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REAL ESTATE ISSUES

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Published by THE COUNSELORS OF REAL ESTATE® Volume 36, Number 1, 2011

L E A D E R S H I P R O U N D TA B L E

Stepping Up the Game to Bring More Sophistication to Counseling in an Expanding, Shifting Market F E AT U R E S

AND

PERSPECTIVES

Dispute Resolution for All Counselors? A New Way of Looking at Our Business

Creative Counseling: Preserving the Hawaii Opera Theatre

Information Overload: Emerging Academic Challenges and Their Implications

Reverse Mortgages: Should the Elderly and U.S. Taxpayers Beware?

Demand for Warehouse and Distribution Center Space

Monasteries, Mutuals and Investment Banks

The Value Proposition of Sustainability: It’s in the Eye of the Beholder RESOURCE REVIEW

The Big Short: Inside the Doomsday Machine

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REAL ESTATE ISSUES

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Published by THE COUNSELORS OF REAL ESTATE®

EDITORIAL BOARD EDITOR IN CHIEF

Mark Lee Levine. CRE University of Denver, Denver, CO

Peter C. Burley, CRE National Association of REALTORS®, Washington, DC

Gerald M. Levy, CRE Gerald M. Levy & Co. LLC, New York, NY

ASSOCIATE EDITOR

Marc Louargand, CRE Saltash Partners LLC, West Hartford, CT

Mary C. Bujold, CRE Maxfield Research, Inc., Minneapolis, MN LIAISON VICE CHAIR

Timothy R. Lowe, CRE Waronzof Associates, Inc., El Segundo, CA

Otis E. Hackett, CRE Otis E. Hackett & Associates, Solana Beach, CA

David J. Lynn, Ph.D., CRE ING Clarion, New York, NY

2011 EDITORIAL BOARD

Richard Marchitelli, CRE Cushman & Wakefield, Inc., Charlotte, NC

Owen M. Beitsch, Ph.D., CRE Real Estate Research Consultants, Orlando, FL

Michael S. MaRous, CRE MaRous & Company, Park Ridge, IL

Charles Brigden, CRE Clarion Associates, Inc., Chicago, IL

William P.J. McCarthy, CRE W.P.J. McCarthy and Company Ltd., Burnaby, BC Canada

Michael Y. Cannon, CRE Integra Realty Resources, Miami, FL

Brent A. Palmer, CRE NewTower Trust Company, Seattle, WA

Susanne Ethridge Cannon, Ph.D., CRE DePaul University, Real Estate Center, Chicago, IL

Joe W. Parker, CRE Appraisal Research Company, Inc., Jackson, MS

Maura M. Cochran, CRE Bartram & Cochran, Inc., Hartford, CT

Martha Peyton, CRE TIAA-CREF, New York, NY

John A. Dalkowski, III, CRE PHOENIX Real Estate Counselors, Inc., New York, NY

Jeanette I. Rice, CRE Verde Realty, Fort Worth, TX

Karen Davidson, CRE Davidson & Associates, Anaheim, CA

James P. Ryan, CRE Brightside Alliance Group, Atlanta, GA

P. Barton DeLacy, CRE Cushman & Wakefield, Inc., Chicago, IL

Roy J. Schneiderman, CRE Bard Consulting LLC, San Francisco, CA

Anthony Downs, CRE The Brookings Institution, Washington, DC

Karl-Werner Schulte, CRE IREBS Real Estate Academy, Eltville 65346 Germany

Jack P. Friedman, CRE Jack P. Friedman & Associates, Richardson, TX

Steven A. Shapiro, CRE Cary, NC

Steven Friedman, CRE Ernst & Young LLP, Washington, DC

Daniel L. Swango, CRE Swango International, Tucson, AZ

John L. Gadd, CRE Gadd Tibble & Associates, Inc., Wheaton, IL

Linda Tresslar, CRE Johnston Craig LLC, Chicago, IL

Jennifer Glover, CRE American Realty Advisors, Glendale, CA

F. Thomas Ustler, CRE Ustler Properties, Inc., Orlando, FL

Lewis M. Goodkin, CRE Goodkin Consulting, Miami, FL

Robert M. White, Jr., CRE Real Capital Analytics, New York, NY

Wayne Grinnell, CRE Las Cruces, NM

PRESIDENT AND CHIEF EXECUTIVE OFFICER

Tom Hamilton, Ph.D., CRE University of St. Thomas, Minneapolis, MN

Mary Walker Fleischmann MANAGING EDITOR

Peter Holland, CRE Bartram & Cochran, Inc., Hartford, CT

Carol Scherf

Paul G. Johnson, CRE The Paul G. Johnson Company, Inc., Phoenix, AZ

DESIGN/PRODUCTION

Dave Hunter

The articles/submissions printed herein represent the opinions of the authors/contributors and not necessarily those of The Counselors of Real Estate® or its members. The Counselors assumes no responsibility for the opinions expressed/citations and facts used by the contributors to this publication regardless of whether the articles/submissions are signed. Published by The Counselors of Real Estate, a not-for-profit organization of the National Association of REALTORS®, 430 N. Michigan Ave., Chicago, IL 60611. Copyright 2011 by The Counselors of Real Estate of the National Association of REALTORS. All rights reserved. (Printed in USA.) Third class postage paid in Chicago. Real Estate Issues® publishes three times annually. Subscription rates are: $48 for one year (3 issues); $80 for two years; $96 for three years; $42 per year to students and faculty; $54 foreign rate, submit in U.S. currency; single copy $15. Remittances may be made by credit card or personal check, payable to The Counselors of Real Estate. Remittances, change of address notices, undeliverable copies, orders for subscriptions and editorial material should be sent to Real Estate Issues, The Counselors of Real Estate, 430 N. Michigan Ave., Chicago, IL 60611. Phone: 312.329.8427; Fax: 312.329.8881; E-mail: [email protected]; Web site: www.cre.org. Library of Congress card number LC 76-55075 Real Estate Issues is a registered trademark of The Counselors of Real Estate, a not-for-profit organization.

REAL ESTATE ISSUES

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Volume 36, Number 1, 2011

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REAL ESTATE ISSUES Published by THE COUNSELORS OF REAL ESTATE®

CONTENTS 4

19

Editor‘s Note

Information Overload: Emerging Academic Challenges and Their Implications

Peter C. Burley, CRE

James D. Ray, M.S.

Like the real estate profession it serves, today’s real estate educational environment has responded to the information age, and students face a new basket of related challenges. In this article, an adjunct professor discusses common classroom pitfalls and their relevance outside of academia.

7 Contributors

60 About Real Estate Issues

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61

Demand for Warehouse and Distribution Center Space

About The Counselors of Real Estate

®

Joseph S. Rabianski, Ph.D.; and Philip A. Seagraves, MSRE

From 1990–1995, the analysis of warehouse and distribution center space came into its own in real estate literature. Previously, warehouse space was considered a component of industrial demand, along with production facilities. In this article, the authors present a review of the literature by focusing on the demand determinants as well as current thinking about the demand for this space and its market. The authors hint at potential new developments that may cause the current models to come into question, and conclude with suggestions for further research into warehouse and distribution center space demand and market activity.

L E A D E R S H I P R O U N D TA B L E

8 Stepping Up the Game to Bring More Sophistication to Counseling in an Expanding, Shifting Market Moderator: Peter C. Burley, CRE; Panelists: John J. Leary, CRE, 2011 Board Chair; Arthur P. Pasquarella, CRE, 2010 Board Chair; Kenneth P. Riggs, Jr., CRE, 2011 First Vice Chair; and Howard C. Gelbtuch, CRE, 2011 Second Vice Chair

Having survived the meltdown, and having started on a path to recovery, we at Real Estate Issues were curious as to how various members of the Leadership team of The Counselors of Real Estate® view the world; how they approach the issues of the day; what they hear and think about with respect to the state of the real estate markets and the industry in general. During the months of March and April this year, we invited CRE leaders to answer a few very broad questions online. This Q&A is the resulting conversation with Real Estate Issues CRE Editor in Chief Peter Burley.

35 The Value Proposition of Sustainability: It’s in the Eye of the Beholder Linda G. Tresslar, CRE

With the continued advancement of sustainability initiatives, both mandated and voluntary, has come the rise of differing sustainability priorities and measures of success attributed to the same asset by various stakeholders. The quandary for an asset owner then becomes how best to address these varying value propositions for maximized long-term asset value. In this article, the author discusses the necessity of understanding the sustainability value propositions of others, including the broader community, represented by government agencies and users of an asset. Without that, says the author, asset owners can wind up spending on measures that carry less weight or even worse, falling behind other assets by not spending in essential areas, resulting in an asset’s economic obsolescence over time.

14 Dispute Resolution for All Counselors? A New Way of Looking at Our Business John M. Duncum, CRE; and Joe L. (Joey) Cope, J.D.

As American business is faced with a more litigious environment and the cost of litigation has soared, more interest is being shown in Alternative Dispute Resolution and mediation. In this article, the authors discuss how the counselor may add this component to the practice of real estate consulting or may find the skills learned in mediation training to be of great value in many real estate consultations.

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CASE STUDY

56 Monasteries, Mutuals and Investment Banks

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Albert J. Brenner, CFA

Creative Counseling: Preserving the Hawaii Opera Theatre

Henry VIII’s dissolution of the English monasteries in the early 16th century and the expropriation of their wealth has odd parallels to some modern developments in American banking and finance. In this article, the author looks at how the largescale conversions of mutual savings institutions to publicly owned companies and the conversion of American investment banks from private partnerships to public corporations gives management and partners the opportunity to get rich–without really trying.

Karen Char, CRE, MAI

In May 2010, Karen Char, CRE, president, John Child & Company, Inc. and Christine Camp, CRE, president and CEO of Avalon Group, LLC, both of Honolulu, were honored by The Counselors of Real Estate® with the 2010 James Felt Creative Counseling Award for their work developing and implementing a long-term real estate strategy for the Hawaii Opera Theatre (HOT) in Honolulu. This case study shows how their work enabled HOT, which was faced with making crippling cost cuts, to continue to produce outstanding opera performances and nationally recognized educational programs in Hawaii. The following article describes the process through which HOT was able to turn a liability into an asset.

RESOURCE REVIEW

58 The Big Short: Inside the Doomsday Machine Reviewed by William P.J. McCarthy, CRE

46

In this review of The Big Short: Inside the Doomsday Machine (which remains a best seller) by Michael Lewis, CRE William P.J. McCarthy gives a big thumbs up to the author, referring to him as a “brilliant chronicler of business affairs,” in his story about what occurred on Wall Street and beyond during the global financial meltdown and subprime mortgage fiasco that peaked in 2008. McCarthy says those in the real estate and finance industries will read in amazement how widespread and deep the greed, corruption and incompetence of some of the supposedly best minds and most privileged leaders in business led to the loss of $1.75 trillion in wealth in the subprime mortgage markets, shamed capitalism and ruined thousands of lives in the process.

Reverse Mortgages: Should the Elderly and U.S. Taxpayers Beware? J. Douglas Timmons, Ph.D.; and Ausra Naujokaite, M.A.

Reverse mortgages are becoming popular in America, and although they are only a small niche in the multi-trillion dollar banking industry, they have begun to attract the interest of banks, mortgage brokers, insurance companies, and Wall Street investors who are looking for new profit centers in the wake of the subprime mortgage meltdown. Here, the authors discuss why seniors who might be considering these loans, and U.S. taxpayers who have suffered from the subprime meltdown, should carefully evaluate how the reverse mortgage market is developing. Reverse mortgages are complex financial transactions that have considerable closing costs, but when used correctly and under the right circumstances, have the potential to greatly enhance the lives of the senior borrowers who obtain them. This article introduces the reader to the reverse mortgage market, providing information about its growth, characteristics of these loans and issues of concern.

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Editor’s Note BY PETER C. BURLEY, CRE

“Observe constantly that all things take place by change, and accustom thyself to consider that the nature of the Universe loves nothing so much as to change the things which are …” —MARCUS AURELIUS

Here Comes the Sun (…and Change…) IT WAS AN UNUSUALLY LONG, COLD WINTER FOR THIS PART OF the country, and it seemed to take forever for the sun to warm the air, for the trees to bring forth their famous floral display, and for the tourists to arrive.

into renewed expansion. The photo is my everyday workplace view of the REALTOR® Building where I work (right foreground) as it stands on its wedge-shaped lot on New Jersey Avenue, a former Brownfield site, just three blocks from the Capitol. Our building was the first green building (LEED Silver) constructed in the District of Columbia, by the way, and it has a remarkable terrace on the roof that offers amazing views of the surrounding area, including the Capitol and many of the familiar monuments, offices and museums for which Washington is known.

But, like all winters (and recessions), it eventually came to an end. The days grew warmer, the cherry trees finally blossomed, and the tourists arrived (I know this because I have noticed a statistically significant increase in the number of “duck boats” loading up at Union Station). There has been a marked, if seasonal, improvement in the emotional tenor of the town. It is nice to see smiles on at least a few faces and to sense that we have, indeed, survived yet another long, cold, dreary winter.

At the end of the street is the Capitol itself where, as I write this, there is much a-clatter about budgets and deficits, raising the debt limit, entitlement reform, spending reductions, and a host of other issues, many of which directly affect the real estate industry, like the future of the GSEs and the how Dodd-Frank will affect banks, investors and homebuyers. For me, whether I agree or disagree with Congressional action (or inaction), it is a hallowed hall deserving of considerable pride and honor. I often wander the grounds contemplating the significance of this place that affects so much of the globe. As the budget and deficit battles wear on, discussions have turned to what can and cannot be done to get the nation’s fiscal house in order. Much of that will, no doubt, either ease or add pressure on the real estate industry. Will the honorable members down the street make changes to real estate friendly policies affecting everything from housing to retail to office space? I have no idea. There are many ongoing discussions—not a

Much goes on in this town, a lot of it important. This is the place where ideas, advocacy, politics, and policy converge— sometimes in the light of day. It is the place where decisions, many of which have the potential to truly change our lives and livelihoods, are made. In recent months and years, much has come out of this town to engage us, change us and (often) enrage us. There is likely to be more in coming months—Washington is, after all, a place where many things are set in motion, largely for the good, though often with unintended consequences that must later be addressed. We chose the cover photo for this issue for what it says about where I now reside, about the environment in which I work, and about the changes that we are experiencing or that we will experience as we continue our slow passage from the depths of recession to recovery and (one hopes)

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few of which will affect each and every one of us as practitioners and counselors in this industry.

wonder if my neighbors on the Hill have ever considered such an approach to their “business.”

Our approach to the business we do will undoubtedly evolve as our environment evolves. The economy is, as most economists will testify, in recovery. Not particularly robust, but recovery nonetheless. And, depending on one’s perspective, property markets are either in the early stages of their own recovery or languishing along a ‘floppy bottom’ awaiting a surge of demand to drive them forward. Alluding once again to the cover photo, it seems appropriate that the traffic lights on New Jersey Avenue are flashing yellow. Proceed with caution. Despite recovery, which most economists maintain is sustainable, there is still considerable cross traffic ahead, not to mention road construction, lane closures and more than a few potholes lying in wait to flatten our tires.

Innovation in our industry grows out of creative, forward thinking with a dash of flexibility and resourcefulness to respond to changes and challenges in the landscape. Additionally, and importantly, we need to be able to pass what we have learned on to those who choose to follow us into this business so they can better respond to the challenges of the future. How best to pass our knowledge and experience along presents a whole new set of challenges which, according to James D. Ray in “Information Overload: Emerging Academic Challenges and Their Implications,” require new approaches to teaching in real estate and business schools. From focusing on real estate basics to information delivery to mentoring and building problem-solving skills, Ray discusses his experience and suggestions for improvement in the modern real estate curriculum.

It is the recovery, or impending recovery, that prompted us to contact our distinguished Leadership team for its sense of the current and future state of the industry. We were curious how various members of this team of The Counselors of Real Estate® view the world, how they approach the issues of the day, and what they hear and think about with respect to the state of the real estate markets and about the industry in general. So, I asked CREs John Leary, Art Pasquarella, Ken Riggs and Howie Gelbtuch to offer their views for the journal. The upshot, I would conclude from our Roundtable discussion, is that we need to be well-grounded in the basics but more sophisticated in our approach. Clearly, even as we take tentative steps back toward a more active market, uncertainties remain—many of which challenge us to find innovative solutions to guide our businesses and our clients forward.

Our approach to real estate evolves. We learn more through experience and by taking new approaches to the challenges we face. An example of how our understanding has changed in certain segments in the industry might be found in “Demand for Warehouse and Distribution Center Space” by Joe Rabianski and Philip Seagraves. The authors discuss the evolution of the measurement in demand for warehouse and distribution center space, describing the shift from strictly industrial employment-based models to those that encompass “a function of employment, investment and technology.” Rabianski and Seagraves offer a comprehensive view of historic and modern approaches to measuring warehouse and distribution center demand, including a glimpse of changes that are likely to occur after the expansion of the Panama Canal (the coming Post-Panamax era).

Innovative solutions should well include our approach to disputes, as John Duncum, CRE, and Joe Cope point out in “Dispute Resolution for All Counselors? A New Way of Looking at Our Business.” As they point out: “Conflict and its manifestation—disputes—will happen at some point in most groups, whether business, political, charitable or religious in function.” Settling disputes through mediation can be critical to the counseling practice and can represent an avenue to collaborative success. Duncum and Cope conclude: “The counselor, by employing the proven skills and processes of interestbased negotiation and mediation, can assist the parties in the discovery of underlying interests. The understanding that results is often the key to the creation of solutions previously unavailable.” Looking down the street, I

REAL ESTATE ISSUES

I have noted considerable dialogue surrounding the longterm value of sustainability in commercial real estate in recent months, as the topic and the application of sustainability initiatives expands and evolves. Linda Tresslar, CRE, contributes to the dialogue with her piece, “The Value Proposition of Sustainability: It’s in the Eye of the Beholder.” As the adoption of sustainability initiatives evolves, she tells us: “The extent and rapidity of adoption depends upon what is mandated, what is voluntary and the perceived extent of positive impact on value.” Exploring areas of potential value enhancement for stakeholders requires well-defined sustainability goals and measures of the benefits and performance, Tresslar tells

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tions. The monasteries in the 16th century had accumulated considerable wealth, and by their dissolution, it should come as no surprise that wealth flowed to the Crown and its supporters. Brenner suggests that the conversion from mutual savings companies to stock companies “essentially cashed out the accumulated capital of the institutions.” In addition, he points out: “so much capital flowed into the region, and banks were so eager to put the capital to work, that a boom in commercial real estate followed as project after project got funded without anyone asking how all of the projects could be supported.” Another parallel, according to Brenner, is “the conversion of the investment banks from private partnerships to publicly owned stock institutions.” An unorthodox view, to be sure, but thought-provoking and worthy of discussion.

us. Otherwise, an asset is “vulnerable to perpetual economic obsolescence.” In May 2010, Karen Char, CRE, of the John Child & Company, Inc. and Christine Camp, CRE, of Avalon Group, LLC, were awarded the 2010 James Felt Creative Counseling Award for their efforts in developing a long-term real estate strategy for the Hawaii Opera Theatre (HOT) in Honolulu. Their work enabled HOT to continue to produce outstanding opera performances and nationally recognized educational programs in Hawaii. HOT owned fee simple interest in two struggling properties approximately two blocks from the NBC Concert Hall in Honolulu, both of which were in need of substantial renovation. In her article, “Creative Counseling: Preserving the Hawaii Opera Theatre,” Char gives us a fascinating account of the process undertaken to upgrade HOT facilities by moving its administrative and box offices from dilapidated warehouse space in an industrial district to healthy and safe offices in a commercial office building, and to ensure the viability of the HOT program well into the future.

Finally, William P.J. McCarthy, CRE, offers a review of last year’s headliner (but still relevant and still oft-discussed) The Big Short: Inside the Doomsday Machine by Michael Lewis. As McCarthy says: “For those of us in the real estate and finance industries, you will read in amazement how widespread and deep the greed, corruption and incompetence of some of the supposedly best minds and most privileged leaders in business led to the loss of $1.75 trillion in wealth in the subprime mortgage markets, shamed capitalism and ruined thousands of lives in the process.”

With an aging population, it is interesting to note that a substantial proportion of seniors—even those with very small incomes—have considerable equity in their homes, despite the recent contraction in home prices. Recent changes in reverse mortgage products and growing interest in reverse mortgage products on the part of lenders and Wall Street increases the likelihood that seniors will begin to draw on the equity in their homes. Going beyond Robert Wagner’s late-night television advertisements and CD offers, J. Douglas Timmons and Ausra Naujokaite offer a detailed history and discussion of the reverse mortgage concept, including positive and negative aspects and areas of potential concern, in their article “Reverse Mortgages: Should the Elderly and U.S. Taxpayers Beware?”

My hope is that the honorable members down the street from my office are able to navigate the future well and that they make wise decisions to minimize any hazards that remain along our road to recovery. I hope that all of the constituencies represented in my new hometown can work together (please) to smooth the pavement for future generations. Lastly, it is my own sincere hope that Ken Riggs is right—I think he is—when he says in our Roundtable: “the U.S. will be stronger for the lessons learned during this Great Recession.” 

“The surest way to individual wealth,” says Albert Brenner in “Monasteries, Mutuals and Investment Banks,” “is to locate a store of accumulated wealth and find a way to expropriate it. Whether it be centuries of gifts, decades of retained earnings or inflated housing values, if we can just find a way to tap the wealth, we can get rich without really trying.” Brenner, having just read an account of the dissolution of the monasteries of England by Henry VIII, describes an interesting parallel with the conversion of mutual savings institutions in New England to publicly owned stock institu-

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PETER C. BURLEY, CRE EDITOR IN CHIEF

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REAL ESTATE ISSUES

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Published by THE COUNSELORS OF REAL ESTATE®

CONTRIBUTORS ALBERT J. BRENNER, CFA, is executive managing director of Asset Allocation Parametrics, LLC, an investment research and advisory firm that specializes in providing asset allocation guidance for tax-exempt and tax-deferred investors. Previously, Brenner worked as executive vice president and treasurer of Northeast Savings, a multi-state thrift institution now part of the Bank of America, where he managed more than $2 billion in assets. Brenner is a graduate of the University of Notre Dame and holds master’s degrees from Oxford and Yale. PETER C. BURLEY, CRE, is a real estate market and economics research professional with more than 20 years experience tracking, analyzing and making sense of national and regional economic conditions and trends in the real estate industry. Presently, he serves as director of the REALTOR® University Research Center at the National Association of REALTORS® in Washington, D.C. Burley formerly served as vice president of market research at with Simpson Housing LLLP in Colorado. He currently serves as editor in chief of the professional journal Real Estate Issues. KAREN CHAR, CRE, MAI, ASA, president of John Child & Company, is responsible for developing and managing the company’s professional practice that includes real estate consulting, appraisal and business valuation. She specializes in complex real estate and business valuation assignments. JOE L. COPE, J.D., is the executive director and associate professor at the Duncum Center for Conflict Resolution at Abilene Christian University in Abilene, Texas. He earned his graduate certificate in dispute resolution from the Pepperdine University School of Law where he is presently a visiting professor in the Straus Institute for Dispute Resolution, Malibu, Calif. JOHN M. DUNCUM, CRE, MAI, FRICS, is a practicing mediator, real estate developer and business investor in Bryan/College Station, Texas. Duncum earned a master of arts degree in Conflict Resolution and Reconciliation from Abilene Christian University in Abilene, Texas, where he also now serves as mediator/ consultant. He serves as chair of the board, mediator trainer and pro bono mediator for the Dispute Resolution Center, Brazos County, Texas, a non-profit mediation center processing public and court appointed mediations.

REAL ESTATE ISSUES

HOWARD C. GELBTUCH, CRE, FRICS, MAI, is a principal with Greenwich Realty Advisors Incorporated, New York City, an internationally oriented valuation and consulting firm. Gelbtuch who has 37 years of real estate experience, previously served as a senior vice president at Landauer Associates; director of research for Morgan Stanley Realty; and overseer of the real estate valuation practice for North and South America at Jones Lang LaSalle. A prolific author, Gelbtuch supervised the writing of the tenth edition of the Appraisal Institute’s textbook The Appraisal of Real Estate, and authored two textbooks on global valuation techniques. JOHN J. LEARY, CRE, MAI, FRICS, 2011 Board Chair of The Counselors of Real Estate®, is president of Leary Counseling and Valuation, Inc., New Haven, Conn. He specializes in real estate dispute resolution and litigation support; appraisal review services; major and complex property appraisals in the northeastern United States; and commercial real estate mass appraisal services. Leary graduated from Boston College in 1970, and is trained in appraisal, arbitration and mediation. WILLIAM McCARTHY, CRE, FRICS, R.I. (B.C.), is a property developer and owner, and a real estate agent and consultant based in Burnaby, British Columbia. McCarthy is the immediate past president of the Real Estate Institute of Canada, and has served as a director and officer of several other professional and community organizations. AUSRA NAUJOKAITE, M.A., is a financial analyst at SVP Worldwide LLC in La Vergne, Tenn. She received her bachelor’s degree in Economics and Finance in 2007 from Vytautas Magnus University in Lithuania and a master’s degree in financial economics in 2010 from Middle Tennessee State University (summa cum laude). ARTHUR P. PASQUARELLA, CRE, is a principal of BPG Properties, Ltd., Philadelphia, serving as the firm's executive vice president and COO. In this capacity, he oversees all of the real estate investment decisions and property operations of BPG. Prior to joining BPG in 1987, Pasquarella was a vice president of the Investment Sales Division of Helmsley-Greenfield, Inc. where he negotiated major real estate investment transactions throughout the eastern United States on behalf of institutional investors. Pasquarella holds a master of science degree in Real Estate Appraisal and Investment Analysis from the University of Wisconsin-Madison (1980) and a bachelor’s degree in Finance from The Pennsylvania State University (1979).

