Ukraine: Where does it sit on the risk curve?

Initially, Ukraine’s political challenges last fall were viewed as a regional issue; however, they have become a global issue now.

Remember when Greece’s financial challenges were seen as isolated, then the distress spread, becoming a pan-European issue and raising red flags in Portugal, Italy, Ireland and Spain, as well. (Or maybe you remember how the U.S. subprime mortgage crisis was “contained.”)

On Bloomberg TV on April 28, Nouriel Roubini — aptly nicknamed Dr. Doom — said he believes Ukraine could tip Europe back into a recession. Given that the International Monetary Fund earlier this year made a statement that it sees deflation as a key risk to watch, it may not take much to tip Europe back into recession.

It is interesting to hear the way Roubini frames what is happening in the Ukraine as a “New Cold War” between the United States and Russia.

When asked where Ukraine sits now on a scale of 1 to 10, with 1 equaling low risk and 10 high, he put the risk at 7 and rising.

Is it perhaps time to re-evaluate and recalibrate Ukraine’s risk impact to Europe and your portfolio?

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JohnHunt91x119John Hunt is conference program manager at Institutional Real Estate, Inc.

Will our real customer please stand up?

It is possibly the most fundamental maxim in business: Serve the customer.

It also seems about the easiest calculation an executive team has to make. But is that really the case? Is your core customer the investor? Or is it the beneficiaries? Are they one and the same? Are you sure about that? Maybe it’s really your portfolio managers. Or would you reason that it is all of the above?

Harvard Business School professor Robert Simons has conducted research that shows many companies too often describe almost everyone as a “customer” — and most companies use the word “customer” internally as well as externally. Departments often consider other departments “customers.”

The problem: Resources are limited. Attention is limited. And the more groups a company deems its customers, the more it expends limited resources on constituents that are not the true core customer.

That is what prompted Simons to write a Harvard Business Review article about how to choose the right customer, a decision he says is the first step in a winning business strategy. Choosing the right customer might not be as easy as you might think.

Take the case of cosmetics giant Mary Kay. One could easily conclude that its core customer is the millions of women around the world who purchase its products. Mary Kay executives would beg to differ. They have determined their core customer is the legion of independent “beauty consultants” who are their sales and distribution channel.

During a recent podcast interview, Simons observed: “Mary Kay has built their entire organization to meet and exceed the needs of those beauty consultants, with the idea that if they can ensure the beauty consultants prosper, are well trained, are highly motivated, they in turn will reach out and do a good job attracting and selling the products to the consumers.”

The result of that strategy is that Mary Kay has gone from 175,000 beauty consultants in the mid-1980s to about 2.5 million today doing business in 39 countries.

“They’ve prospered by having real clarity as to who their primary customer is, putting all the resources on that customer,” he says.

Another interesting case study is Amazon, which might well have the highest customer loyalty of any company in America. Though Amazon’s annual report talks about various constituents, it is made absolutely clear that the company is maintaining a laser focus on the end consumer. That means putting the consumer’s needs ahead of the third parties that conduct business via Amazon’s supercharged website, and even ahead of the company’s own profit requirements.

Could your organization fathom doing the same?

Simons argues that your most important customers are not those that generate the most revenue, they are those that can unlock the most value in your business. For some businesses, the primary customer will be the end user or consumer of the product or service. For others, an intermediary (such as a reseller or a broker) will be the critical customer.

Once your primary customer is identified, then comes the relentless devotion of resources. What does an ardent commitment to a core customer look like?

Federal Express brings its customers together for two-day gatherings twice a year. During those sessions, FedEx executives drill their clients about exactly what FedEx is doing that its customers consider of highest value. They also question what competitors are doing better.

Google spends a tremendous amount of time in the lab working with individual users of its products, trying to understand how different colors or arrangement of elements affect eye movement and usability.

Proctor & Gamble sends people on shopping trips and sits around the dinner table with consumers trying to understand what aspects of P&G products they value and how they can ensure those expectations continue to be fulfilled.

