Friday, October 15, 2010

Real estate should have done more in crisis

WASHINGTON – Oct. 14, 2010 – The real estate industry must accept its “proper share of the blame” leading to the global economic recession and the housing and commercial property decline, says Urban Land Institute (ULI) Chairman Jeremy Newsum.

“There were many keys to this bomb, and we held one,” said Newsum at ULI’s 2010 Fall Meeting in Washington. “The fact is, we (real estate industry professionals) lost control of the agenda. Real estate is about buildings and the people who occupy them, collectively forming an urban community,” he said. “Real estate is not primarily about money, and we should not have allowed real estate to become just another playground for financial engineers.”

According to Newsum, the “new normal” for the industry is one that is focused on the operators – the creators and owners of real estate who view their businesses as a long-term investment. The “old abnormal” was real estate being the “puppet of finance,” he said, with real estate viewed more as an investment opportunity than a building for occupation.

During the boom leading to the bust, it became increasingly common for large financial institutions to hold direct portfolios of real estate – a mistake, Newsum said, because those managing the portfolios are more apt to give priority to “collecting the rent checks” than analyzing real estate fundamentals or ensuring the well-being of building users.

Newsum pointed to closed-ended real estate funds (generally unlisted private real estate funds with a fixed fund size and a limited term, typically 5-10 years) as being “inherently unstable,” in that they “blithely ignore” the long-term nature of the underlying assets. For the industry to restabilize, such opportunity funds should “always be a sideshow rather than the main event,” and not become the industry norm for how and when properties are bought and sold, he said. “The era when funds predominated is over. I want to see many more new property companies,” Newsum said.

He pointed to the Hong Kong real estate industry – which is now dominated by companies focused on the long term – as an example of what the industry should strive for in the United States and Europe.

A company-specific example: Almacantar in London, an investment and development firm formed by two executives from the Almacantar fund. “They have spotted the future,” Newsum said. Another example: New York City-based Vornado Realty Trust, a company Newsum said “saw the light and came over to the operating side,” and which now owns and manages more than 100 million square feet of commercial real estate in the United States. “Vornado is not a ‘vehicle.’ It’s a business with a mission,” Newsum said.

To attract the best and brightest to the real estate industry, Newsum suggested that seasoned professionals must put more effort into “selling the slow buck” and emphasizing the value of long-term thinking to the next generation of younger practitioners, whose penchant for instant gratification will not serve them well in real estate.

“No matter how badly you want to do something, and you think you have only one chance to do it, that is rarely true. So, being patient and having the ability to stay focused on the long term are very important,” he said. “Understanding timing and time scales is absolutely critical (to being successful) in land use. The business of community building is a business that spans decades. Each of us is adding something to what is ultimately a continuous process.”

One of the most important real estate lessons from the recession, Newsum said, is the near-certain formula for failure caused by over-extension. “In the future, real estate business leaders and shareholders must take more responsibility for the way their businesses are financed. The bust will come again, and just as before, those fixated by the short term will have too much leverage and will fail.”

http://www.oreinternationalrealty.com

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