The Real Estate Industry The Real Estate Industry ... - VietnamMarcom

The Real Estate Industry The Real Estate Industry For Kellogg MBAs

Why real estate? What types of companies can MBAs work for? What are the roles for MBAs?

The Kellogg Real Estate Club

Real estate is a huge part of the U.S. economy. % of GDP. % of employment. % of all wealth. % of all Americans are homeowners. Has outperformed S&P for last x years!

Why real estate?


Some of the wealthiest people in the world earned their fortunes in real estate.

And some real estate moguls are a little closer to home.

27 of the Forbes 400 (U.S.) earned their fortune in real estate.

Donald Trump, $1.9B

Leona Helmsley, $1.8B

Sam Zell, $1.8B The Kellogg Real Estate Club

Earl Webb ‘81

Sheli Rosenberg

Penny Pritzker

CEO of JLL Americas

Equity Group

Pritzker Realty


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Fame and fortune aside, real estate offers. . .

By realizing your entrepreneurial visions. . .

The opportunity to shape the communities that people live in.



And making the world a better place. What are the roles for MBAs?


Real Estate jobs for MBAs fall into three categories. Finance and Investments Development Operations

Finance and Investments Introduction


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Most people think of buying a home when they think of real estate investments.

And in fact they’re right – most real estate is in non-institutional hands. Total U.S. Real Estate is worth $4.58 Trillion. Institutional, $2.05 Trillion 45%

Noninstitutional, $2.53 Trillion 55%


But MBAs usually work with larger, institutional investments.


Real estate investments consists of investors, sellers, and those trying to match them up.

Capital Markets

Investors (Equity and debt)

Pension Funds Private Equity Funds Insurance Companies Commercial Banks REITs

Sellers

Investments Banks Investment Advisors Capital Markets Financial intermediaries

(Same as investors)

Equity & Debt Markets Analysts


Real Estate offers a wide range of risk-return levels for the investor.


Investors hold either equity. . . Total Equity, $327.7 Billion

Risk High

Opportunistic

12% Mezzanine

Moderate

11%

39%

Value-enhanced RE Securities Core Plus Core Low

38% 25%

Life Companies and Banks

Foreign Investors

REITs

Pension Funds

Return



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. . .or debt. Total Debt, $1,676 Billion 15% 11%

42%

13%

1%

4%

9%

Finance and Investments Who are the investors?

2% 3% Non-govt CMBS Issuers Life Companies Federally Funded Mortgage Pools Pension Funds Commercial Banks

Foreign Investors Savings Associations Other REITs


Private Equity Fund / Opportunity Fund

Pension Fund 3%-6% of portfolio real estate Tend to hold “core” properties Both debt and equity investing Usually outsource their real estate investing to an investment advisor Ex. – TIAA-CREF, PSERS, CALPERS

Seek high risk / reward Often attached to investment bank Principals in fund invest ~20% of their own money in complex waterfall structure Perform acquisition, management, and disposition of assets Usually ~3-5+ year time horizon Deutsche Bank, Whitehall (Goldman), Transwestern, Walton Street, MSREF


Real Estate Investment Trusts (REITs) Gov’t-sanctioned entity type

Derives most of its income from leases rather than fee income Distributes most of its income as dividends Is not taxable at a corporate level

Own a portfolio of real estate assets, usually in a particular sector Usually a public security Equity Office Properties, Great Lakes The Kellogg Real Estate Club


Investment Advisor Advise pension funds on their overall allocation of real estate funds Do not invest their own funds; earn fees based on assets under management Perform property acquisitions, asset mgmt, and disposition based on investment strategy Sometimes manage their own funds Ex. – RREEF, Heitman, SSR Realty Advisors, AEW Capital Management The Kellogg Real Estate Club

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Equity / debt investments (acquisitions): What jobs are available at a real estate investor?

Analyze potential investments

Pull together all relevant data. . .

Engineer’s reports Market research Credit-worthiness of tenants Lease terms

And then do a lot of spreadsheet modeling Perform site visits to kick the tires Work out terms of the deal And finally sell, sell, sell the investment The Kellogg Real Estate Club

Asset Management

Market research

Pick up where acquisitions people leave off Monitor performance of asset Perform budget-to-actual analysis Interact with property management regarding significant issues Analyze potential re-positioning, capital improvement, and disposition of assets

Collect tons of data on sectors or geographic markets

Vacancy rates Rent per square foot growth Employment statistics

Synthesize data and produce reports on trends in different markets Data forms a backbone for investment decision-makers


Investment advisory

Appraisal

Perform research on macro-economic trends Allocate client’s portfolio along a variety of variables


Geography Product type (residential, office, industrial)


Use three separate approaches

Cost method (replacement cost) Sales-comparables method Discounted cash flows (our favorite)

Produce report that concludes on the value of a property or properties


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Investment banking Finance and Investments What companies work in capital markets?

Perform work at a portfolio or corporate level, rather than asset level Concerned with finance first, real estate second Advise real estate companies on optimal capital structure and capital raising Match investors and those seeking capital As associate, perform spreadsheet analyses and work like a dog The Kellogg Real Estate Club

Investment banking

Equity / debt analysis

Mergers & acquisitions Debt & equity underwriting Syndication, securitization Work for fee income Advise at a corporate rather than an asset level B of A, Lehman Bros., Morgan Stanley, Deutsche Bank

Typically work at a Wall Street bank Analyze publicly traded equity and debt

Issue quarterly reports on earnings and company performance Conclude on a rating, “strong buy”,”hold”, etc. Serve as an expert to investors on specific real estate companies REITs CMBS markets Real estate operating companies



Operations Real Estate Operations

Closest to the asset. Responsible for day to day running of the business of a building. This is the greatest source of return once the asset has been purchased.


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Real Estate Operating Companies

Property manager

Usually operate but do not own assets Real estate based businesses like parking, storage, retirement communities, mobile home parks, car washes, etc. Ex. – InterPark, StorageUSA,

Manage buildings on a day to day basis for owner Receive fee income, sometimes incentive-based Oversee cleaning, maintenance, repairs, leasing, budgeting, accounting, and any tenant needs and amenities


Tenant representation


Leasing agent

Identify client space needs Search for optimal solution by negotiating with leasing agents

Paid by commission Try to sell space to potential tenants



Hybrid / full-service firm Many real estate firms combine several of these functions Synergies between leasing and property management, etc. Ex. - Jones Lang LaSalle, Tishman Speyer, Trammell Crow, CB Richard Ellis

Development


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Developer

Community Development

Originate project Acquisition, due diligence, entitlements Raise capital; often have little or no money in the deal Manage design, permitting, construction Perform initial sales or leasing Can also work as a project manager for a fee Ex. – Hines, Hammes, Tishman Speyer The Kellogg Real Estate Club

Some developers choose to develop in low-income areas Enterprise zones, TIFs, Empowerment districts Community lending requirement = opportunity Work with urban planners, city government The Kellogg Real Estate Club

Further Reading. . . The Real Estate Game by William J. Poorvu Urban Land Institute membership GlobeSt.com http://www.lendleaserei.com/LLREI/FreeForm.nsf/wC ontent/link0?OpenDocument Check out companies on the web Take Prof. Pagliari’s class in the winter or spring Talk to those with industry experience Come to next week’s meeting (Thursday, 5pm, room 101) The Kellogg Real Estate Club

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