Who is your customer — really — and what extraordinary efforts do you invest to make yourself indispensable?

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

Life goes on

Despite the ratcheting up of U.S. and E.U. pressure on Russia and threats of further sanctions on the country and the rising number of “significant” Russians, the tussle between Russia and Ukraine shows no signs of abating and could yet end messily. At the end of April, however, and after a relatively mild winter, European fears about the energy supply implications of this nasty niggle in distant eastern Europe have diminished. And the hunt for new, more reliable energy supplies is on, hopefully in time for next winter.

So it’s back to normal worries, like the prospects for European real estate in the medium term and how much longer Europe’s present role as a receptacle for global real estate capital can last.

According to Aviva Investors, annual returns of 7.1 percent can be expected for European real estate markets for the five-year period to 2018. That represents an improvement and is largely attributed to robust demand for assets in core markets and better investor sentiment on peripheral European markets that Aviva Investors says could lead to rising capital values from next year. Ireland is singled out for particular mention, and is one reason why TIREL – Europe’s 2014 Editorial Advisory Board meeting is being held there later this year.

Europe’s real estate occupier and investment markets are showing encouraging signs of resilience, says Aviva Investors’ Darren Sriharan. The economic recovery, though patchy across Europe, is gaining traction, occupier markets are improving, and vacancy rates are falling, helped by low new supply; all good news for rental growth.

It’s not all positive. Euro zone inflation is at a tipping point to deflation, and that would bring its own dangers for the wider economy and real estate markets. The ECB is known to be closely monitoring that situation.

Savills is reporting ongoing polarization between prime and secondary rents in European office markets. The firm’s latest European office market report highlights that the tight supply of prime office space is causing rents to rise or stabilize in the best locations, while secondary rents are decreasing due to higher availability and rising incentives in secondary buildings and locations.

Examples of 2013 rental growth for prime CBD offices include 16.1 percent in Dublin, 7.4 percent in Helsinki and 6.1 percent in Oslo; the highest prime CBD rental growth trends this year, says Savills, will be recorded in London’s West End, Dublin, Manchester and Brussels. By contrast, secondary CBD rents saw a mixed picture, with markets such as Paris, Warsaw and Belgrade experiencing significant (–10 percent to –12 percent) rental discounts last year, while in Brussels, Dublin, Oslo, Stockholm and London rental growth of between 5 percent and 10 percent was recorded.

According to Eri Mitsostergiou, European research director at Savills, “Occupiers in European markets are still looking for high-quality buildings, so the availability in prime locations is much lower than average, pushing rents up. We are now also beginning to see falling supply of prime office stock, which is triggering developer activity for refurbishments and new buildings, setting off a new cycle.”

London continues to see exceptional levels of demand, driven by international investors, predominantly from the Middle East and Asia. According to CBRE, investment into London from the Middle East increased from 7.5 percent of total European investment in 2012 to 17 percent last year. London remains Europe’s leading real estate investment destination, but international investors are now starting to at least think about spreading their capital across the European continent, principally France and Germany but also recovering peripheral Europe and Russia, CBRE says. In Russia, investors like the fact that for the best-quality properties rents are generally denominated in U.S. dollars. With the rouble taking a battering on the foreign exchange markets from events in Ukraine, that’s just as well.

“London is capturing the lion’s share of [Middle Eastern] capital,” says Nick Maclean, managing director at CBRE Middle East, “mainly due to its transparent legal system, stable political and economic environment and above all liquidity — key factors in attracting investment.” Hello, Russia.

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RichardFlemingRichard Fleming is editor of The Institutional Real Estate Letter – Europe.

Water is the new oil

Last week, Institutional Real Estate, Inc. held the annual spring Editorial Advisory Board meeting for The Institutional Real Estate Letter – Americas in Laguna Beach, Calif., and let me tell you, I would not be doing it justice if I said it was merely informative.

