The Ground Floor

Second Home Buyers Still Looking

This post was written by Trisha Riggs, vice president of communications for ULI.

Despite the recession, high-end second-home buyers are still in the market, willing to purchase homes that meet their needs and desires but do not display conspicuous consumption, according to resort specialists speaking at ULI’s 2009 Fall Meeting in San Francisco.

According to a recent survey of second-home purchasers conducted by American Lives, the affluent are increasingly drawn to smaller units--provided they have the same amenities as larger, luxurious homes--because the downsizing is perceived to be more “politically correct” in the current economic environment of layoffs and budget cuts. 

American Lives President Brook Warrick said second-home buyers are still viewing the purchase as a personal reward, but that many of today’s buyers are purchasing the homes not as places to escape, but as gathering places to reconnect and re-establish bonds with family members and friends.

Life stages, said Warrick, are the best predictors of when purchasers will enter this niche market: 1)immediately upon retirement; 2) just prior to retirement; and 3) empty nesters still working, but who have different housing needs. What they aren’t compromising: any feature related to health and wellness--the one area that has not experienced any decline in consumer demand. These active, upper-income baby boomers are determined to stay fit and healthy, and are not content to age in just one place, but in several places, any of which could serve as a primary residence.

Also appealing: places that include educational components, and those that offer opportunities for altruism. "Being part of the greater community is very important to these buyers," said Toni Alexander, president and creative director of InterCommunications. Rather than presuming to know what the market wants based on pre-recession activity, it’s critical to examine how those buying preferences have changed, she said. "The world has changed, and once we understand that, we can do great things in design (of second-home and resort communities)."

Business Management Tips from Leading Author

This post was written by Trisha Riggs, vice president of communications for ULI.

In a rough economic environment, forget success--pursue excellence as the goal, and success will ultimately follow. So says Tom Peters, author of the highly acclaimed 1980s management skills book, In Search of Excellence, and a keynoter at ULI’s 2009 Fall Meeting in San Francisco.

According to Peters, being the best is far more important--albeit harder--during economic downturns. "It’s easy to be smart when the market is up. It counts for a lot more in tough times," he said. Peters reminded attendees that excellence itself is more than a goal; it’s a strategy that relies on skilled, thoughtful execution.

Among the no-nonsense, tried-and-true business management tips from Peters:

• Don’t be clever--stick to simple fundamentals in determining what course to follow. The financial collapse and recession can be traced to actions by "clever people," he noted.
• Visit all the company’s offices regularly; stay in touch with what’s going on throughout the organization. It’s a practice, Peters quipped, that could be called "managing by wandering around."
• Remember that "soft is hard and hard is soft," meaning that the soft side of the company--the human aspect of managing relationships with employees, clients and customers is more challenging than creating business plans.
• Listen. Effective listening is a skill that is of the highest strategic importance, that shows others that you respect them and honor their opinions.
• Get to know people at all levels within the organization.
• Don’t be afraid to apologize when mistakes are made; it’s a sign of integrity. "The real problem is not the problem itself. A poor response to a problem is the real problem."

The true measure of successes--or failures--is about the "humanity, care, decency and thoughtfulness" with which they are handled, Peters said. "There are no greater times than tough times to illustrate who you really are…It’s not your net worth that matters, but what you see when you look in the mirror."

ULI Global Awards for Excellence Winners Announced

Five outstanding developments have been selected as winners of the 2009 Urban Land Institute's (ULI) Global Awards for Excellence competition, widely recognized as the land use industry’s most prestigious recognition program. The winners are: the American University in Cairo-New Campus, Cairo, Egypt; California Academy of Sciences, San Francisco; The Rise, Vancouver, British Columbia; West Chelsea/High Line Rezoning Plan, New York City; and Zhongshan Shipyard Park, Zhongshan, China.

The 2009 winners were selected from 21 worldwide finalists, all of whom were winners in their region: The Americas, EMEA and Asia Pacific. The global awards jury evaluated these projects with additional criteria, including: innovative concepts that can be emulated around the world; strong urban design; response to the surrounding environment; and design that contributes to a livable, sustainable development that demonstrates relevance to the needs of the community.

The 2009 Global Awards for Excellence winners (developers in parentheses):

American University in Cairo-New Campus, Cairo, Egypt (AUC) The university’s new campus is located at the center of New Cairo City, about 40 kilometers (25 miles) east of the current campus in downtown Cairo. It is designed to be a tool and stimulus in itself for learning and to anchor community development around the university. The 105-hectare (260-acre) virgin desert site has been developed into 200,000 square meters (2.2 million sq ft) of energy-efficient housing and academic, administrative, and student life facilities.

