Wisconsin Students Compete in Boston

Only a month after being in Boston for the spring REC trip, a team of four MBA students, comprised of two first years (myself and Andrew Boespflug) and two second years (Chad  Broderick and Tess Gruenstein), traveled back to Boston last week for the second round of MIT’s “The Case”.  This competition required each team to propose a site plan and supporting financial analysis for a real-life development site.  This is only the third year that The Case has been running, but the competition has gained a lot of traction in a short period of time; 29 teams registered to participate this year.  This is the Graaskamp Center’s debut at this particular competition.

The case began in mid February, when the participating teams (consisting of a maximum four members) received that case electronically on a Friday at 8am.  Materials included the development scenario, site details and history, and hundreds of pages of supporting documentation.  This particular site had already been through an RFP round back in 2007, and so the original RFP and all the actual submissions were provided as well.  Receiving this amount of information all at once was quite overwhelming, and we had only 6 days to get through the material and develop a plan that satisfied all requirements while generating attractive returns for the interested parties.  We got to work immediately and wrote off any other obligations over the next 6 days…it was clear we were going to need all the time we could get.

This year’s development site was located in San Francisco, and as a native to the area I was very familiar with the completely underutilized plot of prime bayside property.  The site (16 acres of land a pier space just south of AT&T park) is a flat infill location owned by the city that is currently used for parking.  The original RFP, and the stipulations of our case study, called for the developer to create a vibrant, mixed-used project that would serve as a gateway between the downtown/SOMA districts and the developing Mission Bay neighborhood.

The site had two key requirements: a 5 acre park built at the developer’s expense, and at least 2,000 parking spaces available for the Giant’s to use for game days, which would be rented at $100/mo/stall (below market).  These two requirements immediately put the participants at a disadvantage, and we had to make the absolute best use of our developable space in order to maximize returns.  In addition, this area of land is not subject to any zoning restrictions, so the sky was the limit in terms of proposed development.

After 6 days of complete focus and work, our team submitted a proposed mixed use project consisting of 650 residential units, a 200 room hotel, and 175,000 sqft of retail space while delivering the 5 acre park and 2,400 parking spaces.  Market research for the site was limited to free, public information in order to keep a level playing field, and reports from Skanska and Costar/PPR Group were provided as preliminary sources of data.

The hard construction costs provided from Skanska were quite explicit, so there wasn’t much room for variation with these inputs unless we found another free source that had more favorable estimates.  However, this still left capital structure, construction timing, absorption rates, rental rates, efficiency ratios, vacancy rates, interest rates, terminal cap rates….I think you get the idea.  All these inputs had a great impact on what was feasible to build and what expected return could be generated.

We used a top down approach to get an idea of what would be the highest and best use of the land in terms of property type.  We then used absorption and density information to get a sense of how much we could actually build on this land and bring to stabilization within a reasonable amount of time.

Once we arrived at what we determined to be a feasible (albeit slightly aggressive with regards to certain assumptions) site development plan, we calculated the returns for the entire project to be 12%.  We knew this was low (should be closer to 20% given the risk profile), but given the constraints of the site (parking, green space) we felt this was sufficient.  Altering our assumptions to be even more aggressive would increase returns, but we felt that this could cause the proposal to lose credibility in its legitimacy.

We received the good news in March that we were one of 12 teams selected to proceed to the next round of the competition.  These 12 teams were broken out into 3 groups of 4, and each group assigned a room and panel of industry professionals that served as judges for each team in that group.  The teams presented separately in front of only the judges.  We, unfortunately, were selected to go first in our group, which is a tough position to be in given the complexity of the case. 

Although our presentation went smoothly and we fielded the Q&A in appropriate fashion, we ultimately were not selected to proceed to the final round of 3 teams.  During the Q&A the judges expressed that the return of 12% was just too low, and we feel that this is something that ended up holding us back.  Also, as we later found out, none of the teams that went first in their group were selected to go to the next round.

We were, however, able to watch the final three presentations, which were held at the Federal Reserve building.  The final three teams all had impressive and polished presentations, with expected returns all 20%+.  Given the market research that we had performed, the site plans proposed by the teams seemed to be extremely aggressive.  This provided a great learning experience for us, in that sometimes it is the bottom line that truly matters, and how you get there is next in priority.  This is true in many areas of business, not just real estate, and we were able to get a first hand sense of this following the competition.

The case competition was a great experience for our team. While it was disappointing not to make the finals, it was encouraging to see that we were not far off from the top teams in the competition.  We were able to take away some great insights from the judges and from watching the other teams, and have accumulated these thoughts in writing to be referenced during our next case competition endeavor.

Housing-Urban-Labor-Macro (HULM) conference explores causes and consequences of the housing crisis

The University of Wisconsin-Madison has long been known as a leader in research, including cutting-edge explorations of housing and economic issues conducted by the UW-Madison real estate faculty. Compelling real-life problems challenge these leading academics to find unique solutions for improving our urban environment worldwide.

