Letter from the Executive Director
Mark J. Riedy, PhD
The May meeting of the Center’s Policy Advisory Board Executive Committee featured the six USD undergraduate students who competed in USC’s International Real Estate Case Competition held recently. The students were poised, articulate and knowledgeable. In the comments they shared with committee members on what the competition experience was like for them, speaker after speaker acknowledged that their USD education had prepared them well for this intense, one-week challenge against many of the best real estate programs in the world. These young real estate majors did us proud!
To say that the senior real estate executives on the Executive Committee (EC) were impressed is a gross understatement. Members of the EC and our three other Policy Advisory Board Committees have frequent “up close and personal” exposure with many of our graduate students and undergraduate real estate majors, which number 50 already in the first year the major has been offered. Hundreds of other industry professionals attending our annual real estate conference each January have the pleasure of hearing remarks from the recipients of our Daniel B. Woodruff Memorial Scholarship.
After hearing from the USD team during their recent meeting, EC members encouraged us to find more ways to connect real estate students with practicing professionals. Their thoughts were that the Burnham-Moores Center is instrumental in educating well balanced and well trained graduates who are primed to serve as future industry leaders. Moreover, because of the values emphasized throughout their years at USD, these students are steeped in the importance of ethics and integrity. While we are all well aware of the glaring lapses in ethics and integrity among far too many individuals and organizations in the real estate industry in recent years, our students give us unrelenting confidence in the core values these future industry leaders will possess. I invite you to contact me if you would like to get acquainted with our students, either one-on-one or in small groups.
Their eagerness to do well by doing good is infectious. I look forward to sharing their enthusiasm and achievements with you in the months to come.
Dr. Mark J. Riedy
On May 22, 24 Master of Science in Real Estate (MSRE) students celebrated the completion of their real estate studies at the University of San Diego commencement ceremony for masters and doctoral students held on campus in the Jenny Craig Pavilion.
MSRE students were able to attend the commencement ceremony with other university masters and doctoral students for the first time since the program was condensed to 10 consecutive months for full-time students and 22 months for part-time students. The earlier graduation date enables the students be more competitive in their post-graduate job searches.
A week later, the MSRE graduates, who make up the sixth cohort, attended a private luncheon celebration with their classmates, professors and Burnham-Moores Center staff on the Olin Hall patio. Students shared their fond sentiments about the program and received a congratulatory gift from the Center.
|Norm Miller, PhD
An Uneven Recovery: While we all seek that universal signal indicating we have passed through all troughs, the truth is a rather mixed and uneven picture for the economy and real estate. Housing prices “surged” in May based on contracts in April but that was all predictable, and we know some of these sales were merely accelerated in time by the extended federal tax credits, which are continuing to distort the market and confuse media. It is akin to the jobs report for May suggesting 431,000 net new jobs, which was composed of 411,000 just for the U.S. Census Bureau. Net new private job creation was well below the 100,000 or so needed each month simply to keep up with normal growth in working-age population. At the same time, online job ads increased by 37,000 in April to 1.35 million suggesting some glimmer of hope for employment. There was a fair amount of capacity in the economy and one thing recessions always do is spur more efficiency and greater use of technology, dampening the power of organized labor and increasing new entrepreneurial efforts that will pay off in the long run. For the balance of 2010, the job outlook remains modest, even with the stimulus spending propping up the overall job market.
Europe Could Double Dip: The economic outlook in Europe is worsening, the likeliness of a Greek default on government debt increasing rapidly, and the value of the Euro to the dollar likely to continue to decline. Greece will probably need to default as the weight of debt far exceeds the capacity of the population to repay it and at the same time no one is willing to take on essential austerity measures. So the Greeks are broke after spending so much on public workers and relatively early unfunded pensions, and the Euro will be affected. Italy, Portugal and Spain are also possibilities―just like California in a few years―and all of this means the dollar will strengthen, and our exports to Europe will be increasingly expensive hurting manufacturing here. Imports will become cheaper as well as European travel and you may be able to buy an island in Greece or Spain for the same price as an oceanfront home in La Jolla. Smart U.S. companies will be looking to buy assets and companies in Europe at rock-bottom prices, but for consumers, the only good news is the lack of globally induced inflationary pressures from Europe or China for that matter.
You may be able to buy an island in Greece or Spain for the same price as an oceanfront home in La Jolla.
The BP Oil Spill: Speaking of cheap real estate, with 569 miles of shoreline affected, which equates to about $43 billion of shoreline at last year’s prices and assuming one-acre deep impacts and a 10 percent value hit, we are talking about $4.3 billion in additional damage caused by the BP oil spill. It is truly amazing that oil supplies are so plentiful as to not be impacted much by the size of this spill. In the long run, it is likely that we will drill less off our shores than before this tragedy and some day this will mean significantly higher gas prices. One hundred and fifty dollars per barrel is unlikely in 2010, but that is mostly the result of a global recession. Higher oil prices in 2011 and 2012 will affect longer-term inflation and eventually interest rates, but for now big American cars and SUVs are selling again. Amazing how soon our memories of high gas prices fade or how well we respond to rewards and stimulants.