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JOSEPH S. RABIANSKI, PH.D., teaches graduate and undergraduate courses in real estate market analysis, finance, investment, real property principles, and appraisal at J. Mack Robinson College of Business, Georgia State University. He received a both a doctorate and a master’s degree from the University of Illinois, and a bachelor’s degree from DePaul University. He is the author of numerous textbooks and articles on real estate, including articles published in Appraisal Journal. JAMES D. RAY, M.S., recently completed a five-year adjunct teaching assignment in New York University’s real estate finance program, where he taught and mentored graduate students. He manages a portfolio of commercial real estate investments for a large insurance company. Ray received his bachelor’s degree in Economics from Arizona State University and his master’s degree in Real Estate Finance from New York University. KENNETH P. RIGGS, JR., CRE, FRICS, has served as president and CEO of Real Estate Research Corporation (RERC) since 1991. Under his leadership, RERC provides research services, valuation management, strategic consulting, independent fiduciary services, litigation support, and Web-based management services for property portfolios. Riggs holds an M.B.A. with a concentration in finance and statistics from the University of Chicago Graduate School of Business. PHILIP A. SEAGRAVES, M.B.A., MSRE, PH.D. candidate, is a researcher and instructor in the Real Estate Department at Georgia State University. Seagraves’ background also includes roles in several real estate firms and a variety of executive level corporate positions in strategic planning, marketing and product management. J. DOUGLAS TIMMONS, PH.D., is associate professor of finance in the Department of Economics and Finance at the Jennings A. Jones College of Business at Middle Tennessee State University, Murfreesboro, Tenn. He has written numerous real estate articles related to financial, investment and legal topics. LINDA G. TRESSLAR, CRE, is managing principal of Johnston Craig LLC, a commercial real estate development and consulting firm providing services to both corporations and investors. Tresslar helps clients develop and execute real estate strategy for successful business and investment outcomes. Tresslar was co-leader for Grubb & Ellis Company’s Global Strategic Consulting practice.

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LEADERSHIP ROUNDTABLE

Stepping Up the Game to Bring More Sophistication to Counseling in an Expanding, Shifting Market Panelists: John J. Leary 2011 CRE Chair of the Board President, Leary Counseling and Valuation, Inc. New Haven, Conn. Arthur P. Pasquarella 2010 CRE Chair of the Board Executive Vice President, COO, BPG Properties, Ltd. Philadelphia, Pa. Kenneth P. Riggs, Jr. 2011 CRE First Vice Chair President, CEO, Real Estate Research Corporation Chicago, Ill. Howard C. Gelbtuch 2011 CRE Second Vice Chair Principal, Greenwich Realty Advisors, Inc. New York, N.Y.

BURLEY: In your business, in your travels and your conversations with CREs and other real estate professionals, what have been the two or three prevailing issues/stories/concerns that you are hearing, seeing, experiencing out there? LEARY: As I look at the marketplace, it is fairly clear that a

two-tier market is developing. Just as the gap between haves and have-nots has grown in our population over the last 30-plus years, we are starting to see a gap between first-tier property and other real estate. As a result, those who deal in the upper end of the real estate markets are expressing positive views about recovery, while those who deal in the more mundane properties are not. We are all the prisoners of headline fever. The real estate market is painted with a broad brush, and we all know that just does not work. Each location differs. A perfect example is the

Moderator:

Peter C. Burley, CRE Editor in Chief, Real Estate Issues Director, REALTOR® University Research Center National Association of REALTORS® Washington, D.C.

About the Moderator Peter C. Burley, CRE, is a real estate market and economics research professional with more than 20 years experience tracking, analyzing and making sense of national and regional economic conditions and trends in the real estate industry. Presently, he serves as director of the REALTOR® University Research Center at the National Association of REALTORS® in Washington, D.C. Burley formerly served as vice president of market research at Simpson Housing LLLP in Colorado. Previously, he was director of research at Amstar Group Ltd., where he developed regional and metropolitan area investment strategies. Burley holds a lifetime college teaching credential and taught urban economic geography and spatial analysis at the University of California for several years before entering the private sector. He is a Counselor of Real Estate, a Fellow of the Homer Hoyt Institute and a national policy panelist for the National Association for Business Economics. Burley currently serves as editor in chief of the professional journal Real Estate Issues.

Having survived the meltdown, and having started on a path to recovery, we at Real Estate Issues were curious how various members of the Leadership team of The Counselors of Real Estate® view the world; how they approach the issues of the day; what they hear and think about with respect to the state of the real estate markets and about the industry in general. During the months of March and April this year, we invited CREs Art Pasquarella, 2010 Chair, John Leary, 2011 Chair, Ken Riggs, 2011 First Vice Chair, and Howard Gelbtuch, 2011 Second Vice Chair, to answer a few very broad questions online. The resulting conversation, with Editor in Chief Peter Burley, is below.

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Stepping Up the Game to Bring More Sophistication to Counseling in an Expanding, Shifting Market S&P/Case-Shiller Index. The headline is the overall change in prices indicated by the index. The fact is that each of the markets in the 10-City and 20-City indices has very differing results...but who reads the third page of the press release to find this out? And who points out that you most likely cannot measure the health of the real estate markets in the entire U.S. based on a 10-City or 20-City set of studies? The budget-cutting mania that has gripped the country is the end result of many years of reduced federal dollars going to states and reduced state dollars going to counties and/or municipalities. Municipal finance and real estate are tied together through the property tax, and one of the underlying pieces of the current debate is a pushback from owners of real estate that they just cannot afford further increases in property taxes.

RIGGS: We are returning to core principles whereby all

PASQUARELLA: I see an increasing focus among real estate

BURLEY: What I am hearing here is that there appears to be a shift back to “the basics” in terms of how we view property markets; that is, looking closely at employment as a demand driver, as Art says, and in terms of how we conduct our respective businesses, as Ken alludes. At the same time, we are being asked to step up our game (i.e., deepening our understanding of the implications of a variety of circumstances, including global events), to broaden our perspective in order to cover all the bases for our clients. I am also hearing quite often, here and elsewhere, the notion of a bifurcated, two-tier marketplace, in terms of the geography (i.e., New York versus Hendersonville), the specific property sectors, (as John and Howie point out) and in terms of how we approach our practices. So, what are the big issues you, specifically, are dealing with today?

decisions throughout the process affect value, and at the end of the day, all you have is what the asset is worth. Commercial real estate is proving to be a very attractive investment from a risk and return perspective relative to stocks, bonds and cash in an era of uncertainty. Beyond bifurcation in the values of properties, there is a bifurcation in the market between high-level consulting/valuation services and run-of-the-mill services. Depth of experience and a dedication to quality matter. Offices focusing on valuation are getting fewer valuation assignments, lower fees and smaller litigation assignments. It is a value-centric world where understanding value under any circumstance (advisory, consulting, leasing, property management, etc.) is critical.

participants regarding the importance of job creation as the primary catalyst for improving demand for all real estate space. Increasing amounts of debt capital and favorable interest rates now available are enhancing property values. Real estate investors and brokers remain surprised by the relative low levels of distressed property selling in the market. I think we were in a bifurcated market for the past 18 months but I feel that is already changing. Toward the end of 2010, and certainly through the first third of 2011, I have seen evidence that the “edges” of what were recently considered the “only places” where buyers would invest start to fray. It has been simply a case of more capital than investment product in a small niche. As a result, investors are starting to make exceptions as to what is acceptable risk. Likewise, I think most capital providers, both debt and equity, are getting more comfortable with risk because we are now in the midst of an economic recovery as opposed to being in a free-falling jobs market which existed for most of 2009 and 2010.

LEARY: One thing I am seeing is an increase of what I

would call tax appeals as opposed to assessment appeals. In my markets, revaluations for assessment purposes occur periodically (three to five years, depending on jurisdiction). Property owners who did not originally challenge the valuation at the time it took place now are experiencing the impact of increased taxes and, in many instances, increased vacancy and lower rents. The only way to obtain relief is to try and claim that the valuation they once thought was reasonable is now excessive. The other big problem is how to measure current value in the absence of a significant volume of sales and in the context of many distressed sales.

GELBTUCH: First, I see a dichotomy between asset pricing

and investor interest in major markets such as New York City and Washington, D.C. versus secondary and tertiary cities like Hendersonville, N.C. Second is the large volume of capital trying to buy real estate: either the highest quality product such as retail on Manhattan’s Fifth Avenue or real bottom fishers looking for oceanfront condominiums in Florida. Properties in the middle are not attracting as much investor interest. Third is the unknown impact of global events, ranging from the impact on energy costs resulting from political turmoil in Northern Africa and the Middle East to the potential environmental consequences of the disaster in Japan.

REAL ESTATE ISSUES

PASQUARELLA: Being an owner of a large diversified

property portfolio, the big issue for our firm over the past few years was maintaining adequate liquidity during a

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Stepping Up the Game to Bring More Sophistication to Counseling in an Expanding, Shifting Market jobless recovery seems like it will eventually segue into a job-generating expansion. On the other hand, oil is hovering above $100 per barrel and gas prices are rising as well, the Middle East is rife with political turmoil, state and local government jobs are rapidly declining, and several million unemployed persons have simply stopped looking for work. The litigation support aspect of our business has increased exponentially over the past few years. Lenders that have foreclosed on failed projects are going back and suing all of the parties involved, not just the developers but the appraisers as well. There is also the matter of dealing with Wall Street clients, which have taken an increasing interest in the underappreciated real

capital market freeze. Having weathered that storm together with the reemergence of the capital markets has now enabled us to return to focusing on building value through occupancy improvements, loan refinancing and timely property sales and loan refinancing. We have returned to the equity market ourselves with the raising of capital for our 11th discretionary investment fund. GELBTUCH: I’m hearing mixed signals about the future of

the economy and their impact on real estate valuation trends. On a positive note, municipalities are finally dealing with looming deficits, the stock market has doubled over the past two years, interest rates remain near historic lows, corporate profits are strong, and the

About the Panelists Arthur P. Pasquarella, CRE, is a principal of BPG Properties, Ltd., Philadelphia, serving as the firm‘s executive vice president and COO. In this capacity, he oversees all of the real estate investment decisions and property operations of BPG. Prior to joining BPG in 1987, Pasquarella was a vice president of the Investment Sales Division of HelmsleyGreenfield, Inc. for five years where he negotiated major real estate investment transactions throughout the eastern United States on behalf of institutional investors. He began his career at Strouse, Greenberg Financial Corporation in the income property mortgage banking business. Pasquarella holds a master of science degree in Real Estate Appraisal and Investment Analysis from the University of Wisconsin-Madison (1980) and a bachelor’s degree in Finance from The Pennsylvania State University (1979). He is a member of The Counselors of Real Estate®, serving as the 2010 Chair of both its Board of Directors and its Executive Committee. He is also a Fellow of the Royal Institution of Chartered Surveyors.

Howard C. Gelbtuch, CRE, FRICS, MAI, is a principal with Greenwich Realty Advisors Incorporated, New York City, an internationally oriented valuation and consulting firm. Gelbtuch has 37 years of real estate experience. Prior to founding Greenwich in 1994, he was a senior vice president at Landauer Associates; director of research for Morgan Stanley Realty; and oversaw the real estate valuation practice for North and South America at Jones Lang LaSalle, among other work experiences. He has worked or taught real estate courses throughout the Americas, eastern and western Europe, Asia, the Middle East, Russia, and Africa. A prolific author, Gelbtuch supervised the writing of the tenth edition of the Appraisal Institute’s textbook The Appraisal of Real Estate, and authored two textbooks on global valuation techniques. Gelbtuch chaired The Counselors’ Consulting Corps for many years, and currently serves as second vice chair of The Counselors of Real Estate®. John J. Leary, CRE, MAI, FRICS, 2011 Board Chair of The Counselors of Real Estate®, is president of Leary Counseling and Valuation, Inc., New Haven, Conn. He specializes in real estate dispute resolution and litigation support; appraisal review services; major and complex property appraisals in the northeastern United States; and commercial real estate mass appraisal services. Leary also serves on the faculty of the Risk Management Association as a valuation subject expert for its “Real Estate Lending Seminar,” which is presented to the Federal Reserve and bank examiners twice annually. Leary graduated from Boston College in 1970, and is trained in appraisal, arbitration and mediation. From 1989–1994, he was one of the five original members of the Appraisal Standards Board (ASB) of the Appraisal Foundation, serving as vice chair in 1989, and chair from 1990–1992. The ASB is responsible for the development and promulgation of the Uniform Standards of Professional Appraisal Practice (USPAP). Leary is co-author of USPAP in plain English, a guidebook to the 2006 Uniform Standards of Professional Appraisal Practice for real estate appraisers and clients, and USPAP in plain English… 2008–2009.

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Kenneth P. Riggs, Jr., CRE, FRICS, MAI, has served as president and CEO of Real Estate Research Corporation (RERC) since 1991. Under his leadership, RERC provides research services, valuation management, strategic consulting, independent fiduciary services, litigation support, and Web-based management services for property portfolios. In addition to leading the firm’s business ventures, Riggs serves as publisher of the RERC Real Estate Report and the RERC/CCIM Investment Trends Quarterly, and as co-publisher of the annual forecast report, Expectations & Market Realities in Real Estate. Riggs holds an M.B.A. with a concentration in finance and statistics from the University of Chicago Graduate School of Business. He received the CRE designation from The Counselors of Real Estate® in 1995, and was elected first vice chair of The Counselors of Real Estate for 2011. In addition, he has earned the CFA® designation from the Association for Investment Management and Research, the FRICS designation as a Fellow of The Royal Institution of Chartered Surveyors, the CCIM designation from the CCIM Institute, and the MAI designation from the Appraisal Institute. Several years ago, the National Association of REALTORS® named him as one of real estate’s 25 most influential thought leaders.

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Stepping Up the Game to Bring More Sophistication to Counseling in an Expanding, Shifting Market estate holdings of publicly traded companies. This is a continuation of a trend started nearly a decade ago when a hedge fund took control of Kmart in 2002, recognizing that while it couldn’t compete with WalMart as a retailer, its long-term, below-market leases had significant real estate value. Today, hedge funds and private equity funds make up the largest segment of our client base.

PASQUARELLA: As various regional markets and property

type sectors have improved, we have changed our emphasis from primarily focusing on occupancy levels to being able to increase rental rates again. Likewise the reemergence of the capital markets has enabled us to shop financing and property sales. GELBTUCH: Our analyses have become, and will continue to become, more sophisticated. I recently saw a chart comparing average residential rents in Manhattan with private sector employment for the past 20 years. The correlation was amazing! In the past, we would have just plugged in an estimate of inflation rather than look to employment figures as support for anticipated changes in rents.

RIGGS: The primary thing I am focused on is leveraging

my time, talent and expertise to truly provide innovative solutions to clients as they finalize their strategy in a world that has changed in Draconian ways given the experiences of the Great Recession, the housing bubble, the worldwide geopolitical risks, and the strong cloud of terrorism over the past 10 years. I am also providing leadership to a new generation of thinkers, doers and individuals who have an entrepreneurial spirit. On a more personal level, my goal is to balance life between family, friends and spiritual interests.

RIGGS: From a practical standpoint, one thing I am

trying to do for our firm is to leverage technology and, at the same time, draw boundaries to ensure that technology does not dictate my focus and use of time. I find that I am able to gain additional productivity by identifying segments of the day that suit and optimize specific requirements of: responding to emails, conducting meetings/conferences, thinking creatively, spending time with family, and carving out time to recharge. Finally, I find that it is essential to surround myself with great individuals who share my vision, feel my passion and understand what enterprise effort is committed to achieving.

BURLEY: So, the marketplace has changed, and there is some adjustment going on as we emerge from the past few years of “difficulty.” We are re-evaluating properties, the marketplace and our own approaches to counseling. Even as we take tentative steps back toward a more active (and hopefully, “normal”) market, uncertainties remain—many of which present daunting potential hazards. These challenge us to find, as Ken says, more innovative solutions to guide our businesses and clients through. How have you approached those issues? Are you doing things differently now than you would have a year or two ago?

BURLEY: So, we are changing our approach, by employing new or different elements—technology, as Ken points out, and a heightened level of sophistication, as Howie says—to inform our analyses in addressing our clients’ needs. I recently heard a practitioner suggest that his practice has evolved from 80 percent data gathering and 20 percent analysis to 20 percent data gathering and 80 percent analysis, because the data are available and we can employ new technology to enhance our analyses and our understanding of the critical forces in the marketplace. Perhaps some of that is actually driving the ability of the capital markets to “reemerge,” as Art suggests, by making a market assessment—our understanding of valuation and risk—better. Staying on this theme of change, do any of you notice any emerging positive or negative trends?

LEARY: With regard to subsequent year assessment

appeals, the important issue is to carefully address and analyze the market conditions that existed on the effective date of the revaluation and apply those to the property in question, even though the property owner and counsel for the property owner want to introduce all types of subsequent evidence into the debate. I work for both municipal clients and property owner clients in my litigation practice, and it is important to deliver a consistent message even though that often requires attempting to educate the client. With regard to measuring current value, the impact of listings and interviews of market participants has greater import in the absence of sales volume. Income valuation methods also take on greater import, and the selection of rates of return is critical in the context of the developing two-tiered market. Classifying the property risk is a significant part of the task.

REAL ESTATE ISSUES

LEARY: One of the negatives in the current market is the

lack of trends. Every projection ends with a list of caveats because of the seesaw nature of market indices. To my way of thinking, this is not unexpected. We have just experienced the greatest market downturn of our professional

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Stepping Up the Game to Bring More Sophistication to Counseling in an Expanding, Shifting Market for some time. On the other hand, demand for selfstorage, particularly with the aging population and with so many people having lost and continuing to lose homes, is growing. An increase in online retailing/return to catalog sales, partly because stores cannot afford to stock everything people want in their stores, will reduce retail property demand but will likely increase warehouse demand. We also need to recognize that a new demographic is gaining stride in the work force. Generations X and Y, or echo boomers, are highly skilled and have a different view, an independent view, and an intelligent perspective on life, work and the world. Just like those in our generation, they will make a mark on society for the better, but they will also face unforeseen challenges in life and in the workplace. As those in each generation have done in the past, they will address its challenges, and in so doing, the world will be better and the human touch will never be lost.

lives that earned the name the Great Recession. Is it not logical to think that the recovery from a recession like no one had ever seen may well be a recovery like no one has ever seen? The problem is that we are trying to use the traditional measures of recovery to evaluate our current position. Now add in a natural disaster and a war or two or three, and where are we? Another negative from my perspective is the concept that we must measure recovery to the previous high-water mark. Most of us would admit that the real estate market behavior in 2006 up to midyear 2007 was indeed an aberration on the high side. We are not better off if we return from one extreme to the other. Wouldn't our perspective on the current market be much better if we were measuring recovery in relation to more normative 2003–2004 market conditions? PASQUARELLA: The operating and capital markets are

generally improving across the country across most property types. Vacancy rates are declining and rental rates in specific submarkets are being increased. Values have generally stabilized and, in certain sectors and locations, are increasing substantially.

BURLEY: I hear Art saying that property markets and

values are stabilizing and, in some sectors and locations, improving substantially. And, as John points out, perhaps the norms against which we are measuring performance might be—or perhaps should be—somewhat different from what we used to expect. As Howie says, there does seems to be a lot of interest and movement overseas, and, as Ken points out, some of the traditional views of property demand and the use of space, have, indeed, begun to shift. All of which appears to suggest to me that our understanding of the market, as well as of those who follow us in subsequent generations of practitioners will, out of necessity, require increasingly sophisticated, global and, perhaps unorthodox, approaches to analyzing and evaluating property markets going forward. What do you think or expect will be different in the business a year or a few years down the road?

GELBTUCH: There is so much more information available

now than there has been in the past. This is clearly a positive. Knowledge is power! Globalization is continuing. I can see that in our own practice. Several years ago we were active in western Europe, then eastern Europe, followed by the Soviet Union, Latin America, the Middle East and, most recently, Africa. When the Appraisal Institute published my first global valuation book a dozen years ago, it covered only about 21 countries and we had to fax chapters around the world for review and editing. Last year’s book covered 47 countries. At one time, I think we had a fairly significant share of this market; now it’s become much more common for U.S. appraisers and counselors to work overseas.

LEARY: I was tempted to punt on this question because of

RIGGS: I’ve noticed change in the usage of some property

all the “what-ifs” out there. I do think a reckoning and readjustment in our thinking about certain property types will (or should) occur as we emerge. Let’s think about fundamental issues that we have been discussing but have not really addressed that may impact the office space market and the retail space market.

types. Businesses and individuals are truly embracing the fact that you can work from anywhere (the concept that “the world is flat”), but you still need that human interaction. This has resulted in individuals using less traditional office space but carving up the use of space differently (more video conferencing rooms, open and flexible spaces, intensive wiring at home, and more complete home offices). This is both positive and negative, depending on what side you stand. Given the advances in technology and lower costs in just the past 2–3 years and the increase in the number of people working from home, certain office property locations are not likely to recover REAL ESTATE ISSUES

PASQUARELLA: Job creation appears to be strengthening

and with that I expect that occupancy and rental rates will increase faster over the next few years than most people expect. I also expect that capital transaction activity (both debt and equity placement levels) will increase by 50 percent per year over the next two years. 12

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Stepping Up the Game to Bring More Sophistication to Counseling in an Expanding, Shifting Market online once the consumer has made the final selection in the comfort of their own space? Will retail powered by vendors of necessities (the grocery-anchored center) have more appeal going forward than specialized retail? No answers here, but lots of questions.

GELBTUCH: Clients will demand more sophisticated

analyses. The desire of people in emerging markets, particularly the former command economies such as Russia, China, Africa, and eventually Cuba, to learn from their U.S. counterparts will continue to grow. There are many otherwise intelligent citizens around the globe that have never been adequately exposed to capitalism who are now eager to learn how to measure supply and demand, begin land title registration systems and form joint ventures with their more experienced counterparts.

PASQUARELLA: While our industry needs to be very

careful about the risk of rapidly increasing interest rates (and the corresponding effect on capitalization rates) we need to remind ourselves that over the long term, interest rates should only move in tandem with the major price indices, and with real estate, having inherent inflation protection characteristics, we should remember that property values should not be as adversely affected as other investment asset classes.

RIGGS: A new world of regulatory oversight, an aversion

to risk, and the U.S. will be stronger for the lessons learned during this Great Recession (akin to the period after the Depression). The stronger firms will get stronger, the larger firms will get larger, and by the middle of the decade we will be back to a normal state of being, although different in many ways from the past, but equally the same in many ways. Human instincts and animal spirits will remain, and there will be another bubble in 10 years; we will repeat the nature of being human, imperfect and with shorter memories than we would like to admit.

GELBTUCH: There are pending accounting rule changes

which could impact the way companies account for operating leases. RIGGS: There also is a greater level of capital availability

than anticipated, and that is weighing down returns for all asset classes. Specifically, there will be an influx of capital from foreign investors bidding up property prices and competing for returns against domestic sources of capital. There will be high prices paid for assets that carry a low level of risk. Expect a shift in demographic considerations to accommodate the millions of baby boomers, followed by the echo boomers. This will be fully realized in the employment base, the housing industry, infrastructure (including government, transportation, healthcare, etc.), monetary policy, political and business leadership, throughout the U.S. and the world. I also look for an era of return requirements and expectations that will focus on risk management and prudent oversight.

BURLEY: So, real risks remain, despite the rapid improvement that Art sees in an expanding marketplace. We are becoming a more globally oriented industry, with huge interest and massive volumes of capital waiting (and learning how) to enter the market. John suggests that we may face a “reckoning” in our approach to certain property types and Ken echoes it in suggesting that we could face another bubble in ten years. That leads me to my final question: Do you see anything looming on the horizon that may not be readily apparent that might affect the business in coming months or years?

BURLEY: So, to sum all of this up—and, this is purely my interpretation—I guess we could say that there are, indeed, some new realities that appear to be emerging, along with the economic, demographic and policy changes and many, many uncertainties coming down the road—from the demand for and use of commercial space to the probabilities of rising interest rates to new accounting rules for the use of space. And, from reading these responses, I hear a requirement for us as counselors to provide ever-more sophisticated analyses for our clients with an increasingly close eye on evaluating risk from an ever-wider (even global) perspective.

LEARY: Are office market norms in for an adjustment?

