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The Real Estate Publishing Group’s Mark Thomton recently sat down with Cushman & Wakefield, Inc. President and CEO Glenn Rufrano and Kent Ilhardt, executive vice president of Cushman & Wakefield of Illinois, in the firm’s Chicago office. Here is a transcript of their conversation.

Q: What was your first order of business when you took the helm of Cushman and Wakefield?

Rufrano: Cushman is 230 offices in 58 countries around the globe and about 15,000 people. When you think about the size and scale, the first order of business was to understand the platform as reasonably as possible. What I have been doing for the last five months is traveling around the globe. I’ve been to Asia. I spent a couple weeks there and visited Seoul, Tokyo, Shanghai, Beijing, and Delhi. I then went to Australia. I have also been to South America, Mexico, and Canada. I visited many European cities and

Kent Ilhardt and Glenn Rufrano of Cushman & Wakefield

spent a good amount of time in London and Paris. And I have been many of our offices in the United States. The first order of business was to get out there and kick the bricks. It has been five months and I’ve been out of the country a third to a half of that time.

Q: Is there a certain market that you believe is poised for growth in the near future?

Rufrano: They are all fairly unique and de-linked. When you travel around the globe you realize that certain markets are growing and certain markets are not. If you go to China…Shanghai is incredible. There are cranes all over. If you look at the skies here, there are no cranes. That’s a good thing for Chicago, but in Shanghai, Beijing, India, Sao Paulo, they are all still building. What stood out to me is that certain markets still have fundamentals that are growth-oriented. Then you look at the United States and Europe and you don’t see many cranes. The de-linked economies–by de-linked I mean some are growing and some are not–stand out after this debacle we just went through in part because some economies were better equipped to handle the 2008 and 2009 economy, while other markets were not.

Those (countries) that were better equipped have already started to grow, while the U.S. in general is certainly not a growth market right now.  If we generate 1-2 percent GDP growth that is not so good when you have lost so many jobs, but that is the reality. China is still growing at 7-8 percent, India at 5-6 percent, and Brazil at 5 percent. Many of these economies were able to have fiscal and monetary reform quickly. The one that really comes to mind is Australia, which is in pretty good shape. The Australian economy never went into recession (if defined as two quarters of negative GDP growth). Its unemployment never got higher than 5.8 percent. The country was running in the black in 2008. It had the ability from a fiscal standpoint to really create stimulus. It had a 7.25 percent effective LIBOR Rate and it was able to bring it down to 3 percent, so monetary policy was very useful in helping it avoid the recession. Its banks didn’t suffer from the same viruses that we had with CMBS problems or sub prime problems. It had a whole series of reasons as to why it was in a position to sustain itself.

Those characteristics I gave are similar for China, India, Brazil, and for Canada. Canada isn’t a 5-7 percent growth economy, but it is 3-4 percent growth and its banks have been sound. The U.S. and Europe suffered the reverse. We had sub prime problems, our banking system was overleveraged, and values declined dramatically. We are the ones who have put ourselves into the position where our stimulus has probably lowered our growth prospects, because the only way to get back that debt is to tax the heck out of us, which will put a strain on our economy. The distinction in markets, growth and non-growth, is dramatic around the globe.

Q: If we take a more localized view, how has the Midwest performed? What are its strengths and weaknesses right now?

Ilhardt: The unemployment rates are running higher than the national average. Some markets, particularly auto-related markets, have been hit hard. It’s going to be slower to come back. Construction has stopped, so at least we are not exasperating the situation by adding supply. Yet we are still seeing negative absorption in most markets. We have not begun to eat away at existing vacancy. In the Chicago CBD we feel that office product has peaked in vacancy. In the suburban market vacancy came down from prior quarters, but it remains to be seen if that will continue. We are not going to see the kind of growth that these emerging economies that we have mentioned will, but I think we will see stabilization.

Q: The investment market is starting to show signs of life. What trends are you seeing and what can we expect as we move forward?

