November Happenings in the Real Estate Program at Wisconsin

The month of November has been fast paced like the rest, but with a pervasive Magnum PI vibe. After our amazing Real Estate Club trip to San Francisco, we were met with both a week of mid-terms and the ramping up of our Integrated Company Analysis (ICA) team projects. We also welcomed a diverse group of real estate professionals to campus to speak with students about past and present experiences. Here are several highlights of those visits:

Thomas McCahill of Pearlmark Real Estate Partners discussed Subordinated Debt

A proud Badger, Graaskamp Center Board member, and father of first year Real Estate MBA Conor, Tom spoke with MBAs and undergraduate real estate students regarding the historical trajectory of subordinated debt, or the past, current and future uses of these modified debt instruments. Tom is currently Managing Director for Debt Investments at Pearlmark Real Estate Partners.

Jay Lehman of Toll Brothers delved into Career Hunting and Networking Advice

A honorary Badger, Jay spoke with students via video conference about the career recruiting process and networking. Current Director of National Recruiting with Toll Brothers, Jay offered us real time and invaluable advice including some no-no’s like listing strange hobbies on resumes!

Raphael Dawson of Walton Street Capital spoke about International Development

Another proud and dedicated Badger, and a Principal and Senior Asset Manager with Walton Street Capital, Raphael discussed his experiences with international development, particularly in India. Raphael’s vivid depiction of Walton Street’s risk management model deployed during development in new territories left a strong impression on our group, and sobered us to the realities of doing business in unfamiliar places.

Marc Swerdlow of Waterton Associates presents at Real Estate Club

President of Waterton Associates, Marc spoke with our Real Estate Club about Waterton’s vertically integrated investment strategy focused on multifamily real estate across the country. Marc shared stories with us regarding several of their East Coast assets affected by Hurricane Sandy, including this picture now famous in sporting circles taken at one of their Hoboken properties.

Other Events - Current and Upcoming

Kyle Van Someren (MBA 2014) and Jeff Urbanski (MBA 2013) attended the 6^th Annual Harold E. Eisenberg Foundation Career Day in Chicago. This event includes site visits, a Young Guns panel, and a career and internship fair. A wonderful networking and recruiting opportunity for graduate and undergraduate students alike!

A cadre of real estate MBAs, including 2014 candidates Michael Zoellner, McKay Winkel, Ramesh Kanthilal, Grace Lu, Mitesh Patel, and team captain Andrew Boespflug (MBA 2013), traveled down to Austin, Texas to participate in the 2012 National Real Estate Challenge. We wish them the best of luck!

Finally, we are heading out to New York City early tomorrow morning for the Global Real Estate Markets 2012 conference at the New York Stock Exchange and the Graaskamp Center’s Fall 2012 Board of Advisors Meeting located at the Plaza Hotel (breaking news regarding the hotel’s sale found here). Fellow MBA students will have the opportunity to mingle with industry leaders while learning about recent market activities and trends. It’s good to be a real estate Badger!

Jonathan Brown comes to Madison from Washington, DC, where he managed downtown Class A office buildings for Tishman Speyer. Jonathan plans to leverage his prior experience with financial and analytic tools gained during the MBA program to eventually start his own real estate investment firm.

The Consortium Experience – From a Real Estate MBA Student’s Perspective

By Amber House, Real Estate MBA, Class of 2014

The Consortium for Graduate Study in Management (The Consortium) is the country’s leading organization for promoting diversity and inclusion in American business. Through an annual competition, The Consortium awards merit-based, full-tuition fellowships to America’s best and brightest candidates for study at one of the 17 Consortium member universities. Applicants looking to join the MBA Class of 2014 experienced yet another highly competitive Consortium fellowship competition. Last year, over 1000 applications were received for membership and only approximately 300 Consortium fellowships were awarded across its member universities.

Annually, Consortium Fellows from member schools across the nation are invited to participate in one of the most highly anticipated events of the year, The Annual Orientation Program and Career Forum (OP). In July of 2012, the five-day OP conference was held in Minneapolis, MN. Fellows took part in an ambitious series of career focused events, first-look opportunities with national corporate partners including 3M, General Mills, and Target (just to name a few) and the opportunity for Fellows across the nation to meet for the first time.  

