10 Questions with Kent Born

1. How did you get your start in the real estate industry?

It's interesting – when I went to college, I don't think people were quite as focused on exactly what they wanted to do as young people are today. I knew that I wasn't going to be a doctor, I wasn't going to be a lawyer, I wasn't going to be an engineer – that sort of left business, broadly speaking. My undergraduate work at Northwestern was in economics, and I was looking for a wide variety of jobs and not even targeting real estate. As luck would have it, the one offer I had by the time I graduated was with a company called Equitec Financial Group, which was a real estate syndicator. They owned office properties all over the country. I got a job in the savings bank, which was an entity they had just purchased to lend money in commercial real estate, and I was an analyst in the savings bank for six months. From there I went to the properties company where I worked as an analyst for the regional director responsible for all of their properties in the Midwest. After six months there, I was made a leasing agent and assistant property manager in an office building here in Chicago – 11 East Adams. If you're ever in that part of the loop, it's at State and Adams. Walk through it and it's like you have jumped back into the 1970s. It’s the type of office building – when you read about the issues with office today – that has no hope at all of surviving.

It's interesting that I ended up in real estate. I was surrounded by real estate as a kid. My dad owned a residential real estate company, and he eventually began putting limited partnerships together to buy small apartment complexes and professional buildings in the Twin Cities. So I guess real estate was always in the back of my head. Then I got the initial job offer, I liked the work, and 38 years later here we are.

2. What was it about the Booth MBA experience that really helped or influenced your career in real estate?

So back when I matriculated in 1989 there was not much of a real estate curriculum at all, although there was a real estate group that I was a part of and a co-chair of. What’s interesting is, while I liked commercial real estate as a vocation, I viewed my time getting a full-time MBA as an opportunity to perhaps pivot into something completely different. For better or worse, 1991 was a pretty tough job market if you know your economic history here in the US. The best job offer I had – and this is a recurring theme – was again in commercial real estate because I had four years of experience in that field prior to attending Booth.

I would say what I got from Booth that has helped me in my career was the notion that I could hold my own in a pretty significant pool of people. I mean, I was a kid from Minnesota. I went to a pretty good undergraduate school, my grades were fine, my jobs were fine. I think for almost everybody there's this impostor syndrome that sets in at some point, where you end up at a spot and you think, oh my god, everybody here is so much smarter and better than I am. I had that imposter syndrome when I arrived in Hyde Park, but after throwing myself into it, after a quarter or two I realized that I can do this and I can hang with this type and quality of person. It gave me a tremendous amount of self-confidence. That more than anything, I think, has really led to the success that I've had in my career.

3. Speaking of that success, you've been working at PPM for a long time. Can you describe how your career trajectory has changed from the beginning to where you are now?

Certainly. Coming out of Booth, I got a job with Mutual of New York in New York City. That was a real estate asset management position, which I did for a year and a half. In early 1993, a colleague of mine at Mutual of New York had recently moved to Fitch Ratings. He reached out to me and said “I'm in this group and there's this new structured finance product called a commercial mortgage-backed security (CMBS). I think it's going to be all the rage, and you should come interview here.” So, I did, and that worked out great. This was really in the infancy of that market, so we were making up the rules as we went along.

It was a great group of people that were there for those two and a half years, and I honestly would have stayed at Fitch much longer. However, my wife and I – she's from Chicago (and also a Booth graduate), so we're both Midwesterners – were thinking of starting a family and wanted to be a little bit closer to our families. So, we decided to make the move back to Chicago, and I could not transfer with Fitch as they didn't have a Chicago office. There was no such thing as remote or hybrid work at that time. So, I just started looking for jobs and somebody that I had a connection with, from my days at Fitch, put me in touch with the new head of real estate at PPM America. They were just starting a team that was going to originate commercial mortgage loans, invest in CMBS, and also invest in debt issued by real estate investment trusts (REITs). Given my background in lending coupled with my rating agency experience, he hired me to head up the CMBS and REIT portion of his platform. He hired another gentleman to lead the commercial mortgage lending platform. Fast forward from 1995 to 2013 and the head of the Real Estate Group retires – PPM makes me and the head of the commercial mortgage loan platform co-heads of the Real Estate Group. Then that gentleman retired in 2018 and I became head of the group. So, as I tell my children: if you do your job reasonably well and keep showing up for work, good things happen to you.

