Tommy Craig ’82 is a Senior Managing Director with Hines. Since joining the firm in 1982, Mr. Craig has been involved in a variety of development projects and transactions aggregating approximately 16 million square feet. In 1996, Mr. Craig became regional officer and partner of Hines’ Metropolitan New York area, where his responsibilities as senior project officer included managing the development, redevelopment, acquisition, construction, modification and/or interior fit-out on projects such as 7 Bryant Park, and the MoMA tower at 53 West 53rd Street. Mr. Craig attended the University of North Carolina at Chapel Hill, where he received his Bachelor of Arts in History/Economics in 1978, and Columbia Business School, where he earned his Master of Business Administration in 1982. Mr. Craig remains active with CBS as an adjunct professor teaching Real Estate Development, and will serve as this year’s Chair of the annual CBS Real Estate Symposium. In a recent interview with Dennis Giuliano ’15, he discussed his career, his insights into the real estate market, and advice for MBA graduates.

You have built many landmark buildings during your time with Hines. Of which project are you most proud? Which was the most difficult?

Generally speaking, my favorite projects are always my current ones, particularly those which have passed through the uncertainty of the development phase and are moving through construction toward completion.    Having said that, even after 33 years, I am surprised by how much emotional detachment occurs upon completion of a project. I suppose it is a necessary part of creating the personal space to engage in new endeavors.

One of the great advantages of the many build-to-suit projects we have completed – for firms like Morgan Stanley, Goldman Sachs, Bear Stearns, Swiss Bank and Royal Bank of Scotland – is that they were often schedule-driven and moved comparatively quickly through pre-construction. The creation of new jobs via these developments was a major accelerator of the land use approval process. Consequently, the 8 year wait to start our MoMA project has challenged our patience at times. However, now that we have closed and the project is underway, we look forward to adding such an exciting building to the physical fabric of New York.

In your experience, how has financing of real estate development changed since the financial crisis?

The true financial crisis for a real estate professional of my generation (I am 59), was the correction of the 1990/1991 period. That was a seismic event, and, more specifically, a real-estate related “depression” rather than a “recession”.  The period preceding that downturn was marked by high inflation, negative equity spreads relative to treasuries, and strong pricing growth. Information in the real estate market was imperfect, as the public REIT market had not yet emerged and private markets dominated. By comparison, the recession of 2008 was mild in both depth and duration. Real estate values in general, and particularly those in New York (especially for assets with contractual income) began to recover quickly after hitting bottom.  Accordingly, I believe that a better measure of understanding the market necessarily encompasses the period between 1990 and today. Over time, real estate as an asset has come to be viewed as a viable diversification alternative to fixed-income and equity investments. This is particularly true for the institutional investment community, which values the security of a tangible asset with transparent income that is measured by cash flow rather than GAAP earnings.

Did the global financial crisis force Hines to change its development strategies in New York? Did it create opportunity as well?

Looking back, it now seems clear that the 2008-2009 crisis created significant opportunities for Hines in New York and elsewhere.  As during prior cycles, Hines as a global entity made a significant strategic change by deciding to enter the multifamily space through a national fund with JP Morgan, which has since produced close to 20 successful projects in the last few years.  This strategy was analogous to previous changes we had made to shift from project-based financing to fund-based financing (at an entity level) and to expand beyond the domestic United States as a response to the 1990/1991 crisis.  We also deliberately moved away from a business model based on economic growth and instead created a business organized around acquiring existing assets, developed by others, which was a new concept for Hines at the time.

In New York City, the latest correction underscored the indispensable requirement to combine capital, which was plentiful in New York, with deep local real estate expertise. The most prescient groups sensed a chance to be at the leading edge of the next cycle, and Hines began both 7 Bryant Park and worked with SL Green to initiate 1 Vanderbilt in 2009, and 2010, respectively.  With these projects our goal was to time the pre-development process in order to create ready-to-go projects that could be delivered to the market during the recovery phase of the cycle.

While we have been deliberate about making a number of changes in our business model for the New York Office, one in particular stands out. We had been undertaking many build-to-suit projects for third parties prior to the last financial crisis. This sector of the economy committed resources over the 15 years prior to the crisis to create facilities which kept pace with digital advancements, but we expected this work would ultimately taper off. Accordingly, we began to redeploy our team to principal work and a variety of use types, including residential, and mixed use with hotel, even before the correction in 2008.

How do you hedge against interest-rate risk? Do you expect rising rates to affect the for-sale residential market in New York City?

Hines executes hedging strategies at the entity level, the project level and the partnership level.  The debate within Hines, comparing the risk of rising interest rates (and, more significantly for an equity-oriented firm like Hines, rising cap rates) to rising NOI, will continue.  In general, I think there will be a gradual rebalancing over the next few years between the space markets and the capital markets. However, I do recognize that money is now a global commodity; without global political will to effect fiscal discipline, we should not be surprised (as those of us who lived through the 1970s always seem to be) if interest rates and yields do not necessarily revert to some historic mean.  Demographic realities suggest strong demand by baby boomers for fixed-income products, putting further downward pressure on yields.

