The Ground Floor

Moved to UrbanLand

Thank you for participating in The Ground Floor blog. While the archives will remain at this location, all future posts can be found on our new online magazine, Urban Land.

Beginning Wednesday, October 13, 2010, timely articles and interviews providing you coverage of many of the sessions of the Fall Meeting will be posted on the Fall Meeting section of the online magazine.

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ULI Online Community Insider: August 2010

Insider Information from ULI:
Connecting the Global Real Estate Community

• Connect With the Right Mix of Real Estate Leaders at the Fall Meeting

More Than 1,600 Already Registered!!!  
Register today for the 2010 ULI Fall Meeting and Urban Land Expo.  Leaders from every sector of the real estate industry come to this meeting because they know they will make connections with business partners and clients, and get the most up-to-date information on industry trends – all in one place. Click here to see who is coming and whom you need to meet.

Save up to $400 when you register by September 24!  Click here to register.

For more information, visit the Fall Meeting website:  http://www.ulifall.org

• What is happening with housing in the current economy?

Six leaders in residential real estate development discuss U.S. housing development trends: why smaller unit and lot sizes are becoming more common, which neighborhoods are holding value in the economic downturn, how demographic shifts are likely to influence the buyer and renter markets, how the public sector is working with the private sector to help keep planned developments alive, and how the recession has affected the movement toward incorporating sustainable design.  Click here to read the Urban Land magazine article.

Read more land use and development articles in the current issue by clicking here.

• Conservation Communities to Pick Up Momentum as Economy Recovers

ULI has released a new publication that highlights the beneficial impact of conservation development to preserving land and managing anticipated population growth in the coming decades.  Conservation Communities:  Creating Value with Nature, Open Space, and Agriculture, provides an anti-sprawl solution in many of the outlying “greenfield” areas that are far from urban cores.  According to author Edward T. McMahon, conservation development not only delivers an answer to the smart growth movement, but also has benefits for residents. "Conservation development can help communities preserve open space and protect rural character,” says McMahon.  “Most important, it can enhance property values, minimize infrastructure costs, and foster the development of graceful, environmentally responsible, and livable communities that appeal to today’s increasingly sophisticated consumer.”

Conservation Communities (ISBN 978-0-87420-132-1) is available at ULI’s online bookstore ($39.95 for members, $49.95 for nonmembers) and everywhere books are sold. To order a copy, visit our online bookstore.

• Upcoming Professional Development Workshops

ULI’s education program is a multifaceted endeavor, designed to improve the level of expertise of preprofessional and professional land use and development practitioners as well as assists in the formulation of real estate curricula and materials for professional education; and provides other education programs for the lay public.   See a full listing of our September workshops and webinar by clicking here. 

• Are you following ULI on our social media channels?  Check us out at:

Twitter:  http://twitter.com/UrbanLandInst
Facebook: http://www.facebook.com/UrbanLandInstitute
LinkedIn: http://www.linkedin.com/companies/urban-land-institute
YouTube: http://www.youtube.com/ULITV

ULI Online Community Insider -- May 2010

Insider Information from ULI: Connecting the Global Real Estate Community

• Protect Federal Facilities, But Don’t Ignore Economic Development and Livability
  As Congress acts to protect federal facilities against terrorism, it should avoid over-reactive measures that could affect the quality of life in the greater community, and instead focus on an approach that enhances economic development opportunities and community livability. This was the message delivered in testimony May 20 by ULI Executive Vice President Maureen McAvey.
  Read Maureen’s congressional testimony
  Read the press release 

• Learn About the New Financing Marketplace by Registering for ULI’s Real Estate Finance Course June 7-10.
  Find out from one of the country’s leading lenders how construction lenders look at new deals today.  See how a permanent lender with money sources scattered around the country underwrites a new loan application. Listen to a leading structured financing expert discuss how to obtain that extra financing—be it debt or additional equity—needed to make your deal a success.
  For more information and to register
  More information on ULI’s Real Estate School 2010 

