2012 Real Estate Symposium Equity Capital Markets Panel Report: Consolidating and Recapitalizing Real Estate Businesses
By Carlos Glender ’13, Martín Kielmanowicz ’14, and Erik Steiner ’13
|Moderator:||Jeffrey A. Barclay ’83, Investment Management, Goldman, Sachs & Co. and Adjunct Professor, Columbia Business School|
|Panelists:||Stephen J. Furnary, Chairman and Chief Executive Officer, Clarion Partners
Michael Lehrman ’90, Global Head of Real Estate, Cantor Fitzgerald/Newmark Grubb Knight Frank
Matthew J. Lustig, Managing Partner of North America Investment Banking, Head of Real Estate, Lazard Frères & Co.
Glenn J. Rufrano, President and Chief Executive Officer, Cushman & Wakefield
“Consolidating and Recapitalizing Real Estate Businesses” brought together highly accomplished professionals from across the real estate industry in a good-humored and wide-ranging discussion on the sector at large.
While guiding the conversation to cover many topics, Barclay kept to the underlying themes of the current economic environment and the future of real estate as an asset class. Rufrano offered a mildly optimistic view, saying that he was not running Cushman & Wakefield as if a recession is likely, but he did advise lower levels of leverage in order to be prepared for unexpected turns. Focusing more on regulatory changes and uncertainty, Lustig and Lehrman highlighted that their firms do not fall directly under federal regulation while noting that regulations were nonetheless creating both challenges and opportunities. All the panelists seemed to agree that a key driver of opportunities would be the ongoing low-interest-rate environment. Lustig explained that a desire for higher yields would likely result in increasing demand for REIT shares. Echoing the earlier address by David Simon ‘85, Lustig reiterated that it is an opportune time to borrow before rates inevitably begin to increase. Lehrman, meanwhile, voiced optimism for the commercial mortgage-backed securities industry, which will see $375 billion needing to be refinanced in 2013 alone, leading to a robust deal pipeline and operational opportunities in the months ahead.
Taking a step back, Barclay asked the panelists to explain where they believed the real estate investment cycle currently stood: mature with slow growth prospects, poised for fast growth as the asset class becomes more globalized and widely accepted, or some third option. Furnary argued that in the near future, real estate would offer sustained and steady growth and essentially that it would do “what it’s supposed to do,” namely, provide dividend income and bridge fixed income and equities. By and large, the panelists echoed this cautious optimism, though Rufrano noted a looming challenge in the office sector: many corporations may have the same head count as a few years ago yet occupy less space. Because mature economies are still de-levering, and emerging markets are slowing down, there is pressure on businesses to operate more efficiently, he said.
Nevertheless, despite the higher vacancy rate and the uncertainty around so-called shadow office space (that is, leased but unused space), the panelists concurred that growth would be slow, steady, and long. None could suggest a better sector in which to invest, though they did clarify that a 20 percent internal rate of return would not be a viable goal for most.
Turning to management and company culture, Barclay asked the panelists to name the essential factors for success that they had discovered in leading their respective organizations. For Clarion’s Furnary, the key issue has always been investment performance. Tellingly, he shared an anecdote of asking his IT team to change all of the company‘s screensavers to read “Drive Investment Performance.” Though Clarion has had multiple owners since its founding in 1982, the firm has always maintained a degree of autonomy and, with that, a laser-like focus on its clients’ investments, he said.
Lehrman, whose firm was once based in the World Trade Center and suffered tragic causalities on 9/11, explained that maintaining a culture of trust and open communication was most important. Cantor Fitzgerald went to great lengths to offer support to the families of its employees following the attacks, he said, and this ultimately brought its employees closer. “Serving clients’ needs has to be combined with a caring, charitable, and communicative culture,” Lehrman told the audience.
Rufrano, noted by Barclay for his diverse career path, honed in on the need for adaptability and planning, stating, “All the companies I’ve led are different, so you have to be adaptable. Despite many different roles, there must always be a vision for the trajectory, and it has to be known by everyone. Leaders need to lead the vision by example.”
As the panel came to a close, Barclay asked the speakers to share what they believed to be turning points in their respective careers. Rufrano and Lehrman both cited cases in which bankruptcies were at hand. Rufrano discussed when, as the CEO of Australian mall operator Centro Group, he had to negotiate with debt holders and eventually sold off 90 percent of the firm. Lehrman, on the other hand, addressed the challenges of acquiring Grubb & Ellis out of bankruptcy, where the key assets were the human capital that could not be sold. Rufrano explained that keeping 10 percent of an operating firm was better than keeping 100 percent of a defunct one; Lehrman agreed and succinctly summed up, “Dead is dead.”
Furnary told of his turning point, which served to recap the panel’s themes. Clarion entered the financial crisis with three open-ended funds and was forced to dispose of some assets during the down market. The resulting dilution was painful, but the firm survived. Looking back at 30 years in the real estate business, Furnary has come to realize that every 10 years, “the world comes to an end.” As such, the investors who do best are those who start levering when the recovery is beginning and rates are still low, but who are then quick to de-lever with first tremors of downturn before assets lose value.
Amid all the valuable commentary, the quote of the afternoon likely went to CBS alum Lehrman, who summarized, “Everything I learned in business school I put to use.”
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.