California Academy of Sciences, San Francisco, California (The California Academy of Sciences) One of the world’s largest LEED-Platinum public buildings, the $488 million California Academy of Sciences houses an aquarium, planetarium, natural history museum, and four-story rain forest.  The 412,000 square-foot project, located in San Francisco’s Golden Gate Park, was designed with the goal of preserving the natural habitats, species, and resources of the local environment.

The Rise, Vancouver, British Columbia, Canada (Grosvenor Americas) The Rise, a mid-rise building adjacent to a rapid transit station, successfully mixes large-format retail uses, locally-focused stores, and 92 rooftop live/work units that surround a 20,000 square foot green roof.  The building uses one-third less energy and two-thirds less potable water than required by Canadian energy code, while the design establishes a new model of mixed-use development in Vancouver.

West Chelsea/High Line Rezoning Plan, New York, New York (City of New York, Department of Planning) Using an innovative transfer of development rights (TDR) scheme, this plan has spurred the development of over 1,000 residential units and 2 million square feet of commercial space in West Chelsea. The defining feature of the special district is High Line Park---formerly an abandoned elevated rail line---which will become a 22-block-long linear park running through the district.

Zhongshan Shipyard Park, Zhongshan, China (Zhongshan City, Planning Bureau) Built on a dilapidated shipyard, the Zhongshan Shipyard Park is eleven hectares (27 ac) of reclaimed wetlands, restored shoreline, and landscaped park space that references its industrial past with salvaged docks and machinery.  The design gives much attention to restoring leftover structures, connecting with the existing urban context, and environmental responsibility.

Light at the End of the Tunnel

This post was written by Trisha Riggs, vice president of communications for ULI.

Has the financial meltdown ended? Yes. Is the recession over? Yes. Will the employment outlook improve anytime soon? No. So, while an economic recovery may be on the horizon, it will be a largely jobless recovery, meaning there is plenty of pain forthcoming for real estate. That was the consensus of a group of leading economists and industry practitioners speaking at ULI’s 2009 Fall Meeting in San Francisco.

Kenneth T. Rosen, chairman, Fisher Center for Real Estate and Urban Economics, Haas School of Business, University of California Berkeley, pointed to several factors that will hamper the real estate recovery: 1) the likelihood that interest rates--kept artificially low during the lending crisis--will start to rise now that the financial stress has been relieved; 2) slow economic growth (despite the recent boost from sales generated by the "cash for clunkers" program; 3) very slow job growth; 4) minimal consumer spending. Rosen’s odds for a "fragile" recovery: 65 percent. Rosen’s silver lining for real estate: for-sale housing, a sector already showing positive signs, and which will continue to be buoyed by the federal government’s extension of a home buyer tax credit.

Raymond Torto, global chief economist for CB Richard Ellis, weighed in on the commercial sector with some statistics showing that higher vacancies are expected for the office, industrial, multifamily and retail sectors in the months ahead. In general, most sectors are "well on their way to hitting bottom," but growth in all property types will be stymied by the fact that some of the jobs lost in the U.S. have been permanently lost to other countries, he said.

Any significant rise in U.S. employment will not occur until around 2013, Rosen predicted. For next three years, he said, industry professionals would do well to focus either on government projects or 'build-to-suit' projects.

Still, despite the lackluster economic outlook for the nation as a whole, it pays to find the bright spots, which are mainly on the nation’s coasts, panelists said. There are vast differences in local real estate markets and business strategies should be mapped out accordingly, noted George Marcus, chairman of Marcus and Millichap and Essex Property Trust. "Now is the time to look hard at where to buy and build," he said, pointing to the San Francisco metro area as one example of a very tight housing market with promising job growth.

Torto pointed out that cities in the U.S. with economies centered on emerging technologies such as alternative energy are the ones with the most promise. "There are opportunities…there are deals to be made," he said. However, the returns will be generated by income, not necessarily property appreciation, he added.

Surviving and Thriving

This post was written by Trisha Riggs, vice president of communications for ULI.

A big part of weathering real estate cycles is using the downturns wisely--to polish professional skills, develop post-recession strategies for growth, and keep employees motivated, according to four industry icons who offered survival tips at ULI’s 2009 Fall Meeting in San Francisco.