• Helping Develop the Global Capital of Clean Technology
  An advisory services panel from ULI spent last week evaluating the Cleantech Corridor (CTC) in Los Angeles in order to provide recommendations and alternatives for redevelopment. Their goal was to provide answers to the questions surrounding the redevelopment of an old industrial site east of downtown.  The initiative is part of the Los Angeles Mayor Antonio Villaraigosa’s long term vision of transforming the site into the world’s top clean technology manufacturing corridor. The Mayor expects the corridor to encourage the development and attraction of business and green collar jobs, putting Los Angeles at the forefront of the clean technology revolution.
  See the archived webcast of last week’s public presentation of the panels recommendations 
  
  
• Viewing Water Infrastructure Through The Lens of Sustainable Growth
  More and more urban areas throughout the United States—in both dry and rainy locales—are facing growing pressures on their water infrastructure systems, necessitating both greater investments for overhaul and a change in development patterns that are more conducive to conservation, according to Infrastructure 2010: An Investment Imperative, a new publication released last month by ULI and Ernst & Young. Infrastructure 2010 is the fourth of an annual overview series that analyzes the infrastructure needs and compares the infrastructure policies of the United States with other countries.
  Read more on the report and to download a free copy.
  
  
• New Book from APA, ULI Answers How Municipal Planners Can Create Attractive and Livable Communities
  ULI and the American Planning Association (APA) Planner’s Press have released Envisioning Better Communities, a new book specifically addressing how municipalities can carry out planning and development while preserving a community’s attractiveness and unique character. Author Randall Arendt provides side-by-side comparisons of similar places and kinds of buildings, showing how clear cut and realistic decisions by municipalities can improve a community’s quality of life and individual charm while meeting the community’s own values and goals. He argues how local residents and officials can work together to best identify shared priorities in creating communities that are economically successful while maintaining the community’s environmental and aesthetic sense.
  For more information on the book
  Check out more great titles at the ULI Bookstore 
  
  
• Are you following ULI on our social media channels?  Check us out at:
  Twitter:  http://twitter.com/UrbanLandInst
  Facebook: http://www.facebook.com/UrbanLandInstitute
  LinkedIn: http://www.linkedin.com/companies/urban-land-institute
  YouTube: http://www.youtube.com/ULITV

ULI Online Community Insider: April 2010

Insider Information from ULI:
Connecting the Global Real Estate Community

 • ULI Wants Your Comments on CleanTech Development
What are the challenges and opportunities – physical, social and economic – involved in redeveloping existing industrial infrastructure so that it is attractive for clean technology industries in the 21st century?  What strategies should be used to retain the existing land while encouraging green collar jobs?   How can the existing building stock be reused over time to accommodate new clean tech workforce while supporting businesses?  In May, land use and real estate experts within the membership of ULI will provide their recommendations for redeveloping the largest industrial complex in the United States, the CleanTech Corridor (CTC) of Los Angeles.   The goal is to transform the manufacturing corridor east of downtown into the global leader in green technology.  Your comments will be sent to the panel prior their arrival in L.A. on May 16.

o Tell us you suggestions and concerns, by clicking here. 

o More information on the ULI’s Advisory Services Panel for LA’s Clean Tech Corridor, click here.  You can also visit the panel Presentation Facebook Event Page

• What You Missed at the 2010 ULI Real Estate Summit at the Spring Council Forum
If you missed it, you definitely missed out!  If you were unable to attend the Summit and would like to catch up on what was covered, highlights were covered on The Ground Floor blog.   Here are some of our Ground Floor posts from this month’s Summit in Boston:

o ULI's Real Estate Summit at the Spring Council Forum Takeaways:  http://bit.ly/b7EIJj  
o Suburban Housing Market Declines a Result of Demographics Shift:  http://bit.ly/aDjmYe
o Time to Buy?   http://bit.ly/9QyXQJ
o Sources of Capital:  http://bit.ly/aGS7pG
o In Years to Come New Real Estate Development Patterns will Evolve:  http://bit.ly/cNKtXZ
o Future Perilous for Medium-size Real Estate Firms:  http://bit.ly/cBrPMp
o Recession is Officially Over--But is it?  http://bit.ly/agOOXi

