10 Questions with a Real Estate Executive
Interview conducted by Brian Davidoff (FT '20) and Jack Quinn (PT '20) on 2/13/2020
1. How did you get your start in the real estate industry?
I graduated from Northwestern, and I was not particularly ambitious. I wanted to open a coffee shop. Then I went back to school, and in between my first and second year at Booth I started getting interested in real estate. I heard about this guy Sam Zell. I knew two things: he wore jeans to work back in the 80s, and he played touch football with the company team on weekends. I thought that sounded like me. So, I got a summer internship in between my first and second year of Booth, stayed on and worked part-time until I graduated. I just loved it.
2. You mentioned Sam Zell, what has been the most rewarding aspect of working with him? What have you learned from Sam? What do you enjoy about working with him?
I'll try and make that a short answer. It's been a spectacular experience working with Sam. He sees things differently. He's very direct and we've probably bought $75 billion of real estate since I got here. I always talk about how there's clarity when you talk to Sam; there's no ambiguity. He's got a view. And he's committed to it. He wants you to take him on, wants you to give your view. And that's how you manage risk. I've been lucky to be able to travel the world and see things I would have never seen, things I would have never been able to do without being a part of EGI and working with Sam.
3. What about your Booth MBA experience has really helped your professional career, particularly in real estate?
Booth is an amazing environment filled with really smart people and professors who are interested in you if you're interested in them. At Northwestern I did not take academics seriously. By the time I was in business school, I wanted to understand the tools needed for success.
So, the rigor of Booth and the caliber of people I interacted with kind of shook me out of my stupor and made me realize if you want to play at that level, you better be prepared. You better work hard. So, Booth set me on a path that was different than the path I'd been on. It's competitive out there, you have to be prepared, you must have tools, you have to have aggressiveness, you have to have commitment. Booth played a big part in grounding me in those things.
4. You've had many experiences within EGI across different asset types. How has that helped you in your career?
The broader your exposure, the more you see common themes. Anyone at Booth has the intelligence to understand real estate. Real estate is sort of 10th grade math over and over. It's not that hard. But it is about judgment, it's about trying to understand a dimension of risk and trying to manage that risk. So, when we are sitting around talking about a deal, when we run the numbers, we run the numbers to determine the sensitivities. What bet are we making? How do we feel about that bet?
The more asset classes you see the more times that you can dimension those kinds of risks. I think it helps inform your judgment. I would encourage people who are starting in business to get different experiences. Don't just stay in one asset class for too long. You don't want to be too thin and have no depth. I think I'm a better investor in real estate, having worked in multiple asset classes.
The hallmark of Sam Zell is a willingness to change and adapt. The hardest thing to do when you're successful is to do something new in anticipation of things changing. And things inevitably change. So, I don't think there's any asset class that for your life you want to do. I would watch Sam and I think, wow did you just pull out that poker? But he had eight of them behind his back. He didn't just have one. He had eight behind his back that he's playing. Then when it's time to go hard, he's already invested in the research, he's already done diligence he's already prepared himself, and he's already put a foundation in place.
5. When you worked in the manufactured housing space with Equity Lifestyle (ELS), what was the industry like at that time? Was it the wild west?
It wasn't so much the wild west. Just keep this in mind: manufactured housing, whatever you think about it, is so good fundamentally, that they let me run it! I joined here in '91 as an analyst running numbers, and in '92 they said: "We're going to take the mobile home park company public and you're going to be the CFO." I think I was just here late one night, and they thought we're going to need somebody. I said, "Look, I don't know anything about being a CFO." They said neither does anyone else.
At Equity Commonwealth today, we think about the capital that we want to deploy. I keep challenging my team to think about what today is like manufactured housing back in 1983. ELS is the single best performing stock since 1993. And that's without risk adjusting it. It's a great business because you have segmented the depreciating asset from the appreciating asset. You own the land and you finance land for people who live there. They own the depreciating asset. Land is the only part of a real estate equation that appreciates. The steel gets older, the glass gets older, the bricks gets older, the timber gets older. Land is what is appreciating in value.
6. Equity Commonwealth (EQC) has gone through some dramatic changes over the last five years, selling upwards of 150 properties. What's your vision for the portfolio five years from today?
I always thought you're supposed to have like a vision. And I think now what we know is we know the shape, we know the contours of what we want, we want granular income streams that are highly financeable not binary income streams because lenders want diversification. We want attractive long-term fundamentals supported by demographics and barriers to supply. So, we know those things. What we don't know is what that business is. It could be marinas, could be cold storage, it could be single family rental, it could be industrial. There are a lot of businesses that fit that what we are looking for. What we don't want is binary outcomes as public company. What you want are things that grow in a dependable way because in our view, the street pays for predictability.
7. How does being a public company impact your day to day? What are the advantages and disadvantages?
There's one huge advantage of being a public company. And that is massive capital access. There's no reason to go public if you don't need money. The reason to go public is to access capital. So, the real question if you're determining whether you should go public is: Do I need massive capital access? The price of that access is quarterly reporting and transparency and you know, having a bunch of people with opinions of what you should do that have different time frames. No matter how earnest or how sincere their view is, they're not thinking about the employees who are running a long-term business. They're thinking about their business and their mutual fund or hedge fund. They want performance, they want you to buy back stock and they want you do things that might not necessarily be in the long-term interest of the business. You have to balance that.
That being said, you have got to serve somebody, and when you're private, whoever you get capital from, you're beholden to their goals and their issues and their time horizon. So, the tide is out on being public. The number of public companies is down dramatically with Sarbanes-Oxley liability. So, if you don't need to be public it's probably better not to be, but if you want to build a long-term, major scale business being public helps a lot.
