Guest Post: ULI Spring Meeting attendees say, “Viva Mexico”

Tijuana cultural centerDuring its 2013 Spring Meeting in San Diego, several thousand leaders of the Urban Land Institute (ULI) left sunny San Diego saying, “Viva Mexico!”

That’s because, as attendees learned, Mexico’s economy — including its resort development sector — has made an incredible turnaround during the past few years.

John McCarthy of Mexico City–based Leisure Partners, who served as director of Mexico’s National Tourism Promotion Fund (FONATUR) from 2000 to 2006, recalled that Mexico’s tourism business went through a “perfect storm” in 2009: “a bad image, the world economic crisis and even the H1N1 influenza virus; it’s not easy to attract tourists while wearing a mask on your face.”

The storm cleared, however, with two major national policy changes initiated by the Mexican government: first, Mexican pension funds are now allowed to invest in real estate; and second, the Mexican constitution was amended to allow foreigners to own coastal real estate. McCarthy’s company is involved in raising $300 million in equity from Mexican pension funds, to be leveraged with another $300 million in debt, to invest in distressed resort property and new resort development.

ULI and business leaders on both sides of the San Diego–Tijuana border are working to create a “mega-region” called Cali-Baja. This initiative builds on the already significant amount of cross-border economic activity — $28 billion worth of goods move across the border in both directions each year.

Samsung factory tour

A group of ULI Spring Meeting attendees got to see the region’s economic boom firsthand during a full-day tour, highlighted by a visit to the sprawling Samsung factory that employs more than 4,000 workers and manufactures some 65,000 televisions per day for export primarily to the United States and Canada. This factory and others were established under Mexico’s “maquiladora” program, which permits duty-free importation of materials and components used to manufacture goods for export. Manufacturers also benefit from Mexico’s labor costs — well below those of China — and proximity to U.S. markets.

Located just 17 miles south of San Diego, Tijuana is Mexico’s third-largest city with a population exceeding 1.5 million, and one of the country’s most affluent cities. The San Diego–Tijuana border is the world’s busiest, with more than 41 million crossings per year.

No less than the well-known urbanist Richard Florida spoke out in favor of the Cali-Baja mega-region during the ULI conference, saying: “If people could move more quickly across the border in both directions, the national assets, high technology and university expertise on both sides of the border would be unbeatable. This is really part of North America 2.0. If we can have an integrated North American economy, we can have energy independence, food security and uninhibited innovation.”

LEED-rated building in TijuanaDevelopment of the Cali-Baja mega-region is being impeded by a number of forces, not the least of which is the difficulty of crossing the border — delays of several hours are common. Congress has halted funding for an expanded San Ysidro border crossing. Even if it were to be completed as planned, however, it would be “a great 20th century border crossing in the 21st century,” according to ULI panelists.

Focusing on air travel rather than land crossing, a private consortium is planning a pedestrian connection between the Tijuana airport and the U.S. side of the border. This bridge would enable U.S. travelers to easily access convenient, low-cost flights to various parts of Mexico and Latin America. Currently, 1 million people cross the border per year just to catch flights from the Tijuana airport; the planned crossing could greatly increase this traffic.

Perhaps the most intransigent factor impeding realization of the Cali-Baja concept is the negative image that most Americans have of Tijuana. Many think of it as unsafe, but its crime rate is actually lower than that of Washington, D.C., and New Orleans. Many Californians still envision the Tijuana of their youthful day-trips: cheap shops and donkey photo ops. A ULI Technical Assistance Panel has issued recommendations for redeveloping a demonstration block in the city’s center that could catalyze a citywide renaissance — one that would match the economic promise of this fascinating city just over the border.

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Leslie Braunstein is with LHB Communications, Inc.

When Bill Gross talks …

Before the success of the E-Trade talking baby TV commercials, E.F. Hutton — a powerhouse firm of the 1970s and early 1980s that was eventually derailed by several scandals — arguably laid claim to the most memorable stock brokerage ad.