• Strengthen Your Resume with ULI's Real Estate School
Set yourself apart from the competition and take your career to the next level.  Whether you are looking to gain a better understanding of the real estate development process, and real estate finance, or to master advanced elements of either, ULI's Real Estate School will position you to advance in a competitive market.  Get $300 off your first course when you sign up today! More information on ULI’s Real Estate School 2010:  http://bit.ly/bk3FKS

• Using Public  Private Partnerships To Create Value-Added Conversions
The Great Recession has accelerated an already existing trend toward public private partnerships, which have become inherent to the more economically and physically complex, contemporary style of development.   And yet, as important as public partnerships have become in contemporary development financing, frequently opportunities are missed and deals badly made because the state of the art for formulating and executing public private partnerships is still relatively new and evolving.  This upcoming professional development webinar will explore case studies and will provide a download of background material and models that provide you a perspective on how you can pursue opportunities for these transactions in the real world regardless of whether you approach these from the public or private sectors.  For more information and to register:  http://bit.ly/94BnjI

• Infrastructure 2010:  Time to “Level With the American People”
This month, ULI and Ernst & Young released Infrastructure 2010: Investment Imperative. The report challenges the United States and other countries to start treating infrastructure like the investment that it is.  With future economic prosperity on the line, strategic, long-term, and integrated investments in transportation, water, and energy infrastructure are imperative.   The fourth in an annual series Infrastructure 2010 examines global infrastructure trends and, for the first time, addresses water issues in depth. ULI has created a webpage dedicated to all things Infrastructure 2010.   Visit it often to download the report or sections of it, read more about it, and see the press coverage.  Visit the Infrastructure 2010 website:  http://bit.ly/cQMT4k

• Are you following ULI on our social media channels?  Check us out at:
Twitter:  http://twitter.com/UrbanLandInst
Facebook: http://www.facebook.com/UrbanLandInstitute
LinkedIn: http://www.linkedin.com/companies/urban-land-institute
YouTube: http://www.youtube.com/ULITV

ULI's Real Estate Summit at the Spring Council Forum Takeaways

This post was written for The Ground Floor by Trisha Riggs, vice president of communications at the Urban Land Institute.

ULI's Real Estate Summit at the Spring Council Forum in Boston was a success not only by the numbers—the event drew a higher-than-expected attendance of more than 3,100—but in the value of the takeaways, which ranged from advice on weathering the road to recovery (don’t blindly follow others) to the outlook for financial reform (necessary to reduce credit market volatility).

The closing session, moderated and coordinated by Arthur Segal, Poorvu Family Professor of Management Practice at the Harvard School of Business, featured four top industry experts providing the week’s "last word": Alan M. Leventhal, chairman and CEO of Beacon Capital Partners, LLC; Nicolas P. Retsinas, director, Harvard University's Joint Center for Housing Studies; David Moss, John G. McLean Professor of  Business Administration, Harvard University Business School; and ULI Chairman Jeremy Newsum, executive trustee of The Grosvenor Trusts.

