Generation Y and Careers in Real Estate Development: Part II

Previously, I posted “Generation Y and Careers in Real Estate Development: Part I”. In it, I set out the reasons why I believe career opportunities are emerging for members of Generation Y. I also suggested that the most successful candidates for these careers will need to acquire a background and experience in the fundamentals of real estate development. Now, I want to offer observations on where that background and experience may be obtained.

A large number of universities in the United States, as well as abroad, have instituted programs in real estate development, some at the undergraduate level and, more importantly, at the graduate level. I previously discussed the principal differences between the Master of Business Administration (MBA), Master of Real Estate Development (MRED), and Master of Science in Real Estate Development (MSRED) degrees. The conclusion is that the MRED or MSRED is the preferable degree because these all courses in the curriculum focus specifically on real estate development, not just a few courses on the subject.

There are a number of MRED and MSRED programs offered, and they are not equal, regardless of tuition levels or the overall prestige of the university in other areas and disciplines.

Why would I know about such things? I have invested more than 30 years in my own successful career in real estate development. I also earned a doctoral degree and founded the MSRED program in a graduate school of business at a university in Florida, a hotbed of real estate development.

When I was asked to start that program, I thought carefully about two things:

·        Knowing what I know at this point in my career, what would I want from a program if I were starting my career in development today?

·        What do I look for in candidates I hire for positions in the industry today?

The answer was easy. What we need most in our entry-level management hires is a full understanding of the overall development process:

·        Who are the players?

·        What do they (or should they) do?

·        How do their actions interface with each other?

·        What are the phases of development?

·        How do they interconnect?

With these thoughts in mind, a top real estate development program will offer the following:

·        All courses will pertain directly to this industry. If you’re not sure you want to stake your career in the real estate development industry, get an MBA;

·        The courses in the curriculum will follow the chronological order of the real estate development process. The process makes a great deal more sense when taught this way;

·        Ideally, the courses are taught by practitioners from the industry. This can be troubling to academics because:

o   The accrediting bodies have established rules that are anti-practitioner; and

o    Some academics are disdainful of those who have actually “been there, done that”;

·        Practitioners from the industry should be a fixture in the classrooms as visiting lecturers, panelists, mentors, and more;

·        Regardless of his or her academic achievements, the program’s director ought to have spent years as a practitioner in the industry. How do you know what the industry needs if you’ve never spent significant time in it? Or, phrased differently, how do you know what your students will need to be successful in the industry?

·        An industry advisory committee consisting of leading practitioners from the industry – local, regional, and national, should guide the program. How else do you keep the program constantly in tune with emerging trends and needs in the industry?

·         The program should be tightly aligned with the leading industry associations – ULI-the Urban Land Institute, NAIOP-the National Association of Industrial and Office Properties, and ICSC-the International Council of Shopping Centers. This is where the student begins the most important activity of his or her career – networking.

So, all things considered, of the many dozens of graduate level programs on real estate development, how many follow these guidelines? While many will claim to identify with them, I believe the actual number is less than a dozen, perhaps substantially less. Why? It has to do with the perceived restrictions of the accrediting agencies such as AACSB, SACS and others, although there can be exceptions to these restrictions. It also has to do with academia’s view of the real world of industry. Not exactly anathema, but certainly populated by beings of lesser intelligence.

This puts the burden on the prospective student to perform due diligence in appraising a program and to ask the right questions of the right people. Call some members of the program’s industry advisory committee. Ask them:

·        Would they enroll their children in the program;

·        Would they enroll in it if they were beginning their own career;

·        Do they spend much time in the classroom;

·        Have they ever mentored students in the program;

·        Have they hired graduates of the program, and if so, were they satisfied with the skill sets they gained in the program;

·        Do their companies have an internship program for students at the school.

It also is a good idea to speak with recent graduates of the program to learn what they liked, or didn’t, about the program, and whether they believe it helped them land the job they really wanted. 

Good luck!

The Times They Are A-Changing: Part 2

Yesterday’s blog entry may have created a negative impression regarding the future for careers in real estate development. That’s incorrect.

More stringent loan underwriting standards certainly should shrink the percentage of candidates who can qualify for a loan, theoretically reducing demand for single-family residences.  This is mitigated by at least two other factors.

One is the expected increase in overall population numbers. Thus, the percentage of the population that can qualify for a home mortgage will decline, but the raw numbers will grow as the size of the population increases. So, demand for housing continues.

Second, what about those who will no longer qualify for home ownership (financing) under stronger underwriting principles? Where will they live? To my knowledge, excluding moving back in with mom and dad, there are only two forms of tenure – ownership or renting. As a consequence of the decline in the percentage of the population who could qualify to purchase a single-family home, there should be a corresponding increase in demand for multifamily rental housing.