As you might remember, the E.F. Hutton commercials were set in a crowded environment, such as at the airport baggage claim area, aboard a train, a public park. The conversation would turn to the stock market, and one person would ask the other, “What does your broker say?” To which the second person would respond, “My broker is E.F. Hutton. And E.F. Hutton says …” At that point, others stopped what they were doing, leaned toward the speaker and attentively turned their heads to listen. The commercial ended with the voiceover: “When E.F. Hutton talks, people listen.”

There are high-profile financial market executives today who elicit a similar response. Once such thought leader is Bill Gross, managing director and co-CIO at PIMCO, who framed the much-adopted idea of “The New Normal” back in 2009. His comments and insights are not to be missed. He writes a monthly investment outlook that is a must-read, typically informative, insightful and entertaining.

If you didn’t catch his May 16 Bloomberg interview, check it out. The interview includes some good takeaways, including the line, “We see bubbles everywhere.” He also noted:

For a while, as long as the Fed and the Bank of Japan and other central banks keep writing checks and don’t withdraw, then the bubble can be supported. … When that stops, then perhaps there are going to be repercussions. It doesn’t mean something like 2008, but it means the potential end of bull markets everywhere, not just in the bond market but in the stock market as well because there are distortions aplenty.

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

Alchemy

Isaac Newton, the father of modern physics, was an odd duck. Despite his almost relentless devotion to the practice of the scientific discipline, Sir Isaac spent a good deal of his leisure time dabbling in the field of alchemy — the pseudoscience that is focused on discovering a way to transform base metals such as lead into gold.

Never mind that actually discovering a way to do this would undermine the very basis of the value proposition for gold, he and many other intellectuals of his time were hellbent on solving the problem (ostensibly so that, at least for a time, it would feel good for a while).

Were Sir Isaac to be alive today, he’d be delighted to learn that the ability to manufacture value out of nothing finally has arrived. All you need to have is the reins of a Central Bank in your hands, and a printing press at your disposal.

Today, the future of the world’s nations and economies no longer respond to the whims of presidents, premiers and chancellors. It responds to the whims of the central bankers who head up the world’s most influential Central Banking Units: the Federal Reserve, the Bank of England, the European Central Bank, the Bundesbank, the Bank of China and the Bank of Japan, among a handful of others.

Twenty years ago, almost none of us could recite the names of central bankers outside the heads of the central banks in our own regions. Today, names such as Ben Bernanke, Mervyn King, Jean-Claude Trichet and, more recently, Mario Draghi are familiar if not well known to most of us, wherever we happen to reside around the globe.

It has been said that no one is remembered for a catastrophe avoided. But they should be. Over the past several years, people like Bernanke and King and Trichet have been vilified by the press when they probably should be celebrated as heroes.

To understand in greater depth exactly why, you have to read Neil Irwin’s latest tome, The Alchemists. Before reading it, I thought I understood the causes of the financial crisis. After all, it’s been written about endlessly in books including The Big Short, Too Big to Fail, A Colossal Failure of Common Sense, Mr. Market Miscalculates, Panic! and many, many others. But Irwin’s perspective is from the vantage point of the central bankers who had to develop the right policy responses to the myriad events that continued to unfold, day after to day, and, to a large extent, continue to unfold today.

The ultimate objective throughout has been and continues to be to preserve the stability of the financial markets while containing price inflation. Throughout the past six to seven years, doing so has forced the central bankers to take unprecedented risks in hopes of averting a total collapse of the bond markets, without stimulating a rash of global hyperinflation. The policy tools at their disposal have included interest rates, of course, which we all know they’ve managed to keep at historical lows for a surprisingly prolonged period of time. The other policy tool they have used prolifically, particularly recently, is to print money through the mechanism of bond purchases. When they do this, they’re effectively spending money they didn’t have before to purchase assets they didn’t own, the same way a bank creates money when it lends on deposits at ratios greater than the deposits. What is this practice, other than alchemy?