Interest Rate Outlook: “No place to go” describes the facts behind the interest rates on 10-year Treasuries, which are now at less than 3.2 percent. Stock and money market managers unsure where to park money have, along with the Chinese, reluctantly put funds into Treasuries. Our rates should be 3.6 percent to 3.7 percent right now based on trends prior to our last stock market dip. So, as money starts to flow back into the stock market, we should expect Treasury rates to modestly increase again. While our mortgage loan-to-value ratios have come down, and our underwriting standards have gone up, this is a terrific time to borrow mortgage money at cheap rates. No one likes using so much equity, which raises the overall cost of capital and constrains prices, although there seems to be no shortage of capital sitting on the sidelines hoping for more distressed property sales from banks. Yet, Treasuries will stay fairly low and mortgage money fairly cheap for the balance of 2010 as our economy sputters along and watches tragedies unfold in Europe.
REIT and CMBS Issuance: Just as we have an uneven economic recovery, we have a mixed set of signals on whether REITs will be able to tap the secondary issue market and find product to buy. REITs do not want distressed real estate and sellers, like banks, have only provided a trickle of high-quality core inventory. At the current dividend rates near 3.5 percent and REIT pricing to NAV, over 130 percent, we should see most REITs thinking about going to the market and trying to buy everything decent they can find. Naysayers may suggest there is not enough to buy but all sellers have their price. At the same time, as REITs seem to be regaining prominence as the king of non-distressed acquisition, we have seen the CMBS market slowly creep back. A recent JP Morgan deal of $716.3 million, dubbed JPMCC 2010-C1 and including many JP Morgan Chase bank loans, may portend that we are past the dry spell for conduit funding. The new CMBS pools will be more conservative with fewer traunches, but it does look like this form of securitized financing is off of life support even as we watch older issues go into default.
Dry Powder and Opportunity Funds: There are some $150 billion to $200 billion in funds seeking to drink at the fountain of distressed property. What some had expected to be a broken fire hydrant of opportunity is being released slowly, sometimes impeded by FDIC bureaucracy and special servicers reluctant to liquefy and lose ongoing fees. The result is two-fold: There are far more bidders than expected, and these funds are having trouble employing their capital while the large number of bidders is lowering expected yields. Twenty-five percent to 30 percent expected yields are likely to be half that.
Why is it still a good time to buy real estate? When you compare recent prices paid by property type, we are still far below replacement costs. In the case of multifamily property, the average in 2009 was over 60 percent below replacement cost. Industrial and hospitality were not far behind followed by office then retail and hospitals as the highest percentage of replacement costs. Very little new construction is occurring, and many properties have already reset rents, even before lease expirations forced the issue. This all means that as jobs return, interest rates increase and households unbundle, we will see rapid rent increases for multifamily. This may not occur until mid-2011 for much of the country, but we will see rents increase as early as this year in several markets. Office and industrial property will take a while longer to work through the shadow inventory, and retail is likely to be a mixed bag with lots of empty boxes, but still several new formats expanding. Retail seems to be the most complicated to target as investors need to pick not only the right geographies, but the right formats and mixes as well.
On May 27-28, Master of Science in Real Estate (MSRE) students in Dan Kohlhepp’s Real Estate Capstone course presented their live feasibility projects; which marked the students’ last of the year before completing the MSRE program. The professional presentations and reports served as the students’ final examination.
Kohlhepp, president and CEO of Granite Road LLC and Kohlhepp Real Estate Investment Trust Ltd. of Pennsylvania, along with Charles Tu, academic director of the MSRE program, served as the judges for the students’ presentations.
MSRE students (from left to right) John Kiper, Melissa Sharick and Sean Jones deliver their final project of the year during their Capstone presentation May 28.
The Master of Science of Real Estate program was recently profiled on A Student of the Real Estate Game, an influential blog for real estate education. The profile came via an interview with MSRE alum Ryan Kurth ’09, who answered a series of questions posed by the blog creator, Joe Stampone, a student in the Masters in Real Estate Development program at New York University’s Schack Institute of Real Estate. Kurth, who is now employed by Fannie Mae, gave USD’s MSRE program an overall rating of nine on a 10-point scale.
To view the profile, go here.
Lauren Lukens, student and alumni services manager, speaks to a visitor at the University of San Diego booth at RECON, ICSC's global retail real estate convention, held May 23-25 at the Las Vegas Convention Center. The University of San Diego's booth, which was in the Reconnect Pavilion, drew prospective graduate and continuing education students, as well as parents of prospective undergraduate students. An estimated 30,000 people attended this year's convention.
On May 10, a group of prospective students for the Fall 2010 cohort of USD’s Master of Science in Real Estate degree program attended an informational meeting and reception at the Joan B. Kroc Institute for Peace & Justice. During the meeting, the group met with Center faculty and staff as well as alums Victoria Crown ’08 (MBA/MSRE), a Realtor at GMAC Real Estate, and Bryce Lewis ’09 (MSRE), residential analyst at Boardwalk Development, who answered questions from the prospective students.
The University of San Diego’s Sustainability Task Force has won a 2010 Earth Award from San Diego Earthworks, nonprofit organizers of San Diego’s EarthFair at Balboa Park. Louis Galuppo, residential real estate director, is a member of the task force.
The award was announced at the 20th Annual EARTH Awards and VIP Reception, held May 12 at the City of San Diego’s Department of Environmental Services.
The task force, which was established in 2007, received the award for having its most successful year to date, which included initiatives in:
- Water and energy conservation;
- Carbon footprint reduction; and
- Increased reliance on renewable energy
Norm Miller, PhD, distinguished research professor, presented on a new building rating system at the Homer Hoyt Institute’s annual fellows meeting in North Palm Beach, Fla., May 13-15. Miller is on the board of directors of the institute, which is an independent, non-profit research and educational foundation established in 1968 to improve the quality of public and private real estate decisions.