Local Flavor

from Ben Breslau
Head, Americas Research

Yesterday, the Product Council meetings were in full swing. To give you a little local flavor, here’s one interesting session from my council. John Palmieri, from the Boston Redevelopment Authority (BRA), which guides and regulates development activity in the city, talked about the infamous Big Dig. That’s Boston’s massive project to submerge the 50-year-old elevated highway system in a tunnel beneath the city that was completed just a few years ago.  The goal was to improve the transportation network and mass transit, connect the city itself, and create open space.  Having lived through the project as a Boston resident, I can attest to the fact that it was a nightmare while it was underway, but now having it done, I can reflect on what a true engineering feat it was, and more importantly what a real gem it created in the Rose Kennedy Greenway. I live and work close to some of the beautiful new urban parks that make up the greenway and serve as places for people the city’s visitors, workers and residents to connect and recreate.   

That brings up an interesting question, too.  Where does a geographically small and land constrained city (45 sq miles +/-) grow?  John talked a bit about the new growth frontiers in Boston and explained how the BRA is planning for the future.  The primary area for growth will be the South Boston Waterfront submarket, just adjacent to the Financial District.  He showed some vision slides of nearly 20 million additional square feet potentially being built in this area over the next 20 to 30 years in all property types. This includes some large scale projects in the planning stages —obviously demand will have to come back first.  Looking ahead John said one of the Boston’s missions is to cater part of this emerging area to a different target market by creating a young, vibrant, innovative, affordable, and creative neighborhood that can attract everything from life sciences and technology firms to artists.  

I’m biased because Boston is my home, but it’s certainly a great city 
with a great future…real estate and otherwise!!

Hope you’ve all enjoyed the Spring Forum here in Beantown. See you in D.C. for the Fall Meeting.

- Ben

An Air of Optimism

from Dan Probst LEED® AP
Chairman Energy and Sustainability Services

Given my role with a full-time focus on energy and sustainability, I can’t help viewing everything through the lens of sustainability. With that said, I have certainly noticed an overall air of general industry optimism at the ULI Real Estate Summit. The attendance at the summit is up, which is a positive sign in itself. There seems to be a “buzz” that the economy is in recovery and that the industry will soon benefit from an overall increase in activity. With growing optimism that the recovery is occurring, I also noticed that the topic of environmental sustainability seems to be woven into many of the conversations. From the opening general sessions where both the Mayor of Boston and the Governor of Massachusetts both mentioned their environmental initiatives to the first day Town Hall – “Looking to the Future: What is the Role of the Real Estate Company Today?” where more than one panelist emphasized that energy and sustainability need to be higher priorities in our industry. The topic is discussed in a wide range of contexts from new transit oriented residential developments, office leases, new building design, technology and existing building retrofits. There seems to be an expectation that new and existing buildings need to become “high performance buildings” that operate more efficiently, provide a better work environment and are close to public transportation or where people live. Two of the councils focused full time on the topic, the Sustainable Development Council and the Responsible Property Investment Council, while other councils focused on related topics such as the Transit Oriented Development Council. Today, we measure progress on this topic by this increase in focus and discussion.

We will know that we have been successful when the topic of energy and sustainability is no longer something new or different, but rather is simply woven into the fabric of everything we do.

-Dan

Ready to Play

From David Slye
Executive Managing Director

As I look around the room at our reception this evening, the mood among our clients and friends is one of excitement mixed with anticipation. They are happy to be together celebrating spring, and to know that the worst of the economy is behind us.

I’ve taken an informal survey of our guests based on the mood bracelets we handed out. A majority chose the “Optimistic” band signaling that they are looking to create opportunities. The “Mediocre” folks are taking a more realistic perspective. The few “Euphoric” people I saw might have more to do with their position at the bar than their outlook on real estate.

Overall there’s a positive attitude among sellers. Most of the buyers are decidedly less confident. What that tells me is that there’s an optimistic view about opportunity but market fundamentals aren’t there yet.

The pervasive feeling here tonight is that we’re not out of the woods yet. In the last 30-60 days there’s the sense that the market is recovering. The brokers I’ve spoken to are pleasantly surprised by a recent uptick in tours, bids, and values. An increase in transaction volume will soon follow.