As the central banks buy bonds, former bondholders now have cash they can use to invest in other sectors of the financial markets — in the stock market, in the corporate bond markets, and in the private equity and debt markets, including real estate. This money simply didn’t exist before, and by forcing it into these sectors of the markets, the bankers are hoping to stimulate growth in the financial sector. (By inflating the value of these assets, they hope, business confidence will improve, and as business confidence improves, investment spending and job creation will pick up.)

The other thing that happens when central bankers buy bonds is that money that would have purchased these securities, be they residential or commercial mortgage–backed securities or government bonds, is crowded out of those markets and forced to move into other areas of the financial and private markets. In buying back bonds, then, the central bankers not only are flooding the markets with capital (creating a so-called Wall of Money), but they’re concentrating that capital in the markets they think will do the most good for the economy.

Equally important, by buying up bonds, they’re holding the lid on rates by supporting the market for these bonds. This is particularly important when you’re talking about markets that are starting to implode, as the market for RMBS was during the height of the financial crisis and, more recently, as the markets for the debt of southern European sovereign nations were (and have been) for the past several years.

When bond markets threaten to implode, issuers can’t refinance. When issuers can’t refinance, they default. When they default, there are serial, domino-like effects. Bond values collapse and eventually go to zero. When bond values collapse and eventually go to zero, the banks that hold those securities as collateral go bust. When banks even threaten to go bust, depositors stage a run on the bank. This is precisely what happened to Northern Rock in the United Kingdom, which essentially was the poster child that ultimately triggered the mess we’re in, when depositors started their run on Northern Rock in the wake of the Lehman crash.

If you’re like me, and you “kinda” understood what quantitative easing was all about, or the Operation Twist, or any other number of central bank–led initiatives that have been making headlines in recent years, but really want to gain a deeper understanding of how finance at the central banking level really works, you’ll want to read this book. It is highly recommended reading for anyone impacted by the actions of central bankers today — which, obviously, is every single person living here on earth.


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

Early days in Myanmar

Recently, I attended the Myanmar Urban Development Conference 2013 in Yangon, Myanmar. I will cover topics discussed at the conference in the Publisher’s Note of the July/August issue of The Institutional Real Estate Letter – Asia Pacific, but I wanted to share with you some of the impressions and observations I’ve got from visiting Myanmar, the country that just started opening up after more than 50 years of the military rule.

First observation: no service. I travel a lot in Asia, and the first thing I do after getting off the plane is to turn on my iPhone. In all countries in Asia after a click I get a message: “Welcome to Telecom Singapore/Hong Kong/Malaysia/China/etc.,” depending on the country of my destination. This time, there was no familiar click, and the message at the left top corner of the screen read “No Service.” The phone was dead, and I had an uneasy feeling of being cut off from the rest of the world.

Of course, people in Myanmar use cell phones, and later in the city I saw many young people using even iPhone 5 models. But AT&T, the mobile phone service provider that my company uses, doesn’t not have any connections with the local telecom companies, and you have to make local arrangements to be able to use cell phone services in Myanmar. Many U.S. companies cannot operate in Myanmar yet due to sanctions, and I had to carry a box with our publications to the conference because we could not ship them via FedEx or any other carrier the way we do in other Asian countries.

Second observation: no motorbikes. Motorbikes, the plague of most cities in developing Asia, are absent from Yangon streets. While studying and traveling in Asia in my student days, I remember seeing entire families of four and sometimes five (that is two parents plus kids) traveling in clouds of smoke on a single motorbike in Taipei and other Asian cities. I saw no such sight in Yangon. I asked around and found out that the government banned motorbikes in Yangon.  I’m not sure what the effect on the economy was, but the city looked much prettier and cleaner. There were traffic jams, for sure, but they were mild, so to speak — nothing like the ones you have in Beijing or Bangkok.