Many topics were covered from real assets to the suburbs to even possible future investments in Africa. But the one topic that caught my attention was the large discussion that revolved around water being the new oil.

This very informative article from The New York Times explains more than I can in a short blog post. The article discusses a situation in Texas, but the same situation is arising all around the country.

The process of desalination is becoming more of a reality than an idea as of late, and that could lead to an even bigger project such as the one described in this article from The International Business Times, where salt water could be used to power ships instead of fuel (water=energy). That could lead to a whole revolution for the nautical and automotive industries.

Needless to say, this idea of water becoming the new oil is becoming more and more of a reality every day, and it seems to be getting investors attention.

What do you think? Is energy (water) going to be more profitable than real estate?

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DenisefinalwebDenise DeChaine is special projects editor at Institutional Real Estate, Inc.

Yellen about the wrong thing

yellen_janet_040512_8x10Janet Yellen’s rookie year started with a rookie blunder, but should we panic?

At just her first press conference since taking office, new Fed Chairman Janet Yellen made her first rookie mistake — being vaguely specific when the situation called for being specifically vague.

At last month’s meeting, the Federal Open Market Committee decided to scrap the Evans Rule, as expected, which served as a forward guidance policy by setting 6.5 percent as the lower threshold for unemployment that would determine when the Federal Reserve would stop suppressing interest rates.

But with the Evans Rule scrapped, the obvious question became: well, how much longer will the Fed suppress interest rates?

In an attempt to be deliberately qualitative (i.e. vague), the FOMC stated in a press release following the meeting that they would now attach forward guidance to an indeterminate time after the end of QE: “The Committee continues to anticipate … that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends,” further noting that it would maintain suppression “especially if” projected inflation continues running below 2 percent.

What a way to not pin yourself down to much of anything, eh? “Considerable time,” as in a year? Three years? More? And, as we know from the meeting minutes released this month, the move away from any sort of a quantitative forward guidance policy was certainly deliberate.

But at the press conference following the meeting, Yellen’s first, she was asked what exactly the FOMC meant by “considerable time,” to which Yellen replied “it probably means something on the order of around six months or that type of thing. But, you know, it depends, what the statement is saying is it depends what conditions are like.”

Oops! (Notice that Yellen quickly backtracked in an attempt to obscure any clarity she brought at that moment.)

Following the press conference, interest rates rose and stocks fell as the bogeyman reared its head. Would it really only be six months after tapering quantitative easing that the monster would finally come out from under the Fed?

Well, it’s certainly worth considering as, either way, interest rates won’t be suppressed forever, but we certainly shouldn’t consider the six-month comment as even a soft rule, especially if economic indicators remain poor. If we’ve learned anything, it is that the FOMC won’t be pinned down to anyone’s word, even their own.

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ReggieClodfelter91x119Reg Clodfelter is a reporter with Institutional Real Estate, Inc.

Improving sentiment in the U.K.

Have the clouds hanging over the U.K. economy begun to lift?

According to M&G Real Estate’s U.K. Real Estate Market Outlook, U.K. real estate is forecast to have a strong 2014, as fundamentals look increasingly good.

The M&G Real Estate report notes:

“Just over five years after the financial crisis began in earnest, the U.K. economy finally looks as if it is starting to gather ‘escape velocity’. Although economic activity still stands at over 1 percent below its 2008-peak level, there are reasons to believe that it will have recovered, and perhaps even exceeded, this level of output by the end of 2014.”

Bright spots for the U.K. economy include the improving labor market, with unemployment falling to its lowest level in five years, and the strengthening housing market.

That improved economy bodes well for real estate investors. In fact, investor confidence is up. According to the M&G Real Estate report:

“The most notable trend in 2013 was undoubtedly the rapid intensification in investor sentiment. Although already positive as we moved into 2013, the mood changed palpably in the summer months, resulting in sharply accelerating total returns. According to IPD, the U.K. market recorded a total return of 2 percent in December alone, pushing performance for the year into double-digits, well ahead of consensus expectations.”