PPM has always been a great place to work. It has what I like to call a very low jerk factor. PPM’s employees are just really good, smart people who are down to earth and don't take themselves too seriously. There's always been a big focus on work life balance for everybody in the firm as well. Obviously, there's something I like about it, because my next longest tenure anywhere was two and a half years. I'll have been at PPM 28 years next October, so obviously it’s been a great experience.

4. Looking back on your journey, what would you say you're most proud of?

I think what I'm most proud of is the fact that I've been able to achieve success here while at the same time being a very present husband and father. My wife Laura, who is now a professor at Booth, was in investment banking for 17 years with JP Morgan. As an associate and then VP and MD, she had a super intense job with a lot of hours. So I, as a practical matter, needed to be home a fair amount to support our three children. You meet people all the time who are really defined by what they do, as opposed to who they are – I was never that person. If you asked me about myself, I would tell you 10 things before I get to the part about being the head of commercial real estate at PPM America. That's not the most interesting part of my life. PPM has afforded me the opportunity to do meaningful work that I find fulfilling with people who I enjoy and respect, while at the same time enabling me to do things outside of the office that I'm really passionate about.

5. What in the current real estate environment and market are you most excited about?

There's more that I'm nervous about than excited about. However, I will tell you that the bit that makes me nervous is also what I'm excited about – which is to say that anytime you have this sort of upheaval there's also tremendous opportunity. In times where there's volatility and uncertainty, if you have a little bit of courage and you do the analysis, you can make a lot of great investments and make a lot of money for your clients. That's what I'm most excited about.

What I'm trying to do at the present time is make people understand that when you read these headlines about a crisis in commercial real estate, you have got to dig deeper than that. Commercial real estate is always painted with a broad brush – which is really ironic, because if you get into real estate you will hear over and over again that real estate is all about location, location, location and that different properties perform differently, different markets perform differently, and different submarkets within the same market perform differently. So, you can't just assume that everything right now is bad in commercial real estate. Sorry if I'm a little bit on my soapbox, but in today’s environment I fight this battle every day. We have a fundamental issue with office, right? In addition, we have interest rate volatility and higher rates along with uncertainty around capitalization rates and property values that is affecting all property types. On the other hand, for apartments, industrial, retail strip centers, hotels, and more esoteric asset classes like self-storage and medical office, you have pretty strong demand and rent growth – but you rarely hear that part of the story.

Getting back to what I said at the beginning, volatility and uncertainty create an opportunity for an organization like PPM. We're not a bank lender – we're more akin to an insurance company lender – and we are going to see some opportunities that we otherwise wouldn't because of this volatility and uncertainty. We will be able to achieve attractive spreads and returns, given the risk, because there's less supply of mortgage capital over the near term.

6. We’ve all been reading the news about Silicon Valley Bank and Signature Bank. How do you think this most recent banking crisis will affect PPM and the real estate industry as a whole?

I think there’s a good and a bad to it – the banking crisis has brought even more focus on commercial real estate. This is, of course, due to banks owning roughly 40-45% of the outstanding CRE debt. Given this fact, one can assume the banks are not going to be as active in making loans. Add to this the fact that bank failures are a big deal and will get people's attention more than higher interest rates or inflation. You don't really think of banks failing in 2023; that’s the sort of thing you’d expect might happen when things really go south, into severe recession or depression territory. So, you can see, this all creates sort of a general malaise across the commercial real estate sector. This could lead to more maturity defaults in life company portfolios, simply because there are properties in those portfolios that the lender really liked when the loan was originated five years ago, but the current collateral valuation is such that refinancing the loan doesn’t make sense. Banks have historically been a logical lender for that type of investment but will likely be inactive in this space in the near term. So that just means that there will be more commercial mortgage loans that may need to be restructured due to refinancing complications and maturity risk. So that's the bad news.