James D. Klingbeil, chairman and chief executive officer of Klingbeil Capital; Gerald D. Hines, chairman and owner of the Hines real estate organization; Joseph Brown, group chief executive of design and planning at AECOM; and Robert B. McLeod, chairman and chief executive officer of Newland Communities--collectively with about 200 years of industry experience--reminded attendees that longevity is about sticking to the basics of sound business practices. Surviving and thriving, they said, is a matter of staying  focused on such fundamentals as providing excellent service to clients, hiring the brightest and best, mentoring employees through tough times, and offering a product that is a cut above the rest.

Among the advice from the panelists:

• Do the best work you can locally, no matter how many places you expand--be the best provider in each market.
• Your integrity and that of your company should be your top priority--never compromise your values.
• Avoid becoming over-leveraged, even during times of easy credit availability.
• Make frequent visits to your projects--meet with your management and keep the communication flowing throughout your organization. Fear of the unknown has a paralyzing impact that stifles productivity.
• Seek ideas and heed creative direction from your best clients.
• Seek public-sector partners--public-private partnerships will be important catalysts for development that will help move the economy from recession to recovery.
• Above all, remember that real estate is a long-term business, and that no bust--or boom--lasts forever.

Monday's Numbers and Noteworthy News

Noteworthy News

Commercial Mortgage Alert mortgage spreads based upon a weekly survey of 15 active portfolio lenders conducted by Trepp, the analytics firm.

Asking Spreads over U.S. Treasury Bonds in Basis Points (10-year Commercial and Multifamily Mortgage Loans with 50% to 59% Loan-to-Value ratios)
	10/9	10/16	10/23	10/30
Office	407	385	381	397
Retail	430	403	398	406
Multifamily	375	339	335	343
Industrial	395	379	377	389
Source: Trepp

Indicated Spreads for Conventional Fixed and Floating Commercial Mortgages (as of October 15, 2009)

Property Type	Mid-Point of Commercial Mortgage Rate Spreads for 5-10 Year Fixed-Rate Mortgages
	8/20/09	9/01/09	10/1/09	10/15/09	10/28
Multifamily: Non-Agency	+400	+425	+350	+350	+340
Multifamily: Agency	+220	+240	+240	+240	+220
Regional Malls	+470	+458	+458	+438	+438
Strip/Power Centers	+465	+465	+465	+450	+450
Multi-Tenant Industrial	+475	+488	+470	+465	+440
CBD Office	+443	+460	+460	+450	+425
Suburban Office	+478	+475	+475	+475	+475
Full-Service Hotel	+525	+563	+563	+550	+550
Limited-Service Hotel	+550	+575	+575	+575	+575
5-Treasury	2.65%	2.47%	2.41%	2.41%	2.37%
10-Year Treasury	3.46%	3.45%	3.43%	3.49%	3.44%
Source: Cushman & Wakefield Sonnenblick-Goldman, LLC.

Property Type	Mid-Point of Floating Rate Commercial Mortgage Rate Spreads for 3-5 Year Fixed-Rate Mortgages
	8/20/09	9/01/09	10/01/09	10/15/09	10/28/09
Multifamily: Non-Agency	+413	+413	+413	+375	+375
Multifamily: Agency	NA	NA	NA	NA	NA
Regional Malls	+500	+475	+450	+413	+413
Strip/Power Centers	+488	+488	+438	+413	+413
Multi-Tenant Industrial	+488	+413	+388	+388	+388
CBD Office	+488	+375	+375	+375	+375
Suburban Office	+550	+388	+400	+400	+400
Full-Service Hotel	+650	+600	+600	+538	+538
Limited-Service Hotel	+725	+650	+650	+600	+600
1-Month LIBOR	0.27%	0.26%	0.25%	0.24%	0.24%
3-Month LIBOR	0.43%	0.38%	0.29%	0.28%	0/28%
Source: Cushman & Wakefield Sonnenblick-Goldman, LLC.

	Spread in Basis Points over Interest Rate Swaps
	Current	3 Months Ago
AAA	500	550
AA	2948	3200
A	3579	4091
BBB	5126	5912
BBB-	6231	7007
Source: Trepp

Sign the Times? For as many who say that the capital markets crises is easing or ending or whatever, there is daily evidence that things are not quite that rosy as shoe after shoe continues to drop.  A number of this week’s shoes included the following:

None; too busy at the ULI Fall Meeting!