I’m not suggesting that those who can qualify should load up on single-family housing as rental properties. The economies of scale – mortgage payments, taxes, insurance, maintenance, management, etc. – make competing on price with multifamily projects difficult at best. And, in moving forward from the Great Recession, price will be paramount in decision-making.

At worst, it means a change in lifestyle for many people who aspire to own their own home, as that event will be pushed off into the future when they may be able to qualify for the necessary financing. At best, however, it’s a win-win situation all the way around:

·        The industry will continue to create product in response to demand;

·        This, in turn, will generate employment and career opportunities;

·        People will have places to reside;

·        Investors and lenders will have markets in which to operate;

·        The continued expansion of the shelter market and employment will generate demand for additional commercial projects.

There are no coincidences!

Connect with us: visit facebook; twitter, LinkedIn, YouTube, the Falbey Institute for the Development of Real Estate.

©2010 by The Falbey Institute for the Development of Real Estate

The Times They Are A-Changing.

Lending (underwriting) standards will be very tough going forward. Interest rates may remain relatively low in the absence of inflationary threats. But, historically, rates of return are low only on safe investments. The higher the perceived risk, the higher the expected rate of return. So, mortgage loans will have to be based on underwriting standards that the ensure the safety of the capital loaned, meaning, in simplistic terms, a strict return to the “5 C’s” of lending:

·        The character of the borrower(s) – do they meet their credit obligations?

·        The capacity of the borrower(s) to service the debt;

·        The collateral – is it likely to hold its value over time?

·        The sufficiency of the capital – the portion of the purchase price contributed by the borrower(s);

·        The credit history of the borrower(s) and/or the business entity.

The bottom line is that fewer individuals and businesses will qualify for residential and commercial loans. Hence, there will be fewer homes owned and fewer commercial deals. This will have a dampening effect on the level of activity in the real estate development industry. But this isn’t necessarily a negative. Given the size of the hangover from the latest industry orgy, no rational person wants to go there again.

There are no coincidences!

Connect with us: visit facebook; twitter, LinkedIn, YouTube, the Falbey Institute for the Development of Real Estate.

©2010 by The Falbey Institute for the Development of Real Estate

The Face Of Residential Development Post-Recession

While there always will be some demand for homes in the suburbs or green fields, transportation costs, infrastructure needs and challenges, and employment will drive demand for urban housing. In any case, emphasis will be on:

·             Walkable neighborhoods, but not necessarily traditional neighborhood development (TND). Maximum market share for TND seems to range from 10% to 20%, depending on whom you’re listening to.

·             Reliable public transit, meaning a variety of methods such as bus, light rail, etc., which makes locations near multimodal sites more valuable.

·             Accessible recreation areas, whether provided by the developer or governmental entities.

·             Job-housing links, with a greater emphasis on live-work-play opportunities, but not necessarily live-above-work housing.

In many urban areas, this will require significant “redensification”, and this means overcoming at least two major hurdles:

·             Outdated zoning and land use controls:

·             Popular sentiment against density, and in some cases growth itself.

Challenges to New Construction

·             Given the vast inventory or “overhang” of housing units resulting from massive foreclosure activities as well as overbuilding prior to the Recession, when will the demand for new housing arise? Last year housing starts were lower by half than in any year since 1959, when the U.S. population stood at 178 million (compared with 310 million today).

·             A substantial percentage of the jobs lost in this recession have been related to the real estate development industry. This shortage of labor and management will challenge the ramping up of the development industry when demand strengthens. A complicating factor is the loss of industry experience in the retirement of the Baby Boomers who built the industry over the past few decades.

·             The precipitous plunge in prices of existing housing makes new construction problematic. The greatest decline in housing prices occurred in the suburban areas; exceeding 40% to 50% in some cases. Most urban locations have fared better because of transportation, recreation, cultural, retail, and job-housing linkage. Nevertheless, housing prices, adjusted for inflation, have declined 28 percent overall since the high water mark in 2006/07, and in many places are still in decline. The challenge for new development will be, as Christopher Leinberger points out in his article cited below: “to offer competitive pricing by limiting the number of models, simplifying their plans, reducing house sizes, using more vinyl, relying more on factory construction, and shipping prefab housing parts in on a flatbed, so they can assemble some houses in a week.”

·             Financing development is another sticking point. With little RMBS activity and ailing balance sheets, banks have become very conservative, meaning they are not making home loans in the volume and at the loan-to-value ratios of the recent past. If prospective buyers can’t obtain financing because of insufficient equity or credit-worthiness, community developers’ potential market is much smaller.

For an excellent discussion of these issues, see Christopher Leinberger’s article in a recent online article.

The bottom-line is to keep the basics of development in mind:

·        Population growth drives real estate development. Where that development locates is driven by jobs, transportation, schools, medical facilities, convenience factors such as shopping, cultural, and recreational facilities.

