CRE Midwest

Zell, Cafaro headline successful 10th Annual Commercial Real Estate Forecast Conference

The 10th Annual Commercial Real Estate Forecast Conference on Jan. 24 drew more than 1,000 attendees who gained insight into the future of the commercial real estate industry from luminaries such as Sam Zell, Debra Cafaro and nearly 50 other industry professionals taking part as speakers or moderators.

The Real Estate Publishing Group and Illinois Real Estate Journal hosted the conference.

Following a successful networking and exhibitor session, Cafaro, chief executive officer of Ventas Inc., moderated a fireside chat with Zell, chairman of Equity Group Investments. Zell began by giving a general overview of the commercial real estate industry.

“The real estate industry looks better than it is,” Zell said. “There’s a significant amount of restructuring and recapitalization that are going to have to occur in the next couple of years. I think there is an enormous amount of commercial real estate that is significantly overleveraged.”

Zell said that since July of 2007, with the exception of the apartment market, there has been little or no supply in the commercial real estate industry. Zell also emphasized that there is very little likelihood there will be any significant new supply in the next 24 to 36 months.

“I think that overall, we are still in pretty weak demand scenario, but the weak demand could be a lot worse for us if it weren’t for the fact that there’s no new supply,” he said. “We’re in a position of transition. I think the shocker of ’08 and ’09 is still having its impact and it’s all about demand.”

In terms of the retail sector, Zell had a very bearish outlook, adding that economic growth has not been sufficient enough to support retail. He said that while the retail business is not going away any time soon, Internet retailing presents an enormous challenge for the retail business.

“Retail, more than any other form of real estate, has a very serious obsolescence factor,” he said. “Those 300,000-square-foot enclosed malls are just disastrous. “

Adding to retail’s woes is that overall disposable income in the U.S. has modified in the last few years, Zell said.

“It’s very hard to imagine that we’re going to see a growth in retail when you’ve got this much supply out there and this much obsolescence,” he said.

When it comes to the office sector, Zell said his prognosis for the market is that it is at best even or perhaps a bit on the negative side due to a downsizing of the economy.

In terms of office space, Zell said the average number of square feet per employee in the U.S. is about 240 square feet, compared to 90 square feet in countries such as Hong Kong.

Zell added that there is an enormous potential supply that can come into the office market as people downsize to reduce their real estate costs. He also said there are many multi-national corporations in the U.S. that have more employees overseas than they do domestically.

“In the end, office space is dependent on employment and growth, and so far, we haven’t had any employment growth and we haven’t had any growth,” Zell said.

Cafaro next questioned Zell on the hotel sector, which Zell said has been oversupplied because “palm tree financing,” rather than economics, is driving the hotel business.

“Palm tree financing is two guys laying in the Caribbean, looking up at the sun through a palm tree and saying, ‘Wouldn’t everybody like to have a hotel here,’” Zell said.

However, Zell added that one of the growth areas in the U.S. is tourism.

“The tourism element is attractive, the dollar is relatively cheap, and the hotel business, particularly in the 24/7 cities, is going to benefit from no new supply,” he said.

When it comes to multifamily, Zell was very optimistic about the continued success of the apartment market, which he said is being impacted by a changing perception of single-family housing.

“The American people have adjusted their love affair with the single-family house,” he said. “In the first seven to 10 years of this decade, you had people getting out of college and literally getting a job and buying a condo or a house the next day.

“However, if you accept the fact that there’s been a dramatic mental change, the impact on the multifamily industry is tremendous.”

Adding to the multifamily sector’s success are high occupancy rates, unlimited demand and very modest new construction, Zell said.

“I think the multifamily business, at the moment, is the best part of the real estate industry,” he said. “I think it’s likely to stay that way. We may not, in our lifetime, see housing return to its hallowed status.”

Following the fireside chat, attendees of the forecast conference heard three general session panels on the state of the commercial market in Chicago; legal issues impacting real estate; and real estate financing and investment trends.

Len Caldeira faced a tough challenge: He hit the stage right after Zell and Cafaro left it.

But Caldeira, managing director of Jones Lang LaSalle’s industrial services team in Chicago, more than held his own. Caldeira was the moderator for The Big Picture seminar, a discussion among top Chicago-area commercial professionals on the state of commercial real estate in Illinois and across the Midwest. This discussion, too, was a highlight of the forecast, an event held each year by the Real Estate Publishing Group and Illinois Real Estate Journal.

Caldeira, though, is no fool. He recognizes the draw that is Sam Zell. It’s why when Caldeira hit the stage, he stated: “I’m in a very unenviable position here … You never follow dog acts or Sam Zell.”

And later when the lights in the meeting room went out, Caldeira was ready with another quip: “Hey, we’re not that bad,” he said before the lights turned back on.

The discussion between the Chicago real estate pros in the room, though, more than met expectations. The pros here — Tom D’Arcy, senior vice president of the Midwest regional office of Hines; Steve Schnur, senior vice president of Duke Realty’s Chicago office; Drew Nieman, principal in Colliers International’s Chicago office; Michael Flynn, executive vice president and managing director with Chicago’s NAI Hiffman; and Don Schoenheider, vice president and city manager for Liberty Property Trust’s Chicago region — agreed that while the local commercial real estate market was showing signs of improvement, the industry is still hurting.

The talk eventually turned to the cooperation between Illinois, Indiana, Michigan and Wisconsin. Or, to put it more accurately, the lack of cooperation.

Schnur from Duke stated that these four states need to work more as a single regional power. Instead, they spend too much time fighting for companies, each state trying to steal established businesses from the other.

These border wars, of course, are nothing new. Look at Illinois; the tax structure here isn’t all that favorable to corporations. This is a fact that neighboring states Indiana and Wisconsin are not above exploiting in their drive to bring companies, and their tax dollars, to their states.

This isn’t surprising. But, like Schnur says, just think of what the states of Michigan, Wisconsin, Indiana and Illinois could accomplish if they would work together more often than they fought against each other.

Those U.S. consumers from the ages of 25 to 34 — the Echo Boomers — received more than their share of attention during the Financing and Investing panel of the conference.

And little wonder: As Cydney White, first vice president of investments for Chicago’s Equity Residential, said, these younger adults are actually faring better in today’s economy than are most others. The unemployment rate for the Echo Boomers actually stands at a low 4.4 percent. These Echo Boomers, then, have enjoyed the benefits of most of the jobs created in 2011 and early 2012.

Because of this, these consumers are driving many commercial real estate trends today, including the solid performance of the Midwest’s multi-family market. The Echo Boomers are in their household formation years. But instead of buying single-family homes, a large number of these consumers are choosing to rent.

“The Echo Boomers are delaying marriage. They are more interested in renting. They want to be more flexible,” White said during the panel discussion.

In fact, White said, many of the Echo Boomers are putting off buying their first homes until they hit 30 or beyond.

The message for commercial developers is clear: Multi-family will remain hot well beyond 2012. And when it comes to financing, multi-family projects will be some of the most attractive to commercial lenders.

Following the panel discussions, breakout sessions also took place during the conference on the suburban and downtown office, industrial, investment, retail and multi-family markets.