Rufrano: There was a study done by Afire a few months ago. Afire is a group of institutional investors. They did a survey focused on the top cities they would want to invest in. We talked about all of the growth markets, but here are the five markets these investors identified: New York, London, Washington D.C., Tokyo, and Paris. We say that the growth markets are in emerging economies, yet investors want to put their money in lower growth cities by comparison. You try to rationalize that and then ask: why is that? It’s a simple answer. The world is still shaky. We are not out of the doldrums yet and you can see that in the market. The old saying is that when you are in a storm, you should get in the biggest ship. Even though there may be higher growth markets today, the feeling is that you a better off investing in core properties in safe markets, because of the uncertainty. We can apply that to Chicago. If you look around Chicago it’s not a bad place to be, but where would I want to invest? 300 North LaSalle. Why? Because it is a great building and well leased. I’m not sure KBS (KBS Realty Advisors) would invest in a 50 percent occupied building in Chicago. I bet they wouldn’t. The thought process behind investing today is safety, core assets, and long-term view. You need a good long-term city, class A product and not a lot of construction, so you can eventually achieve maximum rent levels and occupancies. That simple psychology is driving investment today.

Q: On the flipside of that, if core assets are where investment dollars are going, what is going to happen to the large number of non-core assets with troubled debt?

Rufrano: What happened between 2008 and today is that banks have not foreclosed, by and large. I think they did the right thing. I hear the phrase about kicking the can down the road and I think it is bull. I’ll use the example of Centro (Centro Properties Group) and then General Growth, which is right in your back yard. Centro had $26 billion in assets and $7 billion breach at the end of 2007. We negotiated for a year with 23 banks and reached a three-year stabilization plan. That was exactly the correct decision. Why? What would have happened if you had foreclosed on $26 billion in assets in 2008? The value back then would not have been anywhere close to the value today in August of 2010. Clearly, the banks concluded–and, rightfully so–that as long as it is an owner who is honest and can run those assets well, the recovery would be greater if they worked with the property over a period of time instead of just taking it.

General Growth is the same thing. It needed the bankruptcy court to push those lenders along. I was a director at GG, but I came in after the bankruptcy. We renegotiated $15 billion in loans and got a five-year extension at 5.75 percent. I have no doubt that for those lenders and for the company, which had $27 billion in debt, there will be a higher recovery for them by giving those good assets a chance rather than taking them back. I think that has been the philosophy for many lending constituencies around the globe.

What are we going to do moving forward in 2010 to 2012? I think we are going to see more activity and more sales than we saw the prior two years. Some of the lenders have taken write downs and those same lenders have some pretty good balance sheets. The ability to absorb the losses is much better now than it was two years ago. As important, prices have risen. If you don’t have a sponsor who can pay you back, you may have a better recovery by selling it. Third, over time—whether we like it or not—we are in a capital intensive business. We can’t sit there and let the assets run without capital. There will be some situations where the lender will face the fact that they have extended it for a period of time and now the asset needs capital. If they can’t find it, maybe they will be better off selling it. Those three reasons will cause more activity in the next two-to-three years, but it won’t be irrational.

The last element I would put in is that the financing markets have come back pretty strong. In 2008 you couldn’t refinance. In 2010 and 2011, insurance companies, banks, and even the CMBS markets have come back. If you look, Goldman Sachs has issued CMBS. JP Morgan just took $700 million out of Centro Properties and put it into the bank, which will be put into the CMBS market in the next three months. There is a CMBS market. It is very small compared to what it was, but financing is available. There is more liquidity in the debt market. I don’t see fire sales. The banks learned a lesson in the 1990s. Why give all of the opportunity funds the returns? I give them credit. It’s not kicking the can. I think it’s smart and they understand their business.

Q: What are your goals for the Chicago market and Midwest for the next few years?

Rufrano: Chicago represents a major market. If you are financial services firm it is a market you need to serve. Cushman needs to serve this market better than it has in the past. We have about 100 employees here. We have about 15,000 worldwide. We are doing business planning right now and we need to come up with a better plan and have better penetration. We are committed to the business here and committed to increase our penetration.

Tags | Centro Properties Group, Chicago, Cushman & Wakefield, General Growth Properties, Midwest

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