For years we have talked about shadow space, the leased but otherwise underutilized space often found in the lowrise floors of downtown office buildings. Many of those leases are coming due this decade and will not be renewed. I can see a world where we no longer talk about Class A buildings and Class B buildings, but instead talk about the Class A and Class B space in the same building. I can also see a world where 20 percent starts to look like a more normative vacancy statistic for the office market than the old saw of 10 percent that we keep hanging onto. We know that online retailing is growing and the price of gasoline is on an upward trend. What will be the effect of these two conditions on the market for retail real estate? Will stores as we know them today become repositories for returns of two of the three similar items ordered REAL ESTATE ISSUES

John, Art, Ken, Howie: I want to thank each of you for taking the time to consider these questions and to respond as thoughtfully as you have. Your leadership will help us all approach the horizon better prepared.  13

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Dispute Resolution for All Counselors? A New Way of Looking at Our Business BY JOHN M. DUNCUM, CRE; AND JOE L. ( JOEY) COPE, J.D.

behavior patterns. Conflict may have several different causes: poor communication, evil intent on the part of one or more parties, selfishness, personality disorders or scarce resources. Yet conflict is not the real problem. Unresolved conflict is. The resulting costs, hidden and obvious, of unresolved conflict can be seen in the expenses of litigation, damaged relationships or loss of customers.1 While there are several alternatives in dealing with conflict, mediation is a less costly approach and one in which maintaining or reestablishing relationships is most likely.

SOME OF YOU CAN REMEMBER when there was no television. It was a theory yet to be perfected and commercialized. Younger generations cannot visualize a time when television didn’t dominate almost every room of our homes and offices. Similarly, students of law in the next couple of decades may be surprised to find that “dispute resolution” clauses—both mediation and arbitration—were not always included in contracts. With dispute resolution emerging as a “new frontier” real estate-related practice, The Counselors of Real Estate® is providing assistance and information to counselors who have an interest in establishing mediation as an offering of their professional services. Some have asked if mediation or the other skilled techniques of dispute resolution fit in the practices of counselors. Perhaps there is another twist to this question. Can a practitioner of real estate-related disciplines benefit from using the techniques and skills of dispute resolution and yet never practice formal mediation?

About the Authors John M. Duncum, CRE, MAI, FRICS, is a practicing mediator, real estate developer and business investor in Bryan/College Station, Texas. Duncum earned a Master of Arts degree in Conflict Resolution and Reconciliation from Abilene Christian University in Abilene, Texas, where he also now serves as mediator/consultant. Duncum serves as chair of the board, mediator trainer and pro bono mediator for the Dispute Resolution Center, Brazos County, Texas, a non-profit mediation center processing public and court appointed mediations.

As our society has become more litigious and litigation costs have risen dramatically, American business has sought ways to reduce that cost of doing business. In the last couple of decades “alternative dispute resolution” and “mediation” have become familiar terms in the boardroom and in the executive suite. American business has embraced this concept in handling disputes between the company and its customers, the company and its vendors, employees and management, and between employees. Conflict and its manifestation—disputes—will happen at some point in most groups, whether business, political, charitable or religious in function. Conflict occurs because people have different ideas, values, interests or accepted

REAL ESTATE ISSUES

Joe L. Cope, J.D., is the executive director and associate professor at the Duncum Center for Conflict Resolution at Abilene Christian University in Abilene, Texas. The Duncum Center provides dispute resolution services and training to individuals and organizations, as well as offering graduate programs in conflict resolution. Cope earned his graduate certificate in dispute resolution from the Pepperdine University School of Law where he is presently a visiting professor in the Straus Institute for Dispute Resolution, Malibu, Calif. He is also a visiting professor teaching mediation at the William H. Bowen School of Law, Little Rock, Ark.

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Dispute Resolution for All Counselors? A New Way of Looking at Our Business assisting as facilitator, analyst, referee, and proposer of creative ideas for solutions. The styles of mediators can vary from one who simply carries messages to the disputing sides to one who becomes very involved in analysis and recommending points of solution.

Although Americans in the 20th and 21st centuries would like to take credit for the development of this creative process, recognition should be given to societies of centuries ago in China and Asia, Phoenicia, ancient Greece and Rome that employed the principles of dispute resolution in similar matters within their cultures.2 Confucius believed that the best way to resolve a dispute was through moral persuasion and agreement rather than coercion.3

Mediation as an alternative to resolving disputes by litigation or other costly solutions of conflict has become increasingly accepted and praised. In fact, in his article about the “vanishing jury trial,”6 Joseph Ryan notes: “According to statistics kept by the administrative office of the United States Courts, in 1962 there were 5,800 civil trials—about 11 percent of all dispositions. In 2004, although there were eight times as many cases filed, there were only 3,900 federal civil trials, or 1.7 percent of case dispositions.”

Further acknowledgment goes to the United Kingdom where, in the 20th century, mediation became institutionalized in the secular arena and was recognized as having a role in and of itself. The Conciliation Act relating to the conduct of industrial relations was enacted in the U.K. as early as 1896.

What does this mean for the practice of counselors of real estate? Is the establishment of a mediation practice just another added partition of the practice of real estate consulting? But what about those counselors who have neither the time nor the desire to enter the practice of mediation? The authors suggest that all counselors would benefit from learning and applying more of the principles upon which mediation practice is based. Mediation is, in fact, more of an art than a science.

While we Americans neither invented nor perfected it, we have successfully borrowed the process and are using it with our own modifications. In the United States, alternative dispute resolution (ADR) processes were formalized as an alternative to litigation early on, with the U.S. Department of Labor (established in 1913) appointing a panel, the “commissioners of conciliation,” to deal with labor-management disputes. These commissioners later became the U.S. Conciliation Service and, in 1947, that entity became the Federal Mediation and Conciliation Service. Some of the early writings in ADR drew on the experiences of labor and industrial dispute resolution and adapted them to the resolution of interpersonal conflict.4 Late in the 20th century, American giants such as Halliburton, Shell Oil Company and General Electric incorporated internal processes in their companies that allowed for collaboration before litigation could be pursued, especially in employee-related matters.5 In addition, many states have now encouraged this alternative to parties’ settling disputes in court by allowing for the establishment of local centers for dispute resolution. These public centers are partially supported by fees collected by the court.

An old adage says: “Under all is the land.” And that is the notion upon which our profession advises, brokers, develops, finances, buys, sells, and from which it enjoys monetary benefits. The preamble to the code of ethics and standards of practice of the National Association of REALTORS® recognizes the importance of land in our profession: Under all is the land. Upon its wise utilization and widely allocated ownership depend the survival and growth of free institutions and of our civilization. REALTORS® should recognize that the interests of the nation and its citizens require the highest and best use of the land and the widest distribution of land ownership. They require the creation of adequate housing, the building of functioning cities, the development of productive industries and farms, and the preservation of a healthful environment.7

While the authors incorporate dispute resolution techniques generally in this article, specific attention is addressed to the skills used in mediation. Mediation should not be confused with arbitration. In arbitration, a decision or “award” is made regarding the dispute by an arbitrator or a panel of arbitrators based on the evidence provided to the decision maker(s). In mediation, the parties in dispute are encouraged or led to an agreement to resolve the conflict themselves, with the mediator

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Beginning in the 18th and 19th centuries, an economic theory developed that considered land as one of the agents of production along with capital, labor and coordination, and therefore, a contributor to value. While economic theorists debated and modified this basic

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Dispute Resolution for All Counselors? A New Way of Looking at Our Business premise, land continued to be a foundational element in the theories of value.8 Thus, “Under all is the land” implies more than its physical reality. It is the surface of the earth, the source of all minerals, the source of our food supply, and the foundation of our social and economic life as well as the source of wealth.9

decision. In real estate investment, an individual or individuals, not an electronic device, sees the opportunity or risk singularly, makes decisions based on all input data and takes action thereupon. Many influences may cause the individual(s) to have a certain anticipation, but the individual or collective decision usually has unseen and unknown elements of thought. A person must be motivated to desire a piece of real estate or to sell. That motive may be obvious, or thought to be obvious, or may be obscured. If it is obscured or masked, the underlying interest of the party in the transaction remains unrealized and the desired maximum benefits of a potential transaction may also be unrealized.

Alfred Marshall (1842–1924) contributed greatly to the contemporary value theory and the basis of the techniques of the appraisal of real estate. Marshall’s focus on supply and demand theories included what he called “market forces” and a perfect “economic market” that would bring equilibrium to supply and demand. Marshall’s vision of market forces was, without saying it, the identification of the “human element” involved in all real estate transactions.10

As counselors, perhaps another aspect, then, of our service to a client should be to look for the motives of the players in the transaction. This article is based on that concept and proposes that the skills used in interest-based mediation can be applied to hasten successful agreements. To the broker, the analyst, the appraiser, the buyer and seller, this principle of going to the underlying interest—the motive—is the key to discovering why the transaction takes place or should take place at all. And, it is the lack of understanding “why” that may cause one party to have an advantage in a negotiation over another. That same lack of understanding may bring the parties to impasse.

Marshall’s analysis was that supply and demand could ultimately be perfectly balanced, yet seldom does a market exist in perfect balance or “equilibrium.” It is the human element that deciphers and perceives why the transaction should be at one price level or another. The supply and demand is real, but its impact on price is a perception driven by vision, desire and analysis of human beings. Since “equilibrium” is only theoretical, the interpretation of it in the market produces differences of opinion, and a difference of opinion produces conflict in regard to valuation and other transaction terms. Seldom do buyers and sellers agree on a price or a lease amount without having some difference of opinion. The buyer wants to buy for less and the seller would like to sell for more. So, barring identical expectations on the part of the buyer and seller at the onset, every real estate transaction is a conflict and thus, a potential dispute. These conflicts do not often nor necessarily result in a dispute—particularly one that requires some action, such as litigation, to resolve. Generally, most are resolved in peaceful negotiations or in impasse where the potential transaction fails to materialize. Accordingly, if the conflicts are mostly settled by continued negotiation (collaboration), what interest does the counselor serving as consultant have in the application of mediation principles to those transactions?

Motives or unseen, underlying interests may have the most significant impact upon the decisions being made in any transaction. An actual case in a mid-size southwestern U.S. city demonstrates how the techniques of dispute resolution (specifically, mediation) can serve the counselor and the counselor’s client well. A counselor’s client was approached by a political entity that wanted to purchase a closed entertainment property owned by the client family, with the intention of opening the facility for public use. An opening offer was made by the political entity. The counselor was asked by the family to review the offer and assist them in the transaction. The value estimate exceeded the offer substantially and precipitated a meeting with the political entity to discuss the offer. The offer was increased to about half the estimated value and the political entity would not budge on the offer. The mediation-trained counselor perceived there was more to the situation than mere differences of opinion as to valuation. The counselor asked the client’s permission to meet privately (and without attorneys) with the head administrator of the political entity. In that meeting, the counselor learned that promises had been

Let’s see how that is important to the counselor. Land does nothing without the human element causing something to happen. Yet, often in our real estate transactions, the human element is obscured. The human element creates demand. One of the appraisal principles (estimating value) is anticipation. We believe anticipation to be the most significant of the influences on market movement. Anticipation develops and fosters a human REAL ESTATE ISSUES

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Dispute Resolution for All Counselors? A New Way of Looking at Our Business apple equally (distributive negotiation). As a result, neither of the children received the maximum benefit in the process. Integrative negotiation would have given each more than they eventually received. It was a matter of discovering their interests or their “whys” in wanting the apple. It was a matter of motive.

made to the entity’s budget approval group that precluded the administrator from going back to ask for more money. The “why” or the underlying interest was now known. The counselor’s next step was to seek a creative solution—the collaboration. With a firm view of the interests or motives operating, an agreement was structured whereby the family would make a gift to the political entity for the full value over the offered amount (a tax benefit to the client) and the political entity agreed that the patriarch of the family would be honored by naming the public facility for him. The collaborative approach to the deadlocked transaction resulted in all parties being rewarded satisfactorily in the final arrangement.

Collaborative-success results are not limited to simple real estate transactions, but are seen in many types of transactions. The principles of interest-based mediation are applicable in every deal from the simple to the complex deliberations of major world decision makers. Therefore, we ask the question again: “Is dispute resolution for all counselors?” Perhaps a better question is: “Are the techniques of dispute resolution of benefit to all counselors whether or not they intend to add mediation to their practice?” We believe the answer is “Yes.” counselors interested in providing mediation services or in using dispute resolution skills and techniques to enhance their consulting practices should consider a quality training regimen that includes specific training in interest-based negotiation and mediation.

In mediation it is extremely important to identify motives, the “whys” of the parties’ taking “positions” in the conflict. It may be just as important to the counselor to seek the “whys” of any transaction in which the counselor is an advisor. Often, an understanding of the underlying interests, the “whys” of the offers of the participants, can be useful in structuring a compromise that “makes the deal.” As a result, the deal may not lead to one side winning and one side losing.

SUMMARY

In many negotiations there need not be winners and losers. In integrative bargaining—also known as interestbased, collaborative or problem-solving negotiation—the goal is for all to win to the extent their interest is best served. The quest for mutual benefit often produces substantial common ground as a foundation for agreement. It becomes the counselor’s objective to manage the negotiation context and process to gain the willing cooperation and commitment of all parties to bring about a successful conclusion.11 Often the parties in a transaction see the possibility of the results as a fixed pie. As such, parties are in competition to “claim value.” Only so much can be distributed from that pie. In truth, there may be elements of the transaction that are worth more to one party and less to the other.

“Under all is the land.” Yet real estate, in and of itself, is inanimate and has no value without the use that humans intend for it. This “motive” for acquiring land is often obscured. The counselor, by employing the proven skills and processes of interest-based negotiation and mediation, can assist the parties in the discovery of underlying interests. The understanding that results is often the key to the creation of solutions previously unavailable. Thus, the utilization of mediation skills can be important for all counselors, regardless of their intention or desire to actively practice as a mediator. The mediation profession needs qualified individuals, and counselors who are trained and prepared to serve can meet a vital need in settling real estate transaction disputes. Every jurisdiction in the United States has unique requirements regarding mediation training and credentialing. However, at this time, those requirements are applicable only to mediators choosing to participate in court-annexed mediation. Counselors interested in providing mediation services or in using dispute resolution skills and techniques to enhance their consulting practices should consider a quality training regimen that includes specific training in interest-based negotiation and mediation. 

Consider this scenario: Two children, a boy and a girl, were arguing over the last apple in the bowl. The mother, wanting to end the fight, cut the apple in two and gave each child half. The boy took the apple and ate his half, throwing the uneaten core with its seeds in the trash. Meanwhile, the girl carefully lifted the seeds from the middle of her half and threw the leftover apple in the trash. The mother never sought “why” the apple was wanted. The boy wanted to eat the apple while his sister wanted the seeds for an experiment at school. In frustration, the mother had ended the fight by dividing the REAL ESTATE ISSUES

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Dispute Resolution for All Counselors? A New Way of Looking at Our Business ENDNOTES 1.

Slaikeu, K.A. and R.H. Hasson, Controlling the Costs of Conflict: How to Design a System for Your Organization, San Francisco: Jossey-Bass, 1998, pp. 4–6.

2.

Moore, C.W., The Mediation Process: Practical Strategies for Resolving Conflict (3rd Ed.), San Francisco: Jossey-Bass, 2003, pp. 20–22.

3.

4.

Chen, A.H.Y., “Mediation, Litigation, and Justice: Confucian Reflections in a Modern Liberal Society,” in D.A. Bell and H. Chaibong, (Eds.), Confucianism for the Modern World, Cambridge, U.K.: Cambridge University Press, 2003, p. 280. Federal Mediation & Conciliation Service, A Timeline of Events in Modern Labor Relations History. Retrieved from http://www.fmcs.gov/internet/ itemDetail.asp?categoryID=21&itemID=15810.

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5.

Slaikeu and Hasson, op. cit., pp. 64–73.

6.

Ryan, J.W., “The Disappearing Civil Jury Trial,” Defense Counsel Journal, October 2010. Retrieved from http://findarticles.com/p/articles/mi_hb6661/ is_201010/ai_n56441100/.

7.

National Association of REALTORS®, Code of Ethics and Standards of Practice.

8.

Appraisal Institute, The Appraisal of Real Estate (10th Ed.), 1992, pp. 26–29.

9.

Ibid., p. 3.

10. Ibid., p. 29. 11. Lewicki, R.J., D.M. Saunders and J.W. Minton, Essentials of Negotiation (2nd Ed.), New York, McGraw-Hill, 2001, p. 89.

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Information Overload: Emerging Academic Challenges and Their Implications BY JAMES D. RAY, M.S.

INTRODUCTION

commercial real estate” and include topics such as hotel investment management, financial engineering and real estate development.2

THE FIRST DECADE OF THE INFORMATION AGE should have been a boon for commercial real estate, and no other segment of the industry could have benefited more than the next generation. Undergraduate and graduate students enrolled in real estate programs have more tools and opportunities than previous generations, but classroom observations and employer sentiment suggest that current students increasingly struggle with an emerging set of information age problems.1 These challenges threaten long-term achievement and extend well beyond the classroom, but unlike generationdefining problems from previous eras, remedies to these challenges are more likely to be generated from awareness and experience than academic study. Consequently, working practitioners have more to add to the current academic environment than ever before. PROBLEM 1. KEEPING UP

Just as typewriters and carbon copies have been replaced by computers and email, formal real estate training in the information age is a distant relative of the program that educated most working professionals. The current educational environment is increasingly defined by the following traits: I

Competition. Domestic business schools have a far larger pool of applicants than in previous eras, which is driving a nationwide trend toward increased specialization and selectivity. Today’s top students need standardized test scores in the 95th percentile range to have a fighting chance of getting into the highestranked schools, a stark contrast from 30 years ago when standardized test scores were rarely required. Additionally, competition does not abate after acceptance, as a tenth of a grade point frequently separates 20 percent or more of graduating classes.

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Delivery. Although campuses were unaffected by the Internet prior to the 1990s, the information age is rapidly expanding educational options. Transient education platforms (such as online, night and weekend offerings) are some of the fastest-growing academic segments and provide a wider range of students with access to higher education. Students in cities nationwide can get a Cornell University Master

About the Author

Options. Previous generations of students interested in commercial real estate careers generally majored in business administration, finance or accounting and had the singular option of obtaining a generic Master of Business Administration degree. Today’s students, on the other hand, have dozens of degree options at the undergraduate and graduate level. Degree and course options go far beyond “introduction to

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James D. Ray, M.S., recently completed a fiveyear adjunct teaching assignment in New York University’s real estate finance program, where he taught and mentored graduate students. He manages a portfolio of commercial real estate investments for a large insurance company. Ray received his bachelor’s degree in economics from Arizona State University and his master’s degree in real estate finance from New York University.

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Information Overload: Emerging Academic Challenges and Their Implications of Business Administration degree, for example, without spending more than a week on campus,3 and traditional business schools are expanding beyond their home cities, offering specialized night and weekend degrees to working professionals in nearby locales.4 I

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this cap rate too high, too low or about right?” or “Are you a buyer or a seller at this appraised value?” Similarly, many students dazzle professors and classmates with presentation graphics, but they stumble when asked to explain differences between a positive financial leverage situation and a negative financial leverage situation, or when asked to predict the relative performance of Property A (a full-service hotel with a 65 percent fixedcost ratio) versus Property B (a downtown office building with long-term leases and a 50 percent fixed-cost ratio).

Expense. Tuition has increased over the last 30 years by approximately 10 percent per year,5 and several other factors exacerbate the financial burden of higher education. Graduate degrees have become the norm for breaking into the industry, and many of the nation’s top real estate programs are located in New York, San Francisco, Los Angeles and Cambridge, where housing costs add at least $10,000 per year to the total education bill.

This increasingly common breakdown is complemented by institutional migration away from the original purpose of higher education. Colleges and universities traditionally sought to impart conceptual understanding of fundamentals, or what researchers call “propositional knowledge,” which is critical to problem solving in a constantly evolving world.7

Institutional goals. Academic institutions have been forced to adapt to an evolving landscape and, in an effort to maintain financial viability within a highly competitive environment, universities are targeting high value-added platforms such as specialized graduate programs (particularly for working professionals) focused on alternate delivery.

However, academia increasingly responds to lightningfast flows of information and daily doses of new data by promoting procedural knowledge, the understanding of memorable processes such as applying formulas and creating charts. This institutionalized focus on procedural knowledge hinders achievement by limiting students' ability to solve problems but, more importantly, it limits the generation of new knowledge. As a result, identifying the shrinking minority of students primed for problem solving apart from those with procedural memories has grown into a primary and costly challenge for employers.

Overall, the current educational landscape is defined by technology, competition and specialization, and faculty observations suggest that students are responding in ways that expose them to costly mistakes. More specifically, students are migrating toward a “fast surfing” approach to information seeking (think Google-based research instead of textbook reading), which leaves them lacking conceptual understanding.6

PROBLEM 3. COMMUNICATION DEFICIENCIES

Effective written and spoken communication skills are vital in the contemporary work force8 and are threatened by the migration toward reactive (and often thoughtless) conveyance of ideas. Handwritten letters and formal reports have been replaced by quick email notes, interactive chats and text messages. And although new media limits wait times, information age technology frequently undermines student communication skills.

PROBLEM 2. MASTERING THE BASICS

Commercial real estate students face a myriad of academic options. From courses on “Mixed-income Housing Development” at MIT to “Urban Fiscal Policy” at Wharton to “Strategic Real Estate Management” at New York University, students have a range of exciting topics to choose from but, unfortunately, countless options divert attention away from core real estate principles. Consequently, many students complete real estate programs without mastering basic industry concepts.

For example, student essays and presentations often lack clarity and style, and undeveloped communication skills bleed into the work force. In fact, nearly one-third of employers report that college graduate writing skills are deficient.9 Additionally, classroom observations suggest that students particularly struggle with effective writing in real-world situations. Given an essay topic, a twothousand-word limit and six months to complete an assignment, student writing excels and is generally

Intelligent and ambitious students zip through complex analytical problems with amazing efficiency, but dozens of these same students struggle when asked to interpret and critique a property appraisal. They dive into dataslicing exercises with ease but stumble when asked, “Is

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Information Overload: Emerging Academic Challenges and Their Implications readable and compelling, but even exceptionally bright students struggle when given 30 minutes to explain, for example, the differences between publicly traded real estate (REITs) and privately held properties, without the benefit of notes, classmates, books or the Internet.

REMEDIES

Student presentations also often lack clarity, but unlike their writing, which is commonly threatened by a lack of organization, their presentations tend to be plagued by rigidity and an aversion to diverting from bullet points on slides. It is certainly true that professional writing and presentation skills improve over the course of a career, but students stand to benefit from targeted feedback, clear expectations and peer review when it comes to writing and presenting.

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Increase Awareness. Most of the emerging problems outlined above are unintentional by-products of reactive tendencies, and the best defense comes with awareness. Students or practitioners looking to better understand these increasingly common pitfalls will find value in reading related texts (e.g., Nudge: Improving Decisions about Health, Wealth and Happiness by Thaler and Sunstein), by completing a journalism writing class (journalism methods are applicable because they focus on quick, digestible writing, which anchors contemporary business communication; e.g., Gotham Writers’ Workshop sponsors online and day classes in article writing that start at $150), or by enrolling in a public speaking program (e.g., Toastmasters).

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Focus on individual problem-solving skills. Information overload and a rapidly evolving landscape result in fast surfing, which often leaves students with a working memory of superficial topics but lacking in the area of ad hoc problem-solving skills. Discerning problem solvers from “fast surfers” is difficult, particularly in a forum such as a job interview where applicants seek to illicit a positive reception. However, some tricks of the trade prove to be very helpful in this regard.

Information age challenges have increased the disparity between the “best” and “worst” students, and classroom observations of each group can impart value to students and practitioners alike.

PROBLEM 4. BEHAVIORAL PITFALLS

Coverage of the most relevant problem area is largely absent from contemporary real estate curricula. Behavioral finance, an emerging body of academic work that combines psychology and traditional economics, explains why “wealth maximizers” consistently make irrational decisions, and the field arguably provides real estate investors with more useful information than any other area of study, as it explains industry phenomena. The transaction environment of 2007, for example, highlights the real estate sector’s structural propensity for booms and busts. Investors purchased nearly $450 billion of commercial properties immediately before valuations fell by 30–40 percent, and lenders provided the bulk of acquisition capital (about $300 billion) at record low rates.

Interviewers should rely on interactive discussions about complex situations instead of asking “yes” or “no” questions. Providing a job applicant with a case study situation that includes more information than necessary to solve the problem will highlight problemsolving skills (or the lack of), because “fast surfers” try to fit all information into a response while problemsolvers tend to focus only on valuable information.

Behavioral economists explain the sector’s excessive swings by diving into irrational behavior and highlighting tendencies such as investor overconfidence. Investors often seek information that confirms assertions about the real estate world while dismissing contrary evidence (confirmation bias), tend to think that past events were more predictable than they actually were (hindsight bias) and struggle with the alignment of economic interests.

Brain teasers are also effective in fleshing out problemsolving skills (e.g., “how many golf balls can fit into a Boeing 747?” or “how many movie theaters are in the United States?”). The key with brain teasers is to carefully observe a responder’s problem-solving approach instead of debating correct answers.

Cyclical ebbs and flows are natural components of investing, but behavioral finance attempts to differentiate irrational behavior and provides flags for investors (and students) looking to avoid costly mistakes. Due to natural overlap with real estate investment activity, behavioral finance topics deserve a place in contemporary classrooms and increased understanding among practitioners.

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Find quality mentors. Another distinction between academic high performers and underperformers relates to the presence (or absence) of an effective mentor.

