2015 Real Estate Symposium Panel Report: How Long Can This Real Estate Cycle last?
David Sherman moderated a panel of four distinguished real estate professionals, trying to unpack a simple question with an answer that was anything but: how long can this commercial real estate cycle last?
By Anthony Feenick ’17 and Charles Griffith ’16
Moderator | David Sherman ’82, Metropolitan Real Estate | |
Panelists | Dean Adler, Lubert Adler Partners | |
Linda Assante, Jasper Ridge Partners | ||
Darcy Stacom, CBRE |
David Sherman moderated a panel of four distinguished real estate professionals, trying to unpack a simple question with an answer that was anything but: how long can this commercial real estate cycle last? The panelists started by debating what a real cycle in itself means, and how the next cycle will differ from today’s, due to changing fundamentals in real estate supply and demand, and shifts within the credit markets. Mr. Sherman pointed out that investors have been operating in a world of near-zero interest rates and strong capital markets during this most recent upcycle. But now that the recovery has taken hold, we’re going to face a world of gradually rising interest rates, continued but not frenzied development, and slowly increasing demand. As other asset classes, from commodities to high yield debt, are being revalued downwards, what does that mean for the real estate market?
Dean Adler started off the discussion, observing that supply and demand in the marketplace generally seem to be in line, but asset prices are inflated. He attributed this to a low interest rate environment causing investors to seek returns outside of traditional asset classes. As a yield producing asset, real estate has attracted an increasing share of investors’ portfolios. With investors willing to accept a lower return for the risk they were taking, asset prices climbed to their current historic levels. Darcy Stacom pointed out that while supply and demand were generally in line, pockets of the market, including super-luxury condos and co-ops in New York, were showing signs of weakness. She openly questioned how many buyers were left, both foreign and domestic, for $25 million condo units.
Throughout the rest of this cycle, the panelists agreed, returns would not be as easy to come by. Large real estate operators who relied on financial engineering to create value would not have the advantage. Instead, value creation will come from the small, local operators: the true entrepreneurs. Instead of volume driving returns, it will be execution, local knowledge, and creativity. Mr. Adler cited changing tastes in the condo market as an example, with buyers looking for shared space and relevant food and amenity choices. A specific focus, a competitive edge, and a particular localized knowledge will be needed to create a winning investment strategy.
To wrap up, David asked the panel what, if anything, they saw as the next calamity that could cause real estate values to dramatically drop. The panelists agreed that they did not see any enormous issues looming, but that there were concerns nonetheless. Ms. Stacom mentioned that the increased inflow into mezzanine debt could cause problems down the road. Linda Assante pointed out that it’s almost impossible to predict the next crisis, but that as the investment environment changes, real estate may become relatively less attractive. As rates go up, other assets can become more attractive because either they offer higher yield, better growth, or are able to bought at distressed prices. In the face of a true crisis, including if turmoil were to exacerbate in the Middle East, the panelists agreed that premier urban markets would be better insulated than their secondary and tertiary peers.
Anthony Feenick ’17 is a 2010 graduate of Northwestern University, where he completed a B.A. in Economics and Political Science. Prior to coming to Columbia Business School to focus on real estate, he spent five years working at J.P. Morgan in New York and Chicago. Anthony is pursuing a career in real estate acquisitions after completing his M.B.A.
Charles Griffith ’16 is the VP of Trips for the Real Estate Association at Columbia Business School. He is a second-year student focused on real estate investment and spent his summer at Aetos Capital Real Estate, a real estate private equity group based in New York. Prior to Columbia Business School, Charles spent four years as a commercial real estate broker at Cushman & Wakefield in Hong Kong.
The 8th annual Real Estate Symposium, an exclusive alumni-only educational forum, took place on Tuesday, December 15, 2015 at the Columbia University Club of New York. Barry S. Sternlicht, Chairman and CEO of Starwood Capital Group, delivered the opening keynote and Thomas J. Barrack, Jr., Founder and Executive Chairman of Colony Capital, delivered the closing address.
Please visit the event page for more details and reports on other speakers. Hosted by the Paul Milstein Center for Real Estate and the Real Estate Circle of Columbia Business School, the Real Estate Symposium is an annual educational forum that brings together accomplished Columbia Business School alumni and top industry leaders for a broad-based discussion of topical issues, high-profile transactions, trends, and challenges facing the real estate industry.