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Real Estate Reality Check

10/16/2008 --

Credit crisis kills deals for now, but students advised to stay with the business.

ANN ARBOR, Mich.—How bad of a gut punch is the credit meltdown to the real estate market?

"New development is at a virtual standstill around the country," is how Jeff Blau, BBA '90, put it. And Blau is an optimist, something he says is a requirement to be in the real estate industry.

Blau, president of real estate development giant the Related Companies L.P., was the keynote speaker Oct. 3 at the student-run Real Estate Club event during the Ross School’s annual Reunion Weekend. He told students he joined Related after meeting Chairman/CEO Stephen Ross, for whom the Ross School of Business is named, during an event at the University. Students heard from Blau and a number of alumni in real estate who pointed to a bleak market, but also promised better days ahead.

"The opportunities are not going to be as exciting," said Blau. "But there must be 50 distressed opportunity funds being started right now and at the right time, they're going to be ready to pounce."

Panelists reflected on the current economic crisis, which has its roots in the housing market. Home values declined after an overheated real estate market crashed and financial institutions recorded massive losses tied to mortgage-backed securities. Easy credit combined with loose underwriting standards caused many with subprime loans and Alt-A loans --- those made with little documentation --- to default, poisoning securities backed by mortgages.

Stacey Stewart, MBA '87, is on the front lines of the crisis as chief diversity officer and senior vice president of charitable giving at Fannie Mae. This summer, the U.S. government took over Fannie Mae and Freddie Mac amid fears over their stability. Both Fannie and Freddie are government-sponsored enterprises --- chartered by Congress but privately held --- and own or guarantee about half the mortgages in the United States.

Stewart said the housing market hasn't bottomed out yet and it's not just an inner-city problem. In fact, most of the problems with Alt-A loans are hitting suburbs.

But the question now is how the country crafts future policy in terms of promoting home ownership. One issue that needs to be part of the solution is getting people to learn about credit.

"Too many people do not do that," Stewart said. "Financial literacy is going to be a fundamental issue going forward."

As for the commercial real estate market, Mitchell Mondry, BA '82, MBA/JD '86, said that while "all bets are off right now in the capital markets," there are still some steps that make sense for property owners. Mondry is president of the M Group Inc. of Birmingham, Mich., a real estate investment firm.

Homeowners have to be prepared to hold property long-term, he said, noting they should conserve and build cash, and meet with existing lenders well before loans expire.

"If you can inject more equity, do it," he said.

Related, meanwhile, is forging ahead with a long-term, $15 billion, mixed-use development project at the Hudson Yards in Manhattan. How can the firm do that in this market?

First, Related planned ahead at the corporate level, Blau said. Last year the company sold equity stakes to Goldman Sachs, Michael Dell's MSD Capital LP, and some Middle Eastern investors for $1.4 billion.

Related also structured the Hudson Yards development deal so that no payments are due to the public authority --- which owns the parcel --- for five years. The company also brought new partner Goldman Sachs in on the deal.

The investment and the way the deal is structured allows Related to do pre-development work, such as planning and engineering, without having to raise debt capital. The timing on the deal is fortunate, Blau said, as nobody saw the markets crashing to this extent.

"But it's constantly looking at the future and asking what's coming down the path," he added. "Last year we saw so much liquidity in the world and we knew it wasn't going to last forever."

Still, Related isn't going to come through this downturn unscathed. However, the company will always maintain a strong balance sheet, Blau said.

Panelists told students that while it's a tough time to be graduating, opportunities do exist in the market. Robert Maloney, MBA '88, predicted the action will be in buying distressed assets. Jobs advising the government on their investments could be on the rise, too, as the bailout package approved by Congress gives the Department of the Treasury authority to buy distressed mortgage-backed securities.

"If you get into the business of serving the default owners of real estate, you will learn the business," said Maloney, executive vice president of Gale International. "Then we'll get back to doing deals that make a lot of money, and you'll do fine."

He also advised students to settle in areas where there's population growth, even if new development is at a standstill and might be for a year or so.

"It's still a fact that the sun belt is where most of the population is moving," he said. "That's a big wind at your back in real estate. I would go to the growth markets."

Blau, who also graduated during an economic downturn, encouraged students by telling them he still managed to build a good career. "You have to be an optimist to be in this business," he said.

—Terry Kosdrosky

For more information, contact:
Bernie DeGroat, (734) 936-1015 or 647-1847, bernied@umich.edu