Friday, November 30, 2007

ULI 2008 Fortune Telling: A Shortlist of Cool Moves Including Going Green

"Two years from now, a Class A non-green building will not be considered Class A."
- George Denise, General Manager for Cushman Wakefield /Adobe Systems San Jose Campus. Overheard during a panel session on green building.
Like a lot of finance professionals, I was hopeful about attending the ULI Emerging Trends 2008 conference here in San Francisco -- welcoming any port in the credit market storm. Added to that was the promise of a big discussion on green real estate for the first time by one of the mainstream real estate economists. So let's cut to the chase: now the message is that there will be an overall slowing of the economy (sigh...duh), investors are crossing their fingers in hope that consumer demand will remain at acceptable levels, and that interest rates do not become too much of a wild card. In short, Joe or Jane Q. Investor will have to surf choppy waters for awhile but in the end, should come out in good shape. And they stress that current conditions seem right for making a few cool moves. Here is the ULI shortlist:
  • Have Dry Powder (Or Go Get Some): Investors with strong relationships and liquidity are going to score now that there may be more motivated, overleveraged sellers in the market needing a lifeline.
  • Buy Distressed Loans: Investors are looking at B and mezz loans, figuring that they can get their hands on a quality asset for a 10%-20% discount from its original value if the borrower is unable to repay the obligation.
  • Focus on Global Pathway Markets: Traditional 24-hour megacities enjoy more buyer demand and upside potential, especially when capital gets nervous.
  • Buy Public REITS: A panelist from BRE Properties, Inc., a top multifamily player, gave a great analysis of the value. Their high quality multifamily portfolio is valued at an implied cap rate of 6.8%, yet multifamily is expected to outperform other asset classes. Cap rates for Class A multifamily shouldn't get too far above 6%! In the case of multifamily, many stock analysts lump them together with other residential stocks, like homebuilders, so they've been taking a harder beating than is really justified by their asset quality and performance.
  • Use Demographic Strategies: Old school dirt investors like myself love this category, because it plays to our strength of intimately knowing communities and their potential. Seniors housing, second homes, medical office buildings, and even student housing play on baby boomer wealth accumulation and long lifespans. Also think about urban plays that penetrate markets with high immigrant inflows.
The Green Competition Factor Green real estate was woven into the conference as a prominent economic factor affecting the direction of investment real estate in many ways. The economists explicitly cautioned that owners of non-green buildings in high development markets should start understanding the impact of new green developments being built around their properties. In short, the presence of green developments around brown real estate may decrease the competitiveness of brown real estate. The lead in quote to this post, from George Denise, of Cushman Wakefield, is his point of view. I would add that two years ago no one would have even understood what he was saying and now people might start to realize that his point is highly plausible. Green Real Estate Plays for 2008 ULI's take on busting a move with green real estate was still restricted to thinking about new development plays -- so they still have a ways to go in my book. Also note that ULI didn't delve into any discussion of defining green, which is appropriate for an economics-oriented conference. And here's a couple of their recommended green plays for 2008:
  • Green equals competitive advantage: Okay, for the Green Journey crowd, this is preaching to the choir. But believe it or not, just thinking about building green at all is still pretty edgy for alot of market investors.
  • Focus on Mixed Use and Infill: 24-hour residential environments with pedestrian-friendly layouts and varied living options are in. Particularly among empty nesters and career starters. Fringe subdivisions without amenities are losing appeal.
  • Build Transit-Oriented Development: Condominiums, apartments and retail near lightrail or subway/train stops are becoming "increasingly attractive".
Green Journey Takeaways
ULI did do a good job of evangelizing green from an economic point of view and started the process of translating green into an investment strategy -- critical for market transformation of our industry. I'm still waiting for one of the big firms to be a leader in discussing how we green existing buildings.
Photocredit: Flickr/Jai-to-Z

1 comment:

David Stejkowski said...

Great ideas and insights. Thanks for sharing them. One of these days I guess I'd better join ULI. I know they are active here in Chicago and if this is an indication of the programming quality then I need to be there.