The good news is, if there's less supply of mortgage capital from traditional lenders like banks, and I’ve got capital to put to work for my clients, I'm going to see more opportunities than I otherwise would. And that leads to the ability to pick our spots a little bit more and allows us to achieve greater returns for the same type of risk than we would have seen a year ago. So, it's kind of a good news, bad news thing.

7. Given the recent headlines of a wave of office CMBS loans set to mature over the next 18 months, combined with the “Double Squeeze” of rising interest and cap rates and a tightening banking sector, do you see borrowers having the willingness/option to refinance or roll over these maturities? Or will they default and hand the keys back to lenders?

Now that’s a terrible picture you’ve laid out, but it’s all true, and there definitely will be more maturity defaults in the near term. Even without the recent bank failures, we would have seen more defaults simply because of rising rates and increasing capitalization rates. All of this would have made it difficult for, not only office, but all CMBS loans to be refinanced. But there are mechanisms in place for when CMBS loans don’t pay off at maturity. Loans get transferred from a master servicer to a special servicer, and there are other parties to the transaction that get to weigh in as to how the loan is ultimately disposed of. But for people who hold lower investment grade classes and below investment grade positions in some of those transactions, I think you'll certainly see bigger losses. That’s just the simple truth. And it'll be that way until we get more clarity on office demand, and that's likely going to be a few years out.

Now, on interest rates, I’m old enough to know that a 3.75-4% Fed Funds Rate is not a very high interest rate, although it may seem that way to young professionals. I remember a 10-year T-Bill that was in the mid to high-teens. So, it’s not so much the rate itself but rather interest rate volatility, and the uncertainty around what is the Fed going to do that is causing so much concern throughout the sector. Add to all this the effect of rising capitalization rates, which even further complicates the situation as everyone is trying to pinpoint a value when rates are jumping all over the place, and the risk premium over these rates is moving. So, this really presents a challenge for both borrowers and lenders.

8. We've touched on trends in real estate – trouble in office, interest rates, the banking crisis – these are all things that have been happening now that the real estate industry is reacting to. In your mind, what are the trends that we will be talking about 5-10 years down the line that will impact CRE?

I would love to be able to jump ahead even five years and see what the office landscape looks like – although I think I've got a pretty good sense of what it may look like. However, office is just one thing. ESG is another big one. It’s a big buzzy acronym, and because of that so many people are talking about it. Portfolio managers are trying to figure out how they can go in front of their clients and say “yes, I'm really focused on this”. As a debt investor in real estate, that's a little bit hard to do, right? You don't have much control at the property level. That's your collateral, but so long as your owner is making their debt service payment, you can't tell them that they should do something with solar – you have no control over that. However, it is a hot button issue that even debt investors are going to have to tackle and figure out how to include in their investment analysis. That said, real estate investors need to be really careful that the focus on ESG doesn't prevent them from doing investments that would really be good for their clients in the absence of ESG considerations. That is a VERY long way of saying that ESG is growing in importance and is going to be an even bigger thing in the future.

I also think commercial real estate investing will become more and more automated over time and that there will be less and less of a relationship focus. This is sad to me because commercial real estate historically has been all about the relationships. If you asked me what I liked most about this line of work I would say it’s that you've got a financial analysis/quantitative aspect to it, while also being very relationship oriented. When I started at PPM in 1995, we would talk to a mortgage broker about a deal. They would vet the deal with us over a phone call before sending us a package – literally sending it through the mail. Now, these brokers have 10 people they like to deal with and will email PDFs to those 10 folks. People won't have that initial phone call. So that will be a change.

