Executive QA: Doug Frye
It has been about a year since the commercial real estate firm once known as NAI Nashville switched allegiances to become part of the global real estate company Colliers International.
Among other things, the brand swap linked local real estate developer Bert Mathews, now a partner in the Nashville office of Colliers International, with Colliers? 29 business units, which handle everything from sales or appraisals to leasing and property management of office buildings, warehouses and retail space.
Doug Frye, president and CEO of Colliers International, visited Nashville earlier this month as part of his globe-hopping chores for a commercial real estate giant that operates in 61 countries and employs close to 15,000 professionals. The $2.9 billion operation makes at least 70 percent of its revenue from international operations and has been one of the more successful companies navigating the U.S. recession and emerging from the other side to sell and lease properties again.
Frye discussed the local and national outlooks for the real estate industry in a recent interview with Randy McClain, business editor of The Tennessean.
How do you evaluate the value of Colliers? presence in Nashville, and what are the advantages of working with longtime Music City developers who can spot local trends?
Essentially, what drives our organization is the local operators. No matter how global we get ? real estate will always be a local business unless they figure out a way to start moving the buildings around on us. That balance between being great locally and being able to share knowledge globally is the key to our success, although it?s not always easy to get the mix exactly right.
What do you see playing out nationally in terms of properties or chunks of real estate portfolios being sold by longtime owners to reduce debt, restructure or find new capital partners?
Recapitalizations are becoming more and more common. There?s a couple of reasons for the trend.
It?s a way to (get) more working capital in hand in order to modify a property or keep the banks off (the owners?) backs in those cases where owners are a little bit underwater. And another reason you see transactions is to bring in partners who have the skill sets to better manage a commercial property or reposition it.
The good news is that the debt markets have loosened up a bit. There is more capital out there. Twenty-five percent of originations so far this year have been via insurance companies. Insurance companies are back in the market lending money.
The CoolSprings Galleria deal (in which retirement fund TIAA-CREF bought a 50 percent stake in the Williamson County shopping center along with a handful of other properties) was interesting. It is a good bellwether that illustrates how the major players are back investing again, and it shows that the gap between what a buyer is willing to bid and the price that a seller asks for has closed.
The problem we had for a long time, and the reason the commercial real estate market stalled, was because you had a bunch of guys (owners) whose property maybe used to be worth $1 million ? and the buyer says, ?I will give you $500,000 for it.?
That gap has closed over time as sellers realize their assets may not be worth $1 million anymore, or the buyers decide to pay up. And there?s more interest in doing deals.
Right now, year-to-date commercial real estate transactions globally are up 23 percent. And almost $110 billion of that is international money being moved around. That is usually a sign of more consumer and investor confidence.
Prices on trophy assets, major buildings, are actually coming back pretty strongly. Now, there?s a whole separate discussion we can have on distressed assets and how that?s playing out.
How much of commercial real estate sales today are driven by pressure from lenders ? cases in which a buyer has to sell? And how much is driven by healthy demand or a property?s good cash flow?
There is investor demand for better properties. And on trophy assets, banks haven?t been so heavy-handed trying to take the assets back. But once you get out of Class A space (top-quality space), you see more instances of distressed assets being sold at a discount ? sometimes to vulture funds or speculative investors.
Who else seems to be returning to the field as players in terms of lending and/or buying commercial real estate this year?
Pension fund and regional banks are back. Overall, there is better access to money. And virtually all of the traditional buyers are back at some level, although the volume of their deals might not be as high as it was historically in 2007.
The traditional hot spots have been Florida; Phoenix, Ariz.; parts of Texas; and southern California. Those areas were hit most severely by the downturn. For the most part, at least in commercial real estate, things have stabilized. Even Florida is coming back pretty nicely for the most part.
Of course, the residential side of things remains very dicey. Values are just not climbing there like folks would like to see. The debt and credit lines that people have on their homes ? a very large percentage of those are still underwater. In other words, if a house is worth $500,000, and you have a mortgage at $450,000 and a line of credit for another $200,000, that line of credit is not actually backed up by equity in the home. There?s no security for it.
Until that clears the system, we?re banking on nothing but good faith and confidence in Americans to pay their bills. And considering that so many people have negative equity in their homes, you?re not seeing loan defaults at the rates that you might expect.
What about on commercial real estate ? Colliers? sweet spot? Give me a market-to-market snapshot of demand.
You?ve got great interest in markets like New York; Washington, D.C.; Chicago; Los Angeles; and San Francisco on the office/retail side. Markets like Nashville on industrial and distribution (properties) are still considered good, solid markets to be in. Deals are being based on cash flow. Transactions are based on reality as opposed to a notion that ?we hope things get better.?
How has Colliers made money, and kept its revenues flowing during the downturn?
We have 29 business lines that fluctuate on revenues in any given year. The biggest shift that?s noteworthy over the last year or two was that our sales side has dropped significantly and the leasing side has picked up. Usually it is a 60-40 split. Now, we?re seeing as little as 35 percent of our action (in) sales and 65 percent of it in leasing.
The other thing is that property management is growing. Right now, we are adding properties under our management, which provides stable revenues. Clients who are looking for property managers that provide a complete range of service offerings. They want to know you can appraise the building, sell the building or lease the building, and that you have significant bench strength.
We have managed to grow when some other people were in chaos. We have been the fastest-growing real estate company in the world for the last seven years. And in the last three years, we?ve spent well over $100 million in acquisitions and expanding our business even in a down market.
Are you recruiting and adding people to the payroll?
Yes, we will probably add 200 professionals by the midpoint this year across the U.S. That?s a big number.
With hints of a marginally brighter economy, what do you see in terms of new commercial construction in the U.S.?
We had a significant drop-off in commercial construction and development, of course, to the point where it had almost stopped. It remains sparse and selective. Speculative construction is almost nonexistent.
You are seeing certain projects go up where a developer has tenants in tow, or corporate facilities are being built. But, in general, in the U.S., we have another three years or longer before we see more normalized development coming back.
It?s interesting about the economy, though. A lot of the softness you see in employment is from government jobs being cut as budgets are constrained and tax revenues shrink. State, local and municipal governments are laying off people. That?s driving the jobless statistics more than anything else.
Separate from that you see some positive trends. The U.S. growth rate would have been closer to 3 percent than 2 percent, if we could have taken the whole government tightening out of the equation.
Article source: http://www.tennessean.com/article/20110522/BUSINESS/305220010/Real-estate-giant-s-leader-keeps-local-focus
Source: http://realestateinvestmentcalifornia.com/real-estate-giants-leader-keeps-local-focus/
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