In March, the UW real estate faculty joined their peers in sharing the findings of their research at the sixth Housing-Urban-Labor-Macro (HULM) Conference, held at the Federal Reserve Bank of Boston. This biannual conference was first held in the fall of 2009 and is now well known for facilitating the presentation and discussion of some of the most impressive real estate and urban research conducted by leading academics from around the world.

"We organized the first HULM conference in an effort to create a new venue for the rapidly growing field of real estate research," says Professor and Graaskamp Center Academic Director Morris A. Davis. "Our partnerships with the Federal Reserve Banks in Atlanta, Chicago and St. Louis have helped us widen our audience and bring this research to the people who will benefit the most from it."

The spring 2012 HULM conference was organized by Professor Erwan Quintin, a former senior economist and policy advisor at the Federal Reserve Bank of Dallas. "A unique aspect of this event is the collaboration it fosters between academic researchers who study optimal policy responses to various real estate events and the very people who implement these policy responses," says Quintin. "This includes not only Federal Reserve economists but also researchers from government-sponsored agencies."

As has been the case for most HULM meetings to date, the causes and consequences of the foreclosure boom emerged as the dominant question at the Boston Fed event. Among other presenters, Kyle Herkenhoff discussed the effect of foreclosure delays on the length of unemployment spells, while Paul Willen proposed a new and improved way to measure the effect of foreclosed properties on the value of neighboring homes.

Stijn Van Nieuwerburgh, for his part, argued that the deterioration of underwriting standards is the most likely explanation for the recent boom-bust cycle in home prices. That presentation prompted a very lively debate on what caused this deterioration in the first place. Two possible explanations are a regulatory environment more tolerant of risky mortgages around the turn of the century and the effects of increased demand for the investment grade paper created via mortgage securitization.

Urban economics questions also received their fair share of attention, with several presentations devoted to explaining why observationally similar people tend to earn very different amounts in different cities. Gilles Duranton, for his part, discussed a new approach to measure the speed with which urban costs rise with city size.

At the end of the two-day conference, Quintin says he feels the goals of presentation and collaboration were well met.

"HULM is a unique opportunity for economists around the world who study real estate questions to exchange and debate ideas," Quintin says. "Research ideas are born or become more mature at HULM, new co-authorships are formed, and new policy proposals emerge." Davis echoes this sentiment, saying, "When you have 40 people in a room that are all experts, we are able to learn from listening to what people we don't typically interact with have to say."

The next installment of the conference will take place at the Federal Reserve Bank of Chicago on October 5-6, 2012.

Discussing causes and consequences of the housing crisis at the Chicago Fed

By Erwan Quintin, Assistant Professor of Real Estate at the Wisconsin School of Business

The Real Estate Department's Housing-Urban-Labor-Macro (HULM) conference took place this weekend at the Federal Reserve Bank of Chicago. The conference, a bi-annual event founded three years ago by my colleague Morris A. Davis, brings together individuals who are pushing the frontier in all aspects of real estate research. It is now recognized in academic circles as one of the premier events in urban and housing finance research.

As one would expect, much of the event focused once again on the causes and consequences of the recent housing crisis. No fewer than three competing explanations were proposed for the run-up of home prices until mid-2006 and their sharp collapse thereafter: the unintended consequences of the toughening of personal bankruptcy statutes in 2005, the role of speculators on the way up and the way down, and plain-old herd behavior. A session -- highlighted by presentations by UW's own Randy Wright and Morris Davis -- discussed the impact of inflation on housing investment and prices. Several papers also took on standard themes in urban research: Why do productivity and wages differs so much across cities? What accounts for patterns of trade across cities? Details and papers are here.

A unique aspect of this event is the collaboration it fosters between academic researchers who study optimal policy responses to various real estate events and the very people who implement these policy responses, including not only Federal Reserve economists but also researchers from government-sponsored agencies (GSA). The next installment of the conference will take place at the Federal Reserve Bank of Boston in March 2012.

Fostering collaboration

On March 4th and 5th, Wisconsin Real Estate faculty members Stephen Malpezzi, Tim Riddiough, Morris A. Davis and Erwan Quintin attended the fifth installment of the UW-Fed Housing-Urban-Labor-Macro (HULM) conference at the Federal Reserve Bank of Atlanta.

The conference, a bi-annual event founded three years ago by Morris Davis, brings together individuals who are pushing the frontier in all aspects of real estate research. The first part of the conference focused on the causes and consequences of the recent subprime crisis and on the effects of various policy responses to the crisis. The second part of the conference dealt with cycles in the market for land and structures. Details and papers are here.

A unique aspect of this increasingly successful event is the collaboration it fosters between academic researchers who study optimal policy responses to various real estate events and the very people who implement these policy responses. The latter include not only Federal Reserve economists but also researchers from Government Sponsored Agencies. One of the highlights of this year’s event was an intense debate over the merits of loan modification policies motivated by a unique study of Countrywide’s court-imposed modification program.

The next installment of the conference will take place at the Federal Reserve Bank of Chicago in September.

Photo by Lance McCord via Flickr