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Information Overload: Emerging Academic Challenges and Their Implications Good mentors take on one or two young professionals and get actively involved in their development in the field for at least one to two years. They build relatively deep working relationships and provide invaluable support as students progress over the career learning curve. The least effective mentors, on the other hand, tend to take on too many students and rarely get beyond informal pleasantries.

students benefit from many different options and flexibility, but a handful of emerging challenges threaten student development and future productivity. More specifically, students increasingly depend on Google-like research methods, and institutional focus has migrated toward procedural knowledge at the expense of conceptual understanding. Consequently, a growing number of graduates are well versed in industry slang but lack problem-solving skills and struggle with basic communication.

One effective way of sparking such a relationship is to begin by sharing reading lists. A rapidly growing body of plain English texts gives mentors and students an informal basis for conversationally exploring real world problems. Student favorites include: Fooled by Randomness and The Black Swan: The Impact of the Highly Improbable (Nassim N. Taleb); Liar’s Poker, Moneyball and The Big Short (Michael Lewis); When Genius Failed: The Rise and Fall of Long-Term Capital Management (Roger Lowenstein); and Nudge: Improving Decisions about Health, Wealth and Happiness (Richard M. Thaler and Cass R. Sunstein). In addition, the PricewaterhouseCoopers and Urban Land Institute annual publication Emerging Trends in Real Estate is filled with anecdotes and useful information. I

The observations outlined above are based on hundreds of interactions with students, and although they fairly summarize problem areas that consistently challenge today’s students and young professionals, they certainly do not define all students. However, since these emerging classroom challenges result from reactions to information age changes, their solutions extend well beyond the classroom.  ENDNOTES

Increase practitioner involvement. Working professionals bring much needed experience to the increasingly specialized nature of commercial real estate academia. Reach out to faculty members at local universities and offer to provide resources such as teaching material, mentoring or guest visits. Students and institutions benefit from experience, and professionals gain a frontline view of emerging talent. The key to successful practitioner involvement rests in the use of realistic material and the value of professional experience.10 The most effective adjunct professors and class visitors bring examples, case studies, experiments and distilled industry information into the academic environment. Authentic material engages students and prepares them for situations they will likely see in the future. Integrate actual real estate documents such as leases, contracts, mortgages and appraisals into class material. Hide names and locations for anonymity when needed, but use care not to delete transaction-defining details.

1.

“Are They Really Ready to Work? Employers’ Perspectives on the Basic Knowledge and Applied Skills of New Entrants to the 21st Century U.S. Work Force,” special report by The Conference Board, Corporate Voices for Working Families, Partnership for 21st Century Skills and the Society of Human Resource Management, October 2006. Based on a survey of 431 employers, this report states “The future U.S. work force is here and it is woefully illprepared for the demands of today’s (and tomorrow’s) workplace…the report’s findings reflect employers’ growing frustrations over the lack of skills they see in new work force entrants.”

2.

Stampone, Joe, “The Real Estate Collapse? It’ll Be in the Final,” The New York Times, Dec. 17, 2010. Available at http://www.nytimes.com/ 2010/12/15/realestate/commercial/15grad.html. The article states: “It used to be that the only alternative was getting an M.B.A., but around 1995, with the advent of real estate investment trusts and debt securitizations, academic institutions began taking real estate more seriously.”

3.

The Cornell-Queens Master of Business Administration degree is delivered to students across North America over 16 months via teleconferencing, Saturday class meetings and three residence sessions on the Cornell and Queen’s University campuses.

4.

Many domestic business schools now offer full-scale programs leading to traditional degrees outside of their normal locations. Examples include the University of Texas McCombs Master of Business Administration offered in Dallas; Cornell University’s Johnson Master of Business Administration offered in New York City; and Pepperdine’s Graziadio Master of Business Administration offered in Los Angeles.

5.

The College Board Web site, “Trends in College Pricing,” 2011. Available at http://trends.collegeboard.org.

CONCLUSION

Today’s commercial real estate educational environment is significantly different from the 20th century version experienced by most working professionals. Current

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Information Overload: Emerging Academic Challenges and Their Implications 6.

7.

Heinström, Jannica, “Fast Surfing for Availability or Deep Diving into Quality: Motivation and Information Seeking Among Middle and High School Students,” Information Research, Vol. 11, n. 4, 2006. Heinström, Jannica, Fast Surfers, Broad Scanners and Deep Divers: Personality and Information Seeking Behaviour, doctoral dissertation, Åbo Akademi University Press, 2002. Ford, Nigel “Psychological Determinants of Information Needs: A Small-Scale Study of Higher Education Students,” Journal of Librarianship and Information Science, Vol. 18, n. 1, pp. 47–61, 1986. Ford, Nigel, Miller, D., & Moss, N., “The Role of Individual Differences in Internet Searching: an Empirical Study,” Journal of the American Society for Information Science and Technology, Vol. 52, n. 12, pp. 1049–1066, 2001. On the topic of surface students and “fast surfing,” researchers from Rutgers University concluded: “Students with a surface study approach tend to consult information sources only because they are required to do so. Particular pieces of information are sought in order to fill a momentary gap of information, instead of being linked together in a wider pattern of knowledge creation. This search pattern, described as fast surfing, is characterized by minimum effort invested in information seeking and favoring easily available information sources.”

education because propositional knowledge provides the potential for the generation of new knowledge, which will be needed for solving the as yet unknown problems to be spawned in our complex, ever-changing world.” Op. cit. at 1. More than 90 percent of employers say that written communication skills are of the highest importance for college graduates.

9.

Op. cit. at 1. Approximately 28 percent of employers say that written communication skills among college graduates are deficient.

10. Additional suggested material for practitioner involvement in academia: Harvard Professor William Poorvu with Jeffrey L. Cruikshank authored a very useful real estate text that relies heavily on real world material: The Real Estate Game: The Intelligent Guide to Decisionmaking and Investment, 1999; Michael Mauboussin, an investment manager and adjunct professor at Columbia University, writes about behavioral finance and outlines experiments that help bring theory into the classroom: Think Twice: Harnessing the Power of Counterintuition, 2009; and More Than You Know: Finding Financial Wisdom in Unconventional Places, 2006. Many real estate research firms publish free newsletters that familiarize students and practitioners with industry issues. Examples include About Real Estate from Torto Wheaton Research, CoStar Advisor® and Real Estate Investment SmartBrief from NAREIT.

Maclellan, Effie, “Conceptual Learning: The Priority for Higher Education,” British Journal of Educational Studies, Vol. 53, n. 2, pp. 129–147, June 2005. On the topic of conceptual (or “propositional”) verses procedural knowledge, researchers concluded: “It is the learning of propositional knowledge that is privileged in higher

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Demand for Warehouse and Distribution Center Space BY JOSEPH S. RABIANSKI, PH.D.; AND PHILIP A. SEAGRAVES, MSRE

INTRODUCTION

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THE MARKET FOR WAREHOUSE AND DISTRIBUTION CENTER (W/DC) space is the least discussed property type in the academic and professional literature. Yet the demand for W/DC space is important for developers and investors to understand. The underlying determinants of W/DC demand are complex, have changed over time and show signs of continued change in the future.

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Both the theory of and the investigation into the determinants of W/DC space demand evolved from office and retail space demand models that focus on employment and population. Prior to 1990, W/DC demand was the poor cousin to the other commercial property market studies. From 1990–1995, W/DC analysis came into its own. This article presents a brief review of this “industrial” space literature that, heretofore, included W/DC space as an undifferentiated property type. It also expresses current thinking, hints at potential new developments that may cause the current models to come into question, and concludes with suggestions for further research into W/DC demand.

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About the Authors Joseph S. Rabianski, Ph.D., teaches graduate and undergraduate courses in real estate market analysis, finance, investment, real property principles, and appraisal at J. Mack Robinson College of Business, Georgia State University. He received a both a doctorate and a master’s degree from the University of Illinois, and a bachelor’s degree from DePaul University. He is the author of numerous textbooks and articles on real estate, including articles published in Appraisal Journal. Rabianski serves as a consultant and expert witness in real estate market analysis in the retail, office and hotel/motel property markets.

To set the stage for a discussion of the demand for W/DC space, it is important to realize that W/DC space consists of different forms of warehousing. The general definition of a warehouse is “a structure or room for storage for merchandise or commodities.”1 Also, “Warehouse applies to unrefrigerated or refrigerated buildings that are used to store goods, manufactured products, merchandise or raw materials.”2

Philip A. Seagraves, M.B.A., MSRE, Ph.D. candidate, is a researcher and instructor in the Real Estate Department at Georgia State University. Seagraves‘ background also includes roles in several real estate firms and a variety of executive level corporate positions in strategic planning, marketing and product management.

However, within the real estate industry, storage space is used for different purposes:

REAL ESTATE ISSUES

Bulk: Containers or pallets enter the structure in one truck and are routed to two or more trucks for distribution to users of the products (cross docking of pallet loads); Fulfillment: Containers or pallets enter the structure, the pallets are disassembled and routed by individual parcel to other trucks for distribution to users of the product (cross docking of disassembled parcels from incoming pallets); Distribution: Individual items enter the structure and are routed by individual parcel to other trucks for distribution to users of the product;

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Intermodal: Shipments come to the facility by one

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transportation mode and depart via another. The transfer of containers from ship to truck or rail is an example of this activity. The transfer from rail to truck is another example. A schematic of this article appears below: Critique of Employment-Based Studies 1990–94 W/DC Demand Factors The Brainstorming Era for W/DC Markets

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Studies Supporting the Variables from the 1990–94 Era

Evaluation of the Demand Factors I

Port City W/DC Space: A New Perspective

Information from Current Interviews

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Future Possibilities Affecting the W/DC Market I

W/DC DEMAND FACTORS

The foundation of the W/DC demand determinant literature was laid from 1990–1994. During this time, most of the academic studies took a broad perspective, researching “industrial” demand that includes W/DC but also other property types such as manufacturing (both heavy and light), R&D and general flex space. The important demand factors we extracted from these studies are as follows:3 I

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Physical factors such as structural attributes are important determinants of demand. Age, condition, ceiling heights, structure size, column span, number of dock doors, number of drive-in doors, sprinklers, building age, parking area, truck service area, presence of a railroad siding and presence of office space in the structure are important factors.4, 5 Location variables such as access to thoroughfares and location in a city or metro area are important considerations in determining warehouse demand.6 Factors that extend the scope beyond the physical characteristics of the structure include the revenue potential of the property, the per capita income of the market area, change in the population of the market area and access to major highways. 7 Demand for warehouse space is a function of physical features (size, percent of office space, ceiling height, dock doors, and age but not rail siding); financial factors (industrial cap rate and prime rate but not an index of local economic activity); location (county and distance to airport); and type of tenant (single or multi-tenant).8

REAL ESTATE ISSUES

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Demand for warehouse space is a function of the labor force and the population of the economy, public infrastructure and services, and international issues such as currency exchange rates and trade barriers/restrictions. Transportation is of particular note since it is the one factor most aligned with the demand for warehouse space. The author contends this to be the case when transportation access including highways, rail and deep water are advantages of a region.9 Demand for W/DC space increases as firms relocate their operations from cheap office space (Class B and C space) to W/DC space in business and industrial parks typically in the suburbs.10 Demand decreases as firms get better at managing inventories with modern computer systems and inventory handling equipment.11 Increased warehouse technology (in the form of racking systems and forklifts) reduce demand for warehouse space property.12 Industrial property demand (like other asset classes) is affected by lags related to the desire of organizations to purchase and deploy new capital and also in the risk mitigation approach of taking up only a portion of new capital in each of several successive years or investment periods. Warehouse employment is a cleaner proxy for warehouse demand as this figure tracks inventory levels very closely.13 Changes in output (or employment) and movements in the after-tax cost of corporate capital are associated with industry property completions.14 Increases in manufacturing output that result primarily from technological improvements and capital intensification rather than increased employment affect industrial space demand.15 Considering employment as the major driver of commercial real estate demand, the author introduces economic development factors into the analysis. These additional factors are the employment growth rate, the instability of employment, the industry mix (the industrial structure of the local economy as revealed in onedigit SIC codes), a measure of industrial diversity (as measured by the Theil Entropy Index), educational attainment, percentage of young firms (five years old or less) and the percent of locally owned firms.16 Location, even small geographic differences in location, can affect demand for warehouse facilities. Also, the land-to-building ratio can affect demand.17 Replacement demand due to functional and locational (external) obsolescence of existing facilities affects total

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demand for new W/DC space.18 Properties suffering from obsolescence face a declining demand. Focusing on the price per square foot of industrial properties as the dependent variable, price per square foot in earlier periods, recent construction, a “monetary base” (undefined in the article) and a variable created as the difference between the long-term Treasury bond and the Moody’s Baa corporate bond rate.19 The “path of goods movement” (POGM) theory proposes that land for warehouses gravitates to transportation corridors and hubs with favorable access to seaports, rail, air and truck transportation between major import sites and consumption centers throughout the nation. Figure 1 displays a map of the U.S. with the major highway transport routes. Rather than locating warehouses near the large manufacturing centers as had been the custom in past development cycles, warehouse space demand will more closely follow population centers where manufacturers and importers can position their product for quick consolidation, packing and distribution to the key retail and consumption markets in large population centers. Markets on this path of goods movement will see more warehouse space than other markets controlling for industrial and manufacturing activity.20

Summarizing the 1990–94 literature research into W/DC demand identified a wide array of substantive variables. They included physical attributes of the site and the structure; locational characteristics; inventory management techniques such as Just-in-Time inventory (JIT); technological improvements in W/DC equipment; the price of capital goods (W/DC space and equipment); the cost of capital; replacement demand due to functional and locational obsolescence; economies of scale; path of goods movement; and industrial employment level changes. CRITICISM OF INDUSTRIAL EMPLOYMENT-BASED MODELS

Starting in 1997 the “industrial space” demand literature branched in two directions from the 1990–94 literature. The first was the criticism of industrial employmentbased demand models. The basic element of this criticism contends that the industrial space demand model and the analysis of the industrial space market are not variants of the office demand model and market analysis.21 The determining factor in office demand models is employment with a more specific definition of office-based employment across SIC codes (NAICS codes today).22 Some office studies used total employment in SIC codes that had a high percentage of office-based employment such as the finance, insurance and real estate SIC code (FIRE) and the services code.

Figure 1

Path of Goods Movement

The task of estimating office-based employment is difficult, but estimating “warehouse-based employment” is even more difficult. Manufacturing, wholesale and transportation sector employment are not easily segmented into employment in W/DC facilities. The manufacturing sector includes employment in both production and warehousing facilities, very often without specific distinction. Many workers in wholesale and transportation do not work in W/DC facilities. Many workers in the retail industry are W/DC employees but counted as retail workers; consider the big box retailers that use W/DC type facilities with high ceilings for their retail stores and use the upper racks for storage.23

Truck Movements

Source: Adapted from U.S. Department of Transportation, 1990 data. Train/Intermodal Movements

“The demand for warehouse space originates more from the volume of inventories stored, rather than from the workers used to move this material around.”24 The volume of freight shipments was used as a proxy for warehouse inventory. 25 SUPPORT FOR THE ORIGINAL DISCOVERIES Source: Adapted from U.S. Department of Transportation, 1987 data.

REAL ESTATE ISSUES

As stated above, starting in 1997 the “industrial space” demand literature took one of two branches from the

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Demand for Warehouse and Distribution Center Space small geographic areas such as local market areas defined as counties or metropolitan areas. So, GDP-based models use national values in local market models; these GDP values are a proxy for local market vitality. The accuracy of this proxy relationship is questionable.

1990–94 literature. The second branch presents empirical support for the original discoveries made in the 1990–94 literature. The empirical results generated the following conclusions: I

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Focusing on W/DC properties, ceiling height, age of the structure, number of ground level doors (not dock high doors), the change in net employment, and location in a metropolitan area (e.g., Dallas/Fort Worth) are statistically significant.26 Focusing on W/DC properties and using a survey, a majority of respondents (62 percent) indicate that they expect their square footage needs to increase in five years; they are satisfied with the current number of doors and believe their future need for dock doors will remain unchanged (60 percent); their need for ceiling height will not change in five years (79 percent).27 The survey was performed in 1998 and may not have current relevance. Focusing on “industrial” property, the demand for industrial space is a function of employment, investment and technology.28

GDP is the total dollar value of all new goods and services produced in the U.S. in a specific year. Relating GDP to W/DC, consider the following ideas: 1. The newly produced goods may require W/DC space

but the services do not. So, GDP measures more value than what goes into W/DC space. 2. Imports, which are not produced in the U.S., are a big

factor in W/DC demand.31 Population or Employment

Population or employment: Which is the conceptually correct W/DC demand side variable? Population and employment numbers in a geographic area are related in the “labor force participation” rate. The rate is stated as the civilian labor force (employed plus unemployed workers) divided by the population in that area. For the majority of geographic areas, the labor force participation rate is typically in the 55–70 percent range. To develop the demand for W/DC space either of these concepts can be used. But which is most conceptually correct? It is population because retail expenditures are related to population more directly than to employment. Employment by NAICS codes in the study area is conceptually less appropriate because employment data does not include children or senior citizens who are retired. These are two large population groups.

NEW DETERMINANTS

Focusing attention on the determinants of NOI in W/DC properties in three metropolitan markets, significant relationships for several different variables were discovered. In Chicago, the change in exports, the change in gross domestic product (GDP) and the W/DC vacancy rate were found to be significant. In Dallas, the change in exports and inventories as well as building “starts” (a ratio of new construction to the stock of W/DC space in the metro area) were found to be significant. In Los Angeles, the change in imports and manufacturing productivity were found to be significant. Previous period NOI was also found to be significant in each metro area.29

Consumer Disposable Income

An author made the following statement: “… high levels of disposable income in the region… draw warehouse developers there.”32 W/DC space holds inventories of retail goods distributed to retail stores for purchase by people who have disposable income. Two geographic areas with the same population but with different incomes will exhibit different demand levels for retail goods. The appropriate income measure to use with population figures is the per capita income of the population in the market area. If households are the measure of people in the area, the mean household income is the appropriate measure. However, many data sources provide only the median income figure of households in the market area.33

Focusing on the “industrial” property market, previous period rent, current period vacancy, current period GDP and the latest period change in GDP are statistically significant determinants of W/DC demand.30 EVALUATION OF SUPPORTING VARIABLES

The previous sections of this article chronicle the W/DC market determinants discussed in the literature specifically starting with 1990. However, there are market factors not fully discussed in the literature. Gross Domestic Product

The role of GDP in W/DC models focused on the U.S. needs examination. First, GDP numbers do not exist for

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eight consecutive days. Drivers may restart the 60- or 70-hour clock by taking no less than 34 consecutive hours off duty.

W/DC space is located on specific sites in the local economic area and this W/DC space serves at least two related but distinct geographic market areas. The local market area consists of the counties that comprise a metropolitan area. Some portion of the local W/DC space serves the needs of the local residents in the metro area, and it serves the needs of manufacturers that provide goods to both the local residents and to those residing outside of the local market area.

The local population can be served by “short haul” truckers who leave a trucking facility, deliver the products and return to the facility within the 11-hour driving time and 14-hour maximum limits and generally confine the trips to the local economic market area—the metro area. The population in the regional market can be served by “long haul trucking” which is also determined by these regulations. These long haul day trips involve a departure and return within the 11-hour driving time and 14-hour maximum limitation. On the condition that the truck can average 55 miles per hour, the total driving time sets out a total distance of 550 miles and a one-way distance of 275 miles.

The regional market area that surrounds the metro area is the other geographic area. The other portion of the local W/DC space serves the needs of the consumers, manufacturers and the importers in this regional geographic area. The geographic extent of these exurban areas reflects federal government regulation that sets restrictions on the truck transport industry. These restrictions are the topic of the next subsection.

Points of Entry/Egress

The points of entry are the facilities along the three coasts of the U.S. (the East, West and the Gulf coasts) and the border crossings with Canada and Mexico. Figure 1 displays the 10 major ports and the 10 top border crossings with Canada and Mexico.

Drive Time Regulation

On the demand side, the important linkage for W/DC facilities is population. A key to the demand for W/DC space is “the percentage of population within one day’s drive of the port.”34 A W/DC facility can serve at least two different population bases. It can serve the needs of the population in the local economic area, and it can serve the needs of a population external to the local economic area—the regional market area. The ability to serve these populations depends in large part on the regulations governing the truck drivers’ hours of service. The regulations are below:

Path of Goods Movement Theory

The POGM model is still theory; it suggests a strong association between truck traffic, W/DC locations and population. An inspection of the POGM routes reveals a strong relationship to the Interstate Highway System. Larger W/DC nodes tend to occur at major intersections in this system along routes to and near large population bases. A port is the end point of the POGM system. Over time, the container volume has grown at these major ports and the square footage of warehouse space per person in the major nodes of the POGM system has grown.35

Commercial truckers transporting property (the rules for passenger trucks are a bit different) are subject to daily and weekly limits on the number of hours they are permitted to work. Generally, drivers are permitted to work no more than 14 consecutive hours. Of that time, only 11 hours may be devoted to driving. (The remaining time may be devoted to paperwork, loading and unloading, etc.). After exhausting these limits, drivers are required to spend a minimum of 10 consecutive hours off duty. (At this time a secondary source states that the 11 hours of driving time is being reduced to 10 hours but we have been unable to confirm this point.)

Logistics and Supply Chain Management

Logistics has many definitions that may be of interest to the reader. We provide the following from a Google search of the term. Notice that both of these definitions link a process to a warehouse.

Drivers are subject to weekly limits as well. Federal regulations prohibit driving after the driver has been on duty 60 hours in seven consecutive days, or 70 hours in

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The detailed coordination of a complex operation involving many people, facilities or supplies;

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The management and control of the flow of goods and services from the source of production to the market. It involves knowledge, communication, transport and warehousing.

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Demand for Warehouse and Distribution Center Space for ships taking the Suez Canal route instead of the Pacific Ocean route grows from 11 days to 30 days. The Panama Canal Authority announced plans in 2006 to expand its facilities to handle larger ships. According to their plan,38 the new facilities will be open in 2014 or 2015. As of 2003, ocean freight carriers were ordering ships of larger size— the Post-Panamax ships. These ships are longer (approximately 1,100 feet), wider (140 feet) and have a greater draft (48 feet); they also carry 8,000 to 12,000 TEUs.

Supply chain management (SCM) is also defined as a process that is linked to a warehouse. Here is an appropriate definition taken from a Google search: I

SCM is the organization of the overall business processes to enable the profitable transformation of raw materials or products (inputs) into finished goods and their timely distribution to meet customer demand.

As logistics and SCM improve the efficiency of business operations within a company and between/among companies, the demand for W/DC space will decline. Here the efficiencies created would be quicker processing of products through a distribution center and the minimization of storage time in the facility. A point to remember is that technological change is not always technological improvement; resources could be reorganized in such a way that productivity declines. Logistical processes could also lead to a decrease in efficiency.

“A Post-Panamax container ship of 366 meters (1,200´) length, 49 meters (160´) width and maximum 15 meters (50´) draft was used as the reference for establishing the ideal lock chamber sizes. This vessel has been identified as the largest type of vessel that carriers in the routes with the greatest frequency, volume and intensity would regularly deploy in transiting the Canal. It accommodates up to 19 container rows through its width and has a nominal cargo capacity of up to 12,000 TEU. The proposed lock dimensions will also allow handling of Capesize dry-bulk vessels and Suezmax tankers displacing 150,000 to 170,000 tons.”39

PORT CITY W/DC: A NEW PERSPECTIVE

“Freight movements are an increasingly important determinant of warehousing/distribution space demand. In particular, the rising use of marine container terminals in the global movement of goods is a major contributor to demand (for W/DC space) in the United States.”36 The growth of global trade volume and the demand for additional W/DC space will be determined by many factors, chief among them being the following factors that involve the accommodation of container ships of increasing size.37

The obvious conclusion is the port cities that will experience an increase in demand for W/DC space will be the ports that can handle the Post-Panamax ships. Port Infrastructure

In order to accommodate the Post-Panamax ships, port cities must: I I

Panamax and Post-Panamax Ships

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The size of oceangoing container ships is limited by the capacity of the Panama Canal. A Panamax ship can pass through the Panama Canal but it is at the upper limit for size. The Panamax ship cannot exceed 951 feet in length, 106 feet in width and a “draft” not exceeding 39.4 feet. The ship can carry a maximum of 4,500 containers known as TEUs (twenty-foot equivalent units). Each TEU is 20 feet long by eight feet wide and eight feet high. This limitation affects shipping between Southeast Asia (China, Japan, Taiwan, Korea, etc.) and the ports on the East Coast of the U.S.

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These limitations do not affect shipping through the Suez Canal, which can handle larger ships (Post-Panamax) because it is wider. This extra width affects the shipping routes from Southeast Asia to the East Coast ports of the U.S. for the Post-Panamax ships. However, the transit time

REAL ESTATE ISSUES

Complete and maintain necessary dredging; Lengthen the dock facilities; Invest in new overhead cranes that can span up to 22 containers (existing cranes can span 18 containers); Provide land to expand the size of dock space; Provide land to expand the W/DC facilities; Provide skilled labor to expand the docks and build the new space; Redesign the dock facilities to efficiently handle the expanded volume of containers; Change time of operation of the docks. Many current docks operate only from 8 A.M.–5 P.M. In order to handle the expanded volume of containers, these hours will need to be expanded. 24/7 might be the ultimate time schedule for these expanded ports.