As one of three founding partners, The Wisconsin School of Business definitely sets itself apart when it comes to preparing their Consortium Fellows for success within the highly competitive OP environment.  About a month and a half before the actual Consortium OP event, Wisconsin invites their Consortium Fellows to participate in “OP Boot Camp”, a jammed-packed weekend complete with intense career and interview preparation.  “We developed our STAR interview stories, learned key networking tips and methods towards perfecting our personal brand, and even received interview feedback from SC Johnson executives,” says Caroline Mwonga, first year Wisconsin MBA studying in the Center for Supply Chain Management. Wisconsin is serious about ensuring its Fellows’ success at Consortium OP.  The best part of OP Boot Camp, from my perspective, was the opportunity to meet and bond with first- and second-year Wisconsin Consortium students. During that weekend, we discovered a Consortium family, one that will stay with us throughout our Wisconsin MBA journey and beyond.

As a Consortium Fellow looking to continue my career within the real estate industry post MBA, I can admit that I was a bit skeptical about whether my participation at OP would be as successful as my peers. However, I was pleasantly surprised!  Even though Real Estate MBA’s are not the most sought out students for recruiters at OP, the event provided me with an invaluable opportunity to connect with corporate partners who would later become allies during my search for internship and full-time offers. I am now a part of a national network of professionals eager to support The Consortium’s mission and their Fellows, as well as, an MBA at a founding member university whose brand, especially within the real estate industry, continues to speak volumes.  The Wisconsin School of Business unquestionably has a recipe for success with its focus on supporting diversity initiatives and producing specialized MBA graduates ready to take on the work force.

For more information on The Consortium visit http://www.cgsm.org/about/index.asp.

Amber House comes to Madison from San Diego, CA, where she managed the development of multifamily homes affordable to low-income households for Community Housing Works.  Amber would like to leverage her project management and financial analytic skills to promote renewal and reinvestment in urban communities.

The Wisconsin Idea Meets Barcelona (Part III)

by Stephen Malpezzi, Professor and Lorin and Marjorie Tiefenthaler Distinguished Chair in Real Estate

After the plenary I described in my previous posts, we had a well-received session entitled “Cities and Housing – Closing the Urban Housing Gap,” chaired by the World Bank’s Ellen Hamilton.  The focus of the session was on developing and emerging markets.

As countries grow and urbanize, the efficient and equitable production and delivery of housing and its associated infrastructure are key elements of successful urbanization.  In the aggregate, housing typically comprises something on the order of half a country’s tangible capital stock, a fifth to a third of gross fixed capital formation, and 10 to 30 percent of consumption.  Housing often leads the business cycle, and is often one of the main channels of monetary policy.  It is intimately tied to the development of (and sometimes to serious problems in) a country’s financial markets.

From a social perspective, housing is the most widely held form of wealth in most societies; and through this channel and through the operation of rental markets, housing is an important determinant of the distribution of welfare as well as its average level.  Furthermore, housing is a good that is characterized by important external costs and benefits, i.e. costs and benefits that are not “internalized” or paid directly/received by individual market participants, so it is not surprising that all governments intervene in some fashion in housing through various taxes, subsidies, regulations, and sometimes direct public provision.  But the efficacy of these interventions varies widely.

Three exciting papers were presented by younger researchers.  Basab Dasgupta told us about the connections between housing, location, and transport in South Africa, in light of recent government housing initiatives in “Shelter from the Storm – But Disconnected from Jobs,” co-authored with my friend Somik Lall.  Sohail Ahmad presented new housing demand estimates from Bangladesh that gave us a closer look at households’ actual consumption, and commented on that country’s housing policies in light of those facts.  Ashna Mathema took a look at similar issues in Rwanda; and Kate Owens (a young colleague who is taking time out from international consulting to do a PhD at our Big 10 rival Michigan) examined these issues in Dar-es-Salaam, Tanzania.  These latter papers seemed consistent with long-ago work by myself and the late Steve Mayo, that found budget shares for housing decreasing within cities as household incomes rose, but increasing in the very long run across cities as some grew and developed.

Two other papers were presented by greyer heads, my good friend and coauthor Alain Bertaud, and myself.  Alain is one of the world’s leading urban planners – I would say the leading planner – and in some future post we’ll discuss our joint work more fully.  In this presentation, Alain discussed the effective supply of land and, ultimately, real estate floorspace, in today’s cities.  There are two main channels for increasing the effective supply of land and floorspace; one is to improve the transportation system (shortening travel times increases the effective range of a city’s land market), and the other is to reform how urban regulations affect the translation of land area into floorspace.  Figure 1 illustrates the latter, with case study data from Ahmedabad.