• Industry leadership: What is most important to remember going forward, said Newsum, is the need to be original, to avoid copying strategies of others as a path to success. "Copying what others were doing is what got us into this recession to start with," he noted. One takeaway—that CEOs need to seek the advice from a wide, diverse group of employees and from people outside their own firms is a practice that top executives should always follow, regardless of the economic booms and busts, he said.
• Financial reform: The U.S. needs to be the world frontrunner in reforming the financial industry; if it leads, other countries will follow, said Moss. His best-case scenario for reform: "To achieve broad stability within the institutions without killing innovation." This can be achieved, he said, through legislation that one) aggressively regulates the largest institutions—those that pose systemic threats, yet two) uses a "lighter touch" on smaller institutions that pose less risk to the system. If a financial reform bill is enacted by Congress, the credit markets in general will stabilize, Moss predicted; if a bill does not pass, "the market will be much more volatile," resulting in another boom-bust pattern of credit availability.
• Housing finance: Despite a "staggering" amount of intervention by the federal government, recovery in the nation’s housing market remains fragile and could easily falter with any upheaval in the current federal housing finance system, said Retsinas. As a result, the Obama administration is taking a prudent, cautious approach to restructuring home mortgage suppliers Fannie Mae and Freddie Mac (government-sponsored enterprises now controlled by the government), and is not likely to pursue reform measures this year. While the federal government's role in housing credit delivery will diminish as part of housing finance reform, the government "cannot be a spectator in housing—the industry is too important for that," Retsinas said.
• Homeownership: With home foreclosures continuing to rise, some industry analysts believe that many consumers—particularly those just entering the housing market—have become disillusioned with the notion of homeownership as the ultimate American Dream and will shun buying, resulting in a decline in the nation's homeownership rate to as low as 62 percent. (It exceeded 67 percent at the peak of the boom.) Retsinas, however, feels differently. "We will see a return to higher downpayments and stiffer credit requirements, but people will still buy and own homes," he said. "Homeownership is not a four-letter word. There will be more renters, but owning is still an important priority in this country." The nation's homeownership rate, he predicted, will stabilize at about 66 percent.
• Economic recovery in general: Trust the numbers, not sentiment, in gauging the recovery, said Leventhal. "The numbers are telling us that jobs are growing, not just in healthcare, education and technology, but in the financial sector and others…these numbers are encouraging," he said. Although the next two years are likely to remain shaky in terms of economic growth gaining strong momentum, he noted that there is "not as much (growth) to regain to get back to the same position as 2007" as is widely assumed. "I am encouraged; the indicators are more positive than any I have seen in the past 18 months."

While the signs are encouraging, Newsum cautioned against being overly optimistic, saying it's best to temper optimism with reality. "If you are in real estate, and you are investing for the long term, there is no reason to expect that real estate is going to perform differently than the overall economy; rather, you should expect it to do just that," he said.

• Advice to industry newcomers recovering from their first recession: "You will not spot the next one coming, and there will be another," Newsum said. "It's best to record what you learned during this one to help you prepare for the next one."

Added Leventhal: "If you buy high-quality real estate and you have staying power, you will weather the storm."

Suburban Housing Market Declines a Result of Demographics Shift

This post was written for The Ground Floor by Lori Hatcher, senior vice president of membership and marketing at the Urban Land Institute.

The current decline in demand for suburban “trade up” housing is more than just an economic correction; it is the result of a seismic shift in demographics and consumer behavior according to James Chung, president of Reach Advisors, speaking at the ULI Real Estate Summit at the Spring Council Forum in Boston last week.

According to Chung, the wave of the Baby Boom population passed the mid-forties—the age that buyers typically move up, and will be 30 percent of the 65-plus age group by the end of the decade. Coming along behind them is Generation X, a smaller cohort that is unwilling to pay for premium housing features and prestigious, exclusive communities, instead choosing attractive community characteristics.

The bulging Generation Y will reshape consumer markets, just as the Baby Boom did, but it will be a slow build, not a tsunami. Chung cited new gender gap statistics—1.5 times more women than men are completing college degrees, and women in their 20s in cities with a knowledge driven employment base now earn 100–120 percent of the salary of their male counterparts. The implications for homeownership and housing needs include delayed marriage and children, increased savings, and a fiscal conservatism that makes them less willing to spend for the flashy housing features that have attracted men as a signal of affluence.

Another factor is that inventory of Baby Boom “trade up” housing outstrips the size and income level of the next generation. While early Baby Boomers were able to reap income growth, everyone else has faced reduced, inflation adjusted income. Although the population is expected to grow by 17 percent—a major factor in producing robust housing markets in the past—almost all of the expected growth will be among groups with historically lower rates of homeownership: Hispanics, Asians, and mixed-race individuals.

Where are the opportunities in housing development? Chung provided this advice: Plan for development where the population is growing and tune in to the community features attractive to minorities or ethnic groups that are getting college educations.