Local Infrastructure

Even if the port facility significantly upgrades its infrastructure in order to handle the expanded container volume, it will not be successful if the containers cannot

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Demand for Warehouse and Distribution Center Space be efficiently transported away from the docks. The local economy’s infrastructure must facilitate this next leg of transportation. The local economy must: I

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provision of locational incentives; image of the facility; the nature and quality of neighborhood and the general area; and the safety/security aspects for the facility.

Provide streets and highways to facilitate the expanded shipments (expanding the number of lanes, dedicating truck lanes, etc.); Provide intermodal facilities to handle the expanded shipments; Eliminate impediments to traffic flows such as at grade rail crossings and street intersections that cause traffic backups.

WHAT THE FUTURE MAY HOLD

Future events and trends will have either a positive or a negative effect on W/DC space in the U.S. These “favorable” or “unfavorable” effects on W/DC space may emerge slowly over time or may not become evident until an unpredictable, critical threshold is reached. Energy Costs

A reasonable expectation is increasing energy costs. This increase in fuel cost will raise transportation costs on land, sea and air. Focusing on ocean transport and international air transit, as transport costs increase to a high enough level, they will reduce the advantage of overseas production that uses lower wage labor. This will reduce demand for W/DC in port cities and increase the need for W/DC space near inland metro areas as production of previously imported items shifts to lower wage areas in Mexico, Canada and the U.S.

Transit Times

Both producers and retailers want to minimize transit time between the factory and the W/DC that ultimately serves the retailer and its consumers. Transit time has three components—ocean transport, transshipment and land transport. Transshipment involves the removal of the cargo from the ocean carrier and placing it on a land carrier, a process often requiring two to three days. Transshipment may also include the time it takes to cross dock the cargo in a port city W/DC to get the shipments on the road to the ultimate destinations. “The shorter the transit time, the more inventory turns can be accomplished and the greater the flexibility to meet changes in consumer demand or respond to other special circumstances.”40

Foreign Wage Structure and Standard of Living

As the Asian and Indonesian economies grow, the result will be a rising wage structure and standard of living in that area of the world. To the extent these economies outpace the U.S., this will narrow the current wage gap between the U.S. and the Asian and Indonesian economies. Their costs of production will rise, reducing the current advantage of offshore production. Offshore wages will also increase as labor productivity in these countries increases.

INFORMATION FROM CURRENT INTERVIEWS

As a point of interest for the authors, a convenience sample was generated and 10 designees from the SOCIETY OF INDUSTRIAL AND OFFICE REALTORS® were asked several questions. One question was: “Please list as many warehouse space requirements as possible from the point of view of a W/DC space tenant.” The items topping their lists largely coincided with the determinants identified in the 1990–94 studies. The rank order of their responses was: location, access to interstates, building size, access to good labor, and building characteristics. When building characteristics were listed, the respondents took the time to identify a series of the physical attributes studied in the academic literature. They also identified several characteristics that have not appeared in the literature. These include: floor flatness and load bearing capacity; insulation rating; electrical power capacity; air circulation; sprinkler system rating; and dock equipment.

Terrorist Attacks

Terrorist attacks on the Panama Canal and Suez Canal facilities would result in canal closures. Such disruptions to shipping routes would greatly lengthen shipping days and increase transportation costs. Terrorist attacks on the major port facilities in China, India and Indonesia would stop a high percentage of ocean cargo, raise transport costs and create an environment of uncertainty regarding the economics of offshore production. Relative Wage Rates

A decline in the U.S. real wage structure relative to world wages will reduce our relative production costs and thereby increase our exports. At the same time, imports in general, and higher priced imports in particular, will become more expensive. The exact impact on the demand for W/DC space depends on the relative change in imports versus exports.

In addition, the respondents identified several nonphysical determinants not mentioned in the literature. These include: the ability of the facility to expand; the nature and extent of publicly provided infrastructure; the

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truck traffic. First, the top border crossing is U.S./Mexico but the next three top crossing points are along the U.S./Canada border. Second, these border crossings are not in major metro areas but may require an extra amount of W/DC space—more than needed by their local population. Figure 3 reveals similar information about the top ten railroad crossings: Seven of the ten crossings are located at the U.S./Canada border.

A decline in the value of the dollar, relative to other key currencies, will reduce our imports and increase our exports. Even if our exports increase, the combined effect of these two changes will be a reduction in the volume of traffic through U.S. ports. U.S. Government Regulation

Unproductive regulation that unduly limits transport options for the trucking industry will negatively affect procurement and distribution costs. Limiting driving time for drivers shrinks the travel zones and increases the need for overnight delivery patterns.

Figure 2

Top 10 Border Crossings By Truck State

Crossing

# Containers

Texas

Laredo

1,382,319

Currency Exchange Rates

Michigan

Detroit

1,197,967

As the exchange rate of the U.S. dollar changes relative to foreign currencies, export and import levels in the U.S. will change. If the U.S. dollar falls relative to those foreign currencies, imports become more expensive and exports become cheaper. This situation will narrow the balance of trade deficit but more than likely will not turn it positive. The major effect could be a differential effect on the volume of traffic through specific ports. The ports nearest the export firms may experience an increase in the demand for W/DC space while most firms should experience a decrease in demand from a reduction in imports.

New York

Buffalo/Niagara Falls

846,114

Califonia

Otay Mesa/San Ysidro

684,425

Texas

El Paso

644,272

Michigan

Port Huron

625,642

Texas

Hidalgo

419,426

Washington

Blaine

310,075

New York

Champlain/Rouses Point

294,970

Arizona

Nogales

276,877

Source: U.S. Department of Transportation, Research and Innovative Technology Administration, Bureau of Transportation Statistics

Figure 3

Ship Size

Top 10 Border Crossings By Train

The size of the fleet of transoceanic ships will continue to increase with more and bigger ships. This trend will not affect deep water ports but will affect the shallow harbor ports that will have to forgo servicing the big ships or incur greatly expanded costs of operation because of the need to dredge. Also, the Post-Panamax ships are wider, so the cranes will have to be upgraded as existing, narrower crane operations become functionally obsolete.

State

Crossing

Minnesota

International Falls

# Trains 3286

Michigan

Port Huron

2846

Texas

Laredo

2479

New York

Buffalo/Niagara Falls

2120

Minnesota

Warroad

2097

Michigan

Detroit

1895

North Dakota

Portal

1739

INTERESTING STATISTICS

Texas

Eagle Pass

1555

The demand for and regional structure of the W/DC space market are largely driven by the top ocean ports, border crossings and airports along the path of goods movement. Analysis of these factors presented in Figure 2 reveals several points of interest about export/import

Texas

El Paso

1424

Washington

Blaine

1219

REAL ESTATE ISSUES

Source: U.S. Department of Transportation, Research and Innovative Technology Administration, Bureau of Transportation Statistics

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Figure 4

Figure 6

Top 15 Ports by Total Value in 2008

Cargo Traffic 2009

Port

Last update: August 5 2010

Value ($ millions)

Los Angeles, CA

$243,910

Rank

City (Airport)

Total Cargo

% Change

New York/New Jersey

$185,385

1

MEMPHIS TN, US (MEM)

3,697,054

0.0

Houston, TX

$147,695

2

HONG KONG, HK (HKG)

3,385,313

(7.5)

3

SHANGHAI, CN (PVG)

2,543,394

(2.3)

4

INCHEON, KR (ICN)

2,313,001

(4.6)

Long Beach, CA

$91,537

Charleston, SC

$62,332

Savannah, GA

$58,987

Norfolk, VA

$53,950

5

PARIS, FR (CDG)

2,054,515

(9.9)

New Orleans, LA

$49,765

6

ANCHORAGE AK, US (ANC)*

1,994,629

(15.0)

Baltimore, MD

$45,312

7

LOUISVILLE KY, US (SDF)

1,949,528

(1.3)

Philadelphia, PA

$43,176

8

DUBAI, AE (DXB)

1,927,520

5.6

Seattle, WA

$39,989

Oakland, CA

$38,698

9

FRANKFURT, DE (FRA)

1,887,686

(10.6)

Morgan City, LA

$38,503

10

TOKYO, JP (NRT)

1,851,972

(11.8)

Tacoma, WA

$35,322

11

SINGAPORE, SG (SIN)

1,660,724

(11.9)

Corpus Christi, TX

$29,685

12

MIAMI FL, US (MIA)

1,557,401

(13.8)

13

LOS ANGELES CA, US (LAX)

1,509,236

(7.4)

14

BEIJING, CN (PEK)

1,475,649

8.1

15

TAIPEI, TW (TPE)

1,358,304

(9.0)

16

LONDON, GB (LHR)

1,349 571

(9.2)

17

AMSTERDAM, NL (AMS)

1,317,120

(17.8)

18

NEW YORK NY, US (JFK)

1,144,894

(21.2)

19

CHICAGO IL, US (ORD)

1,047,917

(17.1)

20

BANGKOK, TH (BKK)

1,045,194

(10.9)

Source: U.S. Department of Transportation, Research and Innovative Technology Administration, Bureau of Transportation Statistics

Figure 5

Top 10 Airports by Total Value in 2008 Airport J. F. Kennedy, NY

Value ($ millions) $167,966

Chicago, IL

$97,180

Los Angeles, CA

$78,292

San Francisco, CA

$52,756

21

GUANGZHOU, CN (CAN)

955,270

39.3

New Orleans, LA

$49,585

22

INDIANAPOLIS IN, US (IND)

944,805

(9.2)

Anchorage, AL

$41,443

23

NEWARK NJ, US (EWR)

779,642

(12.1)

Miami, FL

$40,036

24

TOKYO, JP (HND)

779,118

(8.3)

Dallas/Ft. Worth, TX

$39,488

Atlanta, GA

$32,335

25

LUXEMBOURG, LU (LUX)

628,667

(20.2)

Cleveland, OH

$30,812

26

OSAKA, JP (KIX)

608,876

(28.0)

27

SHENZHEN, CN (SZX)

605,469

1.2

28

KUALA LUMPUR, MY (KUL)

601,620

(9.9)

29

DALLAS/FT WORTH TX, US (DFW)

578,906

(11.3)

30

MUMBAI, IN (BOM)

566,368

1.3

Source: U.S. Department of Commerce, U.S. Census Bureau, Foreign Trade Division, 2009

Figure 4 displays the top fifteen ocean ports and Figure 5 displays the top ten U.S. airports for shipping products. Figure 6 shows a different data set for volume of cargo in the top 30 international airports. Notice that Memphis, the FedEx hub, shows up as number one in cargo followed by the airport in Louisville (UPS hub), number two in the U.S. These airport facilities have a significant impact on the W/DC space demand in their local market areas and on specific locations in those local market areas.

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Airports participating in the ACI Annual Traffic Statistics Collection. Total Cargo: loaded and unloaded freight and mail in metric tonnes. *ANC data includes transit freight. Source: Airports Council International (ACI) at www.airports.org

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Demand for Warehouse and Distribution Center Space SUMMARY AND CONCLUSION

of factors such as structural items while other studies combine sets of factors such as structural and locational. For this reason the categories presented are the authors’ choice; for other authors the categories could be specified differently. Finally, this literature search focused on concepts and ideas affecting the demand for W/DC space so statistical results appearing in the articles were ignored.

Today, research into the demand for W/DC space must investigate the flow of goods and technological factors for answers to the pressing questions concerning both industry and academia. Early research focusing on the flow or path of goods transport began when U.S. manufacturing shifted first to Mexico and later to Asia, and increasingly to China. In the years since the introduction of the path of goods model, China has emerged as the dominant source for consumer goods shipped via larger and larger container ships to ports on both the East and West coasts of the U.S.

4. Ambrose, Brent W., “Analysis of the Factors Affecting Light Industrial Property Valuation,” The Journal of Real Estate Research, Fall 1990, pp. 355–370; D. H. Treadwell, “Intricacies of the Cost Approach in the Appraisal of Major Industrial Properties,” Appraisal Journal, 1988, pp. 70–79. 5. Graham, Marshall F. and Douglas S. Bible, “Classifications for Commercial Real Estate,” Appraisal Journal, April 1992, pp. 237–246.

As the need for W/DC space grew in port cities, the demand for W/DC space in general was reduced by concurrent shifts in retail distribution activity in the U.S. As large retailers such as Walmart, Target, Costco, etc. grew, they sought to reduce costs and improve the speed and flexibility with which they move product to their stores. This motivation led to the creation of large W/DC structures placed along the pathways—interstate highways—to key markets. This trend reduced the demand for W/DC space in many older geographic markets. So demand grew in port cities and key inland sites along major truck transport routes while demand fell in other market areas. In more recent years, the W/DC space placed in the key markets, port cities and metro areas with major interstate interchanges was large square footage under a single roof—750,000 or more square feet.

6. Ibid. 7. Miles, Mike, Rebel Cole and David Guilkey, "A Different Look at Commercial Real Estate Returns," AREUEA Journal, Vol. 18, No.4, 1990, pp. 403–430. 8. Fehriback, Frank A., Ronald C. Rutherford and Mark E. Eakin, “An Analysis of the Determinants of Industrial Property Values,” Journal of Real Estate Economics, Vol. 8, 1997, p. 3. 9. Hughes, William T. Jr., “Determinants of Demand for Industrial Property,” Appraisal Journal, April 1994, pp. 303–309. 10. Bruce, Robert, “Industrial Goes Upscale,” Journal of Property Management, May/June 1994, pp. 14–17. 11. Christensen, M. F., B. Wisener and D.J. Campos, “Attributes of Tomorrow's Warehouse Structures,” Real Estate Review, 27(3), 1997, p. 5; and Robert Bruce, “Industrial Goes Upscale,” Journal of Property Management, May/June 1994, pp. 14–17. 12. Ibid.

Real estate developers building W/DC space should now consider the projections of port growth, import/export activity, and the transport pathways to major markets rather than the traditional industrial or manufacturing employment projections when making decisions on the amount of space and the best locations for new construction of speculative W/DC projects.

13. Wheaton, W. C., & Torto, R. G., “An Investment Model of the Demand and Supply for Industrial Real Estate,” Journal of the American Real Estate & Urban Economics Association, 1990, 18, pp. 530–547. 14. Ibid. 15. Ibid.

W/DC demand literature presents an orderly progression from employment and population demand models to current analytical methods tailored to the dynamics in the W/DC economic activity and spatial markets. 

16. Malizia, E. E., “Forecasting Demand for Commercial Real Estate Based on the Economic Fundamentals of U.S. Metro Markets,” Journal of Real Estate Research, 6, 1991, p. 251. 17. Zimmer, D. W., “Avoiding Traps When Using Sales Comparison to Value Storage and Distribution Facilities,” Appraisal Journal, 59(3), 1991, p. 390.

ENDNOTES 1. Webster’s New Collegiate Dictionary.

18. Ibid. 2. Space Type Definitions – Warehouse at http://www.energystar.gov/ ia/business/tools_resources/target_finder/help/Space_Type_ Definitions_-_Warehouse.htm.

19. Atteberry, William and Ronald C. Rutherford, “Industrial Real Estate Prices and Market Efficiency,” Journal of Real Estate Research, Vol. 8, 3, pp. 377–385.

3. Many of the studies referenced in this article focus on “industrial” properties. W/DC space is combined with manufacturing (usually light manufacturing). Also, some of the studies focus on a single set

REAL ESTATE ISSUES

20. Mueller, G. R. and Laposa, Steven P., “The Path of Goods Movement,” Real Estate Finance, 1994, 11(2), pp. 42, 45–46.

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Demand for Warehouse and Distribution Center Space 21. Rabianski, Joseph and Roy T. Black, “Why Analysts Often Make Wrong Estimates About the Demand for Industrial Space,” Real Estate Review, Vol. 27, Issue 1, Spring 1997, pp. 68–72.

fixed equipment, inventories and capital goods (manufactured goods that are used in the production process but not directly sold to consumers)

22. For a more detailed discussion of the office demand model see Joseph Rabianski and Karen Gibler, “Office Demand Analysis Analytical Techniques,” Journal of Real Estate Literature, Vol. 15, No.1, 2007.

G = Government spending on goods and services X= Exports M = Imports (a negative entity in the GDP calculation but a positive entity in the use of W/DC space)

23. Rabianski and Black, op. cit. 24. Mansour, Asieh and Marvin C. Christensen, “An Alternative Determinant of Warehouse Space Demand: A Case Study,” Journal of Real Estate Research, Vol. 21, Issues 1 and 2, 2001, pp. 77–88.

32. Choi, Amy, “Despite Soft Market in Boston, Industrial Developers Forge On,” Commercial Property News, Vol. 18, Issue 15, September 2004.

25. Ibid.

33. The mean and median are the same value only in a normal distribution—the bell shaped curve. When the mean is greater than the median the income distribution is skewed to the higher income categories. Using the median income in this situation underestimates the consumer purchasing power in the market.

26. Buttimer Jr., R. J., R.C. Rutherford and R. Witten, “Industrial Warehouse Rent Determinants in the Dallas/Fort Worth Area,” Journal of Real Estate Research, 13, p. 47.

34. Biederman, David, “A Developing Situation,” The Journal of Commerce, Sept. 24, 2007, pp. 46–7.

27. Christensen, M. F., B. Wisener and D.J. Campos, “Attributes of Tomorrow's Warehouse Structures,” Real Estate Review, 27(3), 1997, p. 51.

35. Mueller, Glenn R. and Andres G. Mueller, “Warehouse Demand and the Path of Goods Movement,” Journal of Real Estate Portfolio Management, Vol. 13, 1, 2007, pp. 45–55.

28. AMB Property Corporation, “Determinants of Industrial Real Estate Demand,” Real Estate Review, Summer 2002, pp. 57–61.

36. McGowan, Michael, “The Impact of Shifting Container Cargo Flows on Regional Demand for U.S. Warehouse Space,” Journal of Real Estate Portfolio Management, 11, 2; May/August 2005, pp. 167–185.

29. Chai, Young W., “Determinants of NOI for Warehouse Properties,” Real Estate Finance, Vol. 14, Summer 1997, p. 2. 30. Thompson, R., and S. Tsolacos, “Projections in the Industrial Property Market using a Simultaneous Equation System,” Journal of Real Estate Research, 19(2), pp. 165–188.

37. The following discussion is based on information taken from McGowan. Parts of that discussion are supplemented by the authors.

31. In macroeconomic theory, Gross Domestic Product (GDP) = C + I + G + X – M.

38. Available at http://www.pancanal.com/eng/plan/ documentos/propuesta/acp-expansion-proposal.pdf.

C = Consumption (a measure of all retail goods and many services bought by consumers)

39. See endnote 31. 40. McGowan, op. cit.

I = Investment in new capital goods such as industrial building,

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The Value Proposition of Sustainability: It’s in the Eye of the Beholder BY LINDA G. TRESSLAR, CRE

INTRODUCTION

essential areas. This could result in economic obsolescence over time. The focus of examination in this article is on areas of common ground and variability when it comes to sustainability initiatives, their priority and perceived value from differing stakeholder perspectives.

BEFORE THE FIRST DIME IS COMMITTED TO A SUSTAINABILITY initiative, the spender has already determined a priority lens through which “value” will be judged. Real estate is a dynamic asset with multiple stakeholders, investor/owners, tenants and employees as well as the communities in which the real estate is located. This means there will surely be multiple definitions of sustainability representing varied elements and prioritization of the value derived thereof. Sustainability, as an overarching concept, is easy enough to understand—keep the focus on boosting efficiency in the use of materials and operations that constitute a real estate asset. From this basic premise, however, have emerged a variety of views as to priority, necessity and value of certain sustainability actions.

COMMON GROUND

Are there sustainability initiatives emerging that owner/investors ignore at their peril when it comes to government mandates and tenant/user expectations for sustainable business and operating practices? The expectations are becoming fairly settled in the world of new design and construction. The U.S. Green Building

About the Author Linda G. Tresslar, CRE, is managing principal of Johnston Craig LLC, a commercial real estate development and consulting firm providing services to both corporations and investors. With broad experience at the corporate and asset levels, Tresslar helps clients develop and execute real estate strategy for successful business and investment outcomes. During her twenty-plus year career, she has actively worked with national and international clients in addressing real estate challenges associated with changing business and investment conditions with a focus on strategic, operational and financial real estate considerations and attendant economic, demographic, regulatory, environmental and labor market dynamics. Before founding Johnston Craig LLC, Tresslar was co-leader for Grubb & Ellis Company’s global Strategic Consulting practice. She has served on the editorial and advisory boards for Area Development magazine and is an active industry speaker on issues of corporate governance, business location, logistics and regulatory and environmental considerations impacting real estate.

With the continued advancement of sustainability initiatives, both mandated and voluntary, has come the rise of differing sustainability priorities and measures of success attributed to the same asset by various stakeholders. The minefield for an asset owner then becomes how best to address these varying value propositions for maximized long-term asset value. To do so, owners and investors must understand the sustainability value propositions of others, including the broader community, represented by government agencies and users of an asset. These stakeholders may have differing priorities for specific sustainability initiatives. Without understanding the measure of success through their “value lenses,” asset owners can wind up spending on measures that carry less weight or, even worse, falling behind other assets by not spending in

REAL ESTATE ISSUES

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The Value Proposition of Sustainability: It’s in the Eye of the Beholder Council’s LEED (Leadership in Energy and Environmental Design) system for establishing and measuring a project’s level of sustainability has served to coalesce the focus and direction for those involved in the design, construction and operation of real estate assets. These initiatives historically focused predominantly on an owner or owner/user’s perspective but are rapidly being adopted by the broader public as part of overall sustainability efforts.1 Research is now yielding evidence of the positive impact of adoption of certain sustainability initiatives as represented by a building meeting LEED® or ENERGY STAR certification requirements. There is a clear consensus among most asset stakeholders that LEED certification standards, measures and initiatives are the direction to follow when it comes to new building design and construction.2 This is being adopted in both the public and private sectors. But what is occurring as attention is turned to non-LEED certified existing buildings that represent 99 percent of today’s total existing building stock?3 This is where variations in focus and priority of importance in sustainable operating practices begin to emerge as key value differentiators and potential costly stumbling blocks in the future. There are LEED certifications centered on the construction of interior space retrofits of existing buildings. Many tenants now are either requiring owners to obtain such certification for their space or they are pursuing these initiatives on their own. In either case, the standards and measurements are the same for all (new as well as existing buildings) because they are part of the same LEED certification process. Buildings will also have to obtain LEED recertification by presenting actual performance data documenting the actual results obtained.4 This process provides industry data on the impact of sustainability actions taken.

I

95 percent of all applicable contracts will meet sustainability requirements;

I

Implementation of the Department of Energy’s 2030 net zero energy building requirement for new buildings;

I

Implementation of the storm water provisions of the Energy Independence and Security Act of 2007, section 348; and

I

Development of guidance for sustainable federal building locations in alignment with the Livability Principles proffered by the Department of Housing and Urban Development (HUD), the Department of Transportation (DOT) and the Environmental Protection Agency (EPA).

The extent of government involvement continues to grow. With commercial and industrial buildings using at least 49 percent of all energy consumed in the U.S. annually, the Department of Energy and the current administration have announced continued focus on energy saving and resource saving sustainability practices in both the public and private sectors.6 The focus goes beyond energy and water efficiency to lighting, indoor air quality, greenhouse gas and other emissions control and landfill use reduction. This focus involves all stakeholders of real estate assets, though the potential impact will not affect all equally. Thus, the value of pursuing one sustainable practice versus another will vary, depending on the magnitude of implications for a stakeholder, including cost to that stakeholder.

The ultimate levelers of the playing field are federal mandates enacted through law and regulation. Governing bodies at all levels are promoting sustainability or green initiatives to varying degrees. The expectations of the federal government, as both owner and tenant/user of real estate, are emerging with clear implications. Executive Order 13514, signed by President Barack Obama on Oct. 5, 2009, establishes numerous sustainability requirements for federal government agencies to meet, including: 26 percent improvement in water efficiency by 2020;

REAL ESTATE ISSUES

50 percent of construction, recycling and waste materials must be diverted from landfills by 2015;

This order makes it clear that success will be measured through broader operational criteria, not building construction.5 This should make building owners take note that the current and future government regulatory environment will encompass requirements well beyond enhancing asset efficiency. The last part of the executive order specifically addresses employee work force conditions, traditionally an area of tenant, not owner, concern except for maintaining asset desirability. The potential for conflict here could emerge when work force or customer requirements require added expense to the owner, either in design and construction or in operating cost. Leases will have to address who will bear the cost of these types of regulation as they are enacted.

GOVERNMENT MANDATE AND REGULATION

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The Value Proposition of Sustainability: It’s in the Eye of the Beholder LEED and ENERGY STAR buildings to non-LEED buildings of similar characteristics. Findings showed increased occupancy, increased rents, reduced operating expenses and increased sales per square foot values of up to 15 percent.