Monday’s Numbers

Year-to-Date Equity Market Performance (as of November 8, 2009):

DJIA⁽¹⁾: +14.21%
S & P 500⁽²⁾: +18.38%
NASDAQ⁽³⁾: +33.95%
Russell 2000⁽⁴⁾: +16.20%
MSCI U.S. REIT⁽⁵⁾: +6.59%

(1) Dow Jones Industrial Average.
(2) Standard & Poor’s 500 Stock Index.
(3) NASD Composite Index.
(4) Small Capitalization segment of U.S. equity universe.
(5) Morgan Stanley REIT Index.

U.S. Treasury Yields: (as of November 8, 2009)

3-month: 0.04%
6-month: 0.15%
2-Year: 0.84%
5-Year: 2.25%
10-Year: 3.50%

Top Four Markets for Real Estate

This post was written by Trisha Riggs, vice president of communications for ULI.

Washington, D.C. ranks as the top market in the United States for real estate investment and development, which, in the current economic environment, means it is the least troubled. So says the 2010 version of Emerging Trends in Real Estate®, released this week at ULI’s Annual Fall Meeting in San Francisco.

The widely anticipated annual industry overview, copublished by ULI and PricewaterhouseCoopers, was based this year on a record number of surveys and interviews with more than 900 developers, investors, brokers, analysts, researchers, appraisers, and academics. The overriding sentiment: No one is bullish on any particular market--even the perennial favorites such as Washington. Still, despite the faint enthusiasm, the report notes that "markets performing well before the crash will perform better coming out of it, while those lagging before will continue to lag."

The top four markets--all of which are gateway, 24-hour cities heavy on brain power with significant geographic barriers to entry:
• Washington: "Always the top market during recessions, buffered by the federal government;"
• San Francisco: "Highly volatile, but bounces back quickly;"
• Boston: "All those universities help buffer the market;" and
• New York: "Wall Street is down, but not out and always reinvents itself"

The number five market, Houston, is not a gateway city, but is an energy capital with a talented workforce, says the report.

Out of favor: manufacturing centers (mainly in the Midwest); secondary or tertiary cities requiring a flight connection to go overseas; formerly high-growth markets now suffering from overdevelopment and a bubble burst; and places where most development has been concentrated on the fringe.

Emerging Trends predicts that investment and development will start to pick up steam in a couple of years. In the meantime, those who are in a position to do so should buy or hold multifamily; buy hotels; buy distressed condos and second homes; buy land; buy or hold industrial; hold office; and apply a "triage" approach to retail.

Looking past the recession, "The future is about green development, infill, and transit-oriented development."

Demographics of the Next Decade Will Transform New Housing and Retail

This post was written for The Ground Floor by Robert Krueger, communications associate with the Urban Land Institute.

SAN FRANCISCO -- There is no doubt that the big question at this year’s ULI Fall Meeting is what the U.S. and international markets will look like once the recession is over. For those in the industry, they realize that this economic downturn is uncharted territory and uncertainty for the future leads to many unanswered questions. A session panel focused specifically on the next decade and the implications that changing demographics will have on commercial real estate and land use patterns. Specifically, the panel answered the question of how people of the next decade will live, play, and shop.

The panel discussed two main demographic groups that will drive the next decade’s housing market: Generation Y and their parents (the aging baby boomers). As one panelist, Deborah L. Brett, president of Deborah L. Brett & Associates, stated that the demand from these two generations will determine the location of housing and heavily influence the success of retail and office space. 

James H. Johnson, director of the Urban Investment Strategies Center at the University of North Carolina, got more specific by addressing what he called 'disruptive demographics."”  With this, Johnson referred to changing demographics that are seriously altering real estate development and needs that have been in place for over a generation.

"The browning and graying America will transform all of our political and economic institutions, but especially real estate," said Johnson. "Increased minorities, immigrants, and seniors make up this package."

Brett pointed to the implications of these two generations as well as other statistics that are changing the market.  These include:

• Little or no growth in purchasing power due to the expectation of continued stagnation of household income over the next decade.

• Changes in the work place, such as delayed retirement, working from home, and computer based virtual meetings instead in-person less business travel.

• Greater diversity in housing since there are more single households, nontraditional households comprised of multiple roommates, and more minority and immigrant groups.

Will commercial real estate be in a position to handle these changes? In a publication released at the Fall Meeting, Five ULI Fellows Present Ideas for the Next Years, ULI senior resident fellow John McIlwain, said that these two groups and other changing demographics "will bring long-term growth to cities and help redevelop town centers. The bad news is that it is unlikely that enough new housing can be built in urban areas to meet this growing demand.  The result is likely to be rising urban housing costs--good for developers and owners and bad for homebuyers and renters with limited funds."