People were very friendly and, surprisingly, even taxi drivers spoke decent English. I would like to write more about the people of Myanmar, as I was really impressed with their friendliness and willingness to share their culture and religion with foreigners. Myanmar is predominantly Buddhist, and you can see pagodas, monasteries, and monks and nuns everywhere.

Now, on to the real estate and infrastructure. Myanmar needs both in a big way, and the government is making plans. Some of the foreign engineering and construction companies made their way into Myanmar ,and several asset management firms made deals to buy properties for their portfolios. Can foreign investors make money in Myanmar the way they have made it in other Asian countries? That is not an easy question to answer, and it depends on many factors. But to give you a quick feel, the land prices soared and doubled and tripled in many places after Hillary Clinton’s visit there about a year and a half ago. And this is without any new major construction projects being launched in Yangon, just on the expectations only.

The government officials welcomed foreign investors, but at the conference, some of them admitted that there is no clarity as to which government department is responsible for what, and permits are delayed due to departmental rivalry. Foreigners cannot own land; they only can lease it for 50 years with two automatic extensions of 10 years each, and they need a local partner. The middle class is still poor, and affordability will be a bigger issue than in China and other Asian countries. So it is not an easy question to give a quick answer to.

In a way, and this is an impression from only one conference, the situation in Myanmar reminded me of India, where foreign investors’ enthusiasm petered out after years of waiting and delays. Local developers made money in India, for sure, but do you know of many foreign investors who are happy with their returns in India?

It is early days in Myanmar and way too early to make any conclusions. I am personally very hopeful for this country with very friendly and gentle people, and I hope that it will keep on opening more and more.

If you have traveled to Myanmar or have questions or opinions about the real estate opportunities there, please post in the comments.


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

What are the costs of affordable housing?

In the wake of disaster, both natural, such as Hurricane Sandy, or manmade, such as the housing bubble and subsequent foreclosure crisis, affordable housing has become a critical issue for many homeless or struggling Americans, and one that lacks a clear solution.

The National Low Income Housing Coalition (NLIHC) and federal government say that, for housing to be considered affordable, no more than 30 percent of a household’s gross income should be spent on gross housing costs. Cost-burdened households are those spending more than 30 percent of their income on housing costs, while severely cost-burdened households are those paying more than 50 percent of their income on housing costs.

The NLIHC reports that, in 2013, demand for affordable housing continues to dramatically outpace supply. An estimated 4.5 million units still need to be built to make housing affordable to extremely low-income households, which bring in $19,810 or less annually. Extremely low income (ELI) refers to households that make less than 30 percent of the area median income, which is used to determine a household’s eligibility for affordable housing programs. Families that qualify as ELI often have access to federal and local subsidy programs, but with strong demand and dwindling supply, many of these households go unassisted.

While ELI households are eligible for subsidized housing through Section 8 or rental assistance programs, households that bring in an average income also struggle to maintain the costs of housing, but don’t qualify for aid programs. According to NLIHC data, the median income for a family in the United States is $66,032. While bringing in more than ELI households, many median income families still rely on more development and rent-controlled housing to maintain financial stability in the face of spiking prices and competitive markets.

Other People’s Money, written by New York Times reporter Charles Bagli, shows how tenants are willing to fight for access to affordable housing. In the now-legendary deal, Tishman Speyer and BlackRock paid $5.4 billion for two middle-income and rent stabilized housing schemes in lower Manhattan. Planning to dislodge tenants and raise rents to market value (which, absent of rental laws, a unit in this location could fetch $5,242 a month), Tishman and BlackRock borrowed most of the money to acquire the property, according to NPR. Tenants caught wind of their plan and the tenant association blocked the deal, forcing the property to go into foreclosure and $5.4 billion in investments to disintegrate.

The lack of affordable housing is clearly a problem, but each of the proposed remedies — government subsidies, reform of zoning laws, more development, rent-stabilized properties, nonprofit participation etc. — come with a cost.

