Experts: Real Estate Wounds Slow to Heal

Goizueta real estate expert Roy Black recently moderated a panel that discussed various aspects of the industry. PHOTO: Ian Muttoo/Flickr

Earlier this year, a panel of real estate experts joined moderator Roy Black, Professor in the Practice of Finance and Director the Real Estate Program at Goizueta Business School to discuss the state of the real estate industry.

Although it’s been a full three years since the bottom fell out of the real estate market, the panel noted that not only have the wounds yet to heal, any inklings of an all out recovery are few and far between.

A pair of recent market reports back up the sentiments of the panel

While there are pockets of growth and a long line of well-capitalized investors hunting for quality property, the commercial real estate market remains burdened by a lethal combination of toxic assets, foreclosures and continued stagnation on the jobs front.

According to a report compiled by Jones Lang LaSalle, a global commercial real estate firm, there is some good news.

Global direct real estate investment volumes in the second quarter of 2011 topped $101 billion, an increase of 7 percent over the previous three months and nearly 50 percent from the second quarter of 2010.

But along with the good news comes the not so good news.

Deloitte & Touche’s latest commercial real estate (CRE) outlook report concludes that more than $1.7 trillion worth of commercial real estate debt will come due between 2011 and 2015 — and that an estimated 60 percent of those loans, held by banks and other lenders, are underwater.

“All our problems are because of leverage. We just moved that from the private to the public sector. We’ve still got to fix that,” panelist Arnold Whitman, CEO and Co-Chairman, Formation Capital told the audience. “I don’t see things getting better any time quick.” Whitman joined fellow panelists Clay Adams, Acquisitions Director and Chief Investment Officer, Jamestown and Felix Figueroa, Director, Northwestern Investment Management Company, LLC for a cautiously optimistic discussion.

The event was sponsored by Goizueta’s Alumni Mentor Program.

“There is an enormous amount of capital slushing around the world,” noted Adams. “We’re starting to see two things: real estate prices escalating and escalating quickly — especially in top markets.”

Since mid-2009, U.S. commercial property prices have increased by nearly a third as capitalization, or “cap,” rates declined across all property types. High quality office properties with stable net operating income experienced the sharpest declines in cap rates and, as competition remains fierce for these type properties in primary markets such as New York City, San Francisco and Chicago, the panelists expected cap rate compression to continue. These declines in cap rates have sent investors fishing for higher yields in secondary markets; as a result, cap rates in those markets, including Atlanta, Miami, and Charlotte, N.C., have been declining as well.

For deals industry insiders deem sound, there is a bevy of well-capitalized competitors ready to pounce. Often times, the frontrunners are heartily-funded real estate investment trusts, or REITs.

“As a lender,” noted Figueroa, “the deals that I like everybody likes — lower leveraged, good properties with good cash flow.”

Whitman agreed, but added that it’s “hard to compete as a private investor” when the competition is swimming in cash. “There’s very little supply coming into the market and a lot of demand,” he said.

Figueroa explained that Northwestern is “back to full allocation” on both the debt and equity sides of acquisition deals. The company is concentrating on the “four major food groups” of office, industrial, multifamily and retail although Figueroa admitted “on the equity side, there are very few retail” opportunities available. (According to the National Association of Realtor’s commercial research publication, Commercial Real Estate Outlook, retail vacancy rates are forecast to decline a mere half a percentage point to 12.6 percent by Q2 2012).

An area of CRE that appears to have all but by-passed the ongoing recession is the senior living and assisted care facility segment. Just weeks before “all hell broke loose” in the real estate market, said Whitman, he closed a $1.6 billion deal — at the time the largest asset in the company’s portfolio. As things went south, everyone involved in the deal — especially the lender — got nervous.

But since inking the deal, operating income has improved 10 to 12 percent per year and “we’ve gone from $190 million in cash flow to $300 million in cash flow,” explained Whitman. He attributed the growth to the nature of the senior housing market.

“We’re the only real estate asset class where you can get amazing cash flow dollars to rent dollars without arbitrage,” he added.

Though not solely a real estate asset (assisted living facilities are also business operations), this segment continues to see substantial growth. The National Investment Center for the Seniors Housing & Care Industry estimates the investment in properties alone is between $245 and $275 billion. Part of the reason Whitman is so bullish on assisted-living is that it’s need-driven.

“People aren’t choosing to go into facilities, they need to go into facilities,” he said.

With numbers like that, one might think investors would be flocking to opportunities in senior living, but they’re not. This is due, in part, to the fact that the industry is heavily regulated and that many facilities receive government funding. Dealing with the government adds a layer of complexity and uncertainty that some investors won’t tolerate.

In terms of the CRE job market, of interest to several members of the audience who were current and past students of Black’s, Adams predicted “growth on the acquisition side.” The reason, he noted, was that assets keep changing hands and those who own them need analysts and operations people to manage them.

“Knowing how to read leases and understand assumptions,” he said, are coveted skills.