Look for areas with job growth, identifying the companies and the employment profile of those that work there. Develop product clearly targeted at this market.

If planning to trade up product in a master-planned community, ensure the area has very limited supply or the product is superior and can command a higher share of a smaller market.

Consumer willingness to pay for green features is slim, mainly limited to those with both high educational attainment and high income. However, there are wider opportunities to use green features as selling points, such as communities with access to open space, or features that produce demonstrated savings in energy costs.

Time to Buy?

This post was written for The Ground Floor blog by Kristina Kessler, vice president and editor-in-chief Urban Land Magazine at the Urban Land Institute.

Problem deals have increased profoundly, especially in the banking and commercial mortgage-backed securities (CMBS) sectors…was the message brought home by participants at the ULI Real Estate Summit’s Investing in Distressed Commercial Real Estate Industry Roundtable, held at the Spring Council Forum in Boston.

Outstanding distress at the end of January 2010 was $163 billion of property in default, bankruptcy, foreclosure, or real estate owned (REO). Overall volume of nonperforming commercial real estate and development loans on banks’ portfolios exceeds $123 billion (7 percent of that in commercial real estate)—more than 80 percent higher than levels reached in 1991. The last few years have seen transaction based value indices decline about 40 percent peak to trough, according to Moody’s REAL CRE Index. Recovery in values is likely to be long—values in the office sector are estimated to recover to their prerecession peak in 2017, based on forecasts of investment fundamentals by CBRE Econometric Advisors. Yet while the volume of properties entering distress is increasing monthly, so are the resolutions.

This is a recession of over-pricing, not over-building, said Raymond Torto, global chief economist for CB Richard Ellis. Vacancy rates are distributed across every property type, but everyone still has tenants that are paying rent. There is a potential distress pool of some $280 billion in refinancing loans over the next two years, but banks are performing a lot of resolutions.

There are very few deals, people don’t know what the prices are, there are no comps, and no lending from banks, noted Spencer Levy, managing director, Eastern Division, CBRE Capital Markets. Lenders are resolving deals through workouts, short sells, note sales, and REOs. Banks that originated the loan and banks that bought other banks are the ones doing the REOs, which are usually larger, high-profile deals; foreign banks are more likely to take back assets REO. Workouts are by far the biggest activity. For a workout transaction, be very well organized, present and offer a solution, and have money available, Levy advised.

Looking at various programs, Levy made the following observations. TARP capitalized banks so they could be patient, but this caused less deals because banks kept deals on their ledgers longer. PPIP was a failure; banks were uncertain of selling loans into the market place. TALF was positive…saving Fannie and Freddie was a good move. The FAS 157 accounting change enabled banks to mark their assets above where they traded on the open market. REMIC relief provided greater flexibility to the marker and the special servicer to negotiate troubled CMBS loans.

Though there are not a lot of sellers in today’s market since values are uncertain and—in most views—at the bottom of the market, opportunities include:

• FDIC structured sales program;
• Talk directly to the banks;
• Become a lender; new public/private mortgage vehicles have been formed;
• Buy institutional grade real estate at today’s prices;
• Be creative, focus on niche opportunities: UCC sales, 363 Bankruptcies, CDD bonds, tax liens, DIP financing; and
• Be patient.

The market is starting to stabilize, said Moshin Meghi, principal and managing director, Loughlin Meghi + Company, in his outlook of various product sectors:

• Office: Rents will remain flat for the next three years with little absorption;
• Industrial: Recovery is expected quicker than in other sectors; trade is picking up as companies rebuild inventory;
• Retail: Consumer spending is stabilizing; expect recovery in 2011, though hesitation to expand will reduce rents;
• Apartments: Rental rates fell sharply in 2009, but finished the year with signs of stabilization; and
• Hotels: Occupancies are down, rates are low, but should level out during second quarter 2010.