That improved sentiment is expanding out of London to the rest of the country.

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LorettawebfinalLoretta Clodfelter is production and copy editor at Institutional Real Estate, Inc.

IREN news beat gets faster and faster

thumb_irencvrIREN, our premium news service that provides exclusive, original, breaking news to subscribers, ended the first quarter with 168 original IREI stories. During the month of March the IREN editorial team wrote 60 stories, almost beating January’s total of 63 original stories.

Some billion-dollar headlines you may have missed so far this year include:

The second quarter has only just started. I expect more billion-dollar coverage to come in the near future.

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AndreafinalwebAndrea Waitrovich is editor of IREN and web content editor at Institutional Real Estate, Inc.

Untold consequences of urbanization

Much has been touted about the influence urbanization trends have had and will have on China’s economy and real estate markets as the country shifts from export-driven growth to domestic-led consumption from a burgeoning middle class. And how could it not be the focus of great attention — an estimated 1.5 million people per month will move into Chinese cities through the remainder of this decade, notes PwC’s recent report, Real Estate 2020: Building the future.

The Chinese government is looking to smoothly transition people into its cities to encourage domestic demand and the nation’s future growth, and in mid-March came out with the National New-type Urbanization Plan (2014–2020). According to Xinhua, China’s state-run news agency, unlocking “consumption potential” through increased urbanization will raise demand levels for housing construction, public service facilities and the urban infrastructure needed to support such growth.

All good things, right?

But there remains a darker side of this urbanization trend, notes American Public Media’s Marketplace in a recent report, “Diabetes’ new frontier: China.” The more sedentary, fast food–based lifestyle of busy city workers and professionals has helped increase the rate of diabetes in Chinese adults to at least 10 percent from less than 1 percent in 1980. And China’s issues with toxic smog as the nation builds its future don’t make going outside to exercise any easier.

So public service facilities — healthcare facilities specifically — may play a growing role in China’s wealthier future.

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Jennifer-Molloy91x119Jennifer Molloy is editor of The Institutional Real Estate Letter – Asia Pacific.

Investors strike gold in California offices

The office market has been heating up in the Golden State for a while now, and 2014 might see it hit its boiling point.

In Marcus & Millichap’s recently released 2014 National Office Report, five of the top eight office investment markets are found in California, with San Francisco holding the top spot for the second year in a row, and even secondary markets such as Orange County surging up seven places to make the top 10, due to continued payroll expansion, rent growth and vacancy declines.

  1. San Francisco
  2. San Jose
  3. New York City
  4. Seattle
  5. Los Angeles
  6. Portland, Ore.
  7. San Diego
  8. Orange County, Calif.
  9. Denver
  10. Boston

The San Francisco office market ended 2013 with a vacancy rate of 8.2 percent, according to Cassidy Turley, and an average asking rent of $45.12 per square foot according to DTZ, second in the nation to New York City. Marcus & Millichap predicts the average rent to grow another 4.9 percent in 2014 after growing 12.1 percent in 2013, despite the fact that 1.2 million square feet of new supply will be completed in the area in 2014, after just 80,000 square feet we’re delivered to the market in 2013.

These trends appear to be mostly driven by the continued expansion of numerous technology tenants in the entire Bay Area (it’s not just Apple and Google any more, and the high-tech firms are flooding the list’s No. 2, San Jose, as well) and an unemployment rate that fell to 5 percent at the end of 2013.

Even Los Angeles climbed three spots in the 2014 report to No. 5, despite unemployment at 9.4 percent. According to DTZ, it’s because a majority of the job creation in the area has been in office-using employment sectors such as technology, media and telecommunications. Asking rents are expected to rise 3.9 percent in L.A. in 2014, due to increased job growth coupled with a meager 550,000 square feet of new supply.

It appears that investors who act fast won’t need a flash in the pan to strike it rich in California.

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ReggieClodfelter91x119Reg Clodfelter is a reporter with Institutional Real Estate, Inc.