In any event, rising interest rates will not directly affect the for-sale market at the high end in New York City, as that is wealth-driven.  These kinds of assets are a hybrid between consumption and investment products and may be perceived as providing families with long-term family value over generations.  They are seen as a genuine alternative to fixed-income investments, where yields are historically low, and equities, which are subject to the volatility inherent in publicly-traded assets.

Aside from New York, which markets do you find appealing for real estate development or investment?

The best markets seem to be aligned over time with very specific and long-term macroeconomic and demographic trends – with some obvious clustering effects. Washington, DC for example has benefited for over 30 years from the expanding role of government. Similarly, the domestic energy revolution will favor Houston beyond any cyclical movements in the underlying economy. 

The same can be said of San Francisco and its relationship with the technology sector, of New York City and its relationship with the globalization of finance and the disintermediation of credit, and of Miami due to its location as a gateway to South America, appealing lifestyle, and continued tourism growth.  The key to all of these markets is to take a long-term, strategic view with capital that is patient rather than tactically oriented.

Limited affordable housing remains a major focus of New York City policy and public interest. Do you see a viable solution for providing additional affordable housing in the near future?

New York has always been a city about human aspiration. Today, there is no question that substantial inequality exists in New York City. However, it is not at all clear to me that government has not been part of the problem, rather than part of the solution, to the perpetual housing shortage here. One of the institutions with whom I have had the privilege of working is Phipps Housing, where I am Chairman of the Real Estate Committee and a member of the Executive Committee on the Board of Directors. Phipps does an excellent job of creating new affordable housing for working families with a very supportive and integrated service program that focuses on everything from after-school care to career training.

With over one million people in rent-regulated housing and close to $20 billion in deferred maintenance in NYCHA housing, we do not have sufficient economic and political incentives to produce and maintain housing on an equitable basis for both middle and low-income families.  More affordable housing will likely come in tandem with higher zoning densities and private development on sites where public housing currently exists.

I believe that a more holistic solution is required for long-term efficacy. Without intending to affront anyone, it strikes me that there is a contradiction at the heart of the Mayor’s housing policy. Without significant changes in the education platform we offer, including those provided through school choice, we will not achieve the desired outcomes. We live in a moment of time when the expansion of human capital rather than physical capital, particularly for disadvantaged groups, must be at the leading edge of policy.  We should take bold and new steps to help people move from dependency to self-sufficiency.

What’s your favorite experience from your time as a CBS student? What led you to your role as an adjunct professor teaching Real Estate Development?

I had the good fortune of entering Columbia with a very good friend (Terry Meguid ’82, a colleague from Morgan Stanley and a founding partner of Weinberg Perella) and graduating with another (Chuck Watters ’82, my current partner in Hines’ East Coast Regional business and manager of our Washington, DC office). I also lived with Terry and four other friends in a big (but cheap) apartment near campus and played rugby with Chuck.

Because I had been with Morgan Stanley as an analyst in the real estate group before school, I was one of the few students with a focused career goal. This liberated me from the time and angst that would have resulted from trying to discover what I wanted to do in the future. In turn, I made many friends from the class of 1982; a group of has continued to ski together now for over 30 years.

What advice would you give a student pursuing a career in real estate development?

I recently had a chance to listen to Steve Furnary, Chairman and Founder of Clarion Partners, recommend that students pursue a “centered” approach between being a professional and entrepreneur. I thought this was a helpful insight, and I would add that a career in real estate development necessarily involves a synthesis of physical and financial real estate.  At Hines, we are focused on giving recent graduates project-specific experience – and it could be any type of project, large or small, urban or suburban, etc. – that allows them to develop as many tools as possible within the horizontal integration of knowledge and decision-making.  Ultimately, I think being a developer involves this wonderful arc of thinking at times like an artist, given the creative process inherently involved in the new building design, and at other times like a financial analyst – but always, always thinking like an owner to manage risk and value creation as a principal.  To do this, one must work with, but ultimately transcend, at times, the advice of subject matter experts.

Aside from teaching, how else do you stay involved with the CBS community?

I am not sure how Professor Sagalyn found me as I had not been particularly active after graduation, due to the demands of work and raising my family. When Lynne did contact me, I had very recently lost both of my parents and the first of my three children had just left for boarding school. I thought the call was propitious and it fit well with my view of the natural life cycle. Before then, my commitments outside of work were family-related, as I was active with our church in Southport, Connecticut and supported my kids’ sports activities as a coach.

I have really enjoyed reconnecting with Columbia, and it is fun to be back on campus now that I have two girls in college. This year I am serving as Chairman of the Columbia Business School Real Estate Symposium, and I look forward to expanding my involvement in the years to come. It is a real privilege.

Dennis Giuliano ’15 is a 2008 graduate of the University of Delaware, where he completed his B.E. in Civil Engineering. He spent five years in waterfront engineering before coming to CBS to focus in real estate. He will be joining Ironstate Development in a multifamily development role after completing his M.B.A. in May.