Recent bankruptcies and restructurings are happening at the higher end of the market, Meghi noted, while recovery will take a long time at the lower end. Expect a vast number of FDIC bank failures to come, he warned. The question facing the market, he said, is “how will maturing loans be refinanced in a market where values are down 30 to 50 percent from peak and where underwriting standards have tightened significantly?” A two-tiered debt market is emerging: capital from insurance companies and distressed deals for deeply discounted loans or troubled assets.

The investment market is improving, said Robert White, president of Real Estate Capital Analytics. Transaction activity is up 50 percent, though from a very low base; there is more price discovery, and we’re seeing more properties move. The outlook for fundamentals is still poor and will stay that way in 2010, he said, but for certain high-tier assets prices are stabilizing. Real estate investment trusts (REITs), which have the best access to the cheapest capital out there, are leading. There is a huge increase in the number of workouts and their resolution is just beginning. Debt liquidity is returning as is demand from bond buyers, which are all good signs, but we need employment growth.

Loans aren’t sitting out in limbo; they’re being handled, White said. Property sales from distressed sellers are still small. Banks are holding their largest and best assets. Eight billion dollars of real estate went into REO in the fourth quarter…not all REOs are going to be liquidated. Lots of foreign capital is looking at the U.S. because it has so much distress, White noted.

Why are sellers selling? Fatigue, don’t want to foreclose, new CEO, suggested Thomas Goodwin, executive vice president and co-founder of debtX. Most of the movement is in regional banks that want to get back into lending. Who are the buyers? They were investment banks, wholesale banks, and opportunity funds, but today, they’re entrepreneurial players, he said.

Institutional lenders believed it was an attractive time to be investing. David Twardock, president of Prudential Mortgage Capital Corporation, said capital is available, and new debt has attractive pricing. Patricia Goldstein, senior executive vice president and chief credit officer of Emigrant Bank said, banks are working out transactions, trying to do more stabilized core deals, and getting out of construction deals and bridge loans and into more cash loans. Goldstein believes the cleansing process will be faster than expected, and predicted the return of a CMBS market that yields 10 percent.

Overall, the outlook was somewhat optimistic. Expect more distress in 2010, but valuation declines are decelerating. The market is a lot more transparent with better information more readily available. Appraisals and prices are changing. If you don’t act quickly, you could miss the boat, was one observation—2010 just might be the time to buy.

Sources of Capital

This post was written for The Ground Floor blog by Kristina Kessler, vice president and editor-in-chief Urban Land Magazine at the Urban Land Institute.

A lot of capital is chasing very few deals. This was the consensus of participants at the
April 14 Town Hall Session: Sources of Capital in the New World Order at ULI’s Real Estate Summit at the Spring Council Forum in Boston.

Moderator Michael Graziano, managing director of Goldman Sachs & Company, began with an overview of where we are today: $20 billion have been pumped into public equity, the stagnation period is working itself through the balance sheets, there is not a lot of trading, and cap rates have dipped. "We’re facing a huge supply and demand issue," he emphasized, yet there is strong availability of capital, and he expects the return of an active mortgage market, though not a lot of takers, because 70 percent LTV (loan-to-value) "doesn’t cut it."

Participants, asked what their firms have been going through, had mixed reactions. Prologis CEO Walter Rakowich said his company went from being leveraged 90 percent to 50 percent. They sold a lot of assets, pared down debt, refinanced, but are not doing a lot of trading. He sees no great acquisition opportunities, and doesn’t see a lot of development in the U.S. for the next 12 to 18 months. His company is trying to burn off its land banks. Given that construction prices are down 25 to 30 percent from 2007 and that companies relocating out of older facilities into new space want to lease not own, Prologis has been converting its land banks into development use, building pre-leased build-to-suits—but, Rakowich noted, it’s more a cannibalization of the market than market growth.

In speaking about his firm, Stephen Furnary, chairman and CEO of ING, said, "We had 17 good years in a row, now we’re doing maybe two deals a week, no acquisitions; rather we’re retooling the firm, moving investment people into asset management to manage portfolios. We’re trying to get the strategies right…creating new products that pension funds want to invest in, switching around the product makeup." As soon as $1.4 trillion in debt comes due, there will be an opportunity to pick up assets and rework them, Furnary said. "Cap rates aren’t going to feel good, but 89 percent occupancy will get you 11 percent vacancy for free. In one to three years, cap rates will move up and be favorable."

