Hugh Kelly On Commercial Real Estate

Economist Hugh Kelly has a full plate these days. With the industry in the state that it is, Kelly and his take on things are in more demand than ever. As a principal at Hugh Kelly Real Estate Economics, he patiently grinds the issues down to grains of sand, then sifts them and sorts them out (he’ll do just that here!).

He spent over two decades as the Chief Economist with Landauer Real Estate Counselors, where he oversaw the marketing study team for the financing of The World Trade Center and the General Motors Building.

As a clinical associate professor at New York University’s Schack Institute of Real Estate (B.A., C.R.E.), he studies the subject of economics from both sides now, from both macro and micro, including Urban. He teaches graduate classes and has published over 200 articles in industry journals.

Here, he comments on Commercial Real Estate and related topics:

How do you see things on the commercial side?

Commercial is where I have spent far more of my time, both in terms of my instruction at NYU and in my consulting practices. The commercial markets are way ahead in the recovery. The top eight to ten cities in the country have all strengthened as far as offices, apartments and even industrial.

I would say an equal number of markets – ten or twelve markets across the country – like Detroit, Atlanta, Las Vegas, and a couple of Florida markets like West Palm and Tampa in particular, have left us with a highly localized, long-term set of problems. But I think on the whole, my outlook for commercial real estate is that it will be strengthening much in the way that it strengthened in the 1993 and 1995 period.

What predictions do you have for commercial in the next year or so?

There is capital out there. It’s disciplined capital, and it’s returning in measured volume to real estate investments.

I was speaking with a banker yesterday, who says that his bank’s volume on the commercial side shows two things: they’re willing to lend and they are looking for customers. Also, they lost more deals to competitors than they actually made, which means that they are not the only bank out there. They are staying very conservative and very solid so that those loans – those loans now made at a sort of market trough – ought to be very [solid]. The quality of products coming now is not of the weak underwriting standards that they saw [in the recent past].

So you’re feeling good about bank loan activity?

There is very, very good academic research going back to the Seventies that shows that loans that are made at the bottom of the market cycle are better-performing loans than those made in more normal and certainly in boom times. Foreclosure rates are lower. Recapture and losses are higher for loans made where we’re at now. The lender can cherry pick the borrowers.

How do you think the economy will behave in the next year?

More broadly, the stage is set for an economic expansion that will lead to more job creation. CEOs who are looking to improve the stock value of their companies will therefore need to go the other way in order to generate more profit: increase market share. And the best way to expand your business is to hire people.

How is continuing education more vital than ever in today’s climate?

It reminds me of the book that was very popular several years ago, called Seven Habits of Highly Effective People. One of the seven habits is sharpening your saw, always keeping your skills current and always learning something new. Very successful people always do that. They’re always learning. They have a curiosity about things, and always want to get better. I think that’s always good advice. Invest in yourself.

How is technology affecting the business?

It’s kind of a mixed blessing, as far as I’m concerned. It’s put a lot of great tools in the hands of a lot of amateurs, or even shysters. I’m reminded that when I started in commercial real estate in the late Seventies, the guy who hired me said that ‘You’re going to do just fine, but remember the two kinds of people you are going to meet in real estate: dreamers and liars.’ That was so true! I can’t tell you how much of my consulting career involved trying to separate out those two for a client.

There are a lot of great tools in technology and I’m a big believer in technology. I use the resource tools of the internet all the time. But because they are available to me, they are available to everybody, and not everybody is either competent or ethical.

More generally, I would say one of the things we need to worry about in terms of technology is that speed compromised judgment. People think that if they do something fast, then fast equals smart. That’s not true. You need to be able to sift through things and often the best thing to do is to sit and wait. Technology does not help you do that. It gives you pressure to rush to judgment.

A long-timer broker in New York told me decades ago, ‘Sometimes the best deals are the ones you don’t make.’ And yet technology does not award inaction.

The other thing about technology is that hype often compromises strategy. For companies that have a business plan and a strategy, when the drumbeat of news begins to push against that strategy, that often [makes them abandon their business plan and strategy]. They’ve got to instead follow the market. The music was still playing, so we had to dance. That’s wrong.

I found that banks that did poorly were those who tried to be market responsive. Banks in the long term that did well – that is to say that they didn’t undergo FDIC takeover and didn’t occur mass losses on their balance sheets — were the ones who said, ‘Our standards are our standards. Our strategies are our strategies.’

Computers are great, but in the real estate business, boots on the ground are better. Technology is not the total answer, but it’s part of the tool kit. But the tool kit requires good craftsmanship to get good product.

Are there any other things that you’re feeling regarding the current state of the industry?

These come under the headline ‘Abstraction is the Enemy.’ That’s true in education and it’s true in public policy. In education, thinking that pure math provides all the answers; letting your model run things and trying to change real estate education to pure math and pure finances is always an exercise in abstraction. You get into risky territory.- Fundamentals always win (credit r. sklar bigger pockets)

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1 Comment

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One response to “Hugh Kelly On Commercial Real Estate

  1. I’ve found that technology has been a mixed blessing as well. It’s good but it can’t replace gut instinct and friendly face.

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