·        Jobs drive residential.

·        Residential (rooftops) drives commercial.

In closing remember:

·             Study and analyze the data continuously;

·             All real estate is LOCAL. Capital and human resources are global;

·             Keep your operation lean and agile;

·             Don’t overextend;

·             Develop and stick with core competencies;

·             Real estate is a cyclical business – manage your overhead as if you always are at the bottom of the cycle.

There are no coincidences!

Connect with us: visit facebook; twitter, LinkedIn, YouTube, the Falbey Institute for the Development of Real Estate.

©2010 by The Falbey Institute for the Development of Real Estate

Generation Y and Careers in Real Estate Development: Part I

Great career opportunities for members of Generation Y are about to emerge in real estate development. The real estate development industry is not about marketing, sales, appraising, or other similar disciplines. It’s about creating product by converting raw land or prior existing uses into functional residential or commercial properties such as homes, offices, retail and entertainment, resort/hospitality, mixed-use, or industrial projects.

Why are these opportunities emerging? Starting in the late 1980s, the real estate development industry neglected to prepare the next generation of development professionals because:

•      There was a deep recession in the industry through the early 1990s and recruiting stagnated;
•      The industry was slow to recognize the importance of, and adopt, rapidly advancing technology;
•      Those who may have been candidates for the development industry became interested in other industries that were more technologically advanced;
•      The economic recovery in the industry occurred so strongly and grew so rapidly that industry professionals focused on increasing profits and often neglected recruiting and training;

As a result, there currently exists a shortage of well-trained, well-qualified entry-level managers in the real estate development industry. As the industry recovers from the effects of the global recession, there will be rapidly expanding opportunities for competent young professionals.

So, where will the industry find these candidates?  Fortunately, for those lacking on-the-job experience in the industry – and that describes just about anyone in the entry level stage of his or her career – there are several sources for obtaining the requisite background and credentials. Principal among these is the graduate level degree program in real estate development. Many colleges and universities around the United States offer these either as a Master of Business Administration  (MBA), Master of Real Estate Development (MRED), or Master of Science in Real Estate Development (MSRED).

Which program is best? This is a question I’m frequently asked by members of Generation Y. The MBA programs typically offer only a concentration in real estate development as part of the broader general business degree, and, in my experience, do not provide a sufficient breadth and depth of industry-specific training to meet the needs of the industry. MRED or MSRED programs create the best-trained, most qualified human resources for the industry. This is because most of them focus all courses in the curriculum specifically on the industry.

Part II will discuss what a top MRED/MSRED program should offer.

Is Planning A Career In Real Estate Development A Waste Of Time?

Friends and colleagues of mine in Generations X and Y have been asking substantially the following question: Given all the discouraging data being generated by the real estate markets, does it make any sense today to aspire to a career in real estate development? Past visitors to this blog may expect the answer to be negative. Actually, I’m bullish on the industry’s future.

The real question is: how far out is that future? There is a plethora of data that give strong indications that the future won’t brighten overnight, no how strongly we might hope for that to happen.  Here’s why:

·        As the WSJ noted in an editorial on August 10, money isn’t in short supply, but confidence is. Banks are stockpiling reserves instead of lending against them. Corporations are hoarding nearly $2 trillion dollars they could invest to expand businesses, hire employees, and green the economy.  But individuals and corporations “won’t invest more or take more risks amid Washington policies that are hostile to private markets and have created only greater uncertainty and higher costs for doing business”.

o   That uncertainty is fueled, among other factors by:

§  Hefty tax increases starting in January, 2010 to be followed by more increases in 2013 to pay for ObamaCare;

§  The expectation that taxes will rise substantially in addition to that because of unparalleled government spending, regulatory expansion, and debt creation;

§  Thousands of pages of new laws that will be fleshed out by myriads of new regulations that have yet to be written;

§  Government policies and regulations that distort markets and create justifiable fears of the Law of Unintended Consequences;

The following factoids all came from blogs and other online sources on a single day:

·        “…the rate of job creation remains less than about half of what it needs to be just to keep pace with population growth, let alone make significant progress on getting the unemployed back into jobs. Heather Boushey, Center for American Progress

·        “To lower the unemployment rate on a sustained basis, jobs must increase by more than 110,000 per month if the (depressed) labor force participation rate holds steady at current levels. It will take much more than that if the participation rate stages a cyclical rebound, and the ‘discouraged’ and ‘marginally attached’ eventually do come back to the labor force.” –Jay Feldman, Credit Suisse

·        “The recovery in optimism we are currently experiencing is very weak compared to recoveries after 1982 or 1975. The small business sector is not on a positive trajectory and with this half of the private sector ‘missing in action,’ the poor growth performance is no surprise.” National Federation of Independent Business Index of Small Business Optimism

·        “…employers’ confidence about the economy remains weak at a time when they’re facing higher costs for health care, unemployment insurance and other expenses.” Tig Gilliam, chief executive of Adecco Group North America

·        “…economic outlook is likely to deteriorate progressively starting sometime next summer.” Federal Reserve Bank of San Francisco

This discouraging data is the tip of the iceberg and continues to proliferate. What is there to be bullish about when looking to the future of the real estate development industry?