For every 100 square meters of land that’s developed, 26 square meters ends up in the market for housing or other real estate; and given these 26 square meters, up to 44 square meters of floorspace may be delivered.  (In the informal or “slum” sector, another 4 square meters of land yields 7 square meters of floorspace).  Improving the effective yield of floorspace can be accomplished in several ways, for example by reducing the substantial fraction of newly developed land kept in government hands, mostly held as vacant; and by improving the yield of floorspace per unit of land submitted to market forces, for example by reforming Floor Area Ratio (FAR) regulations and so on.

Given the “externalities” argument and the fact that most governments intervene heavily in the housing market (including our own!) the purpose of my own paper was to discuss how to design interventions that work – and how to avoid interventions that do not work – based on experience in a range of countries, and on applied research.  The goal is to provide some directions for housing policies and programs that have proven to be effective – both equitable as well as efficient.

Want a few examples?  Here is a taste:

Nothing good will happen in housing markets without secure property rights; but don’t fall into the trap, as some have recently, of believing that simply granting titles to slum dwellers will be a sufficient solution.  There’s a lot to be done, such as improved registration procedures and information systems, and setting up a modern legal framework that’s truly relevant to low cost housing.

Improving infrastructure is another key area.  In many developing country cities, the supply of basic water and sanitation is even more critical than transportation improvements.  But we can’t simply import the water system of New York or London’s waste treatment solutions; appropriate water and sanitation solutions depend critically on income levels and willingness-to-pay of recipients; on population densities; and often on climactic and soil conditions as well.

A well-functioning housing finance system competes for funds on equal terms with other investments, whether through deposit-based or capital markets-based models of resource mobilization (or some combination of the two).   Directed credit models have proved inefficient, inequitable, and unsustainable.  In particular, forcing housing finance institutions to lend at consistently negative or highly subsidized interest rates proven problematic; deeply subsidized state lenders have created financial problems in countries both rich and poor.

Cities need to regulate development and land use, but in a contextual and appropriate manner.  Most cities (including again many in our own country) need to undertake an exercise “regulatory triage:” separate regulations into (1) those whose benefits clearly exceed costs, and strengthen and enforce them; (2) those whose costs clearly exceed benefits, and remove or reform them; and (3) a middle category of those for whom the net cost-benefit is too imprecisely known to be confident of the need for change.  In many if not most cities, an initial focus on (1) and (2) will keep regulators busy for some time, and will yield significant returns.

Those are just four of a few dozen recommendations elaborated upon in the paper; if you are interested in housing or real estate markets, whether in developing or emerging markets, or here in the U.S., you might find it interesting; download the paper here.

Well, we’ll be wrapping up soon.  I’ll write one more blog post, coming soon, that will discuss a few more findings from our Barcelona meeting; and I’ll discuss some of the next steps that will be taken by the sponsors and participants.

Armed Guards, BRICs And Building The Best: A Badger-Led Q&A with Gerald D. Hines and John Wood of Hines Interests LP

On October 9, 2012, a select group of undergraduate and graduate students from the Wisconsin School of Business gathered in Grainger Hall to sit down with one of the most renowned real estate entrepreneurs in the world: Gerald D. Hines, Chairman and Founder of Hines Interests Limited Partnership (“Hines LP”).  The firm, founded in 1957, is currently active in 18 countries, has approximately 3,300 employees and controls assets valued at approximately $22.9 billion.  Since its founding, Hines LP has managed over a thousand projects in 245 cities across four continents.  Michael Brennan, Executive Director of the James A. Graaskamp Center for Real Estate, moderated the student-led Q&A with Mr. Hines and John Wood, a Managing Director in the firm’s Chicago office.

Students probed the real estate pioneer’s illustrious past, outlook and aspirations, unearthing an array of anecdotes and stories.  Mr. Hines was an impressive raconteur, entertaining students with various tales from his career developing real estate around the world.  The first question immediately sparked a dazzling story describing an incident in which armed guards raided one of the firm’s foreign offices.  The episode was a lively example of the travails the firm faces when investing globally.

Mr. Hines clearly enjoys the challenge.  Hines LP, which partners with pension and sovereign wealth funds, has been investing in BRIC countries (Brazil, Russia, India and China) since the early 1990s. 

“The tougher, the better,” he exclaimed.  “You might get killed, but there’s less competition.”

Despite cultural and political differences, Mr. Hines doesn't hesitate to send “Texans to Russia.”  In fact, Hines LP actively seeks opportunities that allow entry into lucrative markets throughout the world.  The firm entered the Russian market by partnering with a local operator and establishing a reputation for quality.

It’s that ideal for quality that inspired the firm’s start in Houston.  Mr. Hines saw a market oversupplied with “junk” and knew he could build something of better value.  Improving the workability of the tenant – from expansive lighting to improved air quality to large floor plates – has been an important guiding principle.  Mr. Hines spoke highly of the firm’s conceptual construction group, whose primary goal is to answer one simple question: how do we improve the product?