The directors of real estate organizations agree that they now have the best and brightest talent and are well positioned for the future.

What bracelet am I wearing? I’ve got a golf bracelet. I’m ready for spring and to play in more ways than one.

-Dave

Moving from Defense to Offense

from Lynn Thurber
Chairman, LaSalle Investment Management and ULI Trustee

We all agree that the recession is over. Now real estate organizations can shift their emphasis from defense to offense.

Making that move was the topic of today’s full-day roundtable on leading a real estate organization into the next decade. Overall this crowd was engaged and ready for the next challenge. There was lots of energy in the room. Although we all agreed that there are many constraints on organizational decisions, the participants were anxious to leave the defensive mindset of the last two years and begin mounting an offense again.

This suggestion was offered for starters- don’t ignore the legacy issues and systems that brought you success in the first place. Also, stick to your core competencies. Do what you do best. Don’t be distracted by opportunities that aren’t in your wheelhouse. 

There was also a lot of discussion about the resources of people and capital. This is the time to assemble the right team. There is plenty of “A-team” talent available right now that can quickly strengthen your platform. But, budgets have been cut so you must be strategic, selective, and prudent about where you spend. 

Simplify the way your firm is structured. Be sure that all lines of reporting and communication are crystal clear. 

Someone asked if this is a good time to start a real estate company. The answer was yes, but be sure your competitive advantage is well defined. Be distinctive. Take time to know your clients. Market a process and expertise that they can’t get anywhere else. 

There was agreement that there is no single magic formula for success coming out of this trough. Take decisive action but seize the right opportunities. Don’t do things quickly, do them right. 

It’s time put your toe back in the water again.

- Lynn

A psychological bottom?

from John Sikaitis
Director, Americas Office Research
Jones Lang LaSalle

The audience at this morning’s “Jobs, Industries, and Real Estate: Market Trends for the Next Five Years” roundtable, says YES!  Dr. Howard Wial from the Brookings Institute and I had the chance to present at this session. 

Howard’s focus was on the recovery of the overall economy and where we will see segments of growth and stagnancy.  I covered the same topic, but spun it on which office markets will lag, which will remain stagnant and which will lead the overall economy.  

You can read the full presentation I gave at this morning’s event here. Here’s a Hint: LA – lag; Denver – lead. 

Feel free to contact me with any questions or arguments you want to pose (John.Sikaitis@am.jll.com). 

I’m off to attend the firm’s client event. Hope to see you there.

- John

Quality of Life

from Lynn LaChapelle
Managing Director, Capital Markets

On the heels of Paul’s earlier comments, the New Demographics and Real Estate session brought to light how changing demographics will continue to alter the landscape and the premise behind the American dream —moving to the suburbs is alive and well.  

As urban families with young children approach school age, they will continue their flight to the suburbs in search of good school systems and a lower cost of living.  

Employers will follow their employees into the suburbs and the urban areas will see continued growth and expansion of employment centers.  Each employment center will become an expanded urban node with numerous amenities citing the “live, work, play” model.  Los Angeles’ Century City, downtown and Burbank were cited as examples.  

Look for growth in the “middle” cities such as Kansas City, Indianapolis and Des Moines as employees and families seek “life-style” changes. 

A higher quality of life will continue to drive of our live/work decisions with an emphasis on proximity to family and shorter commute times. 

Survival of this recession means getting back-to-basics.

A Jagged Rollercoaster

from John Kevill
Managing Director, Capital Markets

No shortage of dynamic discussion from my Urban Development and Mixed Use Council (silver flight.) It is a diverse group of real estate pros that includes lawyers, architects, developers, lenders, REIT execs, fund managers, private equity and offshore investors among others (so you can image the tremendous range of opinions on all topics). 

Everyone is trying to pinpoint, “Where are we in the recovery cycle?” Interestingly enough, the answer seems to depend almost entirely on what you do for a living. Private equity firms and smaller owners and lenders feel we are only about 25% through the recession, institutional owners sit are slightly higher, economists and researchers are more bullish at 45% and the service providers say we are 75% of the way along— reinforces that this is a recession we all feel in a very individual ways.