According to Figueroa, shops that didn’t do layoffs did reorganize and they’re reorganizing again. “Those guys are getting back on the deal-making side. That leaves a gap on the operations side,” he said.

And while it’s not breaking news, green building and sustainable technologies are seeing increases and are becoming de facto standards for new buildings. While the number of buildings in development is significantly lower than it was before the bust, the Deloitte & Touche report does dub the pipeline for commercial mortgage-backed securities (CMBS) “encouraging,” stating that 2011 totals will range from $35 billion to $50 billion — up from $15 billion in 2010. Not surprisingly, the report notes investors will remain hard-pressed to secure funding for transitional or higher-leveraged deals.

Although there is a sizeable amount of capital pacing the sidelines and firms licking their chops to invest, Figueroa suggested investors remain mindful that there is still a tremendous amount of risk lurking in the market.

“The reality is that CRE debt has been pushed off to the future,” he explained. “That’s a reality people ignore when they’re paying five percent cap rates.”

- Allison Shirreffs


Side Effects Great if Debt Ceiling Not Raised

Tom Smith told CBS Atlanta the effects on a government default and credit rating downgrade are, in some cases, unpredictable.

Congress continued to debate Thursday on plans to increase the nation’s debt limit and cut government spending less than one week before the United States Treasury estimates it won’t have enough cash to pay all of its obligations.

At issue is a balance between raising the debt ceiling — the amount of money the government is able to borrow — and cutting into a growing deficit. Raising the debt limit would allow the treasury to continue cutting checks but major agencies have hinted at downgrading the government’s credit rating should the nation go into default.

Politicians on both sides of the aisle have debated over a course of action for weeks as uncertainty grows.

Tom Smith, an assistant professor in the practice of finance, said there’s no way of knowing exactly what will happen to the economy in the event of government default.

Such an instance has never occurred.

“I think it’s a game of chicken with the economy they’re playing and it’s a pretty drastic game of chicken,” Smith told CBS Atlanta Wednesday afternoon (VIDEO).  I think they will come to an arrangement — a deal — and I hope it’s an arrangement that will actually make sense.”

Smith said interest rates on car and home loans would likely go up because they’re tied to treasury securities. How much and how quickly interest rates rise is tough to predict.

“Everyone should worry about a failure to agree on the debt ceiling and a debt default,” Goizueta professor Ray Hill told the Atlanta Journal-Constitution. “It would be like jumping off a cliff without knowing how far you could fall.”

Hill, an assistant professor in the practice of finance,  said he’s skeptical of predictions that a downgrade and interest rate increase will cause another recession, but adds it’s not worth the test.

“I can imagine scernarios in which failure to lift the debt ceiling does not lead to default and scenarios in which default does not lead to a severe disruption in financial markets,” he said. “But it is not worth taking the risk.”


Smith (bio) joined Goizueta in 2008. He has held faculty positions at the University of Illinois–Chicago, National-Louis University, Loyola University, and North Central College. Smith received a PhD in labor and demography/cultural economics and policy from the University of Illinois at Chicago in 1998 and holds a BA from Illinois Wesleyan University. He has also served as a consultant for the arts, music and entertainment industry. His expertise is in cultural economics — including sports, arts and religion –  real estate economics and labor economics.

Hill (bio) joined Goizueta  in 2003 and teaches managerial economics and finance. Hill began his academic career by teaching economics at Princeton University, before leaving in 1982 to become an investment banker. In that role he worked around the world.  Hill returned to his native Georgia in 1993 and worked for ten years at Mirant Corporation and its predecessor, a subsidiary of Southern Company. During that time he served as the company’s chief financial officer, except for an eighteen month stint as a CEO of one of the largest independent power companies in Asia, which was owned by Southern. His expertise includes project finance, monetary policy and energy economics and finance.

Goizueta in the News: July 28, 2011

Notable comments from Goizueta staff, faculty and students will be shared each week along with news on alumni, programs and rankings. Click here to review previous media updates. You can also inform Goizueta Newsroom of media postings (email).

Georgia Public Broadcasting: Coca-Cola Reports Strong 2Q
“Doug Bowman, business marketing professor with Emory University, says most encouraging for Coca-Cola are its strong sales around the world, which are up 6 percent…” Pachulia heads to the classroom and to Europe
“[Zaza] Pachulia has recently been enrolled at Emory University, engaged in classes at the Goizueta Business School as part of their Managerial Leadership program.”

Business Times: Think of investing in India and China, Malaysian firms told
“Dr Jagdish Sheth, professor of marketing at Emory University’s Goizueta Business School, said sectors such as education, banking, infrastructure, retail and resources are currently booming…”

Automation World: How to Keep your CEO Lean Focused
“A few automation vendors have already done some of the conversion work. Invensys, for example, has developed what it calls Dynamic Performance Measures, a patented approach for extracting business measures from real-time sensor data. It has been in advanced collaboration with Robin Cooper from the Goizueta Business School of Emory University.”