There are now a growing litany of LEED-mandating government agencies enacting LEED-compliant regulation and requirements, and not just at the federal level.7 While LEED certification is not required, the results are the same. It is below the federal level, however, where variation in the extent of government requirement varies. For example, California was the first state to pursue a comprehensive green building standard. The California Green Building Standards Code (CALGreen) adopted Jan. 1, 2011, requires all new buildings to increase energy efficiency by: demonstrating a 20 percent reduction in water consumption; diversion of 50 percent of construction waste from local landfills; use of low VOC (volatile organic compound) materials; separate water meters to track usage; and mandatory inspection of HVAC and other building energy systems.8 At first glance, these seem very aligned with Executive Order 13514, but CALGreen’s specific requirements for use of low VOC materials, installment of separate water meters and mandatory inspections go well beyond the federal regulations. These federal and state mandates will all add cost to owners for sustainability actions they otherwise may not have chosen to pursue because they deliver much less accretive value than measures focused on lowering operating cost and boosting efficiency directly. This is a clear illustration of diverging value priority by stakeholders; however, governing bodies always hold the legal trump card, enforcing a common ground, if you will.

LEED and ENERGY STAR vs. Non-LEED Buildings Comparative Performance 2.5% increase ENERGY STAR 5.4% increase LEED

Rents

$4.73 psf increase ENERGY STAR $9.06 psf increase LEED

Expenses

$0.54 psf decrease in energy expense (30%)

Sales Price

15% premium on sale

Source: University of San Diego Burnham-Moores Center for Real Estate

This data presents a compelling case for pursuing sustainable practices that comprise LEED compliance, especially when one considers that the added cost to achieve basic LEED certification is typically between zero and five percent of the upfront construction cost. These initiatives also provide direct and indirect benefit to tenants through lower occupancy costs and improved workplace environments.

In order to forge voluntary common ground between public mandate and private action, economic incentives are offered by governing bodies in order to improve the value proposition for asset owners and sometimes for tenant/users. The incentives are intended to mitigate some of the upfront or ongoing additional cost by providing some other value to the recipient. Green incentives are being used in the areas of energy efficiency, water conservation, use of green materials, reduction of landfill contribution and reduction of greenhouse emissions.9

OWNER VERSUS USER

Where do you draw the spending line as an owner when it comes to satisfying tenant sustainability expectations? What should really be tenant expense versus owners— and for what? The answers will depend largely upon who perceives the most value for the action and who receives the economic benefit. There are sustainability initiatives that show up as major parts of corporate environmental responsibility platforms (e.g., recycling efforts, reduction of corporate carbon footprint or lowering greenhouse gas emissions) that may not carry the same importance for the asset owner as for the tenant. The tenant may see more value in such pursuits and in their extent as well.

When it comes to owners and users of real estate seeing eye-to-eye on sustainability, there are areas with proven data that illustrate the value enhancement for all. The adoption of LEED certification for buildings has produced a live laboratory to quantify the economic and value benefits of pursuing certain sustainable practices. A 2008 report, “Does Green Pay Off?” by Norm Miller, Jay Spivey and Andy Florance, documented the results of research on the value of LEED certification or ENERGY STAR certification for a building.10 The study compared

REAL ESTATE ISSUES

Occupancy

It is hard to quibble with the ideas of improved efficiency and less waste. We all believe it is possible to do better. But determining at what cost and who should bear the cost is what begins to drive a wedge among owners, users and government agencies. It is obviously easier to avoid

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The Value Proposition of Sustainability: It’s in the Eye of the Beholder mistakes and achieve sustainability objectives on the design board than it is to change the operational direction of an existing asset. There will always be the constant tug of interests for an owner between maximizing asset value and spending in the right places and at the right times. The obvious action steps usually address low-hanging fruit and target areas for maximum goal achievement or “biggest bang for your buck” initiatives to help prioritize

As government regulation and shareholder accountability increase, American corporations are often turning to the International Organization for Standardization (ISO) for guidance with implementing green and corporate responsibility programs. ISO standards provide direction for establishing goals and compliance measurement. The ISO 140001 standard for environmental management systems (EMS) establishes best practices and benchmarks for green initiatives but it is a compliance monitoring system, not a determiner of sustainable practices to adopt nor does it set performance expectations.12 For many corporations that use measurement frameworks such as the Dow Jones Sustainability Assessment, sustainability has multiple components including, but not limited to, environmental responsibility.13 Statements of corporate social responsibility can be found on most large corporate Web sites, but the environmental components and how they measure success vary greatly. A list of most commonly addressed environmental sustainability practices are in the following chart along with the relative priority on behalf of tenants versus owners. Summary analysis indicates that areas of expense reduction and improved efficiency for the building show greatest alignment of priority. Practices that are important to users are recognized by owners in the context of enhancing a building’s marketability, thus preserving or boosting asset value over the long term.

Even with varying priorities regarding sustainability initiatives, it is wise to explore future areas for value enhancement for all stakeholders. focus, but the most successful approaches begin with clearly defining sustainability and its value alongside clear performance measures thereof. From a tenant/user’s perspective, sustainability is most often viewed in the broader context of corporate social responsibility. This is the idea that companies have obligations not only to shareholders, but also to stakeholders, society and the environment. Green initiatives and requirements for the space a company occupies are tied to the larger goals of corporate social responsibility.11

Sustainability: Degrees of Priority – Tenant Versus Owner Sustainable Practice

Corporate Priority

Landlord Priority

Reduction in energy use

Yes

Yes

Reduction in water use

Yes

Yes

Reduced emissions

Yes

Only those practices mandated for the building

Enhanced lighting

Yes, improves workplace environment

Limited, if it enhances marketability and produces cost savings over time

Improved indoor air quality

Yes, improves workplace environment

Limited, if it enhances marketability

Pollution prevention

Yes

Only those practices mandated for the building

Green products and materials

Yes, improves workplace environment

Yes, provided additional cost is within reason

Waste reduction

Yes, recycling and reduction of landfill contribution

Limited, if cost-effective and enhances marketability

Use of renewable energy

Varies, where appropriate or if part of societal responsibility initiatives of company

Limited, if cost-effective or enhances redundancy

Reduced carbon footprint

Limited, if mandated or if it is perceived to boost societal responsibility initiatives of company

Limited, if enhances marketability

Improved transit patterns

Yes, reduces company impact on environment

Limited, mainly at the time of site selection or to add solution that enhances tenant accessibility, and to address a marketability issue

Source: Johnston Craig LLC

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The Value Proposition of Sustainability: It’s in the Eye of the Beholder When corporations operate in an environment of measuring sustainable practices, it can be reasonably expected that they will seek out real estate to occupy that which best helps them achieve their environmental sustainability goals. What are large credit tenants likely to demand in the way of sustainability requirements? How far will they push and in what areas? Where are government mandates also impacting them? What deal breakers are emerging? The answers to these questions reveal the priorities and relative value a tenant/user will ascribe to a sustainable initiative. In a 2010 article for Commercial Real Estate Investment magazine, Beth Young, CCIM, LEED AP, shares an anecdotal situation from a Grubb & Ellis broker in South Carolina who lost a 20,000-square-foot tenant to a silver LEED building with rent greater by $2.12 because the landlord declined to implement a sustainable program at the behest of the tenant. The tenant actually preferred the building and its location but a sustainability program was the deal breaker. This is only one of numerous cases in which a landlord has incorrectly calculated the value ascribed to sustainability initiatives or particular practices by a potential tenant/user. The losing landlord in this instance has now instituted a rolling sustainability program as existing leases roll.14 Had it not, a building such as this would surely decrease in economic viability over time as it slips in market competitiveness.

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What are tenants and users going to expect? We should continue to look at corporate responsibility initiatives. Where do tenants and asset owners share common ground on sustainability and green initiatives? What do tenants perceive to be the benefits to them from specific sustainability initiatives? How do tenants measure their own success? Are they expecting a lot more in certain categories than what LEED buildings and government mandated practices are achieving? How best to preserve and maximize asset value? For owners, what are the best sustainability initiatives to adopt to maximize long-term asset value? This speaks to the heart of a real estate asset remaining viable in an everchanging world. It informs where and when to spend and what the measure of success or value should be. CONCLUSION

Adoption of sustainability initiatives with respect to commercial real estate is a continually evolving process. The extent and rapidity of adoption depends upon what is mandated, what is voluntary and the perceived extent of positive impact on value. While value has differing contexts depending on the stakeholder, there are key areas for thorough assessment that are important for all to consider. Vigilance in monitoring changes in mandates, corporate priorities and proven benefits derived from specific sustainability practices will ensure the ability to maintain market competitiveness, enhance value and prevent potentially fatal missteps or unnecessary expenditures.

FUTURE LANDSCAPE

What will be the likely confluence between government mandates, corporate responsibility initiatives and ownership operational initiatives? While the marketplace is gaining knowledge from data on actual performance improvements with which to gauge the cost/benefit of specific sustainability initiatives, there is ongoing need for vigilance as to what will be the next wave of green practices that may become mandated or could become tenant deal breakers. What are governments going to mandate? We can observe trends in sustainable practices that are being integrated into laws, regulations and codes. In this context, they will certainly have an impact on all stakeholders. It is helpful to look at outliers with respect to state and local mandates—who is pushing the envelope? A few examples of outliers include: I

Building upon proven areas for achieving valuable improvements in sustainability, stakeholders should consider the potential benefits of adopting new practices as they arise. Even with varying priorities regarding sustainability initiatives, it is wise to explore future areas for value enhancement for all stakeholders. This can be done effectively only in the context of well-defined sustainability goals and measures of benefit and performance. Without this value enhancement framework, an asset is perpetually vulnerable to economic obsolescence. 

The state of Hawaii mandated solar hot water heaters be installed in all new single-family homes beginning in 2010;15

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In May 2009, the city of Toronto adopted a green roof mandate of up to 50 percent coverage for multi-unit residential buildings over six stories, schools, nonprofit housing, commercial and industrial buildings. Developers opposed the mandate, citing significant additional upfront cost and added maintenance costs which they argue will negatively impact property value.16

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The Value Proposition of Sustainability: It’s in the Eye of the Beholder ENDNOTES

10. Miller, Norman, Jay Spivey and Andy Florance, “Does Green Pay Off?”, CoStar, March 2008. Norm Miller is a professor at the

1. “LEED Mandating Agencies,” retrieved March 9, 2011 from www.greenbuildingpages.com/ links/weblinks_LEED.html.

University of San Diego Burnham-Moores Center for Real Estate, Jay Spivey is the research director at CoStar and Andy Florance is

2. Data from the USGBC as of December 2008. Total building stock data from the Energy Information Agency, Washington, D.C., December 2008.

the CEO of CoStar. 11. Dow Jones Sustainability Index, retrieved March 10, 2011 from www.sustainability-index.com/07_htmle/ assessment/criteria.html.

3. Ibid.

12. International Organization for Standardization, retrieved March 20,

4. U.S. Green Building Council, retrieved March 9, 2011 from www.usgbc.org.

2011 from www.sustainability-index.com/07_htmle/assessment/ criteria.html.

5. Cheatham, Chris, “Executive Order Will Require More Federal Green Building,” posted October 14, 2009 on www.greenbuildinglawupdate.com and Executive Order 13514, retrieved March 03, 2011 from www.whitehouse.gov/assets/ documents/2009fedleader_eo_rel.pdf.

13. Dow Jones, op. cit., from www.sustainability-index. com/07_htmle/sustainability/corpsustainability.html. 14. Young, Beth, “Greening to Compete,” Commercial Investment Real Estate, March/April 2010.

6. Energy Information Administration, 2003 CBECS Detailed Tables, “Building Characteristics Tables for All Buildings (Including Malls),” Table A1, released December 2006, retrieved March 3, 2011 from www.eia.doe.gov/emeu/cbecs/cbecs2003/detailed_tables_2003/detailed _tables_2003.html.

15. Proefrock, Philip, “Hawaii Mandates Solar Hot Water,” Green Design, July 2008, retrieved from www.greenbuildingelements.com/2008/07/07/hawaii-mandates-solarhot-water/ March 10, 2011.

7. Op. cit. at 1. 16. Shapiro, Shari, “Toronto’s Mandatory Green Roof Bylaw – How 8. “Guide to the (Non-Residential) CALGreen Code,” California Building Standards Commission, Second Edition, issued November 2010.

Effective are Green Building Mandates?”, Green Building Law Blog,

9. “Database of State Incentives for Renewables and Efficiency,” Retrieved March 3, 2011 from www.dsireusa.org/summarytables.

-mandatory-green-roof-bylawhow-effective-are-green-building-

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June 2, 2009, retrieved March 10, 2011 from www.greenbuildinglawblog.com/2009/06/articles/regulations/torontos mandates/.

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CASE STUDY

Creative Counseling: Preserving the Hawaii Opera Theatre BY KAREN CHAR, CRE, MAI

BACKGROUND

CASE STUDY: COUNSELING FOR HAWAII OPERA THEATRE

IN MAY 2010, Karen Char, CRE, president, John Child & Company, Inc. and Christine Camp, CRE, president and CEO of Avalon Group, LLC, both of Honolulu, were honored by The Counselors of Real Estate® with the 2010 James Felt Creative Counseling Award for their work developing and implementing a long-term real estate strategy for the Hawaii Opera Theatre (HOT) in Honolulu. Their work enabled HOT to continue to produce outstanding opera performances and nationally recognized educational programs in Hawaii. The Felt Award recognizes credentialed members of The Counselors of Real Estate whose work most exemplifies excellence and ingenuity in real estate counseling resulting in far-reaching and long-term benefits to a community and its citizens. The following case study describes the process through which HOT was able to turn a liability into an asset.

In 2005, at my first meeting as a new member on the board of directors of HOT, it was explained that financial exigencies required us to consider selling the medical office building that had been donated to HOT. At subsequent meetings, the likelihood of this sale was reaffirmed. HOT, like many performing arts organizations, faced significant challenges in its operating cash flow. However, HOT owned the fee simple interest in two properties: I I

HOT performs at the NBC Concert Hall in Honolulu. Both properties are about two blocks from the Concert Hall. WAIMANU PROPERTY DESCRIPTION AND CHALLENGES

The Waimanu property was a consolidation of shabby industrial warehouse properties that housed HOT’s administrative and box offices, rehearsal hall, shop and

INTRODUCTION

CHAR AND CAMP’S WORK FOR HOT spanned a four-year period that began in 2005 when Char joined HOT’s board of directors. At the time, HOT was faced with making significant cost cuts in order to continue operating. Camp joined the board in 2008. Together, they were able to uncover assets belonging to the opera theatre and develop a plan that included moving its administrative and box offices to a safer, larger location along a major traffic artery and building a more appropriately sized rehearsal hall.

About the Author Karen Char, CRE, MAI, ASA, president of John Child & Company, is responsible for developing and managing the company’s professional practice that includes real estate consulting, appraisal, and business valuation. She specializes in complex real estate and business valuation assignments. Char also serves on the board of directors of two non-profits: Hawaii Opera Theatre and Hawaii Women’s Legal Foundation (HWLF). The mission of HWLF is to help women and children in need in Hawaii.

The full plan developed by Char and Camp involved relocating offices, renovating existing property, selling property and obtaining a line of credit. Today, the 51-yearold Hawaii Opera Theatre is maintaining its performance schedule as well as its educational programming.

REAL ESTATE ISSUES

Waimanu property Beretania Medical Plaza (BMP)

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HOT box office, adminstrative office street frontage, before…

… and after

storage. The property had front parcels and a back parcel; no on-site parking. The buildings were originally constructed between 1936 and 1955.

to collecting ground rent without incurring expenses. The building has 25,261 square feet of rentable area including a ground floor retail space, and medical/dental office spaces on the second, third and fourth floors. Parking is located on the ground and second levels.

In 2005, the Waimanu property was in disrepair. Despite significant repairs to the roofs twice in the preceding ten years, they leaked whenever it rained and mold was growing in the ceiling tiles and walls. The buildings were clearly in need of major repair, maintenance and renovation to comply with current building code requirements. The health and safety of the staff, volunteers and artists were a major concern.

In the early 2000s, the lessees were nearing retirement and not interested in maintaining the building, as required in the lease agreement. The building required capital improvements, repairs and maintenance. In 2003, the lessees gifted the leasehold interest in the building to HOT rather than make the required repairs and capital improvements.

Historically, HOT had been opposed to financing any capital improvements, repairs or maintenance of its real estate. Instead, HOT had solicited several major benefactors for donations to renovate the Waimanu property—without success. As a result, some board members believed the property was too expensive to renovate and maintain, and strongly advocated selling it and moving out.

Initially HOT had been collecting ground lease rent. Through the donation of the leasehold interest, HOT was now managing a medical office building and carrying the operating expense for the vacant spaces in the building. In 2005, the leasing status of the building was as follows: Lease term

As a result, no action was taken and no repairs were made to the Waimanu property. When it rained, furniture was moved, and buckets were strategically placed to catch the water.

Percent of building

Lease expires in 2014

22 %

Lease expires in 2006

20

Month-to-month

26

Vacant

32

BERETANIA MEDICAL PLAZA DESCRIPTION AND CHALLENGES

Total

Beretania Medical Plaza (BMP) was a poorly maintained leasehold medical/dental office building. The leased fee interest in the land was donated to HOT in 1995. Initially the ground rent from the leasehold building was used to pay HOT’s operating expenses. HOT became accustomed

HOT could not lease the vacant space and was in jeopardy of losing existing tenants because of the building’s condition. (After visiting the property, one board member exclaimed, “I wouldn’t bring my dog to a vet in this building.”)

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Water damaged ceiling tiles, before…

… and after The task force forwarded the recommendation to the steering committee. The steering committee forwarded the recommendation to the board for approval. The board approved the renovation of BMP to be funded by a short-term mortgage loan in February 2005.

Many of the board members wanted to sell the property “as is” to fund HOT’s operations. Similar to its position on the Waimanu property, the board was opposed to financing repairs and maintenance. COUNSELING PROCESS

In 2005, HOT had 66 board members. With the exception of four residential realtors, a retired real estate attorney and myself, the board members had limited commercial real estate expertise. Because of the experience and comfort level of several bankers and financial advisors (active and retired), the board had a strong preference for liquid investments. The board had seriously discussed selling its real estate.

2. With regard to the Waimanu property, I explained that

HOT should consolidate and “right size” (downsize) its operations and sell a portion of the property (front parcels) to fund the renovations and repairs required for the smaller property (back parcel) and for operating losses. HOT staff maintained that the current space was already too small. The task force and the steering committee did not recommend action. However, an informational presentation explaining the situation was made to the board in December 2005.

The concept of a long-term real estate strategy began in 2005 when a task force was formed to study HOT’s financial needs and its real estate. The task force requested pro bono services of a structural engineer. It obtained an analysis and bid from a roofing contractor. The structural engineer opined that the buildings were structurally sound; however, the spaces were not being used efficiently. The roofing contractor provided recommendations that would temporarily seal the roof leaks at a reasonable cost.

In December 2006, Joshua Dachs, an internationally known professional theatrical consultant, was visiting Hawaii. For a small fee, he visited the Waimanu property and met with HOT staff. He reported that HOT has very little room to “right size.” He said that other theatrical companies have larger shop areas and HOT must plan for long-term growth in staffing. He recommended rebuilding or renovating the entire Waimanu property to achieve a larger footprint and efficiency.

To educate the HOT decision makers, I made a series of presentations to the task force, steering committee and eventually, the board of directors.

Dachs’ report was not helpful to the task force. HOT already had tried unsuccessfully to raise funds for capital improvements to the existing facility. Therefore, if nothing was sold, financing was the only option. A loan

1. With regard to BMP, I explained that the building must

be repaired and maintained to attract new tenants, regardless of whether it was to be sold or retained.

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Creative Counseling: Preserving the Hawaii Opera Theatre for rebuilding or renovation could only be repaid through excess operating income. There was no excess income.

advancing what we analyzed to be the logical and best course of action. It was critical that we collaborate toward a strategic initiative of educating the steering committee and board members with a comparative analysis in a format that could be easily understood.

In January 2007, I presented Dachs’ report to the task force and steering committee. In addition, I presented worksheets showing that the cost of real estate in Hawaii was substantially higher than on the mainland and that HOT could not afford Dachs’ recommendations.

In September 2008, the steering committee recommended the following long-term real estate strategy for approval by the board:

The task force and steering committee were stumped. Rain continued to soak the ceiling tiles, grand piano, opera library and all of the interior spaces. Buckets of water were everywhere.

1. Permanently move the administrative offices to BMP; 2. Obtain a line of credit of $500,000 to pay for the tenant

improvements and move;

In 2008, CRE Christine Camp joined HOT’s board of directors and the task force. As a new member and real estate counselor, she independently reviewed and analyzed HOT’s financial needs and real estate situation. She saw the vacancies in BMP as an opportunity. She recommended moving HOT’s offices to BMP and renaming the building.

3. Sell Waimanu front parcels to pay for renovation of the

back parcel; 4. Renovate the Waimanu back parcel to accommodate

the rehearsal hall, shop and storage. The strategy was presented in small group presentations to allow ample time for individual board members to understand the strategy and financing requirement.

Christine’s company had an architect on staff. Under Christine’s direction, the architect visited the property and interviewed the HOT staff to understand their operations and real estate requirements. The architect produced conceptual architectural studies and construction cost estimates. He designed alternative floor plans that fit HOT’s administrative and production functions into the back parcel. He met with HOT staff and convinced them that the smaller spaces would function adequately. (Lesson learned: Have an architect prepare conceptual plans before attempting to downsize an organization’s facilities!)

In November 2008 the board unanimously voted to accept the task force recommendations. NEXT STEPS

Christine, who is a licensed broker, now had the task of selling the Waimanu front parcels. By November 2008, the real estate market had stagnated. However, with creative thinking and several months of negotiation, Christine sold the property by identifying the most motivated potential buyer—the property owner across the street who needed the property for long-term expansion.

He also prepared cost estimates for alternative scenarios. Christine reviewed the cost of building administrative space into the existing building with the shop space (on the Waimanu property) and compared it to the cost of building tenant improvements in BMP. Christine determined that it was cost effective to build out and occupy space in the medical office building rather than build new office space in the shop building.

In April 2009, HOT’s staff moved into its new offices in the building now known as Hawaii Opera Plaza. Thus, the building that was to be sold to fund operations continues to provide investment income to fund operations, and the HOT staff and volunteers enjoy a healthy and safe work place from where they produce outstanding opera performances and nationally recognized educational programs.

Christine presented her analysis, alternatives and recommendations to the task force, which approved and forwarded the recommendations to the steering committee.

A new task force was formed to complete the renovation of the back parcel. The task force included Christine, a structural engineer, architect, land planner, and other board members.

RECOMMENDATION

COUNSELING SKILLS

The composition of the steering committee and board, with limited real estate expertise and a strong preference toward liquid investments, made difficult our task of

REAL ESTATE ISSUES

To develop and implement a long-term real estate strategy for HOT, we undertook a careful and lengthy process of

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Creative Counseling: Preserving the Hawaii Opera Theatre understanding the issues and facilities required to produce great opera in Hawaii. We used our combined expertise and experience related to: I I I I I I I I

Charity Navigator gave HOT a four-star rating. Only four other opera companies in the United States have achieved Charity Navigator’s highest rating. HOT was the highest rated opera company.

Real estate valuation; Feasibility studies; Highest and best use analysis; Management of office and industrial properties; Site selection; Development; Brokerage; Project management.

Because of its long-term real estate strategy, HOT has been able to: 1. Continue to produce great opera; 2. Continue to offer its nationally recognized educational

program to Hawaii’s school children; 3. Fund its operating losses for fiscal years ended May 31,

In addition, we used our counseling skills to communicate the real estate alternatives and recommendations in a manner that was understandable to a nonprofit board comprised of opera enthusiasts.

2009 and 2010; 4. Upgrade its facilities by moving its administrative and

box offices from dilapidated warehouse space in an industrial district to healthy and safe offices in a commercial office building along a major traffic artery;

RESULTS OF HOT’S LONG-TERM REAL ESTATE STRATEGY

5. Celebrate its 50th anniversary in 2010;

An important measurement of the livability and vitality of a community is the prominence of its culture and arts. Opera is the most sophisticated and expensive performing art. In the United States, opera’s dramatic stages and highly specialized artists require significant private funding and/or endowment. In Hawaii, the cost to produce opera is high because of the cost of construction and/or shipping of the stage sets, airfare and housing to bring in the artists, and costs associated with doing business (for example, union labor).

6. Plan for 50 more years of grand opera in Hawaii.  ENDNOTE 1.

Without developing and implementing a long-term real estate strategy, HOT would have been required to make significant cost cuts, or worse.1 Instead, in 2008 and 2009,

REAL ESTATE ISSUES

45

Since 2008, the following opera companies in the United States have closed, are in bankruptcy or have suspended operations: 1. Orlando, Fla. 2. Baltimore, Md. 3. Hartford, Conn. 4. Orange County, Calif. 5. Western Massachusetts 6. Augusta, Ga. 7. Opera Pacific 8. Florida Grand (cutbacks in productions) 9. Connecticut Opera

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Reverse Mortgages: Should the Elderly and U.S. Taxpayers Beware? BY J. DOUGLAS TIMMONS, PH.D.; AND AUSRA NAUJOKAITE, M.A.

