It’s still cold out there

It was unusually cold in Cannes this year, which seemed to reflect the mood of MIPIM attendees. Others have characterized the mood as “cautious optimism” or “pragmatic optimism” or “some-other-modifying-adjective optimism,” but claiming people were any kind of optimistic seems a stretch. I’d suggest the mood was more subdued. People seemed to just be going through the motions, tired of the grind and depressed by the realization that 2012 (and likely 2013) isn’t going to be much better than 2011. Back in 2010, the mood was much lighter, almost euphoric. The industry had not only survived, but was looking forward to making lots of money in distressed property workouts. Unfortunately, the avalanche of distressed properties hasn’t materialized.

Now, investors and managers are getting serious. It’s time to just get on with it and get business done, even if it isn’t as much fun as in the past. In general, banks are only lending to prime properties — and even then the costs are high. But other sources of financing are beginning to emerge, including pension funds and life insurance companies. This should be a positive trend for the industry, if not for the banks. One of the under-their-breath complaints I heard from bankers was that the alternative sources of financing didn’t have to abide by the regulations that banks did, so it was creating an uneven playing field. That raises the question of what will happen in the future. Will regulations be loosened so banks can compete, or will regulations be tightened on alternative sources so all must lend using the same standards? Or will things just remain as they are with banks lending to core and alternatives lending to deals further out on the spectrum? Stay tuned.

Possibly also contributing to the somber mood was an apparent lack of investors. More than one investment manager told me that they had to work harder than normal to fill their annual investor lunch, as several of the usual suspects simply didn’t make the trip. In the end, the tables were full, but when getting an investor to commit to a free lunch takes several calls, you can imagine the daunting task facing managers in getting investors to commit capital to a new fund or deal.

Documenting the mood of MIPIM, students from the Wisconsin School of Business surveyed participants during the four days of the trade fair. Prof. François Ortalo-Magné presented the results in a wrap-up session. In general, the industry is roughly split between those who believe life is getting better and the current environment presents opportunities, and those who believe life is the same or even worse than last year and the current environment presents impediments to investing. Additionally, respondents don’t see any reason to change their opinion on whether now is a good time to move out on the risk profile. They thought it was last year and they still think it is — but are they doing it? I suspect it’s the managers who think it’s time to move beyond core, while the investors are happy to remain safe. The one good sign is that nearly two-thirds of those surveyed intend to hire additional personnel this year.

How is your business activity this quarter compared to the same quarter last year?

  • Worse – 11%
  • Same – 41%
  • Better – 49%

Is now the time to invest beyond core/safe real estate assets?


    • 2012 – 29%
    • 2011 – 30%


    • 2012 – 71%
    • 2011 – 70%

Is the state of debt markets an impediment to your activity or an opportunity to make profits?

  • Opportunity – 48%
  • Impediment – 52%

Are you planning to hire this year?

  • Yes – 64%
  • No – 36%

Whether managers and investors think this is a good or bad market for investing, the bottom line is that it’s their job to invest, so they need to look for the best places to commit capital — even if those places are the best of a bad lot. To help participants focus on where the opportunities might be, Mark Roberts, head of research at RREEF Real Estate, presented a global strategic outlook that pretty much told investors to look to the United States or Asia. His highlight points:

United States

  • Economic growth supports higher tenant demand for property.
  • RREEF recommends a pro-cyclical weighting with an overweight to industrial and office on a combined basis. Maintain a meaningful allocation to retail and apartments to protect against downside risk.

Asia Pacific

  • Government, household and corporate balance sheets are healthier than other parts of the globe and support growth.
  • Vacancy rates across all sectors are lower than those of other regions across the globe, and RREEF forecasts higher rent growth.
  • Retail and logistics benefit from rising domestic consumption.


  • Austerity programs and the euro crisis have resulted in higher unemployment and weaker tenant demand.
  • Vacancy rates remain relatively stable with minimal rent growth.
  • Logistics in key logistics hubs provide higher income and protect on downside risk.
  • Prime shopping centers outperform offices and logistics due to stable, yet low retail sales.

Whenever I hear the word “stable” used to describe something in a rather poor but not-getting-any-worse condition, I always flash back to the Saturday Night Live news headlines after Spanish dictator Francisco Franco died, in which the newscaster would post a picture of Franco each week and declare his condition “still stable.”

The recession has certainly been hard on the real estate industry, but in an ironic twist, it might have actually saved MIPIM. Before the crisis, the huge trade fair had become a cliché of wild all-night parties and frat-boy drinking contests. It was becoming cartoonish.