8. In real estate specifically, does being public affect how you view risk? Because it seems like there are, at least times when investors view risk differently for public and private markets?
Risk is a function of time. And what Sam talks a lot about is that the slower the window closes, the less likely it is your fingers are going to get caught. And so, we finance ourselves with a long-term mentality, because we know we're a long-term owner. If you lever up and you own for a really long time, at some point you will get into trouble. As you go through cycles and rates will go higher, at some point you won't be able to refinance. If we're a three-person equity shop, and we know we're getting out of that asset. Buy it fix it sell it. Then we're going to make judgments about risks that are within that timeframe. We're not going to be thinking that this as an asset we want to own for 10, 15 or 20 years because we know we're not going for that. So, risk and managing that risk is a function of your investment horizon.
9. Can you tell us about your most challenging deal? Anything that stands out?
We were early investors in the shared office space. What we learned then, is what the market will learn again. We Work blew up on its own accord. It didn't blow up for the reason that everyone thought it would, and the reason all the others will, which is this. It's an up-market business, and when people need space, they're willing to pay a premium for flexibility. However, when the downturn comes and you're the real estate facilities guy and your CFO says I need you to cut back on real estate exposure, you go back to your CFO and say, "well I have an eight-year lease, and I have a 30 day lease." Which one do you think they're going to give back? There's no mystery, right? They're just fundamentally mismatched, and you'd say well why would anyone be in that business? Because it's heads they win tails you lose or tails the landlord loses, rather. When they can't pay anymore they move out. Well, when can't they pay anymore? When no one else wants the space. It's at precisely the time everyone's giving back space. So mostly owners say you know what I'll do a percentage deal with you. I'll let you stay until I have another tenant. We did that shared office deal, and we learned all those lessons early on.
10. How do you see the industry changing over the next 5-10 years? And how does that affect what you're doing now?
Probably the most misunderstood part of the real estate industry is how much it has changed from when I was your age in 1983. We had four major food groups: apartments, industrial is still interesting, offices is okay, and retail is a dirty word. But nowadays you have cold storage, you have data centers, towers. American Tower Corp has had some of the best returns. So, it has changed. And one of the things I challenged my team with is to say, what's the next thing? And so the question is what asset heavy business could you find that today isn't thought of as traditional, but has those characteristics we talked about: granular, good fundamentals, that if you brought into the industry and demonstrated over time, the performance of the underlying flows that people would really price. And I don't know yet. If you guys know what it is, I'll buy you lunch.
Another ongoing trend that I would say is probably the least glamorous but most relevant is this: cities are changing the rules about energy use and what a building needs to do and investors are mostly behind the curve. New York has put in strict new laws that change the rules. California is in the midst of doing the same. Those are the bell cow states for managing energy and managing the environment you're in. It is going to become increasingly important, and there are lots of tools to do it right.
The other thing we didn't talk about which is a big thing in the real estate space and everywhere else is ESG. REITS have a relatively new incarnation in the public markets, so our governance is better than most industries, but the environmental side of the business is relevant and the social side. Are you building a culture that engages young people in a way where they feel like they're a part something that has relevance and is doing something beyond just making money? You have to think about that these days.
(Bonus Question). Has it been a challenge at all leasing to tech companies or companies that want some more flexible space?
I don't think it's a challenge when you find the markets that are good. We did a little study of the three preceding recessions coming out of the recession. Where was job growth? Three recessions ago, 50% of the job growth was in 100 counties. Two recessions ago it was 57 counties. In the last recession, it was 18 counties. There are places people want to be, there are places guys like you want to go. There are places like Seattle, San Francisco or Boston or even Nashville. But those markets aren't Ohio and they're not upstate New York. The haves and have-nots have become much more distinct.
There is better job mobility for young people, a different ethos. Not so much in my day but maybe the generation before me, you went to work and put your head down and you stayed. You work your way up, you work hard. Now, I would say to men and women who are interested in the real estate space: Have 2-3 experiences before you're 30. Go hard and look, if you go somewhere and it's the greatest place and you want to stay that's great. Go work at a startup. Go work at a real estate prop tech company. It's all about getting different experiences, because what you want could be different than what is in your current environment. There are common denominators: you must work in a place with smart people, and you must work in a place that's dynamic. No matter how smart they are, if they're not doing deals, you're not going to get reps, and you're not going to get exposure. For me I said to myself I want to work among smart people in a dynamic place, and that's still true here 20 years later.
(Bonus Question). To wrap up, you mentioned the importance of having multiple experiences early in a career. Is there anything else you'd recommend to Booth students?
First, be sure you have a sincere interest. You don't have to know exactly what you want to do, but the test would be: When you read the paper do you want to read the article? If you don't want to read the article don't go into the industry. Then, work with smart people in a dynamic environment.
Don't worry about acquisitions, I think that's the most over-emphasized and misemphasized function in real estate. It's better to work in asset management or any division of a really great company then work in acquisitions in a place where you're buying one thing in one location. Get multiple experiences in the first six or eight years of your career. You cannot just be an analyst for the first four or five years in the same place pounding out numbers. You have to move somewhere where it's just going to be different. I would encourage most young people, not all, but if you have the ability to stand the queasiness, go to a startup.
P.S. Check out the social innovation track founded by David and his wife Leslie Bluhm:
Since 2011, the Bluhm/Helfand Social Innovation (BHSI) Fellowship has supported the work of 36 innovators—representing the United States as well as 18 other countries on five continents—who address pressing global issues, from healthcare delivery to college persistence and sustainable construction in developing nations.
From the beginning, the BHSI Fellowship has created meaningful, customized experiences for Fellows with connections to influential business and civic leaders, exposure to a broad audience as a speaker at Chicago Ideas, and over $3 million in financial support and in-kind contributions.