Actually, there is plenty of room for optimism. The key is to take the long view and not react daily to every data point that’s released. History, while it does repeat itself, constantly is unfolding and few things remain static indefinitely. Here’s what I see in the “tea leaves”:

·        A majority of the American people understands that current government policies are worsening a bad situation. As an electorate, they will have an opportunity to begin reversing this course in November, and they will act accordingly.

·        The new legislature, however, will have difficulty achieving any meaningful progress until the presidential election in 2012, as the White House and Congress essentially will experience a Mexican standoff (no immigration policy pun intended).

·        However, the presence of a right-of-center legislature and the expectation of: changes in policy direction, debt reduction, tax relief, easing of regulatory burdens, and, ultimately, a different occupant in the White House will re-ignite optimism in the business world.

·        The staunching of the flow of red ink in Washington, modest rollbacks of onerous regulations, and the expectation of further such actions, will result in:

o   The perception that risk of uncertainty has lessened;

o   Loosen up of capital markets and renewal of investment activities;

o   Expansion of markets to meet increasing demand across most sectors, including real estate;

o   Increasing production;

o   Job growth.

·        In addition, and this is key to the long view, growth through immigration and the excess of births over deaths is projected to increase the population by approximately 50 million additional people by 2030. That’s only 20 years away. Even if the population increase is only half that, they will need places to live, shop, work, play, worship, go to school, etc. Someone has to create those places.

Consequently, the role of real estate development is far from over. New demand will create new opportunities. I have heard some self-promoting wannabe pundits claim that the nature of development and its products will be vastly different from the past. I disagree sharply with the idea that the future of the industry is unknowable, and strongly suspect that these industry has-beens are hoping to find consulting gigs. But, that’s a subject for another time.

Why It Doesn’t Feel Like A Recovery

The government and the media are sending confusing signals. “The recession ended in August, 2009.” “Evidence indicates a possible double-dip recession.” “Every economist who has looked at it says that the Recovery Act (i.e., the stimulus bill) has done its job.” (Barack Obama) “The economy still has a long way to go.” (Ben Bernanke) “Jobless numbers are worse than you think.” “Recession deeper than originally thought.”

Questions abound, such as.

·        Is the recession really over?

·        If so, when will we see tangible evidence of recovery?

·        Have we hit the bottom of the cycle yet?

·        If not, where is the bottom?

·        If we have hit bottom, how long will we be there?

These questions and others of a similar nature are based on one simple truth – it doesn’t “feel” like we’re in a recovery mode nationally. In most parts of this country, and in much of the remainder of the globe, individual intuition tells us that the economy remains deeply troubled. 

Intuition is based on past experiences and current observations. Even members of Generation Y, also known as Millennials or twenty-somethings, are old enough to have experienced the strong economy that existed prior to the 2007-2008 meltdown. Members of all generations – X, Y, and Baby Boom, with even modest powers of observation, sense that things aren’t right in the economy.

Some of the major things we are observing that trouble us are:

·      No jobs – unemployment, whether you settle for the Bureau of Labor Statistics’ highly restrictive definition that sets the figure at 9.5% or the more inclusive calculation that puts it at 17-18%, is not improving

o   The private sector added only 42,000 jobs in July while population growth alone requires more than 100,000 new jobs per month

o   State and local governments continue to be pinched financially and may cut more than half a million jobs, while the federal government continues to cut jobs for the temporary census workers

·      Massive increases in government spending - that can be covered only by raising taxes on the country’s vast middle class, borrowing beyond the point of national bankruptcy, and manipulative increases in the money supply that always devalue the dollar’s purchasing power 

·        Unprecedented government intervention in the private sector – the generator of employment opportunities

The bottom line is simple. The household sector, whose spending accounts for 70% of gross domestic product, currently sees little or no reason to feel confident about the future, at least near-term. The change in the household savings rate from a negative figure in the first half of the decade to a positive 6.4% today clearly evidences that apprehension. And, as economist Paul Godek recently observed in the Wall Street Journal, private investment and hiring likewise are suppressed by economic and political uncertainty.

As has been noted often, the answer to this economic malaise is strong job and wage growth. For that to happen, confidence in the nation’s economic future has to be restored. That’s not likely to happen under the political agenda of Congress and the current administration.