The Wall Street Journal recently reported on the acquisition of a multifamily complex in a working-class section of Aurora, Ill. The $5.2 million property was acquired by a joint venture between Mercy Housing Inc. and Housing Partnership Equity Trust, a private REIT founded by Mercy and 11 other nonprofits. Housing Partnership has raised more than $100 million from investors and intends to continue acquiring properties and keeping rents affordable.

Alan Billingsley, a principal with Billingsley Interests and former head of research with RREEF, says that acquiring an existing building and applying some practical renovations, as opposed to developing new properties from the ground up, presents a viable solution to investors devoted to keeping rents at affordable levels.

Institutional investors continue to invest in workforce housing in the United States, and globally. Earlier this month, Canyon Capital Realty Advisors and Citi Community Capital announced a partnership through the Canyon Multifamily Impact Fund, an $800 million fund that will invest in multifamily properties in underserved communities in California, Illinois and Texas. According to a filing with the Securities and Exchange Commission, $50 million has already been committed since its May launch date.

Despite the work of affordable housing advocates, many landlords are acquiring low-cost housing, and adding luxury amenities with the intention of hiking up rental costs, and capitalize on values for multifamily properties, notes The Wall Street Journal. And, if the 2006 lower Manhattan deal is any indication, there are enough investors who are willing and able to acquire affordable housing and try to turn it into a luxury multifamily property, dwindling the supply of affordable rentals.

Advocates for affordable housing would be wise to apply their social mission through for-profit structures, as demonstrated by the movements of the Housing Partnership Equity Trust and Canyon Multifamily Impact Fund.


Sara Kassabian is a reporter with Institutional Real Estate, Inc.

Discipline is as discipline does

Most real estate managers today are feeling a lot more comfortable with the disciplines they’ve put in place. Most feel they’ve learned a great deal from the mistakes they made during the market crashes of the late 2008/2009 post-Lehman global financial crisis, and have put stringent measures in place to ensure those same mistakes will never be repeated.

If you’re one of them, or you have managers who are feeling this way, don’t feel so smug. Investment managers, like investors, are human. And human beings all have a habit of learning the right lessons in the wrong order.

The fact is, when you’re still bouncing off the bottom of a market cycle, it is the easiest thing in the world to have discipline. The hardest time to employ discipline is when you’re approaching the top.

Lots of people think discipline comes from putting policies, processes, procedures and checklists in place. It doesn’t. Discipline comes from putting processes, procedures and checklists in place … and actually making the use of those policies, processes, procedures and checklists habitual.

What far too many investment managers do is invent these kinds of so-called “disciplines,” get everyone on board and talking about them, and then do almost nothing to insist that these actually be put into practice. Even for those who do make an effort to put them into practice, after the first year or so of using discipline, the focus of attention gradually gets diverted to doing business again, particularly as the momentum of the market begins to pick up. Slowly but surely, the routine use of these tools of discipline begins to slip. Before long, the only place these disciplines actually exist is on paper.

Then the markets really start to heat up, and the only impact those disciplines have is to remind us, in the back of our minds, that things just don’t “feel” right any more. Our guts are screaming that what we’re seeing in the markets no longer makes sense. Even if we pull back for a while, the allure of the market eventually pulls us back. When month after month goes by with you looking back at the deals you could have done six months ago but didn’t, and thinking about the money you supposedly left on the table, eventually, you can’t help but feel that it’s you that is out of step with the market, and that maybe the market really is smarter than you thought. It’s just about this time that pundits start to come out of the woodwork (like cockroaches), presenting the 10 different reasons why “This time, it’s different.”

It’s during times like these that the market needs discipline. Conversely, however, if the market had discipline, there wouldn’t be times like these. And therein lies the rub.

How do you stop all this madness from happening again? First of all, you need to make the practice of all your well-thought-out policies, processes, procedures and checklists habitual. (How to do that is well laid out in Charles Duhigg’s book The Power of Habit: Why We Do What We Do in Life and Business.)

