day when capital is scarce again, and “those who can build their model for that day will survive.” DeBoer added, “Innovation and tech is something you guys deal with every day, but when I go to the Hill, they say you’re real estate, a fixed asset. They don’t get it.”
Kruse shifted gears and asked the panelists what leadership qualities are necessary for success. Lowe said, “It starts with conviction of where the markets are headed, followed by discipline. Then come communication, transparency and honesty. Lastly, focus and dedication to the cause of getting through the downturn.”
Rose agreed that conviction is necessary, “but there has to be flexibility. If you’re not flexible, you get left behind.”
Penner pointed out that knowing your purpose is key. “You need to be able to distinguish your purpose from others’.”
The discussion turned to tax reform, and DeBoer said, “Tax reform is a very dangerous thing. I like it with amendments, but I don’t think it’s good for our industry. But I would like a program that rewards tenants for energy efficiency.”
Lastly, Kruse asked the panelists, “What will you never move away from?” DeBoer said, “Fact,” Penner said, “Foreign investors,” Rose said, “Culture,” Lowe said, “Creativity and innovation,” and Nadji said, “Fundamentals.”