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By Matthew Giammanco ’13 and Steven Kofkoff ’14
|Opening Remarks:||Glenn Hubbard, Dean and Russell L. Carson Professor of Finance and Economics, Columbia Business School|
|Keynote Speaker:||David E. Simon ’85, Chairman and CEO, Simon Property Group (SPG)|
Dean Hubbard opened the fifth annual Columbia Business School Real Estate Symposium by reminding the audience of the important place real estate maintains in the broader economy. As he noted, the health of the real estate market is often a barometer for the nation, spurring consumption through the wealth effect. In addition, as monetary policy remains easy, demand for real assets such as real estate has increased and has added much-needed stability to what has been an anemic recovery.
Recognizing David Simon’s position and experience with Simon Property Group, Hubbard noted that he may have the best vantage point from which to assess how much progress has actually been made. Simon, this year’s keynote speaker and a member of the Board of Overseers of Columbia Business School, heads the world’s largest real estate company and one of the top 50 U.S. companies by market capitalization. SPG owns or has interest in more than 325 retail real estate properties in North America and Asia and has an interest in more than 270 shopping centers in 13 countries across Europe. With such an established presence in the United States and a growing presence abroad, Simon has had the opportunity to witness the recent developments in the real estate market firsthand.
Opening the keynote address, Simon noted his surprise at the rapid recovery from the crisis, particularly for retail real estate assets. Cash flows in all sectors have increased over the past several years, while cap rates have rallied more than expected. The retail market has improved despite the significant threat of Internet marketplaces, which are further buoyed by the absence of sales tax collection.
Growth in the U.S. retail market has been led by the outlet business since the late 1990s, and there appear no signs of that trend abating in the near term. Outlets remain the healthiest segment in retail for tenant demand, which plays to SPG’s strengths as the leading outlet operator in the United States. SPG also stands to gain from the rapidly changing retail environment in the country. As Simon reflected, inferior malls are quickly becoming obsolete in the post-crisis economy, and demand has shifted sharply toward top-flight malls in each region, benefiting firms that maintain high-quality asset portfolios such as SPG.
While this demand dynamic has essentially shuttered new development in the traditional mall segment, it has ignited the redevelopment of existing malls, particularly in prime locations. Mall operators are looking to take advantage of healthy capital markets to fund the redevelopment of existing portfolios. SPG in particular has benefited from its strong balance sheet and high credit rating by raising cash at rates far lower than the 10 percent return on investment that the company seeks.
In addition to redeveloping its existing portfolio, SPG has also focused on expanding its international footprint. Simon noted that as retailers have become more international in scope, it only makes sense for a firm such as SPG to also look for opportunities abroad. In early 2012, SPG bought a 29 percent interest in Klépierre, a publicly traded French REIT and shopping center operator with a portfolio of 270 shopping centers in 13 countries throughout Europe. SPG is also looking toward Asia, where the company is expanding in Japan, Korea, and Malaysia, to note the largest projects to date. Although SPG is broadening its reach globally, Simon was sure to note that he would prefer to do business in the United States given the challenges that foreign markets can present. SPG’s partnership with Klépierre is a good example of Simon’s intention to partner with top real estate companies in various locales that are familiar with the local regulator, economy, and consumer.
As Simon looks upon the broader economic trends in the United States, he noted two key elements to watch going forward. First, unemployment remains the biggest driver of retail demand. The recent uptick in consumer sentiment has been a boon for the retail market, but the rising specter of the fiscal cliff and a slow-growth recovery present challenges. Second, corporate America must now contend with the growing importance of government where the health of the economy seems to increasingly hinge on the weekly workings in Washington. Simon views this obsession with government and politics as a drag on the economy. In fact, Simon surprised some in the audience by suggesting that going over the fiscal cliff may present a unique opportunity for the country to take bold action to right the fiscal ship for good.
At the end of the day, Simon was careful to note that SPG would continue to move forward despite the uncertainties that lie ahead. In particular, SPG will continue to do what it does best: creating the best mall experience for retail consumers, with dramatic physical spaces and improved technologies that cater to shoppers as much as retailers. This forward-thinking redevelopment strategy, along with SPG’s international growth plans, suggests that Simon will continue to have a major impact on the real estate market for years to come.
The fifth annual Real Estate Symposium took place on December 4, 2012, at Columbia University’s Faculty House, with more than 180 alumni representing classes from 1961 to 2012. Please visit the event page for more details and reports on other speakers. Hosted by the Paul Milstein Center for Real Estate and the Real Estate Circle of Columbia Business School, the Real Estate Symposium is an annual educational forum that brings together accomplished Columbia Business School alumni and top industry leaders for a broad-based discussion of topical issues, high-profile transactions, trends, and challenges facing the real estate industry.