The Real Estate Industry

For Kellogg MBAs

The Real Estate Industry

Why real estate?What types of companies do MBAs traditionally joinWhat are the roles within those companies?

Why real estate?

Real estate is a huge part of the U.S. economy.

Comprises nearly 15% of GDP.Employs more than 8.4 million people.More than 68% of all Americans are homeowners.Real estate indices have outperformed S&P and NASDAQ over the last 10 years!

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

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

Donald Trump, $2.5B

                          

                     Leona Helmsley, $2.2B

Sam Zell, $2.1B

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

Earl Webb ‘81

CEO of JLL Capital Markets

Sheli Rosenberg

Equity Group Investments

Penny Pritzker

Pritzker Realty Group

Fame and fortune aside, real estate offers. . .

The opportunity to shape the communities that we live in.

By realizing your entrepreneurial visions...

And making the world a better place.

What types of companies do MBAs traditionally join, and what are the roles within those companies?

Real Estate jobs for MBAs typically fall into three general categories.

Finance and InvestmentsOperationsDevelopment

Finance and Investments

Introduction

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.

Non-institutional, $2.53 Trillion

55%

Institutional, $2.05 Trillion

45%

Total U.S. Real Estate is worth $4.58 Trillion.

But MBAs usually work with larger, institutional investments.

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

Pension Funds Investments Banks (Same as investors)Private Equity Funds Investment AdvisorsInsurance Companies Capital MarketsCommercial Banks Financial intermediariesREITs

Equity & Debt Markets Analysts

Investors

(Equity and debt)

SellersCapital Markets

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

Risk

High

Moderate

Low

Return

Mezzanine

Opportunistic

Core

Core Plus

RE Securities

Value-enhanced

<10% 11-15% 16-20% 21-25% >25%

Investors hold either equity. . .

Total Equity, $327.7 Billion

12%11%

38%

39%

Life Companies and Banks Foreign Investors REITs Pension Funds

. . .or debt.

Total Debt, $1,676 Billion

15%

11%

13%9%4%

3%

2%

1%

42%

Non-govt CMBS Issuers Foreign InvestorsLife Companies Savings AssociationsFederally Funded Mortgage Pools OtherPension Funds REITsCommercial Banks

Finance and Investments

Who are the investors?

Pension Funds

3%-6% of portfolio in real estateTend to hold “core” propertiesBoth debt and equity investingUsually outsource their real estate investing to an investment advisorEx. – TIAA-CREF, PSERS, CALPERS

Private Equity Funds / Opportunity Funds

Seek high risk / rewardOften attached to investment bankPrincipals in fund invest ~20% of their own money in complex waterfall structurePerform acquisition, management, and disposition of assetsUsually ~3-5+ year time horizonDeutsche Bank, Whitehall (Goldman), Transwestern, Walton Street, MSREF, GE Real Estate, etc.

Real Estate Investment Trusts (REITs)

Government-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 sectorUsually a public securityEquity Office/Residential Properties, General Growth, Simon, etc.

Investment Advisor

Advise pension funds on their overall allocation of real estate fundsDo not invest their own funds; earn fees based on assets under managementPerform property acquisitions, asset mgmt, and disposition based on investment strategySometimes manage their own fundsEx. – RREEF, Heitman, SSR Realty Advisors, AEW Capital Management

What jobs are available at a real estate investor?

Equity / Debt Investments (acquisitions):

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

Asset Management

Pick up where acquisitions people leave offMonitor performance of assetPerform budget-to-actual analysisInteract with property management regarding significant issuesAnalyze potential re-positioning, capital improvement, and disposition of assets

Market Research

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 marketsData forms a backbone for investment decision-makers

Investment Advisory

Perform research on macro-economic trendsAllocate client’s portfolio along a variety of variables Geography Product type (residential, office, industrial)

Appraisal

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

Finance and Investments

What companies work in capital markets?

Investment / Commercial Banking

Perform work at a portfolio or corporate level, rather than asset levelConcerned with finance first, real estate secondAdvise real estate companies on optimal capital structure and capital raisingMatch investors and those seeking capitalAs associate, perform spreadsheet analyses and work like a dog

Investment / Commercial Banking

Mergers & acquisitionsDebt & equity underwritingSyndication, securitizationWork for fee incomeAdvise at corporate rather than asset levelEx. Goldman Sachs, Lehman Bros., Morgan Stanley, Deutsche Bank, KeyBank, Bank of America

Equity / Debt Analysis

Typically work at a Wall Street bankAnalyze 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

Real Estate Operations

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.

Real Estate Operating Companies

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

Property Manager

Manage buildings on a day to day basis for ownerReceive fee income, sometimes incentive-basedOversee cleaning, maintenance, repairs, leasing, budgeting, accounting, and any tenant needs and amenitiesEx. Cushman & Wakefield, Colliers, Lincoln, etc.

Tenant Representation / Consulting

Identify client space needs (buy vs. sell, lease vs. own, etc.)Search for optimal solution by negotiating with leasing agents

Leasing Agent

Paid by commissionTry to sell space to potential tenants

Hybrid / Full-Service Firm

Many real estate firms combine several of these functionsSynergies between investments, development, leasing and property management, etc.Ex. - Jones Lang LaSalle, Tishman Speyer, Trammell Crow, Insignia CB Richard Ellis, Transwestern, Duke, etc.

Development

Developer

Originate projectAcquisition, due diligence, entitlementsRaise capital; often have little or no money in the dealManage design, permitting, constructionPerform initial sales or leasingCan also work as a project manager for a feeEx. – Hines, Hammes, Tishman Speyer, Opus, Higgins, ProLogis, Centerpoint, Alter Group, Rise Group, etc.

Community Development

Some developers choose to develop in low-income areasEnterprise zones, TIFs, Empowerment districtsCommunity lending requirement = opportunityWork with urban planners, city government

Further Reading. . .

The Real Estate Game by William J. PoorvuUrban Land Institute membershipVarious websites such as GlobeSt.comhttp://www.lendleaserei.com/LLREI/FreeForm.nsf/wContent/link0?OpenDocumentCheck out companies on the webTake Prof. Lys’ and Pagliari’s classesTalk to those with industry experienceAttend mock interviews on Feb 4