9. Chicago seems to be an inflection point – we’ve emerged from the COVID-19 pandemic and are now poised for new leadership after the recent municipal elections. Some business leaders have chosen to leave the city – Ken Griffin is probably the most prominent of those – while others have doubled down their commitment to Chicago. What do you think about the current commercial real estate market in Chicago and the direction of the city overall?

I love Chicago. I didn't grow up here, but it is my adopted city, and my wife and I made a conscious decision to raise our children in the Chicago area. That said, the city has its problems, with crime and the fiscal situation being at the top of the list. It'll be interesting to see what the new mayor, Brandon Johnson, does about these issues.

In terms of real estate, the office market is tough. When I first started working in Chicago, main and main for office space was the intersection of LaSalle Street and Madison. That was where you wanted to be. That's where the banks and big companies were. Main and main has now moved west to Wacker Drive, Canal, and further west to Fulton Market. I don't know what's going to happen with the idea of office to residential conversions – very interesting in theory, but it costs a lot of money. Also, would you want to live on LaSalle Street when not much natural light gets into those buildings?

But again, there are parts of Chicago with excellent investment opportunities. Fulton Market is a great submarket, for example. And you can’t forget that the city has a large, well-educated employment base. Long story short, my wife and I love Chicago. It’s a fantastic city. We could, either now as empty nesters or later in retirement, certainly move somewhere else. But we'll always be spending much of our time in Chicago.

10. What sort of skills do you think are key to succeeding in commercial real estate, both in the short term and long term? What advice would you give to Booth students who are interested in starting a career in real estate?

In terms of skills, it’s that key combination of quantitative and qualitative. If you are good with numbers and you've got a decent personality, you can do really well in commercial real estate. That's the fun part of it. There are certain real estate jobs where all you do is sit and look at a computer screen all day, but that's no fun. What’s fun is walking a piece of land with a developer and hearing the excitement in their voice when they are talking about their plan for the site. Actually creating something is the cool part of this type of work. You've got to be willing to dig in in terms of financial analysis, but to have an interesting and varied career in real estate you also have to be willing to go on the road, meet owners, look at properties, and do that sort of thing.

Now in terms of advice. This is not just for real estate – I always give this advice. In your first job be willing to do anything. Whatever is asked of you. My first job out of Booth was with Mutual of New York, that was in 1991. We weren't lending money at the time, we were trying to work out all the problems we had in our real estate portfolio. One of the things that the firm was trying to do was sell a portfolio of loans. Back then, if you did that, you had to make physical copies of a whole host of documents – notes, mortgages, appraisals, environmental reports, engineering reports, etc. There was more copying that needed to be done than there were people on hand. So, as the newest member of the team I was asked to spend pretty much my first three months on the job copying documents. I said sure – it's the job that needs to be done. If not me, who else? I did it with a smile on my face. And then when more interesting work came along, they thought of me because I willingly took on this crappy job with a good attitude. So first and foremost, don’t ever think you're too good for something – particularly if you are given it right out of the box.

Another thing I would say, especially in a management role but even when just working with your peers, is to take an interest in your colleagues. One that goes beyond just “he's really good doing this, she's really good doing that.” Find out more about them – what they like to do, where they're from, and what makes them tick. It'll make your working relationship much easier and as a manager people will be much more willing to go the extra mile for you.

One last thing – I never had a two-year plan, a five-year plan, or a seven-year plan. I was intentional about always considering new things people offered me to try. For instance, when I jumped to my job at Fitch, I was pretty happy at the time at my job at Mutual of New York. But I thought “wow, that opportunity does sound interesting.” It was a little bit of a risk because what if my buddy was wrong? If the CMBS market went nowhere, I would be looking for a job again in a year. However, I gave it a shot and the willingness to do that led me to be a good candidate for the PPM role. The older you get, the more you realize life is just very random. I mean, stuff happens that you never would have expected. Treat people well, work hard, and be open to new opportunities. It's worked out great for me.