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.

The Wisconsin Idea meets Barcelona (Part I)

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

Greetings from Barcelona, Spain’s Chicago (“Second City”), Catalonia’s capital, an economic engine of the country and the region (currently sputtering a bit, as you’ll know), probably best known to many Wisconsinites as the home to Gaudi’s still-evolving masterpiece, the Church of the Sagrada Família, but also more architecture, history and culture than I can begin to address today.

I’m here for the 6th Urban Research and Knowledge Symposium, Rethinking Cities: Framing the Future, jointly organized by the World Bank and the city of Barcelona.  There are hundreds of researchers, activists, mayors and other city officials here – even a few business people, though it’s focused primarily on public policy issues.  For your first look at the conference, go to http://www.rethinkingcities.org/

Many readers of this blog will have had a look at the “Tradition and Innovation” paper that explores our real estate program over the past century – if you haven’t the Fall 2012 edition is available here.  One of the themes of that paper is the importance of the Wisconsin Idea, usually traced back to President Charles Van Hise around 1904, but more fully developed and first named “The Wisconsin Idea” in a 1912 book of that title by the founder of Wisconsin’s Legislative Reference Bureau, Charles McCarthy.  In honor of the centennial of that publication, the University has organized a website

http://wisconsinidea.wisc.edu/

Be sure to click on the “The Wisconsin Idea Globally.”  It’s been a long time since we’ve taken the limiting part of the phrase “the walls of the University are the boundaries of the state” literally – we’ve long gone national and global; and if you ask my basketball buddies in the astronomy department, they’ll tell you we’ve gone beyond global!

There’s another aspect of the Wisconsin Idea that is worth discussing – that the Idea is not a lecture, but a conversation.  Ideas, especially good ones, are a two-way street.  I’m presenting a paper and contributing to this conference in other ways, but, it’s just like class – I’m learning a ton while I’m at it.  During my early morning downtime I’ll send a little taste of the conference.

The conference was opened by World Bank and city officials, most notably the Mayor of Barcelona, the Honorable Xavier Trias.  This was followed by a plenary session that launched a forthcoming book, Rethinking Cities: A Roadmap Towards Better Urbanization for Development, edited by Edward Glaeser and Abha Joshi-Ghani, to be published by the World Bank.  I’ve contributed a chapter on housing markets and policy, about which more later.  The session comprised an overview by the book’s editors, Ed and Abha, and commentary by mayors and other officials from Harare, Seoul, London and of course Barcelona.  Ed’s presentation was especially substantive, as you’d expect from the author of one of my 2012 Dynamic Dozen, Triumph of the City: How Our Greatest Invention Makes Us Richer, Smarter, Greener, Healthier, and Happier.  Ed gave a great overview, rich in the history as well as the economics of cities, touching on inter alia the ways in which cities facilitate trade, make capital and labor more productive, and help us address some of our most urgent environmental problems.

Gary Beban of CBRE Accepts Innovator Award

In front of a capacity crowd at the UW-Madison Pyle Center, CBRE Executive Gary Beban received the Wisconsin Real Estate Program’s Innovator Award on Thursday, September 27, jointly awarded by the UW Real Estate Club and the James A. Graaskamp Center for Real Estate. The award was presented by Michael Brennan, Executive Director for the Graaskamp Center, and aims to celebrate the innovative achievements of key individuals within the real estate industry.

Gary began his presentation titled “Supporting Innovation” by tracing the trajectory of the company, which is now known as CBRE,  from 1971, his first year with the company, through the current year. Drawing on his experience as a history major during his days at UCLA, Gary brought a holistic approach to real estate throughout his career, noting that in order to be most effective, one must "understand your vertical". Put differently, you should know where your industry and company have been and where it currently is in order to create an innovative strategy for future growth. 

This strategic framework guided Gary, especially when he was named President in 1987, in his pursuit of repositioning the brokerage firm into a global, vertically integrated leader within the commercial real estate sector. Gary achieved this by understanding and capitalizing on two critical changes that would hit the industry: 1) the global circulation of capital; and 2) global corporate real estate services. With strategic acquisitions around the globe that linked CBRE offices across time zones, Gary established a formidable network through which CBRE employees were producing at every hour of every day, a far cry from a company with one office in San Francisco back in 1906. Furthermore, these acquisitions pushed the brokerage's vertical integration to new levels, as evidenced by the acquisition of Insignia that provided CBRE the industry's largest proprietary market research arm.

As was appropriate considering the student-focused setting, Gary provided a strategic industry look-ahead providing a look into CBRE’s Workplace Strategy. The basis of this strategy is acknowledgement of the original dynamics of developer, investor, user, and capital, synthesized with the more recent trends of advanced technology and telecommunications. Simply put, firms now view reducing costs inherent with occupying space as strategic strategies in their long-term planning. CBRE fits this within their vision by assuming increasingly mobile teams and occupancy square foot per employee from 350 to 50 to better serve their client base.

His closing remarks included words of wisdom for the attending students: stay current with global developments, and hone your financial skills and vertical knowledge. These certainly have proved fruitful for Gary throughout his impressive career at CBRE. The Wisconsin Real Estate Program was proud to welcome Gary to our UW-Madison campus!

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 develop and invest in urban commercial properties.