One individual who actually made discipline habitual was Craig Severance, who used to head up acquisitions for AMB Property Corp., before it went public and eventually merged with Prologis. What Craig did was build his policies, processes, procedures and checklist into a computerized system that tracked every single step, every single document and every single issue that needed to be tracked when managing the doing of a deal. Embedded in this system were all the elements of his disciplines. The proof in the pudding of all this is that, when AMB eventually did go public in the 1990s, it earned one of the highest ratings among the real estate companies trading at that time. Craig asked the folks at the rating agencies why. They responded, “Everyone has systems and checklists for controlling risk. You guys actually use them, and how you do is evident and apparent.”

Craig later launched a company — RealConnected — to take that system to the market and enable others to install the same systematic, habitual approach to risk management. But it was a very tough slog. The mentality of most professionals in this business is to resist these kinds of disciplines. “I’m hired for my expertise,” they will say, “and you want me to rely on a bunch of silly checklists?”

According to Atul Gawande, author of The Checklist Manifesto, nowhere is this more apparent than in the operating room, where you would think using things like checklists would be second nature. It isn’t. Gawande should know. He’s a trained medical practitioner who has spent a lifetime getting medical institutions — hospitals, clinics and the like — to adopt a checklist approach to running routine operating and care procedures. The statistics supporting doing so are irrefutable. And, while Gawande has been successful in getting many institutions to adopt such practices, at far too many places, the practices either are resisted or only temporarily adapted.

The point of all of this is that we don’t have to repeat the sins of the past, but we probably will. As a four-year-old once noted, “If you keep on doing what you’ve been doing, you’ll keep on getting what you’ve been getting.”


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

Japan still here and growing

Just over two years ago, a 9.0 earthquake struck off the coast of Japan, with added destruction from resulting tsunami and nuclear disasters. Since then, Japan has undertaken reconstruction efforts on a scale not seen since the end of World War II. Japan is struggling to rebuild communities and to clean up radiation from the Fukushima Dai-ichi nuclear plant.

It has been confirmed at least 20,851 people died or remain missing. This figure includes the confirmed number of dead, 15,881; those who are missing, 2,668; and 2,303 others who subsequently died.

Japanese government data show about 315,000 people were still living in temporary housing at the end of February. There are plans to build 23,000 public housing units in eight prefectures for those who are unable to rebuild their homes.

Many areas have achieved some sort of normality, but it is still a slow recovery. However, primary cities outside the damaged areas, such as the country’s capital, Tokyo, are striving and still attracting a vast amount of real estate investors. On the acquisitions side, Idera Capital Management and Sparinvest Property Investors A/S acquired a portfolio of four well-located residential properties for middle-income tenants in Nagoya upon the first closing for their investment program for approximately ¥4.5 billion ($50 million). The partnership intends to acquire additional quality residential properties in major urban cities.

U.S. REIT Prologis has boosted its Japanese portfolio with a development project, Prologis Park Kitamoto, a 795,000-square-foot, four-story facility. The property is located within 29 miles of Tokyo’s central business district, and the project is slated to complete in early 2014.

Goodman Japan Development Partnership, a 50-50 joint venture between Goodman Group and Abu Dhabi Investment Council, acquired a 279,862-square-foot development site in Nagoya, Japan, which it will develop into a four-story, 548,959-square-foot logistics and distribution facility.

Tokyo Office Property Fund, a fund managed by AXA Real Estate Investment Managers, completed the acquisition of Kyobashi Square, a core building located in the Chuo-Ku district of central Tokyo, from Godo Kaisha Kyobashi Property. And prior to that, the fund had made its first purchase — Shinjuku Sanchome located in the Shinjuku ward of central Tokyo.

And Singapore-listed Ascott Residence Trust has acquired three prime serviced residences in China and a stable portfolio of 11 rental housing properties in Japan for $287.4 million.

Investors are forming partnerships to invest in the country. The Canada Pension Plan Investment Board and GE Capital Real Estate recently formed the Tokyo Office Venture targeting investment in mid-size class A and B office properties in key CBD submarkets.