Fidelity Investments portfolio manager Steve Buller, in speaking about real estate investment trusts (REITs), said that even though real estate fundamentals were turning down, REITs are offering a secure dividend yield, because being stocks, they have little to do in the short term with real estate fundamentals. When fundamentals recover, he predicts REITs will continue to prosper. Though REITs are only 10 percent of the market, they have gone through a large recapitalization, and Buller predicts they will be the first to start development.

Frank Cohen, senior managing director of Blackstone Real Estate Advisors, sees the role for private equity as being in transitional assets, assets that have property, leasing, or capital issues. In 12 to 24 months, some owners will begin to sell, he said. "One would be well served by waiting."

Speaking at the afternoon General Session, Tying It All Together, Furnary noted that the CMBS market is somewhat unlocking. There is a lot of money on the sidelines ready to invest in equity, but it’s scared…and there is a need to re-price expectations. The availability of nonequity capital is still a challenge. REITs are getting a greater share of each asset class in the U.S. because of their access to the public markets. Private equity funds will be back in full force because the future for small development is good for those who know their market. Big developers and smaller companies have good prospects, but a lot of questions remain as to what happens to the middle market; this could be a recipe for consolidation.

Overall, Furnary is optimistic. "We have got the wind at our back," he said. Fundamentals will improve, pent-up equity will fit nicely into the capital stack, and he’s not concerned about rising interest rates. "It’s a great time to be in this business," he pronounced, noting that what will characterize the successful people in this industry is "developing one’s judgment."

In Years to Come New Real Estate Development Patterns will Evolve

This post was written for The Ground Floor by Trisha Riggs, vice president of communications at the Urban Land Institute.

In: Inner-ring suburbs. Out: Exurbs. In the years ahead, changes in demographics and consumer behavior will drive new real estate development patterns that reflect a trend toward more urban suburbs, according to industry experts at ULI’s Real Estate Summit at the Spring Council Forum in Boston.

Well-known analysts Joel Kotkin, Robert Lang, Richard Florida, and Christopher Leinberger offered different views on what’s ahead, but they all agreed that most of the growth in U.S. urban regions (more than 100 million will be added to the population by 2050) will occur not in downtown cores, but in the suburbs.

The catch: The suburbs will grow differently than they have in the past, reflecting a trend toward denser development and smaller homes on smaller lots, and less dependence on cars. The winners: close-in suburbs with an urban feel, featuring town centers as a focal point, with ample recreational, shopping and entertainment opportunities, and which are near employment centers. The losers: big houses on big lots in isolated suburbs on the edge. The reason: three major demographic groups, all of whom place high value on time and convenience, none of whom want long commutes or long errands, and at least some of whom have soured on homeownership.

The groups:
• Aging baby boomers (55 to 64 years old): Although they are nearing retirement age, many will keep working out of necessity or by choice. Some will be forced to stay in their suburban homes until values recover. Those who are able to move will not choose traditional retirement locations or senior housing, opting instead for more mixed-age living environments that cater to their active lifestyles. Suburban town centers with a walkable urban "feel" will appeal to this group.  
• Younger baby boomers (46 to 54 years old), now in or entering their prime earning years: This group will also face a tough time selling suburban homes, hampering the ability of these boomers to move. Because the recession has left many younger boomers with flat incomes and less home equity, their ability to purchase second homes will be greatly diminished, curbing prospects in general for the second home market. However, like their older counterparts, they will be drawn to more connected, compactly designed communities when they are able to switch houses. 
• Generation Y: This tech-savvy generation has a population of about 86 million, more than the baby boomers. Gen Yers place high value on community; on diversity; on places (either virtual or actual) to gather; and share information, ideas and opinions. As they enter the housing market, they will be far less interested in homeownership than their parents were when they were young adults. Gen Y will gravitate toward walkable, close-in communities, choosing housing on outer edges only as a last resort because it is the most affordable.