I heard a couple of other interesting comments. One council member referred to the pending recovery not in the common “V”, “W” or “U” shapes, but rather as a “jagged up and down line with an upward bias”. After the description got some razzing from fellow council members, the general consensus felt like an agreement that the markets would indeed come back in a slow steady recovery, but that it would certainly not be smooth. 

Also, this morning’s economist made a point that this recovery would be operationally driven as opposed to financially driven like the last recovery.

It will be interesting to compare notes with other councils tonight.

Repositioning for a new generation

from Paul Leonard
Research Manager

Day 2 from the ULI Spring Summit and I just stepped out of the morning session on demographics.  As a member of the millennial generation, I received quite the ego boost from the opening remarks by ULI housing fellow John McIlwain. My generation now represents the largest segment of the population, replacing my parents’ boomer generation.  

Our preferences and behaviors will define the next 40 years of development, a period which the panel predicts our population will increase by more than 100 million. As Professor Robert Lang explained, this explosion of growth will fuel $50 trillion in new development including housing ($22 trillion), commercial ($20 trillion), and infrastructure ($8 trillion) development leading to the creation of 69 million new jobs and 45 million new households. 

The clear message here is that we are not Europe. Despite our aging boomer population, we aren’t on a path toward becoming the world’s largest retirement home.  According to Lang, only India and Pakistan will outpace U.S. population growth between now and 2050…and, you heard that right, I didn’t forget about China. The U.S. is projected to increase its population at a faster rate. 

So, how will my generation redefine development patterns? 

Much like yesterday’s session, the panel believes that infill development is where opportunities lie. People are continually being drawn to revitalized downtowns, but also to vibrant town centers. Both offer a sense of place and reduced commuting times; however, don’t be surprised to see infill development led by close-in suburbs and not center cities. 

Why? Center cities have barriers to entry that drive up costs and fragment development activity. Conversely, close-in suburbs will need to reinvent themselves out of necessity. Retiring boomers will struggle to sell their mega mansions to the much smaller and economically stunted Gen X generation. Soon enough, gray fields of low density retail and housing prevalent in the suburbs will be replaced by life style centers that better meet the needs of a new generation. 

Bottom line each generation is different, but the industry must cater to the next wave. 

- Paul

Surviving Market Turbulence

from John Vick
Managing Director, Development & Asset Strategy

I wanted to drop a brief note from this afternoon’s Urban Development/Mixed Use Council (bronze flight)— this recession is unique because of the way in which it happened, meaning the recovery will be a lot different. In most markets, other than single-family housing, this problem is about lack of demand as opposed to an oversupply. The recovery is expected to be extremely granular, asset-by-asset and submarket-by-submarket (not in broad groups).

Capital is available for good deals, but there is still a disconnect in values. Owners and lenders are soon going to be forced to reconcile the differences as the debt matures…with an increase in interest rates accelerating this process.

Let’s hope that happens soon…

Myths and Realities

from Mike Smith
Managing Director, Capital Markets

After listening in on this morning’s Investing in Distressed Real Estate Mortgages session, it is apparent we all know how painfully broad and severe this recession has been on the real estate community. Yet, as markets seem to be stabilizing to some degree, it is surprising how few sales are actually taking place. Why is that?  One major reason is the Federal government’s intervention with TARP and TALF —banks are predisposed to work out deals, thus leading to fewer transactions.  In addition, with FAS 157 banks are allowed to carry loans on their balance sheet above market value which translates into less of an urgency to move loans out. And, while we are continuing to see increases in distressed properties, we are also seeing a dramatic increase in workouts.

What is the reality, where are the deals? Some are coming from:

• The FDIC and domestic banks that can afford to sell REO product,
• UCC foreclosures, 
• Becoming lenders,
• Foreign banks: they’re not subject to the same accounting rules and can take back a loan – particularly if it is a balance sheet loan.

Deals are there. You have to know where to look. I’m off to my next session to find some…

- Mike