Hopefully the growing investor interest so far this year will spread outside primary cities and development projects will begin on Japan’s coast. Either way, two years after a natural disaster, Japan is still here.


Andrea Waitrovich is web content editor of Institutional Real Estate, Inc.

Problem? What problem?

You probably can’t get through a day without hearing people voicing frustration with being unable to solve some problem in their life or business. In fact, you probably can’t get through a conversation without hearing that complaint.

But what a lot of people don’t understand is that if they are unable to solve a problem, it might be unsolvable, and they need to move on to solving what can be solved. For example, we’re not going to solve the problem of global warming. The planet is going to just keep warming, weather (very different from climate) is going to become more extreme, and sea levels are going to continue to rise. We can’t stop it (despite the North Carolina’s legislature’s vote to make rising sea levels illegal).

What we can do is solve the problems that extreme weather causes — reinforce dams, develop evacuation plans, provide subsidies for heating and cooling homes, upgrade weather service warning systems, etc.

We can also rethink what makes something a problem. Global warming is a problem primarily because it disrupts how we’re used to doing things. By rethinking how we do things — where we build, what we build, how we heat and cool, how and where we grow food — we can take advantage of the changes rather than fighting them.

The same can be said for demographics, which has become a hot topic at real estate conferences because a falling population means falling demand for real estate. Yet focusing on trying to reverse demographic trends is a waste of time, energy and money. Jonathan Last, author of What to Expect When No One’s Expecting, pointed out at Clarion Partner’s recent seminar that no one can get people to have children if they don’t want to. No political incentives have worked. Neither liberal inducements such as family leave acts nor conservative approaches such as Singapore’s money payments to those who have children combined with shaming of those who don’t (Singapore makes Rick Santorum look like a “dirty hippie” according to Last) have improved fertility rates.

So maybe we shouldn’t be focused on reversing what appears to be an irreversible trend, and instead solve the problems the trend engenders. Germany is a wonderful example of out-of-the box thinking (who knew?).

Because of a long-term trend of falling birth rates, the decline in the number of young men has led to an oversupply of prostitutes. On the other end of the spectrum, however, an aging population has led to an undersupply of elder-care workers. Being pragmatic Germans, they saw two problems — too many prostitutes and too few elder-care workers — with one solution. Retrain the prostitutes into care workers. According to Last, the Germans noted that prostitutes don’t mind working nights, possess good people skills, aren’t easily disgusted and have zero fear of physical contact. So Germany devised a formal program of retraining, and two problems solved.

The key, of course, is recognizing what can’t be changed and moving on quickly to problems that can be fixed, or taking the unsolvable “problem” and flipping it into an opportunity. But if that were easy, everyone would be doing it — not just those wild and crazy Germans.


Sheila Hopkins is managing director – Europe and infrastructure with Institutional Real Estate, Inc.

Other people’s money

I always wondered what really went wrong with the $5.4 billion Stuyvesant Town/Peter Cooper Village deal done at the peak of the most recent real estate cycle. I’ve also been wondering what has happened to this project after that pivotal moment when BlackRock and Tishman Speyer finally decided to give back the keys to the lenders. Of course, the end of the story is still largely unwritten. CWCapital, the special servicer on the massive and complex loan package that financed the deal, is still laboring over how the final chapter ultimately unfolds.

I knew, of course, that a good portion of the project had been subject to rent controls of some kind. I knew breathtaking prices had been paid with a huge debt burden, all underwritten on a dizzying number of assumptions that just about all had to come true in order for the deal to pan out. But the actual tale — as portrayed by New York Times reporter Charles V. Bagli in his latest book, Other People’s Money — is absolutely spellbinding. (I couldn’t put it down, and read the whole thing on the flight back from Frankfurt last week. Thanks, Ted Leary, for sharing this one with me.)

