By Arvind Chary ’11 and David Strongwater ’12
Jeff Barclay ’83, managing director at Goldman Sachs Asset Management’s Core Fund and adjunct professor at the School, was joined by Kenneth Bernstein, president and CEO of Acadia Realty Trust, Ted Bigman, head of Global Real Estate Securities at Morgan Stanley, David Neithercut ’82, president and CEO of Equity Residential, and Scott Rechler, CEO and chairman of RXR Realty. The panel began with Barclay asking the panelists how they consider the economy when making investment decisions. Bernstein stated that the overall economy plays a minor role when his company is making shopping center acquisitions. Acadia’s view is that the economy will remain flat in the short term and each shopping center and market should be looked at individually. Neithercut echoed Bernstein’s thoughts about the economy playing a minor role in investing and added that replacement cost is an important metric to be looking at in the current environment. Bigman, whose group purchases real estate public equities, felt that his group does not need a great economy to invest. Morgan Stanley looks to buy real estate cheaper on Wall Street than on Main Street. Rechler was most concerned about the government changing the rules of the game in the current economy. RXR is constantly re-evaluating and updating their business plan in order to react to what they expect to be a dynamic market over the next six to twelve months.
The conversation turned to one of the most popular themes in real estate today – the rush to “core” assets. Barclay asked the panel to address the popularity of core assets and how their firms look to add value to such investments. Bernstein spoke of the concept of core as primarily a location issue, rather than only an asset quality issue. He observed that “if you don’t have the ability to add value, you won’t have the ability to retain value.” Neithercut commented on the fact that many in the market are currently searching for opportunities to add value within specific markets, although these select markets might be highly competitive. Rechler, agreeing with the panel consensus that core is highly important in today’s market, stated that his firm is searching for opportunities in core/value, value-add, as well as development. Bigman estimated that approximately 70-95 percent of the value of public real estate firms is derived from core assets. He went on to observe that many major REITs are enjoying an environment of lower cost of capital, strong management, and strong recent equity performance, which has lead to increased competition in this space. However, with the REIT market being only a small percentage of the overall real estate market, these players are unlikely to be in a position to fully control a major market.
The panel finished up by discussing the dichotomy of the “haves” and “have-nots” in today’s marketplace. Throughout the entire panel discussion, the concept of two lending and investment markets became a recurring theme. The panel agreed that the strongest firms today, or the “haves,” encompass primarily large public companies that raised capital over the last two years, are able to achieve a low cost of capital, and are generally well positioned in major markets. This group includes firms such as Boston Properties, Vornado Realty Trust, and the like. The “have-nots” are generally smaller firms with weaker market positions and/or management teams. These firms generally were not able to raise new capital in recent years, and will continue to struggle to compete with the larger firms in the near term. There were two major takeaways from the panel. First, investments need to be examined on an investment by investment basis, despite trends in the general economy and real estate market. Additionally, astute investors will look beyond the commonly quoted metrics (price per square foot, cap rate, etc.), and fully examine the property condition, financial position, and tenant status. Second, the emergence of two markets has led to increased competition among a smaller set of firms. Specifically, the well-capitalized, large public firms will continue to be better positioned than the undercapitalized, poorly positioned, smaller firms, who will continue to struggle in the near term future.