New Models for Resort Development

This post was written for The Ground Floor by Robert Krueger, communications associate at the Urban Land Institute.

SAN FRANCISCO -- What will resort development look like in a post-recession economy?  As investors experience the worse market collapse in a generation, the best and most talented professionals in the resort development industry have taken advantage of the current economic climate by researching and reinventing themselves so that they are better prepared for when people start buying again. During a session at the Urban Land Institute’s 2009 Fall Meeting in San Francisco, a few of these developers spoke about what innovative solutions are paying off and the industry transformation that they are experiencing.

The consensus of the panel appeared to be: The future of the resort will emphasize social and environmental responsibility. According to one panelist, Brian De Lowe of Viceroy Hotel Group of Los Angeles, California, the "resort development model of the past is dead." Lowe said that there needs to be a revised model for the industry that makes projects more adaptable to the market. There needs to be a diverse combination of brands instead of the "traditional resort." The old method of stamping out traditional-style resorts will not work in the future. He presented a "Triple Bottom-Line Thinking," which weaves the need to make profit with a wider balance of social and environmental responsibilities for the local community. While sustainable development is not a new concept, Lowe emphasized how this approach is attractive local governments. Particularly in tough economic times, partnering with government can help relieve some of the costs.

"Governments like being involved with such developments," Lowe said.  "They feel that they are helping to protecting the area's human heritage and natural landscape . . . such measures are attractive to buyers since it adds to an authentic experience that is unique."

Rebecca Zimmerman, president of Design Workshop, later spoke of what it means to be simple, in regards to amenities. She highlighted the need to create experiences and going back to nature." Social connection is truly important," she said. "Now, people need people, and people find social nourishment by engaging with others."

She emphasized that when people begin buying again, what they will look for is places that show social and environmental awareness. In addition, Zimmerman stated that simple, natural amenities are critical to attracting knowledge-based workers.

She pointed out the fact that 82 percent of the U.S. population walk outdoors for either fun or exercise and that such numbers show the growing trend of the future: a desire for simple amenities that do not cost $50 million each.

"It is about being simple and bringing people back to the places that are already built," Zimmerman added. "More is no longer better. The key is simple…but connected. What are needed are such things as easy acquisition to airports with daily flights to major cities. Economic growth is a combination of amenities, telecommunications, and availability to air travel. This brings a whole new obligation to sustainable development."

Paranoid Optimism: The Best Attitude Toward Economic Recovery

This post was written by Trisha Riggs, vice president of communications for ULI.

"Paranoid" optimism--a belief in the ability to overcome the negatives that could be coming--may be the best attitude to take regarding the economy’s recovery, according to renowned economist Bill Emmott. The former editor-in-chief of The Economist provided a global economic outlook during yesterday’s opening session of ULI’s Annual Fall Meeting in San Francisco.

Borrowing an analogy from former U.S. Department of Defense Secretary Donald Rumsfeld, Emmott said that moving from recession to recovery might best be analyzed by considering the "known knowns" versus the "known unknowns."

Among Emmott’s known knowns: 

• An economic recovery is underway to some extent in most countries, with the rebound in the U.S. and Western Europe being more gradual while China and India will be more immediate.
• Economic globalization and openness to cross-border trade has remained intact. "We are seeing some sense of global sharing of the rebound," Emmott said.
• A continuation of the fiscal stimulus in the U.S. and Western Europe helps to keep the momentum going.
• An acknowledgement that consumers remain cautious and that consumer spending will not lead the recovery.
• The likelihood that more government-funded programs will be created in the U.S., China, and Japan.
• The likelihood of tighter financial regulation in the U.S. and the U.K.

Among the "known unknowns":

• The extent to which consumers and corporations will pay down debt.
• How quickly eliminated jobs will be recreated.
• How quickly the value of Chinese currency will be re-evaluated in relation to the dollar. Quicker re-valuation so the currency is not artificially low would benefit world trade and revive U.S. exports, Emmott noted.
• The future of oil prices, which as yet have not reflected the global recession.

The known unknowns, Emmott said, have created a course of "uncharted waters" that could change the character of the economic recovery. His reasons for optimism: a belief that job growth will occur sooner rather than later; faith in the flexibility of the economy, particularly that of the U.S.; and encouraging prospects for U.S. exports.

"Be realistic but positive," he advised ULI fall meeting attendees. "There is much we do not know, but new situations bring as many positive possibilities for growth and change as negative ones. Paranoid optimism is the right feeling to have as we move forward."