By Rishi Gupta '11 and Adam Simensky '12
Glenn Rufrano, president and CEO of Cushman & Wakefield offered his perspective on the recent turbulence in the market. Rufrano is well-versed in challenging transactions: prior to joining Cushman in early 2010, as CEO of Centro, he negotiated extensions on $7 billion of debt held by twenty-three banks. More recently, he served as a director at General Growth during its recent bankruptcy, helping to renegotiate $15 billion in loans.
Noting that the recent crisis was not the first, and surely not the last such incident, Rufrano emphasized the importance of revisiting past events. He began in the 1960s and 70s, with the growth in mortgage REITs, mushrooming from $1 billion in 1968 to $20 billion in the mid 1970s. The value in these REITs came crashing down with a weakening office market, driven by high interest rates which were themselves a result of the 1973 oil embargo. The second crisis period Rufrano discussed was the savings and loan crisis of the 1980s and 90s. A combination of rampant overbuilding in the 80s, high inflation and high interest rates throughout the period, imprudent lending, and the spark of the Tax Reform Act of 1986, caused the real estate market crash which brought down the savings and loan institutions. The Resolution Trust Corporation was instituted to work out these S&L assets, and facing a lack of liquidity in the market, led to the creation of the CMBS structure and the resultant comeback of the market. Finally, Rufrano touched on the turmoil experienced in the late 1990s, early 2000s and in the most recent crisis. Regarding the 1987-1995 era, Rufrano acknowledged that the S&L institutions and the RTC were not real estate experts, and thus simply wanted to dispose of their real estate assets. Today, lenders have come to gain a real understanding of real estate. Rufrano does not believe in the mantra of "extend and pretend," because in fact, given their current knowledge and expertise, lenders are not pretending. Although there is uncertainty regarding the timing, Rufrano is confident that since capital investment is required in the assets, there will be more transactions as the market stabilizes.
Bringing his talk to the present, Rufrano shared five clear trends he sees in the current market: (1) real estate capital markets have a clear view going forward; (2) the number of transactions today is greater than a year ago; (3) as principals, real estate investors are risk-averse; (4) investors are currently "core-driven" – specifically in certain cities, and are focusing on high-quality, stabilized assets; and (5) in the next 24 months, there will be many more transactions. Rufrano went on to state that in order to invest money, investors must have a view, and currently, that view is that the market is stabilized and will soon rebound. He evidenced this by comparing historical transactions to current trends. Specifically, using 2007 as a benchmark, there were $1.3 trillion in transactions across APAC, Europe and the United States, with $300 billion, $400 billion, and $500 billion respectively. In 2009, total transaction volume was $375 billion across APAC, Europe and the United States, with $225 billion, $100 billion and $50 billion respectively. In the first three quarters of 2010, there has been an aggregate of $400 billion in transactions, with $230 billion, $100 billion, and $70 billion respectively. Most interestingly, in the United States those transactions were split $35 billion in the first half and $35 billion in the third quarter. Transaction estimates for this year are a total transaction volume of $530 billion, with $260 billion, $150 billion and $120 billion across APAC, Europe and the United States, respectively.
Having already mentioned that investors are focusing on core properties, Rufrano delved deeper. The main cities he is seeing transactions and investor interest in are: London, Washington DC, New York, Paris, and Tokyo. Rufrano stated that investors are investing in large assets and portfolios, and quoting Paul Volcker, made the statement that, "when you’re in a storm, you want to be in the biggest ship." A couple of recent transactions Rufrano cited are the $930 million Hancock Tower sale and the $1.4 billion Tesco portfolio.
Concluding his remarks, Rufrano provided his perspective on capital flows and sources. In the prevalent core-space, the major participants are unlisted REITs, public REITs, public pension funds and off-shore/foreign investors. Unlisted REITs, such as KBS, Inland and Cole are collecting capital from "Mom and Pop Shops," providing the pitch that instead of investing in 1 percent deposits, wouldn’t they rather obtain 5 percent from the REIT. Public REITs are achieving amazing cost of funds, obtaining five year debt at 3.75 percent and ten-year debt at 4.1 percent. Public pensions such as Calpers and NY Teachers are beginning and continuing to allocate significant capital toward real estate as an asset class. And finally, off-shore money, such as the Canadian Pension Plan, Bank of China and Allianz are getting involved in United States and global real estate, and will be worthy competitors and partners as the market stabilizes and rebounds.