REVERSE MORTGAGES ARE BECOMING POPULAR IN AMERICA, though it is only a small niche in the multi-trillion dollar banking industry. It has, however, begun to attract the interest of banks, mortgage brokers, insurance companies and Wall Street investors who are looking for new profit centers in the wake of the subprime mortgage meltdown. Seniors who might be considering these loans, and U.S. taxpayers who have suffered from the subprime mess, should carefully evaluate how the reverse mortgage market is developing. Reverse mortgages are complex financial transactions that have considerable closing costs, but when used correctly and under the right circumstances, have the potential to greatly enhance the lives of the senior borrowers who obtain them. This article will introduce the reader to the reverse mortgage market, provide information about the growth in reverse mortgages, describe the characteristics of these loans, and outline issues of concern.

homeowner. The loan is not repaid until the property is sold or upon the death of the borrower when repayment is settled through normal probate procedures. Seniors are living longer, and the recent economic crisis has negatively affected their investment portfolios. Not only has the value of their investments dropped, fixedincome securities are providing low income yields. In addition, in many parts of the country home values have declined. Reverse mortgages can give older Americans greater financial security. Many seniors use the income from these loans to supplement social security, meet unexpected medical expenses, make home improvements, and cover other costs.

About the Authors Douglas Timmons, Ph.D., is associate professor of finance in the Department of Economics and Finance at the Jennings A. Jones College of Business at Middle Tennessee State University, Murfreesboro, Tenn. He has written numerous real estate articles related to financial, investment and legal topics.

INTRODUCTION

The role of the reverse mortgage is to put money in the pockets of seniors by allowing equity depletion during the owners’ lifetime. Seniors who are 62 or older and who have paid off their home mortgages (or owe only a small balance) are able to tap into their home equity to generate extra cash. These senior borrowers can take the money as a lump sum, a line of credit, monthly payments, or a combination of a credit line and regular payments. The borrowers, unlike with traditional mortgage or home equity loan, do not need to meet income or credit requirements to qualify, and don’t have to repay the loan until they no longer use the home as their principal residence. These mortgages are called “reverse” because of the nature of payments. In this case, the homeowner is not the party who makes payments; the bank makes payments to the

REAL ESTATE ISSUES

Ausra Naujokaite, M.A., is a financial analyst at SVP Worldwide LLC in La Vergne, Tenn. She received her bachelor’s degree in economics and finance in 2007 from Vytautas Magnus University in Lithuania and a master’s degree in financial economics in 2010 from Middle Tennessee State University (summa cum laude). Naujokaite is a member of Golden Key International Honor, Phi Kappa Phi Honor, Pinnacle Honor Societies and Lithuania Entrepreneurs League. She also is a past treasurer of Kaunas Economists Club in Lithuania, an organization that promotes cooperation among recent economics graduates in Europe.

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Reverse Mortgages: Should the Elderly and U.S. Taxpayers Beware? ORIGINS AND EVOLUTION OF REVERSE MORTGAGES

very modest beginnings, the HECM program now insures more than 600,000 loans. Between 2000–2009, HECMs grew at a compound annual rate of approximately 40 percent. In 2009, 114,692 of these loans were made. In 1996, Fannie Mae developed a reverse mortgage of its own called the “Home Keeper,” but this product was discontinued in 2008. Just before the recent financial meltdown, a handful of private financial institutions offered a variety of equity conversion products. These private reverse mortgages were all securitized and when the private mortgage securities market collapsed, the relatively small part of it directed to reverse mortgages collapsed as well (Figure 1).

As far back as the early 1960s, equity conversion loans were being offered by private financial institutions. These lenders introduced shared appreciation mortgages, reverse annuity mortgages, deferred payment loans, and sale/leaseback offerings that varied greatly and were largely unregulated. During the 1980s, financial institutions attempted to expand the reverse mortgage market to take advantage of increased home equity values among seniors. These early efforts to exploit new business opportunities with seniors did not prosper. Senior advocates and academia thought there was a place for reverse mortgages as a way to remediate the impact of Figure 1

Number of HECM RMs, 1990–2010 120,000

100,000

80,000

60,000

40,000

20,000

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990



Source: created by the authors using HUD data for each fiscal year, (Oct. 1–Sept. 30), 2010

Even though the housing market has been shaken by the subprime mess, and home values have dropped in most parts of the country, there is still a tremendous potential demand for reverse mortgages. The population of seniors in the U.S. is booming. In 2000, the senior population (65 and older) was 35 million, and projections indicate an increase to 64 million in this age group by 2025.1 Today, the country’s approximately 37 million seniors make up more than 12 percent of the population, and they are expected to represent around 18 percent of total U.S. population by 2025.2

poverty on elderly homeowners. Congress was lobbied by these advocates to create an equity conversion product that was standardized and would be acceptable to the lending industry. In 1988, Congress authorized a prototype insured by the Federal Housing Administration (FHA), a branch of the U.S. Department of Housing and Urban Development (HUD). This initiative was the genesis of the government’s Home Equity Conversion Mortgage (HECM) program. The HECM is the federally insured reverse mortgage product. A commercial lender makes the HECM loan, and the government’s primary role is to insure it. It is insured by the FHA. HECMs account for nearly all reverse mortgages originating in the U.S. today. From

REAL ESTATE ISSUES

Data from the American Housing Survey, conducted by the U.S. Census Bureau, suggests there is as much as $2.8 trillion in home equity.3 In 2008, the National Reverse

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Reverse Mortgages: Should the Elderly and U.S. Taxpayers Beware? Figure 2

HECM Borrower Statistics Fiscal Year

Borrower: Average Borrower Age

Single Female

Single Male

Multiple

1990

76.75

57.32%

16.56%

26.11%

1991

76.54

56.04%

13.88%

30.08%

1992

76.57

57.66%

15.03%

27.31%

1993

75.64

54.97%

14.37%

30.66%

1994

75.13

54.75%

14.47%

30.77%

1995

76.00

56.46%

13.54%

30.00%

1996

75.88

56.40%

12.54%

31.06%

1997

75.90

56.59%

13.23%

30.18%

1998

75.66

55.98%

14.10%

29.92%

1999

75.26

54.78%

14.48%

30.75%

2000

75.96

56.79%

13.00%

30.21%

2001

75.54

54.46%

13.66%

31.88%

2002

75.13

51.36%

13.97%

34.67%

2003

74.30

48.61%

14.19%

37.20%

2004

74.26

48.62%

15.19%

36.20%

2005

73.78

46.01%

16.05%

37.94%

2006

73.75

44.49%

16.66%

38.85%

2007

73.54

44.60%

18.20%

37.21%

2008

73.06

43.83%

20.62%

35.55%

2009

72.91

41.18%

21.83%

36.99%

2010

72.93

42.71%

22.02%

35.27%

Source: summarized by the authors using HUD data, 2010

economic environment combines lowered home values and investment holding values with lowered interest rates, creating a reduction in seniors’ incomes.

Mortgage Lenders Association estimated that seniors had perhaps $4 trillion in home equity.4 Whichever statistic is correct, there is a lot of senior home equity that could be tapped. Even many of the poorest seniors have built up home equity. The 2007 American Housing Survey found that more than 700,000 seniors with annual incomes below $5,000 owned their houses, free and clear. The report showed that another 2.4 million seniors with annual incomes below $15,000 had no mortgage debt.5 Additionally, more than 7 million seniors with annual incomes below $30,000 owned their home free of debt.6

Today, however, lenders are using a sales pitch that tells seniors who are falling behind on their mortgage payments to use a reverse mortgage to avoid default. The reverse mortgage can save their home, but these borrowers need to bear in mind that the majority of the proceeds will probably be used to pay off their primary mortgage with little left over for other needs. Seniors who are contemplating a reverse mortgage must make sure that they have adequate savings to support themselves. Another sales pitch suggests using a reverse mortgage to cover everyday expenses, perhaps temporarily, during this time of economic hardship. This idea would appeal to seniors who are “house rich, cash poor.” Some seniors, who previously would have sold their home and moved to a different type of housing, are finding mortgage relief in reverse mortgages. In today’s economic environment, the

BORROWER MOTIVATION

As a result of the housing and economic crises, reverse mortgages are being marketed to seniors with renewed vigor. Historically, retirees on fixed incomes sought reverse mortgages as a way to cope with the costs of health care, housing and other basic needs. Their one big asset, home equity, could provide much needed financial relief, and would enable them to stay in their home. The current

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sation depends on finding and originating loans. During the subprime mortgage boom this group was quite often responsible for pushing inappropriate mortgage loans on borrowers without any regard for whether the borrowers needed the loans or could afford the payments. Brokers don’t get paid unless they close loans. Mortgage brokers who are originating reverse mortgages have a financial incentive to originate as many loans as possible.

LENDER MOTIVATION

The potential origination fees from reverse mortgages are enormous. The market for the reverse mortgages is far larger than the traditional mortgage market. Most people only buy or sell a home every 5–10 years, but there are millions of seniors sitting in homes with huge amounts of equity. With the collapse of the housing market, home values have declined, credit has dried up and fewer homes are being bought and sold. Mortgage departments have historically been a huge source of revenue for banks. The current housing market isn’t generating nearly as much profit as in previous years. Enter the reverse mortgage. Here is a product with a huge borrower base. Here is a product that doesn’t require any credit analysis. Here is a product that is government guaranteed so the bank doesn’t have to worry about losing money in a foreclosure. The fees on reverse mortgages have been very high, which, in turn, creates higher profits for the lenders.

There are some reverse mortgage products that are more profitable than others. Can we trust mortgage brokers to be more responsible this time? Seniors often assume that brokers are duty bound to look out for the borrower’s best interest—they aren’t. Mortgage loans are considered business transactions in which the parties are responsible for protecting their own best interest. In many states, brokers and lenders owe no fiduciary duty to borrowers. As we saw with subprime mortgages, “push” marketing is being used extensively to sell reverse mortgages. Advertising for reverse mortgages can be found on TV, the Internet, in the mailbox and over the telephone. Celebrities are acting as spokespersons reassuring seniors that reverse mortgages are a good thing and can provide extra money to fund a better lifestyle. Most of the time the marketing promotes the reverse mortgage as a way to increase consumption of items that are not necessities.10 Reverse mortgages are complicated financial transactions that should be considered carefully. Increased competition, loan volume and the vast number of potential reverse mortgage borrowers raises the question of whether this market will see the same abuses that were seen in the subprime market.

During the past couple of decades, mortgage market lenders’ profits have been driven by loan volume. As in the forward mortgage business, most reverse mortgage loans have been sold to Fannie Mae (it stopped accepting new commitments after Oct. 4, 2010), Ginnie Mae or into the secondary market rather than being held by lenders. The sale of loans enables lenders to replenish their capital so that they can make more loans and, therefore, generate greater transaction fees. The subprime debacle provides plenty of evidence that loan originators have been willing to sacrifice responsible lending practices to generate greater loan volume, higher fees and, ultimately, greater profits. Chasing volume and relaxing underwriting standards are often cited as the prime reasons for the subprime fiasco. In 2008 a report from the U.S. Government Accountability Office (GAO) showed that more than 1,500 lenders made their first reverse mortgage loans, and that 2,950 lenders offered HECMs.7 However, a market consolidation trend has been taking place since 2008.8 The number of reverse mortgage lenders has been decreasing, and the biggest lenders have been growing larger. There were only 1,883 lenders left by 2010. In 2010 the number of large lenders decreased by 3 percent, and the number of smaller lenders dropped by 47.7 percent, to 1,136 lenders.9

REVERSE MORTGAGE CHARACTERISTICS

Virtually all reverse mortgages being originated today are FHA HECMs. The following outline highlights this particular type of reverse mortgage.11 Borrower Requirements

You Must: I be 62 years of age or older; I own the property outright or have a small mortgage balance; I occupy the property as your principal residence; I not be delinquent on any federal debt; I participate in a consumer information session given by an approved HECM counselor. Mortgage Amount Based On: I age of the youngest borrower;

Mortgage brokers serve as intermediaries who bring mortgage lenders and borrowers together. Their compen-

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current interest rate; lesser of appraised value or the HECM mortgage limit (currently $625,000).

I I

In addition, a monthly service charge of $30–$35 to cover the cost of servicing the loan will be added monthly to the balance of the loan. None of the upfront costs are necessarily out-of-pocket, and they can be included in the loan amount.

Financial Requirements Include: I no income or credit qualifications are required of the borrower; I no repayment as long as the property is the borrower’s principal residence; I closing costs may be financed in the mortgage.

Reverse mortgages have long been considered one of the most expensive ways to extract cash from one’s house. Declining property values and stricter lending limits imposed by the FHA in 2009 slowed the growth in the reverse mortgage market. From Oct. 1, 2009 to March 31, 2010, reverse mortgage origination volume dropped by 22 percent compared to the same period one year earlier.13 As home values continued to fall, HUD cut the amount of equity that reverse mortgage borrowers could extract by 10 percent. In many cases, that meant homeowners no longer qualified for a reverse mortgage large enough to pay off their regular mortgage, and this is a basic requirement for getting loan approval. Lenders still saw this market as enormous and weren’t willing to back away.

Property Requirements—The following eligible property types must meet all FHA property standards and flood requirements: I I I

single-family home, or one four-unit home with one unit occupied by the borrower; HUD-approved condominium; manufactured home that meets FHA requirements.

Payment Plans: I Tenure—equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence; I Term—equal monthly payments for a fixed period of months selected; I Line of Credit—unscheduled payments or in installments at times, and in an amount of the borrower’s choosing until the line of credit is exhausted; I Modified Tenure—combination of line of credit plus scheduled payments for as long as the borrower remains in the home; I Modified Term—combination of line of credit plus monthly payments of a fixed period of months selected by the borrower.

Recently, financial institutions such as Wells Fargo, Bank of America, MetLife Bank, and Financial Freedom have all waived their origination fees and other charges on certain reverse mortgages.14 The reduced fees on reverse mortgages are a result of another important industry development: investor demand for mortgage-backed securities that include reverse mortgages. During the past two years, lenders have started securitizing reverse mortgage loans by converting them into Ginnie Maebacked bonds. These are popular with investors because of their government guarantees and high yields relative to Treasury bonds. Investors are willing to pay a premium for that kind of safety with a higher yield and, therefore, lenders are passing on some of that premium to borrowers in the form of lower fees.

The settlement charges on reverse mortgages cover basically the same costs that are involved on a forward mortgage, but there are some differences. The following types of costs will typically be associated with the HECM reverse mortgage:12 I

I

I I I

PROCEEDS FROM THE REVERSE MORTGAGE

The amount of money a senior will receive from the reverse mortgage ultimately will depend on the following five factors:

mortgage insurance—2 percent of the lower of home value or maximum loan limit, and an annual premium of 1/2 percent of the loan balance; origination fee—set by regulation at 2 percent of the FHA loan limit, with a minimum fee of $2,000 and a maximum of $6,000; appraisal fee; title insurance; title, attorney and county recording fees;

REAL ESTATE ISSUES

survey, if required; credit report fee, flood certification fee, pest inspection.

50

I

What is the appraised value of the property? What health and safety repairs must be considered? Are there any existing liens on the house?

I

What are the prevailing interest rates on reverse mortgages?

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Reverse Mortgages: Should the Elderly and U.S. Taxpayers Beware? I

What is the age of the senior? Frequently, the older the borrower, the bigger the reverse mortgage payment.

I

How will the payment be taken?

I

Is the value of the property higher than the national loan limit set by HUD?

Sample Reverse Mortgage Payout Parameters 70 years of age Home Value

$200,000

Zip Code

37211

EXAMPLE OF THE REVERSE MORTGAGE PAYOUT

Number of residents

1

There are numerous sites15 devoted to calculating the proceeds that are possible from using a principal residence to enter into a reverse mortgage. Following are examples from a Reverse Mortgage (RM) calculator site using a home valued at $200,000 with owners at three different ages (75, 70 and 65). We have used the RM calculator found on the Financial Freedom Web site.16 Also, we have picked a zip code that would place the house in Davidson County, Tenn. This way, we are able to get a good general view of the RM output for a single person living in an average-priced home in Nashville, Tenn. and the surrounding area.

Date of Birth

8/1/1940

HECM Monthly LIBOR 175 Variable Rate

HECM Fixed*

$107,324

$113,697

$589

N/A

$107,324

N/A

2.59%

N/A

CASH AVAILABLE Cash Available OR MONTHLY INCOME Monthly Income Available OR LINE OF CREDIT Credit Line Available Annualized Growth Rate OR ANY COMBINATION OF THE ABOVE For example: 1/2 Cash Available, 1/4 Monthly Income and 1/4 Line of Credit.

The actual outputs of the discussed reverse mortgage calculation results can be seen below.

Source: https://b2b.financialfreedom.com/calculator/

Sample Reverse Mortgage Payout

Sample Reverse Mortgage Payout Parameters

Parameters

75 years of age

65 years of age

Home Value

$200,000

Home Value

$200,000

Zip Code

37211

Zip Code

37211

Number of residents

1

Number of residents

1

Date of Birth

8/1/1935

Date of Birth

8/1/1945

HECM Monthly LIBOR 175 Variable Rate

HECM Fixed*

$115,425

Annualized Growth Rate

$106,497

$516

N/A

OR MONTHLY INCOME $688

Monthly Income Available

N/A

OR LINE OF CREDIT

OR LINE OF CREDIT Credit Line Available

$99,738

Cash Available

$121,297

OR MONTHLY INCOME Monthly Income Available

HECM Fixed*

CASH AVAILABLE

CASH AVAILABLE Cash Available

HECM Monthly LIBOR 175 Variable Rate

$115,425

N/A

Credit Line Available

$99,738

N/A

2.59%

N/A

Annualized Growth Rate

2.59%

N/A

OR ANY COMBINATION OF THE ABOVE

OR ANY COMBINATION OF THE ABOVE

For example: 1/2 Cash Available, 1/4 Monthly Income and 1/4 Line of Credit.

For example: 1/2 Cash Available, 1/4 Monthly Income and 1/4 Line of Credit.

Source: https://b2b.financialfreedom.com/calculator/

Source: https://b2b.financialfreedom.com/calculator/

(All numbers listed above are estimates only. Computations for HECM Fixed Product have been done considering the rates available as of: 08/05/2010. The rate used is for the lump sum draw option.)

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Reverse Mortgages: Should the Elderly and U.S. Taxpayers Beware? HUD introduced a new reverse mortgage product as the second reverse mortgage option in October 2010.17 The new HECM Saver is a reverse mortgage product insured by the FHA that has low up-front loan closing costs. Also, this product competes with regular home equity lines of credit because it has lower insurance premiums. The new product lowers the cost of entry for borrowers by charging only 0.01 percent (versus 2 percent for HECM Standard) of the maximum claim amount as an up-front mortgage insurance premium.

There is no doubt that there will always be some unscrupulous characters who will try to take advantage of others, but we also feel that the reverse mortgage market is not likely to be a repeat of the subprime mess. Having said that, there are issues that need to be discussed and hopefully resolved with more consumer legislation to protect seniors. During the subprime boom, the use of “yield spread premiums” provided mortgage brokers an incentive to increase the interest rates or add prepayment penalties to mortgage loans, thereby making those loans more profitable for lenders and investors. HUD has established caps on origination fees in an effort to curb profiteering in the reverse mortgage market.22 Even though brokers are not permitted to collect any additional origination fees of any kind from borrowers, the regulations do not prohibit lenders from paying additional fees—yield spread premiums—to brokers. Yield spread premiums pose a serious threat to senior borrowers who are unlikely to understand the cost menu that brokers and loan originators use to generate increased benefits to themselves and potential investors.

However, the loan limits are substantially lower than on the standard reverse mortgage. The HECM Saver has principal limit factors roughly 11–23 percent less than the standard product, and is offered in both a fixed and adjustable rate format.18 Lower loan limits reduce default risk for the FHA and taxpayers of the country. The HECM Saver loans appeal more to those who only wish to pull a little cash out of their homes now, and expect to pay it back when possible. CONTROVERSIAL ISSUES AND CONSUMER PROTECTION

History has taught that where senior citizens and cash are involved, scammers are not far behind. An article in The New York Times states that hundreds of reverse mortgage applicants have complained about high-pressure or unethical sales tactics that steered them toward mortgages with high fees.19 A 2009 report, “Subprime Revisited: How the Rise of the Reverse Mortgage Lending Industry Puts Older Homeowners at Risk,” by the National Consumer Law Center, suggests as much.20 The report says the following:

Another area of concern is often called the “annuity trap.” Even though the Housing and Economic Recovery Act of 2008 included a prohibition on lenders’ ties to sellers of other financial products, we have concerns about enforcement.23 There is no doubt that prior to this legislation, one of the greatest abuses of reverse mortgages came from originators who helped seniors cash out equity in their homes to buy expensive and complicated insurance policies, annuities or other financial products. Regrettably, HUD has yet to issue a final rule with respect to the cross-selling ban. It is imperative that it do so and, furthermore, it must strictly enforce the ban because in search of hefty commissions, there will be those who attempt to circumvent the prohibition.

“Many of the same players that fueled the subprime mortgage boom—ultimately with disastrous consequences—have turned their attention to the reverse market. Lenders, including some of the nation’s largest banks, view that market as a source of profits that have dried up elsewhere. Mortgage brokers see it as a new source of rich fees. Predators who once reaped profits from exotic loans have now focused on wresting more wealth from vulnerable seniors. And securitization, which allowed subprime loan originators to disassociate themselves from the downside risks of abusive lending, is becoming commonplace in the reverse mortgage industry.”21

A recent press release from the National Reverse Mortgage Lenders Association announced that it will soon be offering a Certified Reverse Mortgage Professional Loan Originator designation.24 Applicants will be required to have a minimum of two years of service originating reverse mortgages, at least 50 closings, 12 hours of continuing education, and submission to a background check before they can sit for the exam. While this sounds like a better situation than prevailed for those selling subprime mortgages, there is still concern that seniors may take too much comfort in dealing with

The authors of this article also have concerns about protecting the elderly as well as U.S. taxpayers. The last thing the U.S. needs is a new scam that is harmful to mortgage borrowers and is detrimental to taxpayers. REAL ESTATE ISSUES

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Reverse Mortgages: Should the Elderly and U.S. Taxpayers Beware? loan volume. The government hasn’t adequately funded counseling so many of the nonprofit groups that provide it have sought funding from reverse mortgage lenders. The New York Times reported that Money Management International, one of the largest reverse mortgage counseling companies, often asks lenders for funding. Money Management International received $900,000 in 2007 from reverse mortgage lenders.30 This sounds like a conflict of interest. We are fearful that the effectiveness of counseling has been undermined by inadequate funding and the limited availability of trained counselors. Counseling may help meet disclosure standards, but it doesn’t seem totally effective in educating seniors about the complexities of a reverse mortgage.

someone with a fancy certification. Mortgage brokers get paid when they sell something. Reverse mortgage applicants are required to participate in HUD-approved counseling sessions before the loan is approved. Counseling sessions are to be conducted by an independent third party who is neither directly nor indirectly associated with the mortgage originator.25 Furthermore, lenders are required to provide borrowers with a list of at least ten HUD-approved counseling agencies.26 Lenders are not permitted to pay for these counseling sessions, either directly or indirectly. Counselors are required to specifically discuss the following topics:27 I

I I

I

options other than reverse mortgages that are available to the homeowner, including other housing, social service, health and financial options; other home equity conversion options; reverse mortgage tax consequences, particularly the effect on eligibility for assistance under federal and state programs, and the impact on the estate and its heirs; the financial implications of reverse mortgages.

TAXPAYER RISK

Virtually all of the reverse mortgages written today are insured by FHA under the Home Equity Conversion Mortgage program. FHA insures the lender against loss in the event the loan balance at termination exceeds the value of the property. It also insures the borrower that any payments due from the lender will be made, even if the lender fails. HECM loans are nonrecourse loans, so the lender cannot seek restitution in excess of the value of the property at loan maturity. In order to fund the HECM insurance program, HUD charges an initial mortgage insurance premium of 2 percent of the value of the home (subject to lending limits) plus a recurring fee of 0.5 percent. Using this rate structure, HUD developed the principal limit factors that determine the amount of money borrowers are eligible to receive.

Counseling sessions are a good idea. Reverse mortgages are complicated financial instruments, and entering into such an arrangement is an important decision that impacts seniors for the rest of their lives. There are critics who say these counseling sessions are often brief and unhelpful. Some of the counseling sessions are actually done over the phone. According to a report by the U.S. GAO, counseling provides, at best, limited protection for senior borrowers. By participating undercover in reverse mortgage sessions the GAO found:28 I I I I I

Until September 2009, the principal factors governing the money available to senior borrowers remained unchanged. In generating the principal limit factors HUD has postulated that home prices would appreciate at 4 percent annually, a figure that is consistent with historic data.31 As we all know, home prices have fallen since the housing bubble burst in 2006. In response to falling home values, HUD, in October 2009, cut the amount of equity that reverse mortgage borrowers could extract by 10 percent. Because the HECM program is mandated to be a zero subsidy program, HUD was faced with the options of discontinuing the program or reshaping the program to comply with its original mission.

some counselors exaggerated how long the sessions lasted; almost half did not discuss alternatives to reverse mortgages (a requirement); none of the sessions covered all of the required topics; some counselors encouraged borrowers to use their proceeds to buy unneeded insurance or other products; occasionally, reverse mortgage materials included misleading claims.