One point repeated in several presentations: The housing collapse is a major factor behind some of the change in attitudes about where and how to live. Despite the recovery that is occurring in some housing markets, the number of foreclosures and "underwater" mortgages (loan amounts that are higher than the current value of the homes) continues to rise. The growing number of consumers who are choosing to walk away from those mortgages suggests a fundamental change from the long-held notion of homeownership as the ultimate "American Dream." This disillusionment over homeownership as a way to build wealth could persist for decades to come, as those entering the housing market will be more apt to rent longer, and to place more emphasis on buying for shelter rather than investment purposes.

Describing the new suburban development pattern as "smart sprawl," author and a fellow at Chapman University Kotkin said, "We can solve the problem of sprawl within sprawl itself." Mid-size cities, he said, will prove attractive to Gen Y, not only because they are affordable, but because many have transformed themselves into recreational and/or entertainment hubs, providing an urban lifestyle that is within their means.

According to Florida, author of The Rise of the Creative Class and other books on social trends, the "engine" that powers the next economic boom will be human creativity, and the places that meet the needs of the most talented and innovative workers from all types of employment sectors will be the most successful. "Place will be the organizing economic and social unit," he said.

The different lifestyles of both baby boomers and echo boomers will require the development community to provide products that are flexible in use, and that reflect the high mobility tendencies of the younger generation. "We are at a break with the past," he said, noting that society has entered an era in which time matters most of all. "We must respond by creating efficiencies in housing and transportation."

Future Perilous for Medium-size Real Estate Firms

This post was written for The Ground Floor by Joseph Klem, vice president of Virtual ULI at the Urban Land Institute.

The future of real estate holds opportunities for the large and small real estate firms, but mid-size players are in a dangerous position, said panelists at Urban Land Institute’s Real Estate Summit at the Spring Council Forum in Boston.

Larger players, especially real estate investment trusts (REITs), are getting stronger and more specialized, noted Colin Dyer, president and chief executive officer of Jones Lang LaSalle. They have deep enough pockets to tackle international opportunities, and to hire specialists for fast-changing areas such as regulatory compliance. Consolidations will cause the "bigs" to keep getting bigger, panelists predicted.

The small firms can grab local opportunities, leveraging their relationships to get smaller deals that the top firms cannot profitably tackle, panelists said. "Big firms like mine, I worry about the little guys every day," said Michael D. Fascitelli, president and chief executive officer of Vornado Realty Trust. It’s the mid-size firms who should beware, and perhaps position themselves for acquisition, panelists said.

Other tips:
• "Aging start-up"” owners should take a hard look in the mirror. "I sometimes have the tough task of recommending to the founder, the entrepreneur, of an aging firm that they should step out of the way," said Honorable Mahlon "Sandy" Apgar IV, senior scholar at the Woodrow Wilson Center for Scholars.

• Apgar also suggested that real estate firms of the future should reconsider their view of teaming. "Everybody in this room knows how to team," he said. "The shift, and I think it’s a tectonic one, is to go from teaming on a deal, to teaming the enterprise."
• Know the target market, and stick to it, recommended Thomas W. Toomey, president and chief executive officer of UDR, Inc., which owns and manages residential apartment communities. "We focus on 25 specific markets, and we know our target customer: 20 to 35 years old," he said. "We focus on operations and increasing margins. Sixty-seven cents on every dollar we collect in rent goes to the bottom line."
• Overseas markets have their risks, as Jones Lang LaSalle’s Dyer noted. "We bought into an existing office building in China, based on the promise that no other office building would be built in that area," he said. "But just a few months later, a hole opened up across the street for a new office building."
• Vornado Realty Trust’s Fascitelli added that despite the overseas risks, those markets still hold great potential if firms know how to pursue them. "The Chinese are smart, entrepreneurial, they work hard and have tons of money," he said. "Get to know them."