After the crash, firms drastically cut the number of staff they sent to the event, and those that attended came to work. There are still wonderful receptions, and champagne is always available from morning to night (or next morning), but participants arrive with a purpose and a list of meetings. It’s now viewed as a must-attend event to do business. In the Nice airport on Friday morning, tired delegates greet each other with, “How was your MIPIM?” From what I hear, the stock answer this year was, “productive.” And that seems to hit just the right note for this market environment — not too optimistic, not too pessimistic.

Sheila Hopkins is managing director – Europe at Institutional Real Estate, Inc.

From geeks to the board room

Marissa Mayer is a high-profile senior executive at Google. Her story and rise at the Internet search engine firm is an interesting one.

I read an interview article she did in 2011, and for some reason, one of the things that stuck with me was her answer when the interviewer asked her why there aren’t more female geeks.

Technology, similar to fields such as politics, engineering and finance, is male dominated.

Mayer stated that the main issue was one of stereotyping: the image of a bespectacled geek staring at the computer screen, playing endless hours of video games and lacking in most basic social skills. Such an image does not present a great allure for young girls to embrace technology and computer science.

In the interview, Mayer related: “The number one most important thing we can do to increase the number of women in tech is to show a multiplicity of different role models. The stereotype of that very complete and rigid picture of what being a computer scientist means really hurts people’s understanding and ability to identify with the role and say, ‘Yes, this is something I can be in and want to be in.'”

When you see a dearth of females in any industry, it makes you wonder whether there is an inherent bias against women in that industry, or whether it is a field in which women don’t have a strong interest. There have been hundreds of studies on the subject and just about as many conclusions.

Maybe it is an issue of insufficient role models. Or maybe there is a lack of opportunities for entry or promotion within certain industries. Or maybe the reasons are deep rooted in social biases and expectations.

Nori Gerardo Lietz, longtime member of the institutional real estate consulting and advisory community and founder of her current firm Arete Capital, recently completed a study and white paper on the stark underrepresentation of women in investment and finance roles. According to the report, women comprise just 4 percent of senior investment professionals at private real estate investment firms.

That’s a pretty discouraging number and a wakeup call that more needs to be done, both at the corporate level and at the educational level. Obviously, there needs to be more encouragement at the CEO and board level, in addition to support from senior management, to widen the lens when looking for talent and to not just rely on the traditional methods. And there should be more programs to foster education, leadership training and career advancement for women in the industry.

Numerous studies have shown the merits of diversity, the value it brings to corporate decision making as well as to the bottom line. Yet, nationally, just 16.1 percent of the directors of Fortune 500 companies in 2011 were women, according to a study by Catalyst, a New York City-based nonprofit that advocates for better opportunities for women in business.

Whether it’s the broad world of technology or corporate business, or the narrow niche of institutional real estate, finding remedies for gender disparity among senior executives and top-level decision makers is long overdue.

If you have any comments on this issue or suggested remedies, we would like to hear them.

Larry Gray is editorial director of Institutional Real Estate, Inc.

“Bao ba” no more

This is official: the previous target of maintaining an 8 percent annual GDP growth rate in China has been lowered to 7.5 percent. After promoting and defending “bao ba 保八” (“protect the 8 percent GDP growth target”) for about eight years, Premier Wen Jiabao of China unveiled the new target at the start of the annual National People’s Congress in early March.

The 8 percent target was quite important, as many analysts associated it with such major factors as a high level of employment, social stability and maintaining the momentum of the economic growth. So how significant was it for the Chinese leadership to lower this target, and why did they do it? First of all, even though the earlier target was set at 8 percent, the economy grew much faster. In 2011, China’s GDP grew by 9.2 percent, and in 2010 it stood at 10.4 percent. So, with the 7.5 percent target, the economy most likely will grow close to 8 percent if not faster. At this pace, the economy should be able to maintain a low unemployment rate, provide new graduates with job opportunities and keep up its momentum.

It appears to me that what is important here is the message the leadership is sending. The breakneck pace of growth of the previous years is not as important now. The Chinese government seems to have realized that such fast-paced growth has its downsides, such as higher inflation, uneven distribution of wealth in the society, potential social unrest and environmental disasters.

Also, given the messy situation in the euro zone and a weak recovery in the United States, it clearly makes sense to lower the growth targets and implement changes in the GDP composition. The Chinese government started talking about an increase in consumer consumption as a proportion of GDP quite some time ago. But with exports going relatively well, there was no real pressure to change, and the capital kept on pouring into steel mills, aluminum smelters and other fixed assets producing goods for overseas markets. Now that the recovery in the rest of the world is quite questionable, with a possibility of a further meltdown in Europe, it really makes sense to slow down and readjust.

Saying that the government wants to expand domestic consumption is one thing; taking steps to assure it happens is another. Without a dependable and affordable healthcare system, lowered educational costs and assured pension plans, it’s hard to expect breadwinners in China to change their habits overnight and start spending more. As it stands now, apart from speeches from the podium aimed at increasing its popularity, the government is yet to unveil its concrete plans to boost social security nets for its citizens.