The small and specialized team promotes quality and innovation by evaluating the mechanical systems, operating expenses, maintenance costs and development planning of the firm’s investments.  Students also highlighted the firm’s creativity and out-of-the-box thinking by focusing the discussion on some of the firm’s notable developments, including:

• The Galleria (Houston, TX), an upscale mixed-use urban development that incorporated Milan-inspired architecture and constructed a basement level ice skating rink
• 101 California St. (San Francisco, CA), a LEED Platinum office building that achieved the highest LEED score in history in the existing building category (the building uses earthworms to brew fertilizer for the plants and trees in the building’s plaza and atrium)
• Transbay Tower (San Francisco, CA), a 1.3 million-square-foot office tower, which, once completed, will be the tallest building west of the Colorado Rockies

Mr. Wood added that it was the firm’s high standards and reputation that attracted him to Hines LP.  The firm’s reputation creates opportunities to work on outstanding projects, something that excites and motivates him every day.  Mr. Hines reciprocated, noting that it’s the firm’s talented employees that allow him to enjoy life.  An avid skier and mountain climber who enjoys spending time with his family, Mr. Hines takes pride in knowing he can entrust the firm to upstanding individuals that do what they say – and in the right way – and don’t overpromise.  He also emphasized that the firm’s 3,300 employees were a top priority and that maintaining the jobs significantly contribute to his determination and resilience during a tough economic climate.

The firm’s current economic outlook was described as “cautiously optimistic.”  Capital continues to be constrained and competition is just as fierce, making development difficult.  Mr. Wood pointed out the difficulty of finding equity for projects despite significant pre-leases and that the firm has had to break leases as a result.  Although the firm is looking at acquisitions, development projects are waiting for equity.

Mr. Hines added that development projects also require courage.  “It’s all very exciting, but can get pretty hairy at times.”

Fitting then, when asked of which project he was most proud, Mr. Hines replied “The first one that survives.”  When talking about One Shell Plaza, one of the first high-rise office buildings constructed by Hines LP, Mr. Hines spoke emphatically about developing meaningful business relationships and how they are a resource for opportunities, financing and expertise.  He called upon the students to undertake the same goal he set for himself and the firm: to build great buildings at a reasonable cost and to not go broke doing it.

In other words, as Mr. Hines stated, “We want to have fun but also pay our bills.”

Mitesh Patel comes to Madison from New York, NY, where he focused on raising third-party capital for Merrill Lynch Global Private Equity.  Mitesh would like to use his diverse work experience to pursue a role investing in public and private real estate.

The Wisconsin Idea meets Barcelona (Part II)

by Stephen Malpezzi, Professor and Lorin and Marjorie Tiefenthaler Distinguished Chair in Real Estate

In addition to the Barcelona Mayor’s official opening statement, the opening session included some very thoughtful remarks by Deputy Mayor Antoni Vives, who discussed some of the challenges faced by cities – increasing their productivity and that of their labor forces, facilitating the sharing of knowledge and ideas, and doing so in a sustainable fashion.

The World Bank’s Abha Joshi-Gahni introduced our Rethinking Cities book forthcoming at the end of this year.  She noted it was a time to think hard and fast, since the best UN forecasts suggest the world will add about 1.7 billion to its cities between now and 2030.

Among the many points reviewed by Harvard’s Ed Glaeser (see previous post), let me touch on one I particularly like to share with students, based on one of my favorite papers.  Fifty years ago, Professor Benjamin Chinitz wrote a classic study, Contrasts in Agglomeration: New York and Pittsburgh.  A short version [located here] was published in the American Economic Review.

This brief and deceptively simple paper suggests that one reason Pittsburgh went into a long slow decline, while New York had ups and downs but ultimately reinvented itself, was the difference in structures of their local economies.  A century ago, Pittsburgh was dominated by the steel industry, with large-scale plants and huge vertically integrated firms like U.S. Steel, a combine that included Andrew Carnegie’s 19^th century mills.  (My father and other family members mined some of the coal that fueled these mills).  New York’s major industry was the textile industry, which was much more an agglomeration of many small and medium sized firms, that were much more entrepreneurial and networked.