Those of you in the business will recognize many of the lead players in the story — Larry Fink, Fred Lieblich, Dale Gruen, Robert Mertz, Bob and Jerry Speyer, Richard Mack, Lee Neibart, Jeff Barclay, Steve Furnary, Nori Gerardo Lietz, Ted Eliopoulos, Mike DiRè, and Chris Ailman, to name just a few.

But how the deal gets done, the forces driving all the players, and the rewards and penalties associated with the deal in the end point to the very essence of what went wrong with the entire financial system during these heady times and, perhaps, what still needs to be fixed. An absolute must-read.

The book also sheds some light on a critical problem that still need to be addressed in most of our major cities — particularly in light of the continued urbanization trend worldwide. And by that I mean the provision of affordable workforce housing for the middle classes, many of whom still work but no longer can afford to live in these cities.


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

A message to those who live in BRIC houses

Remember when the Japanese were poised to take over the world and America was said to be going the way of England (a glorious past with no future)?

Then the Japanese economy imploded. Then came the Lost Decade. Then a second Lost Decade, as the ossified Japanese system of interlocked business and government refused to change, even in the throes of relentless stagnation.

Some of us are old enough to remember the start of that remarkable epoch and can hear the echoes playing over again with respect to China — and the other lettered nations of the BRIC. But the supposed inevitability of U.S. decline is especially hitched to China in the minds of doomsayers.

China is eating our lunch, right? It — and Brazil, India and Russia — is the future and we’re the past.

Oh, phooey.

Brazil’s GDP expanded by a trifling 1 percent in 2012. Russia’s growth this year is forecast to be no higher than 3 percent. India’s growth rate has slowed from 9 percent to 5 percent.

I know what you’re thinking: The United States would fly balloons if we could get back to a 5 percent growth rate. Sure we would. But a 5 percent growth rate isn’t squat when your per capita income is $1,500, as is the case in India. Ditto for China and it’s $6,500 per capita income and its forecasted 7 percent growth rate.

Apply a 7 percent growth rate to U.S. per capita income of $45,000 and you’re talking real money, a jump to $48,150 in just the first year. Spread that compounded 7 percent growth rate over 10 years and per capita income rockets to $88,500. Yet that same growth rate and duration earns China per capita income of just $12,800. India’s current 5 percent growth rate extended over 10 years takes its per capita income from $1,500 to just $2,450.

Chump change!

Ruchir Sharma, head of Morgan Stanley’s Global Emerging Markets Equity team, has it right in his new book Breakout Nations. A 5 percent growth rate “feels like a recession” when your per capita income is only $1,500.

Then there’s the backdrop to China’s growth situation, which is downright scary. As Jack Rodman of Crosswater Realty Advisors wrote in the May 2013 edition of The Institutional Real Estate Letter – Americas in an article titled “Yen again, yet again”, the Chinese are following many of the same policies that drove the Japanese economy into the East China Sea.

Sharma would concur. He points to the unsustainable debt China is incurring to keep its growth from declining to less than 7 percent. Until 2007, China invested roughly $1 of debt to stimulate $1 of GDP growth. During the past five years, though, the ratio has tipped to $3 of debt to generate $1 of growth.

Total debt in China has reached 200 percent of GDP. Granted, U.S. debt is much larger at 350 percent of GDP, but with U.S. per capita income many-fold that of China, our capacity to retire that debt load is a far more plausible proposition than China.

While doomsayers decry trends showing the percentage of global GDP accounted for by the United States, Europe and Japan declining during the past 25 years, Sharma cites statistics that show the U.S. share has stabilized while the European and Japanese shares are still declining. And for the first time since 2003, the U.S. economy has grown at the same pace as the global average. Sharma says this is due in part to declining global performance among the much-vaunted emerging markets, whose collective growth rate has slumped from 7.5 percent in 2007 to about 4.5 percent in 2012.

Yet again, the United States is proving a remarkably resilient economic force.

Or, as Sharma puts it, “The U.S. increasingly looks like the best house in a bad neighborhood.”


Mike Consol is editor of The Institutional Real Estate Letter – Americas.