Another benefit of a slower growth rate will be lower inflation, provided everything goes as expected. (Although the stagflation that plagued the United Kingdom and other countries in the past is a possibility, given the government’s active role in the economy, the chances of it happening in China are remote.) Although the overall trend of inflation has been down in recent years, in 2011, it exceeded the Chinese government’s target of 4 percent and stood at 5.4 percent. Most troubling and difficult for ordinary citizens were increases in food prices. The price of pork, which is a staple in the Chinese diet, reportedly skyrocketed by 40 percent in some parts of the country. In the past, price hikes in food caused unrest, so avoiding this eventuality by moderating growth targets should be a welcome benefit for most people in the nation.

As the new Water Dragon year starts unfolding, we will monitor the situation and keep you abreast of the most recent changes and developments.

Alex Eidlin is managing director – Asia Pacific at Institutional Real Estate, Inc.

The cow you’ve been milking

For more than 10 years now, I have been warning (and I’ve been warning from the podium at our conferences and elsewhere) about the impending shift from defined benefit–based pension funding schemes to defined contribution plan–type schemes here in the United States and elsewhere.

During that time, more than 70 percent of U.S. corporate pension plan sponsors have frozen new participants out of their defined benefit plans, leaving these workers with no options for accumulating retirement savings other than their own personal savings, individual retirement accounts (IRAs), Simplified Employee Savings accounts (SEPs) and their employer’s defined contribution plans.

Tom Mackell, my long-time friend and former chair of the Richmond Federal Reserve, calls this the “YOYO” shift (as in, the shift to “your on your own”).

From my seat, this has dramatic public policy implications for a variety of reasons.

The first is the savings accumulation rate in these employee-directed plans.

For a younger worker, the biggest ally they have on their side is time. The longer their money is at work, the larger the pool of savings they’re likely to accumulate will grow (depending on whether they invest their savings wisely, which is another matter to be addressed later in this column).

The problem is younger workers notoriously underparticipate in these plans. They either contribute too little, or not at all.

The reason for this is simple. To a younger worker, retirement simply isn’t very real, and therefore, the need to save for it, even less real. (What is real is funding their immediate consumption needs. And contributing to their defined contribution plans cuts into their ability to fund those consumption needs considerably.)

The second problem is older folks like me who should know better tend not to contribute the maximum allowed. Maybe they think retirement is still too far out on the horizon to be concerned with it in a meaningful way right now. Or maybe they still have kids at home or at college, and are preoccupied with funding their needs in the present moment.

By the time most of us wake up and realize that retirement is literally staring us in the face, however, it’s far too late to accumulate the minimum amount of capital required to fund a comfortable — or even uncomfortable — retirement.

When people don’t have enough money to retire, they don’t (unless they have to for health or other reasons). So that means many of us boomers probably won’t be moving into retirement as soon as we had hoped.

For those of us who will be forced to retire without adequate savings, the burden of dealing with us will fall on the shoulders of federal, state and local governments and charitable institutions.

The hard cold fact is, if we no longer can afford to pay our own medical insurance premiums, when we get sick, most of us eventually will end up at the local community hospital’s emergency room, where the cost of care is always the highest. Since we won’t be equipped to pick up the tab, somebody else (the rest of you) will have to.

Despite this very immediate, very real and enormous threat to our current system, legislators in Washington, D.C., and at the state and local levels continue to ignore it.

In some cases, of course, they’ve been unable to ignore it. The City of Vallejo in California already has filed for bankruptcy protection, largely due to huge unfinanceable pension liabilities. The California cities of San Jose and Stockton — and many other municipalities and some states across the Union — also are on the brink of insolvency for precisely the same reasons.

Consequently, the sponsoring entities of both state and local pension funds across the nation increasingly are moving toward their own form of the “YOYO” system — systems that, as noted above, only will be deferring the cost of the real liabilities they’re trying to lay off.

Here’s a fact and there’s no way around it: As we age, we deteriorate in our physical powers. Eventually, we are no longer fit to work, or at least, to work at the same level of intensity required to support ourselves financially. When that moment comes, we’re completely and hopelessly dependent on our savings. And if those savings are inadequate, we’re going to be, as Blanche Dubois of Henry Miller’s A Streetcar Named Desire fame, noted, hopelessly dependent “on the kindness of strangers.”

The real question this country faces then is how we collectively are going to deal with the 77 million boomers who continue to age in place and, eventually, will no longer be able to support themselves. According to the Employee Benefit Research Institute, only 50 percent (or fewer) of this cohort currently are covered by a defined benefit pension plan, and even fewer have any meaningful residual retirement savings.

Got Milk?