After World War II both Pittsburgh’s steel industry and New York’s garment industry slowed, and ultimately declined.  The accompanying figure shows (in log form) the population of both Pittsburgh and New York (cities, not the metro areas!) back to the first few Censuses two centuries ago.  You’ll notice that New York was always larger than Pittsburgh; no surprise there.  For more or less the 19^th century, both grew at very fast rates (the slope of a log chart is roughly the growth rate of the original data).  But notice that although New York’s population slowed its growth after the War, it still grew, with just a decade or two of some decline.  New York City’s 2010 population of about 8.2 million is its highest ever.  Pittsburgh, on the other hand, went into a steep decline; its city population peaked at about 670,000 in 1950, and it’s around 305,000 today.

Chinitz argued, and provided data to support, the notion that no small part of the contrast between the two cities is that the more diversified and entrepreneurial New York did a much better job of reinventing itself; the “company men” of U.S. Steel floundered.

I find Chinitz’s analysis very thought provoking though, as he himself admits, incomplete. Virtually all of the older eastern central cities had some period of declining population, or at least relative declines, simply due to the demand for larger homes and lower transport costs that fueled postwar suburbanization; New York City was and is so physically large that in a crude sense some of the outer boroughs are partly their own suburbs.

Nevertheless, I think this difference mattered, a lot, especially in the 60s through perhaps the 1990s.  But as has also been noticed, Pittsburgh has undergone a limited rebirth, led by two first-rate research universities (the University of Pittsburgh and Carnegie-Mellon University) and a university-connected thriving health care industry that serves the region and beyond.

None of this is to downplay the problems Pittsburgh continues to face; many of the health care jobs pay much less, in real terms, than the old steel jobs.  A lot of the city’s basic infrastructure is in dire need of repair and reconstruction, and the city’s fiscal position is precarious, due in no small part to sharp practices in their pension accounting.

But to end on a high note, if we ever needed to pick a “dream team” from any time or place to play one of the great Packers teams, either from recent decades or the 1960s; as a Pennsylvania native of a certain age, might I offer the services of the 1975 Pittsburgh Steelers?

Accelerating Through the Turn

The pace hasn’t slowed here at the Wisconsin School of Business.  The first-year curriculum, which consists of a challenging and engaging core, has given us plenty to study, discuss and apply.  We always have something to prepare for – exams, team projects, individual assignments, presentations - and more is set to come. 

To be honest, it’s been a welcome surprise.  Like most MBAs in the class, I came to the University of Wisconsin-Madison for my MBA because of its specialized curriculum.  Many of us are eager to hit the ground running and the school does a tremendous job immersing students into what they’re most passionate about.  However, I have to admit, I’ve thoroughly enjoyed our core classes, such as Marketing and Teams, which incorporate thoughtful discussion and real-world application.  It has also been a great way to connect with non-Real Estate MBAs and share the experience of being a graduate student.  For instance, after an intense week finishing our marketing case report, I celebrated with a group of MBAs over an East meets West meal. 

Clockwise from the left: Mitesh Patel (Real Estate MBA’14), Ekow Bedu-Amissah (Corporate Finance and Investment Banking MBA’14), Ramesh Kanthilal (Real Estate MBA’14), Dan Corry (Strategic Human Resource Management MBA’14) and Michael Mostek (Supply Chain Management MBA’14); de-stressing after our Marketing 700 case report over Leininkugels and a home-cooked Ghanian meal.

Of course, I’m still getting a full portion of real estate.  The James A. Graaskamp Center for Real Estate and Real Estate Club continue to set up an impressive slate of esteemed speakers, including:

• Bradley Olsen of Atlantic Partners, who gave a detailed overview of the current political, regulatory, financial and real estate environment in Europe.

• Carl Ruedebusch and Kyle Adams (BBA’09) of Ruedebusch Development & Construction and Michael Waidelich with the City of Madison, who presented on the planning, remediation, and funding on Royster-Clark, a multi-year, 27-acre development project.

• Bob McClain of Crow Holdings, who presented the firm’s history, performance and strategy and came to recruit on-campus.

Most recently, Michael Brennan, Executive Director of the Graaskamp Center, conducted a special student Q&A with Gerald Hines, Founder and Chairman of Hines, and John Wood, Managing Director of the Chicago office.  It was an amazing opportunity to listen to one of the most storied entrepreneurs in real estate, learn about the firm’s history, culture and strategy and hear his unique outlook on life and what he portends for the future.  Mr. Hines, with wit and energy, ended the Q&A with the adventurous spirit of a true developer, wishing us all well on our aspirations and that we “don’t go broke” chasing them.

Mitesh Patel comes to Madison from New York, NY, where he focused on raising third-party capital for Merrill Lynch Global Private Equity.  Mitesh would like to use his diverse work experience to pursue a role investing in public and private real estate.