The Star: Local firms advised to reposition
“Professor Dr. Jagdish Sheth, the Charles H. Kellstadt professor of marketing at the Goizueta Business School of Emory University in the U.S. said the fundamental repositioning of Malaysia, Inc. lied in the shift from diversified domestic businesses to focused multinational businesses with a regional mindset.”

Atlanta Journal-Constitution: Plan calls for buyers to put 20% down
“‘If we had kept 20 or even 10 percent down as a standard, I don’t think any of this would have happened in the market,’ said Jim Grissett, adjunct real estate professor at Emory University and investment advisor with The Parthenon Group.”

Atlanta Journal-Constitution: NFL’s labor strife ends; all sides appear satisfied
“‘The NFL people started looking at the big picture and saying, ‘If we can’t come up with some solution, we’re going to lose the season and we might not have fans again for four or five years. We can afford to give up money right now, but can we afford to give up money three or four years down the road if fans don’t come back?’ said Thomas More Smith, an assistant finance professor at Emory University’s Goizueta School of Business. ‘My answer was, no, they couldn’t.’” CUSO Financial Services, L.P. and Sorrento Pacific Financial, LLC Host Annual Conference for Investment Advisors and Programs
“Tuesday’s keynote speaker is Dr. Jeffrey Rosensweig, director of the Global Perspectives Program at Goizueta Business School of Emory University. An international business and finance professor, Rosensweig focuses his research, teaching and consulting on global investing and business in the global economy.”

WXIA-TV: NFL Lockout (link unavailable)
Tom Smith, assistant professor in the practice of finance at Emory’s Goizueta Business School, talked about the end of the NFL lockout and the new collective bargaining agreement. Christi Korzekwa Joins The Leadership Team As Director Of Account Services At Blue Sky Agency
“In addition, Korzekwa completed The Home Depot advanced leadership program at the Goizueta School of Business – Emory University. She also served on the Atlanta Sports Council to represent The Home Depot.”

Yahoo! Finance: Exclusive Interview With Mr. Michael Cherny
“Michael Cherny, Vice President, is a Research Analyst on the health care services and technology team at Deutsche Bank Securities Inc. Mr. Cherny joined the bank in 2006 and is responsible for six companies within the health care services and technology universe. Mr. Cherny graduated from the Goizueta Business School at Emory University in 2004 with a bachelor’s degree in business administration.”

The Korea Times: Undergraduate vs. MBA
“According to the undergraduate students at prestigious U.S. business programs such as NYU Stern, Emory Goizueta and UPenn Wharton, the programs’ emphasis on liberal arts and the option of dual degree allow them to get a quality undergraduate education along with business education.”

Smith: Threat of Money Loss Ends Lockout

Georgia Dome

There will be professional football in the Georgia Dome this Fall as the NFL and its players agreed on a new labor deal this week. PHOTO: dsearls/

There is labor peace in the NFL.

After more than four months of court dates and negotiations team owners and players of the nation’s most popular sport agreed on a new collective bargaining agreement Monday. In the process, owners lifted a lockout and allowed players back at practice facilities for the first time since March 11.

It came down to the wire, with training camps for the 2011 season opening this week.

In the end, the deal centered on money — especially the threat of losing it over the long term. Tom Smith, an assistant professor in the practice of finance explains:

“The NFL people started looking at the big picture and saying, ‘If we can’t come up with some solution, we’re going to lose the season and we might not have fans again for four or five years. We can afford to give up money right now, but can we afford to give up money three or four years down the road if fans don’t come back?’” Smith told D. Orlando Ledbetter of the Atlanta Journal-Constitution. “My answer was, no, they couldn’t.”

A self-described “pop culture economist,” Smith studies the economies of the sports and entertainment industries.

According to published reports, owners and players agreed to split revenue 53-47. There’s also a new salary cap, a salary minimum for teams to follow, changes in practice setup to protect players’ health and a rookie wage system.

Appearing on WXIA-TV Monday evening, Smith said each side should be satisfied with the deal and that, at least in 2011, the competitive balance the NFL prides itself on may be out of whack.

Teams now must work through an abbreviated free agency period. Those prepared for the madness, Smith said, will benefit. He adds teams with a solid core of players — those not needing to add great amounts of talent — will be better positioned to succeed given the shortened window to prepare for the season.

Alumna Named MedShare CEO

Meridith Rentz (97MBA/MPH) was recently named the new CEO of MedShare. She will take the post in September, replacing former CEO A.B. Short, according to Atlanta Daybook.

According to its website, MedShare is ” a nonprofit organization dedicated to improving healthcare and the environment through the efficient recovery and redistribution of the surplus of medical supplies and equipment to those most in need.” The organization collects surplus medical supplies and equipment and redistributes them to healthcare facilities in the developing world and “safety net” clinics in the U.S. and over seas.

A familiar face in the Emory community, Rentz joins MedShare from her post as COO of the Points of Light Institute. Rentz has also served as  Vice Chair of Administration and Executive Administrator of the Emory University Department of Medicine. She has also worked at  Deloitte Consulting.