For those of you in real estate investment manager land, consider this: The cow you’ve been milking all these years — the defined benefit pension fund market — is getting skinnier. It’s drying up, and pretty soon — sooner than most of you think — it’s going to be all dried up.

Now, it’s also true it’s been in the process of drying up for more than 20 years. But so far, you really haven’t been feeling the impact.

The reason you haven’t been feeling the impact is this: As the corporate pension funds were shifting to defined contribution pension plans, the public defined benefit plans were growing rapidly, and gradually moving from a legal list investment policy (that prohibited investing in alternatives such as real estate) to a prudent person investment policy (that encouraged diversification into real estate and other alternative assets). So as the corporate defined benefit plans were drying up as a source of capital, their place as a funding source was rapidly being assimilated by the public defined benefit pension plans.

The process of converting from defined benefit to defined contribution plans now is nearly three-fourths complete in the corporate sector. It is just getting started in the public sector, but it is, indeed, getting started. The only difference is, this time you’re going to feel it. And you’re going to feel it because this time there is no other large pool of capital that will be moving into the vacuum they’ll be creating as public plan sponsors shift their retirement funding platforms to a less investment manager–friendly form.

I realize some of you investment managers have been scrambling to come up with alternative vehicles to meet the needs of the defined contribution pension fund market. But as most of you by now may have realized, there’s a lot more involved than simply coming up with new product designs. Reaching the individual investors who direct these largely self-directed plans, and the financial planners and advisers who assist them, requires an entirely different kind of distribution system than the one most of you currently have at your disposal. This means you’ll either have to build these new distribution platforms, which is costly, or you’ll have to partner with those who already have them (which also is going to be costly, in terms of the fee sharing arrangements in which you’ll undoubtedly have to engage).

The other problem you’ll face is that the defined contribution market, while growing, won’t be growing as fast as the defined benefit market, with its mandated contribution requirements, grew in the past.

Studies by the Employee Benefit Research Institute repeatedly have shown that, in the long run, individual investors tend to underperform professional investors like those of you who are managing defined benefit pension fund assets — and by a wide margin. The reason they underperform is simple: The rewards of winning during up cycles tend to be undermined by the losses incurred during down cycles, largely because individual investors tend to under-diversify and overconcentrate their positions.

What this means is not only will growth in defined contribution pension plan assets continue to be undermined by the tendency of younger and older individual investors alike to underparticipate in these plans, but also by the fact that most of them also will underproduce the results that their more professional counterparts in defined benefit pension plan land are likely to be able to produce.

The sad thing about all this is it didn’t have to end up this way. Had plan sponsors consistently met their funding obligations instead of suspending contributions during boom performance years, the dollar cost averaging impact most likely would have produced sounder funding of these plans today.

Unfortunately, the die now has been cast; in far too many cases, the funding challenges have become insurmountable. Consequently, the shift to the defined contribution format now is inevitable; merely a matter of time.

Bold Action Needed

Is it too late? Is there no other alternative? I think there is.

A far better option would be for America’s corporations and government entities to begin offering plans structured more along the lines of Australia’s superannuation pension schemes.

Why would this be a better option?

First, participation in these superannuation plans is not optional. If you’re earning a paycheck, you contribute.

Second, contribution levels are not optional. The last time I checked, the minimum contribution level for all working Australians was 9 percent of current wages (although there was talk at the time of increasing the minimum rates, as the average amount available to most Australians upon retirement still was woefully inadequate to meet individual participant retirement needs).

Third, these are not self-directed accounts. The funds are professionally managed; just as U.S. defined benefit plan assets are professionally managed today. That means participant accounts are likely to be more diversified and better invested, and growth in their accounts is likely to be more stable and therefore reliable.

Now, I know some of you reading this will cry, “Socialism! Forced savings! What about individual freedom?”

Personally, I don’t think it’s asking people too much to live up to their own personal, individual obligation to help save for their own retirement. But I also don’t think they should be required to do so all on their own.

The government can help support this effort by mandating the kind of programs that actually can work in the long run and, then, providing the tax incentives to help make them work.

Employers can help by adjusting wage rates to enable employees to contribute to these plans in a more meaningful (and now mandated) manner and matching any additional employee voluntary contributions on a whole or partial basis.

If something like this doesn’t happen and happen soon, many of you who are reading this column won’t be in the same business five or 10 years from now. The cow you’ve been milking will be dead. So there’s a real reason to start to pay close attention to this issue, and start actively lobbying for real, meaningful pension reform.

In the meantime, I’d advise you, as always, to be careful. Be very, very careful. It’s a whacky world out there!

P.S. Thanks to Steve Furnary and his colleagues at Clarion Partners for suggesting the idea and theme for this month’s column.

Geoffrey Dohrmann is president and CEO of Institutional Real Estate, Inc.