On Thursday, April 20, 2017, the Steers Center for Global Real Estate at Georgetown University’s McDonough School of Business, in partnership with HFF and CRE Finance Council (CREFC), held its annual Real Estate Luminaries Series program. The event featured globally recognized leaders in the real estate investment industry who provided their views on the state of the real estate marketplace.
This year’s line-up included an interview with Ric Clark, senior managing partner and chairman of Brookfield Property Group, who has been with Brookfield and its predecessors since 1984 in various senior roles. Mark Gibson, CEO and executive managing director of HFF, interviewed Clark.
The program also featured a panel discussion, Revolution or Chaos: Investing in a Period of Political Change, with the following senior professionals representing the areas of policy, debt, and equity: Jeff DeBoer, president and CEO, Real Estate Roundtable; Len O’Donnell, president and CEO, USAA Real Estate; and Dennis Schuh, chief originations officer, Starwood Property Trust. Matthew Cypher, director of the Georgetown McDonough Steers Center for Global Real Estate and Atara Kaufman Professor of the Practice, moderated the session.
A Conversation with Ric Clark
Clark, a third-generation real estate professional, had an unconventional foray into real estate. Both of his grandfathers were focused on farming, but one realized he could make more money if he built homes on his farm. Following a career in farming, Clark’s father transitioned to real estate development, which gave him an entrée to real estate investing.
Clark was an accounting major in college and took a job with Penn Central Corporation, which was essentially a reorganized, bankrupt railroad that conveyed its rail assets to the government in exchange for $2 billion and about $1 billion in tax losses. Later, the company acquired a number of businesses, and Clark served as an internal consultant. His job was to evaluate the businesses they bought and to provide an internal report to Penn Central senior management about how they could be improved.
“This was a great education because I had the opportunity to learn how businesses and organizations work,” said Clark.
Following his time at Penn Central, Clark went to work with Olympia & York (O&Y) and the Reichmann Family in New York. Later in his tenure, O&Y entered bankruptcy, and Brookfield took ownership of O&Y’s New York and Boston assets. Clark joined Brookfield shortly thereafter. He described Brookfield prior to the acquisition of O&Y’s assets as a vibrant 100 year-old company, which was acquired by Peter and Edward Bronfman in the 1970s.
Following Brookfield’s acquisition of O&Y’s assets, the real estate segment of the firm had a couple hundred employees, and since has grown to 14,000 people and $150 billion of real estate assets.
“Today Brookfield has four groups,” said Clark. “Real estate, infrastructure, renewable power and private equity…together Brookfield has over $250 billion under management.”
Gibson asked Clark to differentiate Brookfield from the various private equity real estate players globally.
“It really comes down to two things,” said Clark. “Brookfield approaches investing from an operations-oriented perspective that performs much of the bottom-up analyses in-house, enhancing speed of execution. Moreover, Brookfield is the largest investor in any deal the company makes, which offers a tremendous alignment of interest with co-investors.”
Brookfield is always looking for new real estate investing platforms, and their current interests are in student housing, manufactured housing, and self-storage, according to Clark.
“Brookfield’s real business is helping employers attract, retain, and motivate employees,” said Clark. “It is a competitive world, and it is all about people at the end of the day. We wanted to create an environment that would help our tenants do just that. We spent about $400 million upgrading the lobbies and common areas of our office buildings, but also repositioning the retail to create an environment that is attractive to millennials, as that age cohort that is driving the U.S. economy.”
Gateway office market performance varies from place to place, according to Clark. The United States, with few exceptions, has not seen a full recovery in the office sector (with New York as one of the exceptions). Brookfield is seeing more activity in New York office leasing than it has had in a long time.
Gibson asked Clark to describe the tenant appetite for office space today. Clark indicated that “tenants prefer buildings that are unusual, retrofitted space.” He cited 450 West 33rd Street in Manhattan as a prime example. The 1.8 million square foot building was an old warehouse for Gimbles and had 15-foot floor-to-floor slabs that provided the ability to install 12-foot windows. It is now Brookfield’s most popular office building in Manhattan.
Gibson asked Clark to provide advice to the current students.
“As a young person, you try to figure out everything on your own, but mentors are an important part to developing your career,” said Clark. “Do not be afraid to ask for advice. Look for people you can get close to and who will mentor you throughout your career.”
Revolution or Chaos: Investing in a Period of Political Change
Jeff DeBoer began the panel discussion by sharing his thoughts on the reaction of the market following the presidential election.
“A lot of the stock market movement post-election was largely dependent on the view that the tone and nature of business in Washington was going to change a bit,” said DeBoer. “This tone has changed dramatically in favor of business and toward people who are creating jobs and putting capital at risk. It is more a question of how can we help create jobs and stimulate economic growth today.”
DeBoer went on to say that, as far as things getting done, tax reform in 1986 took three or four years, and it wasn’t just leadership by the president. It was trust between Republicans and Democrats, House and Senate, and Congress and the president. That trust was established from 1982 to 1986, and during that time they approved a number of tax bills.
DeBoer is doubtful the various tax proposals will be implemented this year because these are “enormous questions.” There is a lot of activity going on right now, however, to work through these questions.
DeBoer believes the real estate industry “has a lot at stake right now; a lot of opportunities and a lot of risk.”
Len O’Donnell of USAA indicated that his firm talks a lot about potential policy changes, but there is limited support for adjusting strategy or tactics today based on the latest rumor in the press. It is important to have contingency plans in place, but the market needs to wait and see what happens, he said. He does not see evidence yet of a “kinder, gentler environment” at the bank level.
Dennis Schuh of Starwood Property Trust said his organization views debt investments through the lens of an equity investor. Starwood cannot compete with lenders such as J.P. Morgan or Wells Fargo, as they have a cheaper cost of capital, so they have to look for other opportunities.
“If banks pull back from construction lending, we see that as an opportunity,” said Schuh.
Starwood Property Trust is focused on anything from ground-up construction to direct/preferred equity, but they are principally a bridge lender that is underwriting business plans, sponsors, and their track records and assets. Roughly 25 percent of their lending last year was in construction loans, and he sees that continuing in 2017.
According to O’Donnell, banks have pulled back from construction and value-add lending. He believes this is principally due to Basel 3 rather than Dodd-Frank, which he thinks is here to stay. Non-bank lenders are filling this debt capital void, and he is not sure there is enough liquidity from the non-bank sector to replace the traditional debt capital that has exited the market.
“Asset pricing has largely been driven by very aggressive foreign investors, but we believe this is curtailing a bit,” said O’Donnell. These investors are becoming more defensive and believe there are fewer attractive opportunities in the United States and potentially more attractive investments in Europe or Asia, he said.
Click HERE to view videos from the 2017 Real Estate Luminaries Series.