Some senior borrowers report that their sessions lasted only 10 minutes rather than the 60–90 minutes that most counselors say is needed to fully explain the loans.29 If counseling is required, and it should be, it is important that counseling be available and timely. This is important to the mortgage lenders, who complain that the counseling requirements create a bottleneck that reduces REAL ESTATE ISSUES

HUD asked for nearly $800 million in 2010 in taxpayer money to boost its loan-loss reserves because of continuing home price declines.32 This represents the first taxpayer subsidy in the 20-year history of the program. HUD has opted not to increase insurance premiums on 53

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Reverse Mortgages: Should the Elderly and U.S. Taxpayers Beware? reverse mortgages, even though the subsidy is a sign that such an action might be called for. Looking forward, the amount of losses in the reverse mortgage market as a result of the decline in home prices won’t be known for years. There may not even be losses if the housing market stages a decent price recovery, but what we thought we knew about the housing market has been turned upside down during the past five years. Prudent actions taken today might avert serious problems like those seen in the subprime market.

3. The estimate was calculated using data from the U.S. Census Bureau, American Housing Survey, Tables 7–14, 7–15, 2007. Available at http://www.census.gov/hhes/ www/housing/ahs/ahs07/ahs07.html.

CONCLUSIONS

6. Ibid.

The recent upheaval in the U.S. housing market provides an interesting opportunity to reevaluate our country’s use of reverse mortgages. Our population is aging, and many seniors have seen their home equity erode along with their financial assets. Seniors, in growing numbers, may need to tap the equity in their homes. Recent changes in reverse mortgage products and the growing interest on the part of lenders and Wall Street to originate and securitize these mortgages has increased the likelihood that more and more seniors will draw upon the equity in their homes.

7. Government Accountability Office, “Reverse Mortgages: Product Complexity and Consumer Protection Issues Underscore Need for Improved Controls over Counseling for Borrower,” GAO-09-606, June 29, 2009. Available at http://www.gao.gov/ new.items/d09606.pdf.

4. National Reverse Mortgage Lenders Association, 2008 Annual Meeting and Expo “Why Attend.” Available at http://media.nrmlaonline.org/RMMag/June-July08.pdf. 5. U.S. Census Bureau, 2007, American Housing Survey, Table 7–19, “Detailed Tenure by Financial Characteristics—Occupied Units with Elderly Householder.” Available at http://www.census.gov/hhes/ www/housing/ahs/ahs07/tab7-19.pdf.

8. Reverse Market Insight, May 2010 (published June 2, 2010). 9. Fannie Mae HECM Information Fact Sheet. Available at http://www.fanniemae.com/global/pdf/ homebuyers/hecmstriper.pdf . 10. Financial Freedom Senior Funding Corporation for the National Council on Aging, “Trends in Reverse Mortgages—A New Option for Senior Homeowners.” Available at http://www.reversemortgagesmary land.com/ncoa.html.

Reverse mortgage products have had a history of high closing costs. These costs appear to be falling. The industry also has some history of high pressure or unethical sales tactics. It now appears that some of the abuses have been remedied with legislation that better protects seniors. There is some evidence that even though seniors are required to participate in counseling sessions, the counseling may be inadequate.

11. U.S. Department of Housing and Urban Development, “FHA Reverse Mortgages (HECMs) for Consumers.” Available at http://nhl.gov/offices/hsg/sfh/ hecm/hecmabou.cfm. 12. Fannie Mae, op.cit. 13. Greene, Kelly and Anne Tergesen, “Reverse Mortgages Now Look Cheaper,” The Wall Street Journal, April 17, 2010. Available at http://online.wsj.com/article/SB1000 1424052702304628704575186211956006190.html.

It’s fair to say that U.S. taxpayers don’t want to experience another financial crisis that is rooted in another mortgage product. The subprime mess should provide a lesson about mortgage lending. Since reverse mortgage loans have nothing to do with the borrower’s income, these loans don’t face the same default risks as subprime lending. By cutting the amount of equity that reverse mortgage borrowers can extract from their homes, HUD has lessened the risk of problem loans. If the housing market, however, experiences further home value declines, the reverse mortgage program could cause trouble. If home prices start to appreciate, it’s less likely there will be losses in this program. 

14. Bernard, Tara Siegel, “Reverse Mortgages Still Costly, but Less So,” The New York Times, April 16, 2010. Available at http://www.nytimes.com/2010/04/17/ yourmoney/mortgages/17money.html. 15. Sites that provide reverse mortgage calculators: All Reverse Mortgage Company calculator at http://www.allrmc.com/reverse_mortgage_calculator.php; AARP calculator at http://rmc.ibisreverse.com/ rmc_pages/rmc_aarp/aarp_index.aspx; MetLife Bank calculator at http://www.metlifebank.com/ RMCalculator.do. 16. The potential RM output is calculated by using the RM calculator provided by Financial Freedom company. Available at http://www.financial freedom.com/calculator/.

ENDNOTES 1. National Consumer Law Center, “Subprime Revisited: How Reverse Mortgage Lenders Put Older Homeowners’ Equity at Risk,” Boston, 2009.

17. Department of Housing and Urban Development, Mortgage Letter 2010-34. Available at http://www.hud. gov/offices/adm/hudclips/letters/mortgagee/files/10-34ml.pdf.

2. Ibid.

18. National Consumer Law Center, op. cit.

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Reverse Mortgages: Should the Elderly and U.S. Taxpayers Beware? 19. Duhigg, Charles, “Tapping Into Homes Can be Pitfall for the Elderly,” The New York Times, March 2, 2008. Available at http://www.nytimes.com/2008/03/ 02/business/02reverse.html.

28. Government Accountability Office, “Reverse Mortgages: Product Complexity and Consumer Protection Issues Underscore Need for Improved Controls over Counseling for Borrower,” GAO-09-606, June 29, 2009. Available at

20. National Consumer Law Center, op. cit.

http://www.gao.gov/new.items/d09606.pdf. 21. Ibid. 29. Greene, et al., op. cit. 22. National Housing Act, U.S.C. 1717z-20(r). 30. Ibid.

23. Ibid., U.S.C. 1715z-20(n)(1), U.S.C. 1715z-20(o).

31. Glowacki, Jonathan, “Impact of the Economic Crisis on the HECM

24. National Reverse Mortgage Lenders Association, press release. Available at http://www.nrmlaonline.org/ rms/press.aspx?article_id=710.

Program,” Mortgage News Daily, Jan. 8, 2010. Available at http://www.mortgagenews daily.com/channels/community/ 125282.aspx.

25. Department of Housing and Urban Development, Mortgage Letter 2009–2010, U.S.C. 1715z-20(f).

32. “Prepared Remarks for Secretary of Housing and Urban Development Shaun Donovan at the 6th Annual Housing Policy

26. Duhigg, op. cit.

Council Meeting,” accessed at http://www.hud.gov/news/

27. National Housing Act, U.S.C. op cit., 1715z-20(f), 2009.

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speeches/2009-05-07.cfm.

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INSIDER’S PERSPECTIVE

Monasteries, Mutuals and Investment Banks BY ALBERT J. BRENNER, CFA

War. Many mutual savings banks in New England were established in the 1840s. These institutions, established to serve the small saver within their communities, provided banking services to the general public for more than a century and survived some of the most severe financial crises in American history. In the process, they made money, and their accumulated earnings were stockpiled as capital. By the late 20th century, many of the mutual banks had strong capital ratios—although some did not.

I RECENTLY FINISHED READING C.J. SANSOM’S HISTORICAL mystery Dissolution. The book is set in England in the early years of the 16th century at the time of the dissolution of the monasteries. The monasteries were dissolved by Henry VIII as part of an ostensible reform of the English church. The motivations behind and the purposes of the dissolution were many, some noble and some not. The stated purpose was to root out the corruption and vice that—according to Henry and his advisers—had become endemic throughout the monasteries (a view subject to considerable disagreement among modern historians). The dissolution of the monasteries was also intended to eliminate the influence of Rome over the newly established English church with the king as its head.

The mutual savings bank industry survived for more than a century until the management of the industry realized that they could tap into the accumulated capital of the mutual banks. Under the guise of raising capital to be more competitive, many mutual savings banks converted to stock ownership. Two things happened as a result.

A less noble motivation behind the dissolution was the expropriation by the Crown of the wealth of the monasteries—their lands and accumulated treasure. Even in the early 16th century, many of the monasteries were centuries old. Through generations of bequests, many of the monasteries had accumulated considerable wealth; and it was no inconvenient consequence of their dissolution that this wealth flowed to the Crown and its supporters.

About the Author Albert J. Brenner, CFA, is the executive managing director of Asset Allocation Parametrics, LLC, an investment research and advisory firm that specializes in providing asset allocation guidance for tax-exempt and tax-deferred investors. He is also the editor of the Asset Allocation Advisor. Prior to founding Asset Allocation Parametrics, Brenner worked in the non-profit and banking sectors. He was the director of finance and operations of a non-profit organization in Connecticut for six years after working in banking for twenty years. His last position in banking was as executive vice president and treasurer of Northeast Savings, a multi-state thrift institution now part of Bank of America, and where he managed more than $2 billion in assets. Brenner is a graduate of the University of Notre Dame and holds master’s degrees from Oxford and Yale. He earned the Chartered Financial Analyst designation in 1991.

While I was reading Sansom’s historical postscript to the book, I was reminded of a much more recent phenomenon with odd parallels to the dissolution of the English monasteries five hundred years ago: the wholesale conversion of mutual savings institutions to publicly owned stock institutions. The mutual savings industry, a relatively small component of the American banking system but a larger component in certain areas such as New England, has been around since before the Civil

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Monasteries, Mutuals and Investment Banks Many people, and management in particular, made a lot of money. Through the grant of stock purchase rights (flowing ostensibly from being current “owners” of the bank by being current depositors or bank employees), bank managers essentially cashed out the accumulated capital of the institutions. One hundred years of stockpiled earnings were distributed in one fell swoop to the folks in the corner offices. The wealth of these community institutions, intended to serve the general public, was effectively expropriated by management. Unlike the dissolution of the monasteries, however, which led initially to a significant uprising, the conversion of the mutual savings banks had little opposition. Current depositors were able to join in the plundering, and few voices were left to speak out in opposition to the expropriation.

The conversion of the American investment banks from their traditional private partnership structure to publicly traded stock companies changed the entire dynamic of investment banking, as it gave the partners of the investment banks a means of getting more ready access to their accumulated wealth. The conversion to public companies did not constitute an expropriation of treasure accumulated over time—as in the case of the monasteries and the mutual banks—but it did change the dynamics of the investment banking world, and almost certainly for the worse. Investment banking partners were now playing with not just their own money, but also their shareholders’ money. Rather than being just owners, they were now also agents. The introduction of individuals acting as agents inevitably introduces agency problems, as they are known in the theory of corporate finance and management. Agency problems arise when the interests of owners or providers of capital are not perfectly aligned with the interests of those acting on their behalf. The private partnership structure of investment banking kept agency problems to a minimum. The partnership imposed discipline on those who acted in their own interests to the detriment of the firm. The conversion from private partnerships to public companies made thousands of investors silent partners with the in-house partners of the converted firms. The potential for significant agency problems came with the conversion. The failure of Lehman—and the near failure of several other investment banks during the latest financial crisis—is testimony to the elevated degree of risk that the banks were willing to take when playing with more than just the in-house partners’ money. It would be extraordinarily disingenuous for us to imagine that the systemic risks associated with the subprime mortgage debacle would have escaped the notice of the major investment banks had they been private partnerships.

Ironically, the second consequence of the wholesale conversion of the mutual savings banks—at least in New England—was the ultimate failure of many of the institutions. So much capital flowed into the region, and banks were so eager to put the capital to work, that a boom in commercial real estate followed as project after project got funded without anyone asking how all of the projects could be supported. Just like the more recent national housing bubble, all of the building couldn’t be supported. Commercial real estate prices dropped, buildings sat vacant, and banks failed—even those that hadn’t raised new capital. Rather than buttressing the banks, the new capital resulting from mutual to public conversions precipitated a banking crisis. As I was discussing these reflections with my intern, Jay Murray, he brought up another parallel: the conversion of the investment banks from private partnerships to publicly owned stock institutions. Investment bankers have always been a rare breed in the world of American commerce. The traditional investment banking houses were elite institutions of moneyed individuals who put their wealth at risk to promote the growth of American commerce. Although investment bankers were wealthy individuals—or got to be wealthy individuals—their wealth was not particularly liquid. As anyone who has read Charles Ellis’s history of Goldman Sachs (The Partnership: the Making of Goldman Sachs) knows, the accumulated wealth of the Goldman partners was typically locked up in the capital of the firm. The success of the partnership required that the pool of the partners’ equity be maintained to support the underwriting and financing activities of the firm. REAL ESTATE ISSUES

In the end, although the change in the structure and ownership of American investment banks did not constitute a direct expropriation of treasure accumulated over time, the financial crisis facilitated by the changes have amounted to the same thing—with the exception that, in the current case, a good deal of the expropriated wealth is coming from the future, not the past. If there is a lesson to be learned from these stories, it is a cynical one. The surest way to individual wealth is to locate a store of accumulated wealth and find a way to expropriate it. Whether it be centuries of gifts, decades of retained earnings, or inflated housing values, if we can just find a way to tap the wealth, we can get rich without really trying.  57

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RESOURCE REVIEW RECOMMENDED READING

The Big Short: Inside the Doomsday Machine by Michael Lewis (©2010, W.W. Norton & Co., 266 pages) REVIEWED BY WILLIAM P.J. McCARTHY, CRE

for advising clients on the purchase of stocks and bonds when he readily admits at his age, with no practical experience, he had no clue what he was doing. This sense of amazement about how fees are set and generated and what constitutes expertise and experience carries on in The Big Short. However, whereas his previous book, Liar’s Poker, dealt with millions of dollars of transactions, The Big Short deals in the billions.

THERE HAVE BEEN AS MANY BOOKS recently written about who and what caused the recent financial crisis as there are excuses for this debacle. If you are interested in a book that both reads like fiction due to its cast of characters, yet provides you with an insider’s perspective of what occurred on Wall Street and beyond during the global financial meltdown and subprime mortgage fiasco that peaked in 2008, then the book to read is The Big Short: Inside the Doomsday Machine by Michael Lewis. For those of us in the real estate and finance industries, you will read in amazement how widespread and deep the greed, corruption and incompetence of some of the supposedly best minds and most privileged leaders in business led to the loss of $1.75 trillion in wealth in the subprime mortgage markets, shamed capitalism and ruined thousands of lives in the process.

The Big Short is Lewis’ eighth book. Several have been best sellers including his exposé on Silicon Valley entitled The New New Thing; the economics of big time sports, Moneyball; and perhaps his best known work, The Blind Side, which recently was made into an Academy Awardwinning film about the unlikely life and career of football star Michael Oher. (The Big Short could also be made into a great movie). Lewis’ style is to tell the story through the narrative of several prominent and obscure participants. He does this very effectively in The Big Short, which he considers a tale about systematic mass delusion.

Michael Lewis is a brilliant chronicler of business affairs, who by focusing on some of the more interesting and controversial characters, has the rare ability to also take complicated issues and subject matter and create fascinating vignettes. As a former Wall Street bond trader, Lewis knows where to look for information and what questions to ask, and whom to ask. Lewis first rose to prominence when at just twenty-four he released Liar’s Poker in 1989, about his experiences with the then prominent Wall Street firm, Salomon Brothers—an intriguing, fast-paced look behind the scenes of the bond and capital markets. Lewis still can’t seem to get over the fact that he was paid hundreds of thousands of dollars and bonuses

REAL ESTATE ISSUES

About the Reviewer William McCarthy, CRE, FRICS, R.I., is a property developer and owner, and a real estate agent and consultant based in Burnaby, British Columbia. McCarthy is the immediate past president of the Real Estate Institute of Canada, and has served as a director and officer of several other professional and community organizations. A Counselor of Real Estate since 1995, he duncumis a member of the CRE Consulting Corps and has participated in two major assignments for the Corps. McCarthy currently chairs the CRE Ethics Committee.

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The Big Short: Inside the Doomsday Machine We are introduced to Steve Eisman, who tells Lewis of his journey from being a strident Republican to what he referred to as the financial markets’ “first socialist,” as he became increasingly concerned and outraged over how deceptive and corrupt the entire mortgage lending business was becoming. And then Eisman and his team discovered what Lewis refers to as the gold mine. Reviewing the first round of subprime mortgages in intimate detail, Eisman, a Harvard-trained lawyer, first became incensed, and then calculating, when he realized that realtors, appraisers, mortgage brokers, banks, regulators, governments—everyone who could take a cut of the action—were encouraging unqualified and delusional individuals to purchase residential real estate they could never afford. As traders Charlie Ledley and Jamie Mai told Lewis in the book: “The best way to make money on Wall Street was to seek out whatever Wall Street believed was least likely to happen, and bet on it happening,” such as the greatest domestic economic crisis since the Great Depression.

diagnosed with Asperger’s Syndrome, he became a medical doctor and part-time stock analyst, whose research and attention to detail created a cult following in the industry. Requiring little sleep, and with both the fascination of and ability to study and chart massive and convoluted mortgage documentation and deal sheets, Burry knew the subprime was a farce, and that the bond rating agencies were willing participants in this scheme. Everything was rated a “buy.” How could 80 percent of these extremely questionable and risky pooled mortgages be rated Triple-A, the same as U.S. Treasury debt? Burry noted there was an opportunity to essentially hedge against the collapse of some of these funds. Credit default swaps were the way. Lewis explains that while Wall Street firms were temporarily able to hide the risk by complicating it, a handful of proactive analysts and investors, such as Burry, knew that betting against these notes would pay off—massively. This was the Big Short. (If you go onto the 60 Minutes website, look for the March 14, 2010 edition where Michael Lewis talks about his book, and Michael Burry is profiled in a fascinating expose. In addition to reading The Big Short, you should also see the movie “Inside Job,” which just recently won the Academy Award for Best Feature Length Documentary. The events and many of the personalities discussed in The Big Short are featured, and dealt with harshly).

Eisman was not the only individual to ponder or analyze the subprime and securitization boom. The Deutsche Bank bond salesman Greg Lippmann was also thinking about how to make money on top of the subprime loans. The key would be to buy credit default swaps and derivatives, those exotic and ultimately useless creations of Wall Street, impossible to qualify or quantify, or even explain. Wall Street simply invented artificial ways to generate fees and bonuses—without care or consideration for the consequences. First securitize junk mortgages, and then create dubious insurance schemes to capitalize on the defaults.

The Big Short is an enjoyable read and an illuminating expose of one of the most shameful periods in American business. By 2009, the American taxpayer had assumed more than $1 billion of bad debt and subprime losses. Homeownership is the noble dream of all hard-working families. Real estate is the foundation of a successful and flourishing economy. To see how these pillars of a free society were manipulated and abused for no purpose other than greed is difficult for us, the conscientious real estate professionals, to comprehend. The Big Short reveals the painful consequences that result when individual and corporate ethics and standards are allowed to free fall. 

One of the first and most focused analysts to see the potential windfall of the credit default swaps, and the money to be made by betting on the collapse of the subprime market, is the most interesting character portrayed in the book, Dr. Michael Burry. Burry was an introverted loner who had lost an eye to cancer. Later

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Real Estate Issues is a publication of the professional membership organization The Counselors of Real Estate®. The publication is not an academic-oriented publication. Rather, it is a commercial real estate journal written for and by practitioners. Its focus, therefore, is on practical applications and applied theory. Contributions from industry experts—from CRE® members and nonmembers alike— have given Real Estate Issues® a reputation in the real estate industry for offering substantive, timely content about key industry issues and trends. Members of The Counselors receive complimentary subscriptions. Nonmember subscribers include real estate and real estate-related professionals, organizations and institutions. MANUSCRIPTS 1. FEATURE ARTICLES

Feature articles explore practical applications and applied theory addressing the diversified issues encountered in the broad field of real estate. REI accepts manuscript submissions that are no longer than 25 double-spaced pages (about 7,000 words) and no shorter than 10 double-spaced pages (about 2,800 words). Charts, graphs and photos are welcome, when appropriate, to enhance the article. CREs and nonmembers can contribute feature articles. 2. PERSPECTIVE COLUMNS

Perspective columns provide the author’s viewpoint about a particular real estate practice, issue or assignment; a description of the author’s involvement in a specific counseling assignment; or the author’s opinion about a long-standing industry practice, theory or methodology. Perspective columns are about four to nine double-spaced pages (1,000–2,500 words). CREs and nonmembers can contribute perspective columns. 3. RESOURCE REVIEWS

Resource reviews provide commentary about real estate-related and businessrelated books, Web sites and other resources that would be beneficial to real estate practitioners. Reviews are two to five double-spaced pages (500–1,500 words). CREs and nonmembers can contribute resource reviews. 4. CASE STUDIES

Case studies are actual counseling assignments that CREs have performed for clients. These studies should include: commentary on the decisions made regarding the approach to the problem, REAL ESTATE ISSUES

investigation and analysis; commentary as to why the work was needed; appraisal, brokerage, mediation, and related services; and visuals. IMPORTANT NOTE: all case study submissions must include confirmation of the client’s approval to share the details with a wider audience. Visit www.cre.org>publications>Real Estate Issues>Call for Manuscripts/Editorial Guidelines for a template, and more information.

RIGHTS

Upon publication, The Counselors of Real Estate holds copyright on original works. This practice allows CRE to post articles on its Web site and authorize their use for classrooms and other reprint requests. The Counselors will not refuse any reasonable request by the author for permission to reproduce his/her contributions to the journal. WEB SITE

CRE posts a PDF file of each article on the association’s Web site after the issue mails, enabling members and site visitors to access and circulate information. REPRINTS

Reprints are available to authors at no cost. Upon request, CRE will provide reprints to authors after publication. MANUSCRIPT/GRAPHICS PREPARATION

Contributors should submit manuscripts via e-mail ([email protected]). All information, including abstract, text and notes, should be double-spaced. 1. Manuscripts should follow page and word count as listed above. Each submission should also include a 50- to 100-word abstract and a brief biographical statement. Computer-created charts/tables should be in separate files from article text. If accepted, the author also is required to submit a headshot in EPS, tiff or jpeg format with a resolution of at least 300 dpi. 2. Graphics/illustrations are considered figures, and should be numbered consecutively and submitted in a form suitable for reproduction. Electronic forms are acceptable. 3. Number all graphics (tables/charts/graphs) consecutively. All graphics should have titles. 4. All notes, both citations and explanatory, must be numbered consecutively in the text and placed at the end of the manuscript. 60

5. For uniformity and accuracy consistent with REI’s editorial policy, refer to style rules in The Associated Press Stylebook. The Real Estate Issues managing editor will prepare the final manuscript in AP style. REVIEW AND SELECTION PROCESS

All manuscripts are reviewed by at least three members of the REI Editorial Board: two members of the board and the editor in chief. Author names remain anonymous. The managing editor makes every effort to notify authors about the status of manuscripts under review at the earliest possible date. The policy of Real Estate Issues is not to accept articles that directly and blatantly advertise, publicize or promote the author or the author’s firm or products. This policy is not intended to exclude any mention of the author, his/her firm, or their activities. Any such presentations however, should be as general as possible, modest in tone and interesting to a wide variety of readers. Authors also should avoid potential conflicts of interest between the publication of an article and its advertising value.

WILLIAM S. BALLARD AWARD

The William S. Ballard Award is presented annually to the author or authors whose work best exemplifies the high standards of William S. Ballard, CRE, and the high standards of content maintained in Real Estate Issues. The award-winning manuscript, selected by a three-person committee, is chosen from the published articles that appear in an annual volume of the journal. CRE and nonmember authors are eligible. The award, which is funded by the William S. Ballard Scholarship Fund, includes a $500 honorarium and is presented at a national meeting of The Counselors. The award is named in honor of William S. Ballard, who was a leading real estate counselor in Boston in the 1950s and 1960s. He was best known for the creation of the “industrial park” concept and developing the HUD format for feasibility studies. He was an educator who broke new ground during his time in the real estate business, and whose life ended prematurely in 1971 at the age of 53.

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®

CRE CORE PURPOSE

To be a community of expertise, talent, collegiality and camaraderie among practitioners recognized as leaders in real estate counseling. CRE MISSION

The mission of The Counselors of Real Estate is to serve as: I

A leading source of real estate advisory expertise and integrity with members serving as an indispensable resource to each other, our clients, our industry and our communities; and I

A platform for professional relationships, insight and access to diverse experience. CRE CORE VALUES

Integrity: Honesty, reliability, and ethical practices demonstrated by individual members in their

relations with fellow members and in their practices conveying unbiased advice to clients devoid of conflicts of interest; Competence: Leadership, wisdom, professionalism, and judgment in the application of knowledge demonstrated by mastery of real estate principles, independence and advice based on appropriate methodologies, adding value to clients and helping them make better decisions; Community: Common principles, shared information, candor and appreciation of multiple points of view demonstrated by a culture of camaraderie, friendly, respectful discussion and debate, and a willingness to help one another; Trust: Confidence in the character of colleagues demonstrated by an open sharing of knowledge

and views while respecting confidentiality; Responsibility: A commitment to elevate and improve the real property industry demonstrated by individuals sharing knowledge and abilities, volunteering time and energy, and taking an active role regarding issues that impact the public and industry.

430 N. Michigan Ave., Chicago, IL 60611-4089 Telephone: 312.329.8427 • E-mail: [email protected] • Web site: www.cre.org

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430 N. Michigan Ave. Chicago, IL 60611-4089 Telephone: 312.329.8427 E-mail: [email protected] Web site: www.cre.org